UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
----------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION A3 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ___________________to_____________________
COMMISSION FILE NUMBER 0-16560
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VANGUARD CELLULAR SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1549590
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2002 Pisgah Church Road, Suite 300
Greensboro, North Carolina 27455-3314
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (336) 282-3690.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___.
The number of shares outstanding of the issuer's common stock as of
June 30, 1998 was 36,740,230.
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Item 1. FINANCIAL STATEMENTS
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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(Amounts in thousands, except per share data)
June 30, December 31,
- ------------------------------------------------------------------------------------------------------------------------------
Assets 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (See note)
CURRENT ASSETS:
Cash, including escrowed funds of $8,000 $ 21,732 $ 2,487
Accounts receivable, net of allowances for doubtful accounts of $10,365 and $8,184 56,264 54,340
Cellular telephone inventories 18,094 18,826
Deferred income taxes, current 61,825 43,139
Prepaid expenses 3,693 3,620
- ------------------------------------------------------------------------------------------------------------------------------
Total current assets 161,608 122,412
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS 286,611 307,718
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $184,141
and $166,230 359,633 371,343
NON-CURRENT DEFERRED INCOME TAXES - 9,447
Other Assets, net of accumulated amortization of $8,901 and $10,701 12,734 17,041
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 820,586 $ 827,961
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES: Accounts payable and accrued expenses $ 74,964 $ 58,084
NON-CURRENT DEFERRED INCOME TAX LIABILITY 42,679 -
LONG-TERM DEBT 686,846 768,967
- ------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - $.01 par value, 1,000 shares authorized, no shares issued - -
Common stock, Class A - $.01 par value, 250,000 shares authorized,
and 36,740 and 38,308 shares outstanding 367 383
Common stock, Class B - $.01 par value, 30,000 shares authorized, no shares issued - -
Additional capital in excess of par value 212,932 221,624
Accumulated deficit (197,202) (221,097)
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 16,097 910
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 820,586 $ 827,961
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets.
Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(Amounts in thousands, except per share data)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Service revenue $ 101,384 $ 88,348 $ 191,364 $ 163,457
Cellular telephone equipment revenue 10,647 5,347 18,288 10,101
Other 162 453 500 905
- --------------------------------------------------------------------------------------------------------------------
112,193 94,148 210,152 174,463
- --------------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of service 8,818 8,000 16,231 15,869
Cost of cellular telephone equipment 13,056 9,256 23,720 17,899
General and administrative 28,816 25,229 56,202 48,504
Marketing and selling 19,772 20,185 38,428 34,679
Depreciation and amortization 21,414 18,431 43,512 33,583
- --------------------------------------------------------------------------------------------------------------------
91,876 81,101 178,093 150,534
- --------------------------------------------------------------------------------------------------------------------
Income From Operations 20,317 13,047 32,059 23,929
Net Gain (Loss) on Dispositions 116,748 (2) 116,741 10
Interest Expense (16,123) (14,224) (31,806) (26,625)
Unrealized Holding Loss (9,979) - (9,979) -
Net Losses from Unconsolidated Investments (4,500) (2,961) (19,066) (5,357)
Other, net 246 214 541 345
- --------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Before Income Taxes and
Extraordinary Item 106,709 (3,926) 88,490 (7,698)
Income Tax Benefit (Expense) (42,900) 4,000 (41,439) 8,000
- --------------------------------------------------- ---------------------------------------------------------------
Net Income Before Extraordinary Item 63,809 74 47,051 302
Extraordinary Loss on Extinguishment of Debt. net of
Income Tax Benefit of $2,645 - - (3,971) -
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 63,809 $ 74 $ 43,080 $ 302
- --------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic $ 1.72 $ 0.00 $ 1.15 $ 0.01
Diluted $ 1.65 $ 0.00 $ 1.12 $ 0.01
- --------------------------------------------------------------------------------------------------------------------
Common Shares Used in Computing Per Share Amounts:
Basic 37,107 40,298 37,474 40,560
Diluted 38,626 42,328 38,557 41,762
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Dollar amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 43,080 $ 302
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 43,512 33,583
Amortization of deferred debt issuance costs 579 968
Net losses from unconsolidated investments 19,066 5,357
Net gain on dispositions (116,741) (10)
Deferred income tax provision (benefit) 38,794 (8,000)
Extraordinary loss on extinguishment of debt 6,618 -
Unrealized holding loss 9,979 -
Changes in current items:
Accounts receivable, net (5,157) (24,048)
Cellular telephone inventories 345 382
Accounts payable and accrued expenses 1,413 879
Other, net 93 (1,310)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 41,581 8,103
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (45,420) (90,471)
Proceeds from dispositions 163,682 78
Payments for acquisition of investments (21,068) (5,144)
Capital contributions to unconsolidated entities (5,556) -
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 91,638 (95,537)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments of long-term debt (752,130) (4,004)
Repurchases of common stock (28,527) (10,257)
Net proceeds from issuance of common stock 634 35
Proceeds of long-term debt 670,000 96,000
Debt issuance costs (4,106) -
Decrease (increase) in other assets 155 (234)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (113,974) 81,540
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 19,245 (5,894)
Cash, beginning of period 2,487 11,180
- -------------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 21,732 $ 5,286
- -------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ 32,060 $ 23,820
SUPPLEMENTAL DISCLOSURE OF INCOME TAXES PAID - 20
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - I-1 June 30, 1998 and
December 31, 1997.
Condensed Consolidated Statements of Operations - I-2 Three months and
six months ended June 30, 1998 and 1997.
Condensed Consolidated Statements of Cash Flows - I-3
Six months ended June 30, 1998 and 1997.
Notes to Condensed Consolidated Financial Statements - I-4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - I-14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders - II-1
Item 5. Other Information - II-1
Item 6. Exhibits and Reports on Form 8-K - II-2
SIGNATURES - II-3
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Vanguard
Cellular Systems, Inc. and Subsidiaries (the Company) have been prepared without
audit pursuant to Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission ("SEC"). Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's 1997 annual
report on Form 10-K and Form 10-K/A.
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries and entities in which the Company holds a majority
ownership interest. Investments in entities in which the Company exercises
significant influence but does not exercise control through majority ownership
have been accounted for using the equity method of accounting. Ownership
interests in entities in which the Company does not exercise significant
influence and does not control through majority ownership and for which there is
no readily determinable fair value have been accounted for using the cost method
of accounting. Ownership interests in entities in which the Company does not
control through majority ownership and does not exercise significant influence
and for which there is a readily determinable fair value have been accounted for
as available for sale pursuant to the requirements of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". All significant intercompany accounts and transactions have
been eliminated.
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NOTE 2 -- INVESTMENTS
Investments consist of the following (in thousands):
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
INVESTMENTS IN DOMESTIC CELLULAR ENTITIES:
Consolidated entities:
License cost $ 288,143 $ 297,142
Accumulated amortization (43,248) (43,696)
--------------- -----------
244,895 253,446
-------------- ------------
Entities carried on the equity method:
Cost 10,193 10,193
Accumulated share of earnings 2,183 1,960
------------ ------------
12,376 12,153
------------ -----------
Entities carried on the cost method 9,375 9,592
------------ ----------
266,646 275,191
------------ ----------
INVESTMENTS IN OTHER ENTITIES:
Entities carried on the equity method:
Investment in equity securities 58,278 40,794
Debentures, net of discount of $5,337 12,663 11,551
Loans 4,045 4,045
Accumulated share of losses (55,021) (33,842)
------------ -----------
19,965 22,548
------------ -----------
Investments carried as "available for sale":
Cost 37,736 37,736
Net unrealized holding losses (37,736) (32,757)
------------ -----------
0 4,979
----------- -----------
Other investments, at cost 0 5,000
----------- -----------
19,965 32,527
----------- -----------
$ 286,611 $ 307,718
=========== ===========
Investments in Domestic Cellular Entities
In June 1998, the Company sold for approximately $162 million in cash its
Myrtle Beach, SC RSA market and related operations, and recognized a $117
million gain on this sale in the second quarter of 1998. The purchaser required
the Company to place $8.0 million of the purchase price into an escrow fund for
one year. These escrowed funds are to be held for certain purchase price
adjustments, if any, that may be identified by the purchaser and agreed to by
the Company. Currently, management does not anticipate such adjustments to the
purchase price, if any, to be material.
The Company holds a 50% investment in a joint venture known as Eastern North
Carolina Cellular Joint Venture ("ENCCJV"), created to acquire, own and operate
various cellular markets
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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. In February 1998, the
Company entered into an agreement to sell for $30 million in cash its ownership
interest in the ENCCJV. This transaction is expected to close in the third
quarter of 1998.
In May 1998, the Company entered into an agreement to sell for $172.5 million
in cash its Pensacola, FL MSA and its Fort Walton Beach, FL RSA markets as well
as various minority interests in regional cellular licenses. This transaction,
which is subject to normal federal regulatory approvals, is expected to close in
the fourth quarter of 1998.
The Company also explores, on an ongoing basis, possible acquisitions of
companies that will facilitate new service offerings to its customers, such as
paging and Internet access. The Company entered into an agreement in December,
1997 to purchase NationPage, a leading regional paging provider in Pennsylvania
and New York, for approximately $28.5 million in cash. This transaction is
expected to close in the third quarter of 1998.
In the first quarter of 1998, the Company participated in the Federal
Communications Commission's ("FCC") Local Multipoint Distribution Service
("LMDS") auction, which concluded on March 25, 1998. The Company was the high
bidder for 22 LMDS Basic Trading Area ("BTA") licenses, with an aggregate bid of
$8.9 million. The majority of these licenses are in the same markets as the
Company's existing cellular operations. As of March 31, 1998, the Company had
$5.3 million on deposit with the FCC. In June 1998, the licenses were issued and
the Company completed payment of the $8.9 million to the FCC.
LMDS frequencies may be used for a variety of technologies, including
traditional wireless telephony, competitive local exchange service, broadband
data transmissions, including Internet, video and others. The Company is
studying these applications and presently plans to focus primarily on
traditional wireless telephony and broadband data transmission. There is no
assurance that these are the applications the Company will implement, or when it
will implement these or other applications.
Noncellular Investments
International Wireless Communications Holdings, Inc. and Foreign Investments
At June 30, 1998, the Company owned approximately 29% of the outstanding
stock of International Wireless Communications Holdings, Inc. ("IWC") and has
invested an aggregate of $26.0 million. IWC is a development stage company
specializing in securing, building and operating wireless businesses, primarily
in Asia and Latin America. As existing and new projects are in the network
buildout phase, the losses of IWC are expected to grow significantly in future
years. The Company records its proportionate share of these losses under the
equity method of accounting. During 1995,1996 and 1997, the Company recognized
an amount of losses on the equity method from IWC that is equal to the Company's
equity investment in IWC. As a result,
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the Company suspended the recognition of losses attributable to IWC until such
time that the equity method income became available to offset the Company's
share of IWC's future losses or the Company makes further investments in IWC.
For the six months ended June 30, 1998, the Company invested an additional $10.8
million in IWC. Accordingly, during the first six months of 1998 the Company
recognized losses equal to the amount of this additional investment.
During the first quarter of 1997, the Company entered into a stock purchase
agreement to purchase from an unrelated third party 7% of the outstanding shares
of Star Digitel Limited ("SDL"), a Hong Kong company whose principal business
activities relate to the provision and development of cellular
telecommunications services in the People's Republic of China. SDL is a
development stage company, and as such, is expected to incur operating losses
for the foreseeable future. As of June 30, 1998, the Company had completely
funded the $8.4 million share purchase price and invested an additional $1.6
million, including payment of a $700,000 capital call in the first quarter of
1998. The Company accounts for its investment using the equity method of
accounting. In addition, the Company has guaranteed obligations of SDL totaling
$14.1 million, which includes guarantees of $7.2 million on behalf of IWC. If
the Company must eventually fund these guarantees, the funding will be in the
form of loans to SDL.
During 1997, the Company acquired a 12% equity interest in International
Wireless Communications Pakistan Ltd. ("IWCPL") for $7.0 million which has
subsequently been reduced to approximately 10%. Additionally, IWC's 100% owned
subsidiary, Pakistan Wireless Holdings, Inc. ("PWH"), owns a 33% equity interest
in IWCPL, thereby increasing the Company's total ownership interest in IWCPL to
approximately 20%. IWCPL owns approximately 59% of the equity in Pakistan Mobile
Communications (Pvt) Ltd., a Pakistan company that owns and operates the
cellular license in Pakistan. Through June 30, 1998, the Company had invested
$10.0 million in IWCPL, including $1.6 million invested during the first quarter
of 1998, and has provided $3.0 million in debt financing. The Company records
its proportionate share of the losses of IWCPL under the equity method of
accounting.
Inter*Act Systems, Incorporated
As of June 30, 1998, the Company had invested $10.0 million in Inter*Act
Systems, Inc. ("Inter*Act") common stock for an ownership interest of
approximately 26%. Inter*Act is a development stage Company that provides
consumer product manufacturers and retailers (currently supermarkets) the
ability to offer targeted promotions to retail customers at the point of entry
of a retail outlet through an interactive multi-media system utilizing ATM-like
terminals.
During 1996, Inter*Act completed the sale of 142,000 units ("Units") of 14%
Senior Discount Notes due 2003, which have been exchanged for identical notes
registered with the SEC and warrants to purchase shares of common stock at $.01
per share. The Company purchased for $12.0 million a total of 18,000 Units
consisting of $18.0 million principal amount at maturity of these 14% Senior
Discount Notes and warrants to purchase 132,012 shares of common stock. At
issuance, the Company allocated, based upon the estimated fair values, $8.9
million and $3.1 million to the debentures and warrants purchased by the
Company, respectively. Effective
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September 30, 1997 and in accordance with the warrant agreement, the shares of
common stock eligible to be purchased with the warrants held by the Company
increased from 132,012 to 169,722. The shares issuable upon the exercise of
these warrants currently represent approximately 2% of Inter*Act's outstanding
common stock. In addition, an existing warrant held by the Company was
restructured whereby the Company has the right to acquire at any time prior to
May 5, 2005 an aggregate of 900,113 shares of common stock for $23.50 per share,
which shares presently represent approximately 12% of the outstanding common
stock of Inter*Act.
Inter*Act has incurred net losses since its inception. Inter*Act received
approximately $91 million in net proceeds from the above financing which are
being used to accelerate the roll-out of its systems in retail supermarkets and,
as a result, the net losses incurred by Inter*Act are expected to grow
significantly in future years. The Company records its proportionate share of
these losses under the equity method of accounting. As of June 30, 1998, the
Company's total investment in Inter*Act was reduced to zero through the
recognition of equity method losses. As a result, the Company suspended the
recognition of losses attributable to Inter*Act until such time that equity
method income becomes available to offset the Company's share of Inter*Act's
future losses or the Company makes further investments in Inter*Act.
In addition to the current ownership held by the Company, certain officers,
directors and entities affiliated with certain directors of the Company maintain
an additional 27% ownership interest in Inter*Act.
Geotek Communications, Inc.
In 1994, the Company purchased from Geotek Communications, Inc. ("Geotek")
2.5 million shares of Geotek common stock for $30 million. In September 1995,
the Company purchased, for $5.0 million in cash, 531,463 shares of convertible
preferred stock of Geotek with a stated value of $9.408 per share. Geotek is a
telecommunications company that is developing a wireless communications network
using its FHMA(R) digital technology. Under a management agreement, the Company
earned and recorded as revenue approximately 201,370 shares with an aggregate
value of $2.1 million in 1996, and approximately 300,000 shares with an
aggregate value of $2.4 million in 1995. The Company currently owns less than 5%
of Geotek's outstanding common stock.
During 1997, the Geotek common stock price, as quoted on the NASDAQ National
Market System, declined from $7.13 per share at December 31, 1996 to $1.53 per
share at December 31, 1997. Based on Geotek's historical performance, including
the significant decline in the market value of Geotek's common stock, the
Company's management made the determination that the decline in Geotek's common
stock price during 1997 was other than temporary and, accordingly, recognized an
unrealized holding loss of $32.7 million in the fourth quarter of 1997 to adjust
the Company's investment in Geotek common stock to its market value at December
31, 1997. On June 29, 1998, Geotek announced the filing of voluntary petitions
seeking protection under Chapter 11 of the Bankruptcy Code. Accordingly, the
Company recognized an unrealized holding loss of approximately $10.0 million in
the second quarter to reduce its entire investment in Geotek
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to zero. Geotek's common stock price as of June 30, 1998 was $0.16 per share,
and Geotek was delisted from NASDAQ with the close of business on that date.
Financial Information of Equity Method Investees
Combined financial position and operating results of the Company's equity
method investees, ENCCJV, IWC, and Inter*Act, for the first six months of 1998
and 1997 are as follows (in thousands):
1998 1997
------- -------
Revenues. .................................. $ 24,819 $ 8,758
Gross profit ............................... 6,920 1,282
Loss from operations. ...................... (95,368) (36,133)
Net loss. .................................. (129,904) (49,350)
NOTE 3 -- LONG-TERM FINANCING ARRANGEMENTS
In February 1998, the Company completed the closing of an amendment to the
1994 Credit Facility, increasing the facility to $1.0 billion pursuant to the
Third Amended and Restated Facility A Loan Agreement (Facility A Loan) and the
Facility B Loan Agreement (Facility B Loan) (collectively, the 1998 Loan
Agreements), with various lenders led by The Bank of New York, The
Toronto-Dominion Bank, and NationsBank of Texas, N.A. In addition, the Company
has $200 million of Senior Debentures due 2006. The credit facility is senior to
the Senior Debentures through the use of structured subordination whereby
Vanguard Cellular Systems, Inc. ("Vanguard") is the borrower on the Senior
Debentures and Vanguard Cellular Financial Corp. ("VCFC"), Vanguard's only
direct subsidiary, is the primary obligor on the credit facility.
Long-term debt consists of the following as of June 30, 1998 and
December 31, 1997 (in thousands):
June 30, December 31,
1998 1997
--------- --------
Debt of VCFC:
Borrowings under the 1998 Loan Agreements:
Facility A Loan ............................. $ 487,000 $ --
Facility B Loan.............................. -- --
Borrowings under the 1994 Credit Facility:
Term Loan ................................. -- 325,000
Revolving Loan ............................ -- 244,000
Other Long-Term Debt ......................... -- 130
-------- --------
$ 487,000 569,130
Debt of Vanguard:
9 3/8% Senior Debentures due 2006, net of unamortized
discount of $154 and $163 .................. 199,846 199,837
---------- --------
$ 686,846 $768,967
========= ==========
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Credit Facility of VCFC
The Facility A and Facility B Loans are available to provide the Company with
additional financial and operating flexibility and enable it to pursue business
opportunities that may arise in the future. The Facility A Loan consists of a
$750 million senior secured reducing revolving credit facility which allows for
the issuance of up to $25 million of standby letters of credit. The Facility B
Loan consists of a $250 million 364-day revolving credit facility which may be
extended for an additional 364-day period upon the approval of the lenders or
converted to a term loan according to the terms and subject to certain
conditions of the Facility B Loan Agreement. On June 30, 1998, the Company
permanently reduced funds available for borrowing under its Facility A Loan by
paying down debt with $150 million of the proceeds from the sale of its Myrtle
Beach, SC RSA market.
Borrowings under the 1998 Loan Agreements bear interest at a rate equal to
the Company's choice of the Prime Rate or Eurodollar Rate plus an applicable
margin based upon a leverage ratio for the most recent fiscal quarter. The
ranges for this applicable margin are 0.0% to 0.25% for the Prime Rate and 0.5%
to 1.5% for the Eurodollar Rate. Based on the leverage ratio, computed as the
ratio of Total Debt (as defined) to Adjusted Cash Flow (as defined), the
Company's applicable margins on borrowings under the 1998 Loan Agreements are
0.0% and 1.25% per annum for the second quarter of 1998 for the Prime Rate and
Eurodollar Rate, respectively. Upon the occurrence of an event of default as
defined in the 1998 Loan Agreements, the applicable margin added to both the
Eurodollar Rate and the Prime Rate becomes 2.0%.
Upon closing of the 1998 Loan Agreements, the Company paid fees of
approximately $4 million to the lenders. These fees and other costs incurred in
the refinancing have been recorded as a long-term asset in the first quarter of
1998 and will be amortized over the lives of the agreements. Remaining
unamortized deferred financing costs of $6.6 million related to the 1994 Credit
Facility were expensed in the first quarter of 1998 and are reported on the
statement of operations as an extraordinary item. The extraordinary item
recorded in the first quarter of 1998, net of a related income tax benefit of
$2.6 million, totaled $4.0 million or 0.11 per share on a basic and diluted
basis.
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Interest Rate Protection Agreements
The Company maintains interest rate swaps and interest rate caps which
provide protection against interest rate risk. At June 30, 1998 the Company had
interest rate cap agreements in place covering a notional amount of $500
million. The interest rate cap agreements provide protection to the extent that
LIBOR exceeds the strike level through the expiration date as follows (in
thousands):
STRIKE LEVEL NOTIONAL AMOUNT EXPIRATION DATE
7.5% $ 50,000 February, 1999
7.5 50,000 February, 1999
8.0 25,000 August, 1999
9.5 100,000 October, 2002
9.5 100,000 October, 2002
8.5 100,000 November, 2002
7.5 75,000 November, 2002
-------
$ 500,000
========
The total cost of the interest rate cap agreements in place at June 30, 1998
of $1.6 million has been recorded in other assets in the accompanying
consolidated balance sheet and is being amortized over the lives of the
agreements as a component of interest expense.
Additionally, at June 30, 1998 the Company maintained interest rate swap
agreements that fix the LIBOR interest rate at 6.10% on a notional amount of $50
million through October 2002 and at 5.62% on a notional amount of $100 million
through January 2003. Under these swap agreements, the Company benefits if LIBOR
interest rates increase above the fixed rates and incurs additional interest
expense if rates remain below the fixed rates. Any amounts received or paid
under these agreements are reflected as interest expense over the period
covered.
On December 9, 1996, the Company entered into two 10-year reverse interest
rate swaps with notional amounts totaling $75 million. The reverse swaps
effectively convert $75 million of the Debentures into floating rate debt with
interest payable at the six month LIBOR rate plus 3.1%. Simultaneous with this
transaction, the Company purchased an interest rate cap that limits the total
interest on the $75 million to 10% for the first three years should interest
rates rise. The Company's average effective interest rate under these agreements
during the second quarter of 1998 was 8.8%, or 0.58% below the coupon rate for
the Debentures. Additionally, during the first quarter of 1997, the Company
entered into two 9 year reverse interest rate swaps with notional amounts
totaling $25 million. The reverse swaps effectively convert $25 million of the
Debentures into floating rate debt with interest payable at the six-month LIBOR
rate plus 2.61%. Simultaneously with this transaction, the Company purchased an
interest rate cap that limits the total interest rate on the $25 million to 10%
for the first three years of the 9 year agreement. The Company's average
effective interest rate under those agreements during the second quarter of 1998
was 8.3%, which is 1.075% below the coupon rate for the Debentures.
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The effect of interest rate protection agreements on the operating results of
the Company was to decrease interest expense by $10,000 in the second quarter of
1998 and increase interest expense by $44,000 in the same period last year. In
the six month period ended June 30, 1998 and 1997, interest expense increased
$18,000 and $2,000, respectively.
NOTE 4 -- CAPITAL STOCK AND COMPREHENSIVE INCOME
The Company's Board of Directors has authorized the repurchase of up to
7,500,000 shares of its Class A Common Stock from time to time in open market or
other transactions. As of December 31, 1997, the Company had repurchased
3,065,000 shares of its Class A Common Stock at an average price of
approximately $13.00 per share. During the six months ended June 30, 1998, the
Company repurchased an additional 1,612,000 shares at an average price of
approximately $17.70 per share.
During the second quarter of 1998, the Company entered into a total return
equity swap (the "Equity Swap") with a financial institution counterparty (the
"Counterparty"). Pursuant to the swap the Company has the right to purchase
from the Counterparty on or prior to June 30, 2000, shares of Vanguard Cellular
Systems, Inc.'s Class A common stock ("Equity Swap Shares") at a price based
upon the Counterparty purchase price for said shares at initiation of the
Equity Swap. At each quarter end during the term of the Equity Swap, the
Company is required to settle any decrease in the market value of the
Equity Swap Shares below the Counterparty's cost with shares of Vanguard
Cellular Systems, Inc.'s Class A stock, or with cash or a letter of credit
in the amount of the decrease. In addition, the Company is required to pay
the Counterparty a quarterly fee equal to a LIBOR-based rate on the
Counterparty's adjusted cost to acquire the Equity Swap Shares. Due to the
Company's ability to issue shares to settle periodic price fluctuations under
the Equity Swap the Company records all amounts received (paid) under this
arrangement as increases (decreases) to equity.
The purpose of the total return equity swap is to allow the Company to lock
in the current price of Vanguard Stock in anticipation of, or in lieu of, a
future buyback, without the necessity of a present cash outlay. The Company may
enter into future swap arrangements in order to purchase shares under the Board
of Directors authorized stock repurchase plan. As of June 30, 1998, the
Counterparty had acquired 87,900 shares of Vanguard Cellular Systems, Inc. Class
A Common Stock at an approximate cost of $1.7 million. Based on the closing
stock price of $18.875 at June 30, 1998, the market value of the Equity Swap
Shares was less than the Counterparty's cost of such shares by $12,000.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of
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comprehensive income and its components in a full set of general-purpose
financial statements. The Company adopted SFAS No. 130 on January 1, 1998. For
the three months ended June 30 , 1998 and 1997, total comprehensive income of
the Company was $65.3 million and $1.5 million, respectively. For the six months
ended June 30, 1998 and 1997, total comprehensive income (loss) of the Company
was $43.1 million and ($5.2) million, respectively. The differences between net
income and total comprehensive income consist of changes in net unrealized
holding loss on the Company's investment in Geotek.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a summary of the Company's ownership interests in
cellular markets in which the Company's ownership interests exceeded 20% at
June 30, 1998 and 1997.
<TABLE>
JUNE 30,
CELLULAR MARKETS 1998 1997
- ---------------- ---- ----
<S> <C>
MID-ATLANTIC SUPERSYSTEM:
Allentown, PA/NJ 100.0% 100.0%
Wilkes-Barre/Scranton, PA 100.0 100.0
Harrisburg, PA 100.0 100.0
Lancaster, PA 100.0 100.0
York, PA 100.0 100.0
Reading, PA 100.0 100.0
Altoona, PA 100.0 100.0
State College, PA 100.0 100.0
Williamsport, PA 100.0 100.0
Union, PA (PA-8 RSA) 100.0 100.0
Chambersburg, PA (PA-10 East RSA) 100.0 100.0
Lebanon, PA (PA-12 RSA) 100.0 100.0
Mifflin, PA (PA-11 RSA) 100.0 100.0
Wayne, PA (PA-5 RSA) 100.0 100.0
Binghamton, NY 100.0 100.0
Elmira, NY 100.0 100.0
NEW ENGLAND METRO-CLUSTER:
Portland, ME 100.0 100.0
Portsmouth, NH/ME 100.0 100.0
Bar Harbor, ME (ME-4 RSA) 100.0 100.0
FLORIDA METRO-CLUSTER:
*Pensacola, FL 100.0 100.0
*Fort Walton Beach, FL 100.0 100.0
ST VIRGINIA METRO-CLUSTER:
Huntington, WV/KY/OH 100.0 100.0
Charleston, WV 100.0 100.0
Mason, WV (WV-1 RSA) 100.0 100.0
Logan, WV (WV-6 RSA) 100.0 100.0
Parkersburg-Marietta, WV/OH 100.0 100.0
Ross, OH (OH-9 RSA) 100.0 100.0
Perry, OH (OH-10 South RSA) 100.0 100.0
CAROLINAS METRO-CLUSTER:
Myrtle Beach, SC (SC-5 RSA) -- 100.0
*Wilmington, NC 48.0 48.0
*Jacksonville, NC 47.8 47.8
</TABLE>
* The Company has entered into agreements to sell its ownership interests in
these markets. See "Liquidity and Capital Resources."
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<PAGE>
Results of Operations
The following is a discussion and analysis of the historical financial
condition and results of operations of the Company and factors affecting the
Company's financial resources. This discussion should be read in conjunction
with the Company's consolidated financial statements, including the notes
thereto.
Three Months Ended June 30, 1998 and 1997
On June 30, 1998, the Company completed the sale of its Myrtle Beach, SC
RSA market and recognized a $117 million gain on this sale in the second quarter
of 1998. See "Liquidity and Capital Resources". Since this market was owned and
operated by the Company through the end of the second quarter of 1998, the
results of operations presented below include the revenues, expenses, and
subscribers generated by the Myrtle Beach market. The Myrtle Beach market's
subscriber base at June 30, 1998 was approximately 34,000.
Service revenue in the second quarter of 1998 rose 15% to $101.4 million from
$88.3 million in the second quarter of 1997. This increase was primarily the
result of a 112,000 or 19% increase in the number of subscribers in
majority-owned markets to approximately 692,000 at the end of the second quarter
of 1998, as compared to approximately 580,000 in the same period in 1997.
Penetration, computed as a percentage of the Company's subscribers to total POPs
in majority owned cellular markets, increased to 9.1% in the second quarter of
1998 from 7.7 % in the same period last year. The increase in subscribers is the
result of the growing acceptance of cellular communications and the Company's
efforts to capitalize on this increasing acceptance through an expanded sales
and distribution network. Churn, the monthly rate of customer deactivations
expressed as a percentage of the subscriber base, increased to 2.0% in the
second quarter of 1998 from 1.8% in the second quarter of 1997.
Service revenue attributable to the Company's own subscribers (local revenue)
increased 13% during the second quarter of 1998 to $84.1 million as compared to
$74.6 million in the second quarter of 1997. Average monthly local revenue per
subscriber declined 7% to $41 in the second quarter of 1998 compared to $44 in
the same period last year. This decline was primarily due to the continued
pattern of increased incremental penetration into the segment of consumers who
generally use their cellular phones less frequently. Service revenue generated
by nonsubscribers roaming into the Company's markets increased 26% to $17.3
million in the second quarter of 1998 as compared to $13.7 million in the prior
year. This increase was the result of increased usage partially offset by
continued reductions in daily access and usage rates. The reduced rates affect
the Company as both a provider and a purchaser of roaming services. Local
revenue combined with roaming revenue resulted in overall average monthly
revenue per subscriber for the quarter of $50, a decline of 5% from $53 in the
prior year period.
Cost of service as a percentage of service revenue remained constant at 9%
during the second quarters of 1998 and 1997. The Company expects cost of service
as a percentage of service revenue to remain in the 8% to 10% range in the
foreseeable future.
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<PAGE>
General and administrative expenses increased 14% or $3.6 million during the
second quarter of 1998 as compared to the same period in 1997 primarily as a
result of increased costs associated with higher levels of staffing in the
customer operations and technical service areas, and from increased bad debt
expense associated with the larger subscriber base. General and administrative
expenses as a percentage of service revenue decreased slightly from 29% in the
second quarter of 1997 to 28% in the second quarter of 1998. General and
administrative expenses as a percentage of service revenue are expected to
remain stable.
Marketing and selling expenses decreased 2% to $19.8 million during the
second quarter of 1998, compared to $20.2 million in the same period in 1997,
primarily as a result of reduced commission expense associated with a 4% decline
in gross activations in the 1998 period.. As a percentage of service revenue,
these expenses decreased from 23% in the second quarter of 1997 to 20% in the
second quarter of 1998. During the second quarter of 1998, marketing and selling
expenses including the net loss on cellular equipment ("Combined Marketing and
Selling Expenses") decreased to $22.2 million from $24.1 million in the second
quarter of 1997. Combined Marketing and Selling Expenses per gross subscriber
addition decreased to $336 in the second quarter of 1998 from $352 in the same
period last year.
Depreciation and amortization expense increased $3.0 million or 16% during
the second quarter of 1998 as compared to the same period in 1997. Property and
equipment placed in service since July 1, 1997 of approximately $101.5 million
accounted for all of this increase and was offset slightly by a decrease in
amortization. Also contributing to the increase in depreciation is the Company's
decision to change the depreciable lives of its rental phone assets from 3 years
to 1.5 years, which better reflects the useful life of this equipment. In the
first two quarters of 1998, this change increased depreciation expense by
approximately $2.1 million and $2.2 million , respectively, and will increase
depreciation expense by approximately $2.2 million in each of the remaining
quarters in 1998.
Interest expense increased $1.9 million or 13% during the second quarter of
1998. This increase primarily resulted from an increase in average borrowings of
approximately $110.2 million, offset slightly by a decrease in the interest
rates charged.
On June 29, 1998, Geotek Communications, Inc. ("Geotek")announced the
filing of voluntary petitions seeking protection under Chapter 11 of the
Bankruptcy Code. Accordingly, the Company recognized an unrealized holding loss
of approximately $10.0 million in the second quarter to reduce its investment in
Geotek to zero. See "Liquidity and Capital Resources".
Net losses from unconsolidated investments increased by $1.5 million. The
increase resulted primarily from higher operating, amortization and interest
expenses incurred by Inter*Act Systems, Incorporated ("Inter*Act"). As of June
30, 1998, the Company's total investment in Inter*Act was reduced to zero
through recognition of equity method losses, and the Company suspended
recognition of losses attributable to Inter*Act. The Company continues to
recognize its share of the income and losses of its equity method investees.
See "Liquidity and Capital Resources."
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<PAGE>
During the second quarter of 1998, the Company recorded income tax expense
of $42.9 million related to the net income of $106.7 million generated in the
quarter. This expense is primarily the result of the generation of taxable
income on the sale of the Myrtle Beach market during the second quarter of 1998.
In the second quarter of 1998, the Company reported net income of $63.8
million or $1.72 per share as compared to net income of $74,000 or $0.00 per
share in the second quarter of 1997. This $63.7 million increase in net income
is primarily attributable to the gain on the sale of the Myrtle Beach, SC RSA
market, offset by income tax expense, recognition of an unrealized holding loss
on the Company's investment in Geotek, and from higher operating, amortization
and interest expense incurred by Inter*Act.
Six Months Ended June 30, 1998 and 1997
On June 30, 1998, the Company completed the sale of its Myrtle Beach, SC
RSA market and recognized a $117 million gain on this sale in the second quarter
of 1998. See "Liquidity and Capital Resources". Since this market was owned and
operated by the Company through the end of the second quarter of 1998, the
results of operations presented below include the revenues, expenses, and
subscribers generated by the Myrtle Beach market. The Myrtle Beach market's
subscriber base at June 30, 1998 was approximately 34,000.
Service revenue in the first six months of 1998 rose 17% to $191.4 million
from $163.5 million in the second quarter of 1997. This increase was primarily
the result of a 19% increase in the number of subscribers served in the 1998
period. Local revenue increased 16% during the first six months of 1998 to
$162.8 million as compared to $140.4 million in the same period last year.
Average monthly local revenue per subscriber declined 6% to $41 in the first six
months of 1998 compared to $43 in the same period last year. Average monthly
revenue per subscriber for the first six months of 1998 declined 5% to $48 from
$50 in the prior year period.
Cost of service as a percentage of service revenue decreased to 8% in the
first six months of 1998 from 10% in the 1997 period.
General and administrative expenses increased 16% or $7.7 million during the
first six months of 1998 as compared to the same period in 1997, but decreased
slightly as a percentage of service revenue to 29% from 30% in the 1997 period.
Marketing and selling expenses increased 10% to $38.4 million during the
first six months of 1998, compared to $34.7 million in the same period in 1997,
primarily as a result of increased advertising expense associated with the
rollout of the digital product in a significant portion of markets. As a
percentage of service revenue, these expenses decreased from 21% in the 1997
period to 20% in the first six months of 1998. During the 1998 period Combined
Marketing and Selling Expenses increased to $43.9 million from $42.5 million in
1997. Combined Marketing and
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<PAGE>
Selling Expenses per gross subscriber addition increased to $358 in the 1998
period from $334 in the same period last year.
Depreciation and amortization expense increased $9.9 million or 30% during
the first six months of 1998 as compared to the same period in 1997. Property
and equipment placed in service since July 1, 1997 of approximately $101.5
million accounted for a majority of this increase and was offset slightly by a
decrease in amortization. Also contributing to the increase in depreciation is
the Company's decision to change the depreciable lives of its rental phone
assets as discussed above.
Interest expense increased $5.2 million or 19% during the first six months of
1998. Substantially all of this increase resulted from an increase in average
borrowings of approximately $126.5 million.
On June 29, 1998, Geotek announced the filing of voluntary petitions
seeking protection under Chapter 11 of the Bankruptcy Code. Accordingly, the
Company recognized an unrealized holding loss of approximately $10.0 million in
the 1998 period to reduce its investment in Geotek to zero. See "Liquidity and
Capital Resources".
Net losses from unconsolidated investments increased by $13.7 million for the
first six months of 1998. The increase resulted primarily from an additional
$10.0 million equity investment the Company made in IWC in the first quarter of
1998, recognition of an unrealized holding loss on the Company's investment in
Geotek, and from higher operating, amortization and interest expense incurred by
Inter*Act as discussed above. The Company continues to recognize its share of
the income and losses of its equity method investees. See "Liquidity and Capital
Resources."
For the six months ended June 30, 1998, the Company recorded income tax
expense of $41.4 million as a result of generating pre-tax net income of $81.9
million. This represents income taxes associated with the generation of taxable
income on the sale of the Myrtle Beach market during the second quarter of 1998,
offset by an income tax benefit of $4.1 million recorded on the Company's first
quarter pre-tax loss of $24.8 million.
In the first six months of 1998, the Company reported net income before
extraordinary item of $47.1 million or $1.26 per share as compared to net income
of $302,000 or $0.01 per share in the 1997 period. This $46.7 million increase
in net income before extraordinary item is primarily attributable to the gain on
the sale of the Myrtle Beach, SC RSA market, offset by increases in income tax
expense, losses from unconsolidated investments, depreciation expense and
interest expense.
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
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<PAGE>
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, to provide for increased portable usage and to upgrade its cellular
system for digital conversion and the implementation of new services. During the
six months ended June 30, 1998 the Company incurred approximately $53.2 million
in capital expenditures as compared to $83.5 million in the same period last
year.
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, and although the Company anticipates that in 1999
EBITDA will be sufficient to cover property and equipment and debt service
requirements, the Company does not expect EBITDA to grow sufficiently to meet
both its property and equipment and debt service requirements during 1998. The
Company used $150 million of the cash proceeds from the sale of its Myrtle Beach
market to reduce its debt, and plans to use the proceeds of the market sales
discussed below to further reduce debt. For the immediate future, the Company
will rely on borrowings under its existing credit facility to meet any
liquidity needs. In the first quarter of 1998, the Company entered into an
agreement to sell its interest in the ENCCJV for approximately $30 million
in cash. In the second quarter of 1998, the Company entered into an agreement
to sell its Pensacola, FL MSA and Fort Walton Beach, FL RSA markets, as well
as various minority interests in regional cellular licenses for approximately
$172 million in cash. These transactions, which are subject to adjustment, are
expected to close in the third and fourth quarters of 1998, respectively. Each
transaction is subject to approval by regulatory authorities, including the
FCC. The proceeds from these sales will be used to pay down the Company's
existing debt.
EBITDA does not represent and should not be considered as an alternative to
net income or operating income as determined by generally accepted accounting
principles. It should not be considered in isolation from other measures of
performance according to such principles, including operating results and cash
flows. EBITDA increased to $41.7 million in the second quarter of 1998 from
$31.5 million in the 1997 period and net cash provided by operating activities
as shown on the Statement of Cash Flows increased to $41.6 million in the first
six months of 1998 from $8.1 million in the 1997 period. Net cash provided by
operating activities in the first six months of 1998 reflects an $8.2 million
increase in interest expense and an increase in working capital items of $20.8
million. Investing activities, primarily purchases of property and equipment and
acquisitions of investments, provided net cash of $91.6 million and used net
cash of $95.5 million in the first six months of 1998 and 1997, respectively.
Financing activities used net cash of $114.0 million and provided net cash of
$81.5 million in the first six months of 1998 and 1997, respectively.
Financing Agreements. At December 31, 1997 the Company's long-term debt
consisted primarily of a $675 million credit facility (the "Credit Facility")
and $200 million of 9 3/8% Senior Debentures due 2006 (the "Debentures"). In
February 1998, the Company completed the closing of an amendment to the Credit
Facility, increasing the facility to $1.0 billion pursuant to the Third
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<PAGE>
Amended and Restated Facility A Loan Agreement (Facility A Loan) and the
Facility B Loan Agreement (Facility B Loan) (collectively, the 1998 Loan
Agreements) with various lenders led by The Bank of New York, The
Toronto-Dominion Bank, and NationsBank of Texas, N.A.
The Facility A and Facility B Loans are available to provide the Company with
additional financial and operating flexibility and to enable it to pursue
business opportunities that may arise in the future. The Facility A Loan,
consists of a $750 million senior secured reducing revolving credit facility
which allows for the issuance of up to $25 million of standby letters of credit.
The Facility B Loan consists of a $250 million 364-day revolving credit facility
which may be extended for an additional 364-day period upon the approval of the
lenders or converted to a term loan according to the terms and subject to
certain conditions of the Facility B Loan Agreement. On June 30, 1998, the
Company permanently reduced funds available for borrowing under its Facility A
Loan by paying down debt with $150 million of the proceeds from the sale of its
Myrtle Beach, SC RSA market.
Borrowings under the 1998 Loan Agreements bear interest at a rate equal to
the Company's choice of the Prime Rate or Eurodollar Rate plus an applicable
margin based upon a leverage ratio for the most recent fiscal quarter. The
ranges for this applicable margin are 0.0% to 0.25% for the Prime Rate and 0.5%
to 1.5% for the Eurodollar Rate. Based upon the leverage ratio, the applicable
margins for the second quarter of 1998 are 0.0% and 1.25 % for the Prime Rate
and Eurodollar Rate, respectively. Based upon the leverage ratio at the end of
the second quarter, the applicable margins for the third quarter of 1998 are
0.0% and 0.75% for the Prime Rate and Eurodollar Rate, respectively.
The outstanding amount of the Facility A Loan as of September 30, 2000 is
to be repaid in increasing quarterly installments commencing on September 30,
2000 and terminating at the maturity date of December 31, 2005. The quarterly
installment payments begin at 2.5% of the outstanding principal amount at
September 30, 2000 and gradually increase to 6.875% of the outstanding principal
amount. The maturity date for borrowings under the Facility B Loan is February
18, 1999. However, at the Borrower's request and the Lenders' approval, as set
forth in the Facility B Loan Agreement, the maturity date of the Facility B Loan
may be extended to February 16, 2000. Under the terms and subject to certain
conditions of the Facility B Loan Agreement, the Company has the option to
convert the borrowings outstanding under the Facility B Loan as of the Facility
B maturity date to a term loan maturing on December 31, 2005. Upon conversion to
a term loan, the principal balance of the Facility B Loan outstanding on
September 30, 2000 shall be repaid in quarterly installments commencing on
September 30, 2000 and terminating at the maturity date of December 31, 2005.
The quarterly repayments begin at 2.5% of the outstanding principal amount at
September 30, 2000 and gradually increase to 6.875% of the outstanding principal
amount.
The Debentures mature in 2006 and are redeemable at the Company's option, in
whole or in part, at any time on or after April 15, 2001. There are no mandatory
sinking fund payments for the Debentures. Interest is payable semi-annually.
Upon a Change of Control Triggering Event (as defined in the Indenture for the
Debentures), the Company will be required to make an offer to
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<PAGE>
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.
Among other restrictions, the 1998 Loan Agreements limit the payment of cash
dividends, limit the use of borrowings and the creation of additional long-term
indebtedness and require the maintenance of certain financial ratios. The
provisions of the 1998 Loan Agreements were established in relation to the
Company's projected capital needs, projected results of operations and cash
flow. These provisions were generally designed to require continued improvement
in the Company's operating performance such that EBITDA would be sufficient to
continue servicing the debt as repayments are required. The Indenture for the
Debentures contains limitations on, among other things, (i) the incurrence of
additional indebtedness, (ii) the payment of dividends and other distributions
with respect to the capital stock of the Company, (iii) the incurrence of
certain liens, (iv) the ability of the Company to allow restrictions on
distributions by subsidiaries, (v) asset sales, (vi) transactions with
affiliates and (vii) certain consolidations, mergers and transfers of assets.
The Company is in compliance with all requirements of the 1998 Loan Agreements
and the Indenture.
Borrowings under the 1998 Loan Agreements are secured by the stock of
Vanguard Cellular Financial Corp. and Vanguard Cellular Operating Corp.,
direct or indirect wholly owned subsidiaries of the Company. The Debentures
are unsecured obligations of the Company.
Investments in Cellular Entities. 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 cellular
acquisition. The Company also explores possible acquisitions of companies that
will facilitate new service offerings to its customer base, such as paging and
Internet access.
The Company has entered into an agreement to purchase NationPage, a leading
regional paging provider in Pennsylvania and New York, for approximately $28.5
million. The NationPage acquisition will minimize future paging service capacity
constraints and will be financed through borrowings under the 1998 Loan
Agreements.
In the first quarter of 1998, the Company participated in the FCC's Local
Multipoint Distribution Service ("LMDS") auction, which concluded on March 25,
1998. The Company was the high bidder for 22 LMDS Basic Trading Area ("BTA")
licenses, with an aggregate bid of $8.9 million. The majority of these licenses
are in the same markets as the Company's existing cellular operations. As of
March 31, 1998, the Company had $5.3 million on deposit with the FCC. In June
1998, the licenses were issued and the Company completed payment of the $8.9
million to the FCC.
LMDS frequencies may be used for a variety of technologies, including
traditional wireless telephony, competitive local exchange service, broadband
data transmissions, including Internet, video and others. The Company is
studying these applications and presently plans to focus primarily on
traditional wireless telephony and broadband data transmission. There is no
assurance
I-21
<PAGE>
that these are the applications the Company will implement, or when it
will implement these or other applications.
Other Investments. At June 30, 1998, the Company owned approximately 29% of
the outstanding stock of IWC and has invested an aggregate of $26.0 million. IWC
is a development stage company specializing in securing, building and operating
wireless businesses, primarily in Asia and Latin America. As existing and new
projects are in the network buildout phase, the losses of IWC are expected to
grow significantly in future years. The Company records its proportionate share
of these losses under the equity method of accounting. During 1995 , 1996 and
1997, the Company recognized an amount of losses on the equity method from IWC
that is equal to the Company's equity investment in IWC. As a result, the
Company suspended the recognition of losses attributable to IWC until such time
that the equity method income became available to offset the Company's share of
IWC's future losses or the Company makes further investments in IWC. For the six
months ended June 30, 1998, the Company invested an additional $10.8 million in
IWC. Accordingly, during the first six months of 1998 the Company recognized
losses equal to the amount of this additional investment.
During the first quarter of 1997, the Company entered into a stock purchase
agreement to purchase from an unrelated third party 7% of the outstanding shares
of Star Digitel Limited ("SDL"), a Hong Kong company whose principal business
activities relate to the provision and development of cellular
telecommunications services in the People's Republic of China. SDL is a
development stage company, and as such, is expected to incur operating losses
for the foreseeable future. As of June 30, 1998, the Company had completely
funded the $8.4 million share purchase price and invested an additional $1.6
million, including payment of a $700,000 capital call in the first quarter of
1998. The Company accounts for its investment using the equity method of
accounting. In addition, the Company has guaranteed obligations of SDL totaling
$14.1 million, which includes guarantees of $7.2 million on behalf of IWC. If
the Company must eventually fund these guarantees, the funding will be in the
form of loans to SDL.
During 1997, the Company acquired a 12% equity interest in International
Wireless Communications Pakistan Ltd. ("IWCPL") for $7.0 million which has
subsequently been reduced to approximately 10%. Additionally, IWC's 100% owned
subsidiary, Pakistan Wireless Holdings, Inc. ("PWH"), owns a 33% equity interest
in IWCPL, thereby increasing the Company's total ownership interest in IWCPL to
approximately 20%. IWCPL owns approximately 59% of the equity in Pakistan Mobile
Communications (Pvt) Ltd., a Pakistan company that owns and operates the
cellular license in Pakistan. Through June 30, 1998, the Company had invested
$10.0 million in IWCPL including $1.6 million invested during the first quarter
of 1998 and has provided $3.0 million in debt financing. The Company records its
proportionate share of the losses of IWCPL under the equity method of
accounting.
As of June 30, 1998, the Company had invested $10.0 million in Inter*Act
common stock for an ownership interest of approximately 26%. Inter*Act is a
development stage company that provides consumer product manufacturers and
retailers (currently supermarkets) the ability to offer targeted promotions to
retail customers at the point of entry of a retail outlet through an
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<PAGE>
interactive multi-media system utilizing ATM-like terminals.
During 1996, Inter*Act completed the sale of 142,000 units ("Units") of 14%
Senior Discount Notes due 2003, which have been exchanged for identical notes
registered with the SEC and warrants to purchase shares of common stock at $.01
per share. The Company purchased for $12.0 million a total of 18,000 Units
consisting of $18.0 million principal amount at maturity of these 14% Senior
Discount Notes and warrants to purchase 132,012 shares (subsequently increased
to 169,722) of common stock. At issuance, the Company allocated, based upon the
estimated fair values, $8.9 million and $3.1 million to the debentures and
warrants purchased by the Company, respectively. The shares issuable upon the
exercise of these warrants currently represent approximately 2% of Inter*Act's
outstanding common stock. In addition, under a stock warrant agreement, the
Company has the right to acquire at any time prior to May 5, 2005 an aggregate
of 900,113 shares of common stock for $23.50 per share, which shares presently
represent approximately 12% of the outstanding common stock of Inter*Act.
Inter*Act has incurred net losses since its inception. Inter*Act received
approximately $91 million in net proceeds from the above financing which are
being used to accelerate the roll-out of its systems in retail supermarkets and,
as a result, the net losses incurred by Inter*Act are expected to grow
significantly in future years. The Company records its proportionate share of
these losses under the equity method of accounting. The Company's equity and
warrant investment was reduced to zero through the recognition of equity method
losses during 1997. As of June 30, 1998, the Company's total investment in
Inter*Act was reduced to zero through the recognition of equity method losses.
As a result, the Company suspended the recognition of losses attributable to
Inter*Act until such time that equity method income becomes available to offset
the Company's share of Inter*Act's future losses or the Company makes further
investments in Inter*Act.
In addition to the current ownership held by the Company, certain officers,
directors and entities affiliated with certain directors of the Company maintain
an additional 27% ownership interest in Inter*Act.
In 1994, the Company purchased from Geotek Communications, Inc. ("Geotek")
2.5 million shares of Geotek common stock for $30 million. Geotek is a
telecommunications Company that is developing a wireless communications network
using its FHMA (R) digital technology Under a management agreement, the Company
earned and recorded as revenue approximately 201,370 shares with an aggregate
value of $2.1 million in 1996, and approximately 300,000 shares with an
aggregate value of $2.4 million in 1995. In September 1995, the Company
purchased, for $5.0 million in cash, 531,463 shares of convertible preferred
stock of Geotek with a stated value of $9.408 per share. The Company currently
owns less than 5% of Geotek's outstanding common stock.
During 1997, the Geotek common stock price, as quoted on the NASDAQ National
Market System, declined from $7.13 per share at December 31, 1996 to $1.53 per
share at December 31, 1997. Based on Geotek's historical performance, including
the significant decline in the market value of Geotek's common stock, the
Company's management made the determination that the
I-23
<PAGE>
decline in Geotek's common stock price during 1997 was other than temporary and,
accordingly, recognized an unrealized holding loss of $32.7 million in the
fourth quarter of 1997 to adjust the Company's investment in Geotek common stock
to its market value at December 31, 1997. On June 29, 1998, Geotek announced the
filing of voluntary petitions seeking protection under Chapter 11 of the
Bankruptcy Code. Accordingly, the Company recognized an unrealized holding loss
of approximately $10.0 million in the second quarter to reduce its entire
investment in Geotek to zero. Geotek's common stock price as of June 30, 1998
was $0.16 per share, and Geotek was delisted from NASDAQ with the close of
business on that date.
Capital Expenditures. As of June 30, 1998, the Company had $493.1 million of
property and equipment in service. The Company historically has incurred capital
expenditures primarily based upon capacity needs in its existing markets
resulting from continued subscriber growth. To increase geographic coverage and
provide for additional portable usage the Company intends to increase the number
of sites and add additional capacity to existing sites as it has done over the
past few years. During 1998, the Company plans to continue the expansion of its
network. Capital expenditures for 1998 are estimated to be approximately $105 to
$110 million and are expected to be funded primarily through internally
generated funds and borrowing under the 1998 Loan Agreements. Approximately
$75.0 million of those capital expenditures will be for cellular and paging
network equipment, and the remainder will be primarily for rental telephones and
computer equipment. During the six months end June 30, 1998, the Company
incurred approximately $53.2 million in capital expenditures.
Stock Repurchases. The Company's Board of Directors has authorized the
repurchase of up to 7,500,000 shares of its Class A Common Stock from time to
time in open market or other transactions. As of December 31, 1997, the Company
had repurchased 3,065,000 shares of its Class A Common Stock at an average price
of approximately $13.00 per share. During the six months ended June 30, 1998,
the Company repurchased an additional 1,612,000 shares at an average price of
approximately $17.70 per share.
During the second quarter of 1998, the Company entered into a total return
equity swap (the "Equity Swap") with a financial institution counterparty (the
"Counterparty"). Pursuant to the swap the Company has the right to purchase
from the Counterparty on or prior to June 30, 2000, shares of Vanguard Cellular
Systems, Inc.'s Class A common stock ("Equity Swap Shares") at a price based
upon the Counterparty purchase price for said shares at initiation of the
Equity Swap. At each quarter end during the term of the Equity Swap, the
Company is required to settle any decrease in the market value of the
Equity Swap Shares below the Counterparty's cost with shares of Vanguard
Cellular Systems, Inc.'s Class A stock, or with cash or a letter of credit
in the amount of the decrease. In addition, the Company is required to pay
the Counterparty a quarterly fee equal to a LIBOR-based rate on the
Counterparty's adjusted cost to acquire the Equity Swap Shares. Due to the
Company's ability to issue shares to settle periodic price fluctuations under
the Equity Swap the Company records all amounts received (paid) under this
arrangement as increases (decreases) to equity.
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<PAGE>
The purpose of the total return equity swap is to allow the Company to lock
in the current price of Vanguard Stock in anticipation of, or in lieu of, a
future buyback, without the necessity of a present cash outlay. The Company
may enter into future swap arrangements in order to purchase shares under the
Board of Directors authorized stock repurchase plan. As of June 30, 1998, the
Counterparty had acquired 87,900 shares of Vanguard Cellular Systems, Inc.
Class A Common Stock at an approximate cost of $1.7 million. Based on the
closing stock price of $18.875 at June 30, 1998, the market value of the
Equity Swap Shares was less than the Counterparty's cost of such shares by
$12,000.
Income Taxes. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109--"Accounting for Income
Taxes." This standard requires, among other things, the recognition of future
tax benefits, measured by enacted tax rates, attributable to deductible
temporary differences between financial statement and income tax bases of assets
and liabilities and to tax NOLs, to the extent that realization of such benefits
is more likely than not. Prior to 1996, the Company incurred significant
financial reporting and tax losses primarily as a result of substantial
depreciation, amortization and interest expenses associated with acquiring and
developing its cellular markets and substantial marketing and other operating
costs associated with building its subscriber base. Although substantial net
deferred income tax assets were generated, these assets and the associated
income tax benefits were not recognized for financial reporting purposes and a
valuation allowance equal to the unrecognized asset was established.
Management's assessment was that the Company's historical operating results did
not make future profitability certain enough for it to recognize any part of the
asset and related income tax benefits.
Historically, the Company's strategy has been to enhance shareholder value
by investing in growth initiatives. These efforts have resulted in steadily
increasing levels of subscribers, revenues and EBITDA; however, these
initiatives in the form of market acquisitions, capital expenditures, and
expansion of the Company's sales and marketing and customer service functions
have resulted in significant interest, depreciation, amortization and marketing
costs. In addition, the Company has explored strategic investment opportunities
in international telecommunications ventures and alternative lines of business,
all of which are in the early development stages and are generating significant
losses to the Company. As a result, although the Company achieved profitability
in 1996 for financial reporting purposes, the continued costs of its investment
strategy prevented the Company from generating profitable financial results in
1997.
During the fourth quarter of 1997, management revised its strategy from one
of growth and expansion to enhancing shareholder value through profitable
operations in its core cellular properties in Pennsylvania, West Virginia and
New England. This revised strategy incorporates dispositions of noncore cellular
and noncellular properties over the course of the next several years. As part of
this Board-approved strategy, in the first quarter of 1998, the Company entered
into agreements to dispose of its cellular properties in the Carolinas
Metrocluster, which include
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<PAGE>
the Myrtle Beach RSA and ownership interests in the ENCCJV. In the second
quarter of 1998, the Company completed the sale of its Myrtle Beach RSA and
entered into an agreement to sell its operations in Western Florida. Based on
negotiated sales prices for these transactions, the Company expects to generate
capital gains approximating $285 million in 1998, $117 million of which was
realized in the second quarter with the completion of the Myrtle Beach
transaction.
The gains to be generated on these transactions will utilize an equivalent
amount of the Company's accumulated NOLs. Based on these anticipated gains,
management has assessed that it is more likely than not that a significant
portion of the Company's deferred income tax assets are realizable. As of March
31, 1998, prior to the consummation of any of these transactions, the Company
had recognized $56.7 million of net deferred income tax assets. During the
second quarter of 1998, the Company utilized approximately $43 million of net
operating loss carryforwards, attributable primarily to the $117 million gain
recorded on the sale of the Myrtle Beach market. Further utilization of net
operating loss carryforwards is expected with the closing of the ENCCJV and
Western Florida dispositions, which are expected to close in the third quarter
of 1998. As of June 30, 1998, the Company had recorded a net deferred income tax
asset of $21 million.
A valuation allowance of $38.7 million remains on certain deferred income tax
assets due to uncertainties as to when and whether these assets will be realized
in the future. To the extent that the income tax benefit of these amounts is
realized in future years, a significant portion of the benefit will be recorded
as a direct addition to shareholders' equity as these assets relate primarily to
additional income tax deductions arising from restricted stock bonuses, stock
options and stock purchase warrants.
The transactions discussed above which will create the taxable income upon
which management based its deferred income tax asset recognition decisions have
been approved by the Company's Board of Directors and are represented by
definitive agreements among the parties to the transactions; however, ultimate
consummation of these transactions is dependent on the parties reaching final
agreement on terms and financing and the Company obtaining standard regulatory
approvals. There can be no assurance that these transactions will be
consummated.
For Federal income tax reporting purposes, the Company had net operating loss
carryforwards of approximately $323 million at December 31, 1997. These losses
may be used to reduce future taxable income, if any, and expire through 2012.
The primary differences between the accumulated deficit for financial reporting
purposes and the income tax loss carryforwards relate to the differences in the
treatment of certain deferred cellular license acquisition costs, certain gains
on dispositions of cellular interests, partnership losses, depreciation methods,
estimated useful lives and compensation earned under stock compensation plans.
These carryforwards may be subject to annual limitation in the future in
accordance with the Tax Reform Act of 1986 and the ability to use these
carryforwards could be significantly impacted by a future "change in control" of
the Company. The limitations, if any, arising from such future "change in
control" cannot be known at this time. See Note 6 to the Company's Consolidated
Financial Statements for further information regarding the Company's income tax
status.
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<PAGE>
General. Although no assurance can be given that such will be the case, the
Company believes that its internally generated funds and available borrowing
capacity under the 1998 Loan Agreements will be sufficient during the next
several years to complete its planned network expansion, to fund debt service,
to provide flexibility, to repurchase shares, to pursue acquisitions and other
business opportunities that might arise in the future, and to meet working
capital and general corporate needs.
The Year 2000 Issues
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Year 2000 issue affects virtually all companies and organizations.
The Company currently has ongoing efforts to modify its existing computer
systems and expects to have all essential systems Year 2000 compliant before the
end of 1999. Management believes the effort and cost that will be required to
bring the Company's computer systems into compliance will not be material.
Inflation
The Company believes that inflation affects its business no more than it
generally affects other similar businesses.
"Safe Harbor" Statement under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended:
Except for the historical information presented, the matters disclosed in
this report include forward-looking statements. These statements represent the
Company's judgment on the future and are subject to risks and uncertainties that
could cause actual results to differ materially. Such factors include, without
limitation: (i) the substantial leverage of the Company which may adversely
affect the Company's ability to finance its future operations, to compete
effectively against better capitalized competitors and to withstand downturns in
its business or the economy generally; (ii) a change in economic conditions in
the markets served by the Company which could effect demand for cellular
services; (iii) greater than anticipated competition from PCS and ESMR companies
that provide services and features in addition to those currently provided by
cellular companies, and the risk that the Company will not be able to provide
such services and features or that it will not be able to do so on a timely or
profitable basis; (iv) technological developments that make the Company's
existing analog networks and planned digital networks uncompetitive or obsolete
such as the risk that the Company's choice of Time Division Multiple Access
("TDMA") as its digital technology leaves it at a competitive disadvantage if
other digital technologies, including Code Division Multiple Access ("CDMA"),
ultimately provide substantial advantages
I-27
<PAGE>
over TDMA or analog technology and competitive pressures force the Company to
implement CDMA or another digital technology at substantially increased cost;
and (v) higher than anticipated costs due to unauthorized use of its networks
and the development and implementation of measures to curtail such fraudulent
use; and (vi) greater than anticipated losses attributable to its equity
interests in other companies.
I-28
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Vanguard Cellular Systems, Inc. Annual Meeting of Shareholders was held May
19, 1998. The proposals voted upon and the results of the voting were as
follows:
1. Election of Class II Directors for a three-year term.
<TABLE>
<CAPTION>
BROKER
NON-
FOR AGAINST ABSTENTIONS WITHHELD VOTES
<S> <C>
F. Cooper Brantley 32,335,518 -- -- 1,723,198 --
Haynes G. Griffin 32,340,594 -- -- 1,718,122 --
L. Richardson Preyer, Sr. 32,340,594 -- -- 1,718,122 --
2. Proposal to approve ratification of Arthur Andersen LLP as independent
auditors for 1998.
BROKER
NON-
FOR AGAINST ABSTENTIONS WITHHELD VOTES
34,028,545 17,411 12,760 -- --
ITEM 5. OTHER INFORMATION.
Unless notice of a matter to be presented by a security holder of the
Company at the next Annual Meeting of Shareholders is received at the
Company's principal executive offices on or before March 6, 1998, management's
proxies for the meeting confering discretionary authority may be voted with
respect to the matter without including advice in the proxy statement relating
to the meeting regarding how such discretion will be voted on such matter.
II-1
</TABLE>
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits to this Form 10-Q are listed in the accompanying Index
to Exhibits.
(b) On July 13, 1998, the Registrant filed a Current Report on Form 8-K,
dated June 30, 1998. The Form 8-K reported the closing of the sale of
its Myrtle Beach, SC RSA market pursuant to an Asset Purchase Agreement
dated March 10, 1998, and filed related exhibits. .
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VANGUARD CELLULAR SYSTEMS, INC.
Date: July 31, 1998 By: /s/ Stephen R. Leeolou
---------------------------------
Stephen R. Leeolou
President
and
Co-Chief Executive Officer
Date: July 31, 1998 By: /s/ Stephen L.Holcombe
---------------------------------
Stephen L. Holcombe
Executive Vice President
and
Chief Financial Officer
(principal accounting and
principal financial officer)
II-3
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
*2(a) Asset Purchase Agreement dated March 10, 1998 by and between Triton
PCS, Inc. and Vanguard Cellular Systems of South Carolina, Inc.,
filed as Exhibit 2(a) to the Registrant's Form 8K dated June 30,
1998.
2(b) Asset Purchase Agreement dated May 22, 1998 by and among Wireless
One Network, L.P., Western Florida Cellular Telephone Corp., and
Vanguard Cellular Financial Corp.
*3(a) Articles of Incorporation of Registrant as amended through July
25,1995, filed as Exhibit 1 to the Registrant's Form 8-A/A dated
July 25, 1995.
*3(b) Bylaws of Registrant (compilation of July 25, 1995), filed as
Exhibit 2 to the Registrant's Form 8-A/A dated July 25, 1995.
*4(a) Specimen Common Stock Certificate, filed as Exhibit 2 to the
Registrant's Form 8- A/A dated July 25, 1995.
*4(b)(8) Third Amended and Restated Facility A Loan Agreement between
Vanguard Cellular Financial Corp. and various lenders led by the
Bank of New York, and The Toronto-Dominion Bank, and NationsBank of
Texas, N.A. as agents, dated February 20, 1998, filed as Exhibit
4(b)(8) to the Registrant's Form 10-Q dated March 31, 1998.
*4(b)(9) Facility B Loan Agreement between Vanguard Cellular Financial
Corp. and various lenders led by The Bank of New York, and The
Toronto-Dominion Bank, and NationsBank of Texas, N.A. as agents,
dated February 20, 1998, filed as Exhibit 4(b)( 9) to the
Registrant's Form 10-Q dated March 31, 1998.
*4(b)(10) Borrower Pledge Agreement between Vanguard Cellular Financial
Corp. and Toronto-Dominion (Texas), Inc. as collateral agent,
dated February 20, 1998, filed as Exhibit 4(b)( 10) to the
Registrant's Form 10-Q dated March 31, 1998.
*4(b)(11) VCOC Guaranty between Vanguard Cellular Operating Corp. and
various lenders led by The Bank of New York, and The
Toronto-Dominion Bank, and NationsBank of Texas, N.A. as Secured
Parties, dated February 20, 1998, filed as Exhibit 4(b)(11) to
the Registrant's Form 10-Q dated March 31, 1998.
<PAGE>
*4(b)(12) Vanguard Guaranty between Vanguard Cellular Operating Corp. and
various lenders led by the Bank of New York, and the
Toronto-Dominion Bank, and NationsBank of Texas, N.A. as Secured
Parties, dated February 20, 1998, filed as Exhibit 4(b)(12) to
the Registrant's Form 10-Q dated March 31, 1998.
*4(b)(13) Vanguard Pledge Agreement between Registrant and Toronto-Dominion
(Texas), Inc. as collateral agent, dated February 20, 1998, filed
as Exhibit 4(b)(13) to the Registrant's Form 10-Q dated March 31,
1998.
*4(c)(1) Indenture dated as of April 1, 1996 between Registrant and The Bank
of New York as Trustee, filed as Exhibit 4(e)(1) to the Registrant's
Form 10-Q/A dated March 31, 1996.
*4(c)(2) First Supplemental Indenture, dated as of April 1, 1996 between
Registrant and The Bank of New York as Trustee, filed as Exhibit
4(e)(2) to the Registrant's Form 10-Q/A dated March 31, 1996.
11 Calculation of fully diluted earnings per share for the three
months and six months ended June 30, 1998 and 1997.
27 Financial Data Schedule.
- -----------------------
* Incorporated by reference to the statement or report indicated.
The following schedules and exhibits to the Asset Purchase Agreement, filed as
Exhibit 2(b) hereto, have been omitted. The Registrant hereby undertakes to
furnish supplementally a copy of any such omitted schedule or exhibit to the
Commission upon request.
Schedule 1 Excluded Assets
Schedule 2 Partnership Interests
Schedule 2.4 Capital Expenditures
Schedule 4.3 Certain Changes of Events
Schedule 4.4 Assets Used in Connection with Billing,
Administrative and Technical Support Services
Schedule 4.6 Consents
Schedule 4.7 Governmental Authorization
Schedule 4.8 Interests in Real Property
Schedule 4.9 Description of Personal Property
Schedule 4.10 Subscriber Agreements Outside Ordinary Course of
Business
Schedule 4.11 Paging Resale Agreements
Schedule 4.12 Financial Statements
Schedule 4.13 Contracts
Schedule 4.14 Intangibles
Schedule 4.15 Taxes
Schedule 4.16 Insurance
Schedule 4.18 Employee Plans
Schedule 4.19 Litigation
Schedule 4.20 Compliance with Laws
Schedule 4.22 Environmental and Safety Compliance
Exhibit 2.5 Form of Escrow Agreement
Exhibit 2.8 Form of Partnership Assignment Agreement
Exhibit 2(b)
---------------------------------------
ASSET PURCHASE AGREEMENT
DATED MAY 22, 1998
BY AND AMONG
WIRELESS ONE NETWORK, L.P.,
WESTERN FLORIDA CELLULAR TELEPHONE CORP.
AND
VANGUARD CELLULAR FINANCIAL CORP.
---------------------------------------
<PAGE>
TABLE OF CONTENTS
RECITALS......................................................................1
SECTION 1. DEFINITIONS....................................................1
SECTION 2. PURCHASE OF ASSETS; CONSIDERATION.............................10
2.1 Purchase of Assets.................................................10
2.2 Purchase Price.....................................................10
2.3 Payment of Purchase Price..........................................10
2.4 Capital Expenditure Payment........................................10
2.5 Purchase Price Adjustment..........................................11
2.6 Taxes..............................................................13
2.7 Escrow.............................................................13
2.8 Assignment of Partnership Interests................................13
2.9 Purchase of Inventory..............................................13
SECTION 3. ASSUMPTION OF OBLIGATIONS.....................................13
3.1 Assumption of Obligations..........................................13
3.2 Limitation.........................................................14
SECTION 4. REPRESENTATIONS AND WARRANTIES OF SELLER......................15
4.1 Authority..........................................................15
4.2 Authorization and Binding Obligation...............................15
4.3 Absence of Certain Changes or Events...............................15
4.4 Sufficiency of Assets..............................................16
4.5 No Conflict or Violation...........................................16
4.6 Consents...........................................................17
4.7 Governmental Authorizations........................................17
4.8 Real Property......................................................18
4.9 Personal Property..................................................18
4.10 Subscribers and Suppliers..........................................18
4.11 Resale Agreements..................................................19
4.12 Financial Statements...............................................19
4.13 Contracts..........................................................19
4.14 Intangibles........................................................19
4.15 Taxes..............................................................19
4.16 Insurance..........................................................20
4.17 Labor Matters......................................................20
4.18 Employee Benefit Plans.............................................20
4.19 Litigation.........................................................21
ii
<PAGE>
4.20 Compliance With Laws...............................................21
4.21 Bankruptcy ........................................................21
4.22 Environmental and Safety Compliance ...............................21
4.23 Broker.............................................................22
4.24 Partnership Interests..............................................22
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER ......................23
5.1 Organization, Standing and Authority...............................23
5.2 Authorization and Binding Obligation...............................23
5.3 No Conflict or Violation...........................................23
5.4 Consents...........................................................23
5.5 Buyer Qualifications...............................................24
5.6 Litigation.........................................................24
5.7 Compliance With Laws...............................................24
5.8 Bankruptcy.........................................................24
5.9 Broker.............................................................24
5.10 Financial Capability...............................................24
5.11 Knowledge of Claims................................................25
SECTION 6. COVENANTS OF SELLER...........................................25
6.1 Pre-Closing Covenants..............................................25
6.2 Closing Covenant...................................................27
6.3 Title; Risk of Loss................................................27
SECTION 7. CLOSING COVENANTS OF BUYER....................................28
7.1 Pre-Closing Covenants..............................................28
7.2 Closing Covenant...................................................28
SECTION 8. SPECIAL COVENANTS AND AGREEMENTS..............................28
8.1 FCC Consent........................................................28
8.2 Other Consents.....................................................29
8.3 Cooperation........................................................29
8.4 HSR Filings........................................................29
8.5 Notification of Certain Matters....................................29
8.6 Employees..........................................................29
8.7 Schedule Revision..................................................30
8.8 Transition Services................................................30
SECTION 9. CONDITIONS TO OBLIGATIONS OF BUYER AND SELLER.................30
9.1 Conditions to Obligations of Buyer.................................30
9.2 Conditions to Obligations of Seller................................33
SECTION 10. CLOSING; CLOSING DELIVERIES...................................34
10.1 Closing; Termination...............................................34
iii
<PAGE>
10.2 Deliveries by Seller..............................................34
10.3 Deliveries by Buyer...............................................36
10.4 Form of Instruments...............................................37
SECTION 11. ACTIONS BY SELLER AND BUYER AFTER THE CLOSING.................37
11.1 Tax Matters; Payments of Debts and Liabilities....................37
11.2 Closing Financial Statements......................................38
11.3 Rescission........................................................38
SECTION 12. TERMINATION...................................................39
12.1 Grounds for Termination...........................................39
12.2 Breaches and Defaults; Opportunity to Cure........................39
SECTION 13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND
INDEMNIFICATION..................................................40
13.1 Representations and Warranties...................................40
13.2 Indemnification by Parent and Seller.............................40
13.3 Indemnification by Buyer.........................................41
13.4 Limitation of Damages............................................41
13.5 Procedure for Indemnification....................................41
SECTION 14. REMEDIES....................................................42
14.1 By Seller........................................................42
14.2 By Buyer.........................................................42
14.3 Generally........................................................42
14. Specific Performance.............................................42
SECTION 15. ARBITRATION.................................................43
SECTION 16. MISCELLANEOUS...............................................43
16.1 Allocation of Purchase Price.....................................43
16.2 Fees and Expenses................................................43
16.3 Notices..........................................................43
16.4 Further Assurances...............................................44
16.5 Governing Law....................................................45
16.6 Headings.........................................................45
16.7 Gender and Number................................................45
16.8 Entire Agreement.................................................45
16.9 Severability.....................................................45
16.10 Benefit and Assignment...........................................45
16.11 Confidential Information.........................................45
16.12 Counterparts.....................................................46
iv
<PAGE>
LIST OF SCHEDULES AND EXHIBITS...............................................48
v
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made as of May 22,
1998 by and among WIRELESS ONE NETWORK, L.P., a Delaware limited partnership
("Buyer"), WESTERN FLORIDA CELLULAR TELEPHONE CORP., a North Carolina
corporation ("Seller") and VANGUARD CELLULAR FINANCIAL CORP., a North Carolina
corporation ("Parent") .
RECITALS
WHEREAS, Seller is the holder of non-wireline cellular licenses bearing
the call signs KNKA739 and KNKA696, issued by the FCC, and owns certain related
assets, for the construction and operation of the Fort Walton Beach, Florida,
MSA (Market No. 265A) and the Pensacola, Florida MSA (Market No. 127A) (each a
"System" and together, collectively, the "Systems"; and
WHEREAS, Seller also holds the point-to-point microwave licenses
bearing the call signs set forth on Schedule 4.7, issued by the FCC which are
used in the operation of the Systems; and
WHEREAS, Seller's Affiliate, Assignor, owns the Partnership Interests;
and
WHEREAS, Seller desires to sell and Buyer wishes to buy, on the terms
and conditions set forth in this Agreement, the Assets of Seller identified
herein which are used or useful in the operation of the Systems and the
Partnership Interests;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties agree as follows:
SECTION 1. DEFINITIONS.
The following terms, as used in this Agreement, shall have the meanings
set forth in this Section:
"Actions" shall have the meaning assigned to it in Section 4.19.
"Affiliate" means with respect to any Person, any other Person
controlling, controlled by or under common control with such Person or partners
of such Person if such Person owns a majority of the partnership. For the
purposes of this definition, "control" when used with respect to any Person
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such Person, whether through the
ownership of voting securities or by contract.
1
<PAGE>
"Accounts Receivable" means all subscriber accounts receivable from
customers of the Systems arising in the ordinary course of business.
"Assets" means all of Seller's right, title and interest in all of the
tangible and intangible assets, real, personal or mixed, now owned or held by
Seller or hereafter acquired by Seller on or prior to the Closing Date and used
or useful in or necessary for the operation of the Systems, other than the
Excluded Assets, but otherwise including, without limitation, the Real Property,
the Personal Property, the Contracts, the Governmental Authorizations (to the
extent assignable), the Intangibles, the Books and Records, the Subscriber
Agreements and all Current Assets. The Assets do not include any assets of
Seller's Affiliates used to provide billing, legal, customer service,
accounting, roaming support or other consolidated administrative or technical
support functions (including networking facilities such as North American
Cellular Networks ("NACN"), Cellular Digital Packet Data ("CDPD") and Short
Messaging Service ("SMS")) located outside of the Markets, none of which are
reflected on the Books and Records.
"Assignment Applications" shall have the meaning assigned to it in
Section 8.1.
"Assignor" means one or more members of Parent's consolidated group
which is or may from time to time be the owner of the Partnership Interests.
"Assumed Liabilities" shall have the meaning assigned to it in Section
3.1.
"Balance Sheet Date" means March 31, 1998.
"Benefit Arrangement" means any employment, consulting, severance or
other similar contract, arrangement or policy and each plan, arrangement
(written or oral), program, agreement or commitment providing for insurance
coverage (including without limitation, any self-insured arrangements), workers'
compensation, disability benefits, supplemental unemployment benefits, vacation
benefits, retirement benefits, life, health, disability or accident benefits
(including without limitation any "voluntary employees' beneficiary association"
as defined in Section 501(c)(9) of the Code providing for the same or other
benefits) or for deferred compensation, profit-sharing bonuses, stock options,
stock appreciation rights, stock purchases or any other form of incentive
compensation or post-retirement insurance, compensation or benefits which:
(A). is not a Welfare Plan, Pension Plan or Multi-employer Plan,
(B). is entered into, maintained, contributed to or required to be
contributed to, as the case may be, by Seller or its ERISA Affiliate or under
which Seller or its ERISA Affiliate may incur any liability, and
(C). covers any employee or former employee of Seller or its ERISA
Affiliate (with respect to their
relationship with such entities).
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"Books and Records" means all of the books and records of Seller
pertaining to the operation and maintenance of the Systems, other than the
Excluded Assets but otherwise including without limitation, (i) books and
records relating to the purchase of materials and supplies, invoices, customer
lists, supplier lists, personnel records, billing records and subscriber
information, (ii) public file materials, logs and engineering records, (iii)
plans, diagrams, blueprints, schematics, filings with governmental agencies and
executed copies of Contracts, Subscriber Agreements and maintenance records.
"Business Days" means all days except Saturday, Sunday and the holidays
recognized by the government of the United States for its employees.
"Buyer's Closing Certificate" shall have the meaning assigned to it in
Section 9.2.
"Capital Expenditures Payment" shall have the meaning assigned to it in
Section 2.4.
"Capital Expenditures Summary" shall have the meaning assigned to it in
Section 2.4.
"Cash and Cash Equivalents" means all cash of Seller on hand and in
financial institutions, and cash equivalents.
"Cell Site" means a location that contains, among other things, a
low-power transmitter-receiver that communicates by radio signal with cellular
telephones located in the Markets.
"Claim Period" shall have the meaning assigned to it in Section 13.4.
"Claimant" shall have the meaning assigned to it in Section 13.5.
"Claims" shall have the meaning assigned to it as in Section 13.5.
"Closing" means the consummation of the transactions contemplated in
this Agreement in accordance with this Agreement.
"Closing Financial Statements" means the Closing Date Balance Sheet and
the related statements of income for the Systems as of, and for the period ended
on, the Closing Date, prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods covered thereby and
presenting fairly the assets, liabilities and financial position of the Systems
as of the Closing Date and the results of operations for the period then ended.
"Closing Date" means the date on which the Closing occurs, as
determined pursuant to Section 10.1(a).
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"Closing Date Balance Sheet " shall have the meaning assigned to it in
Section 2.5(c).
"Closing Statement" shall have the meaning assigned to it in Section
2.5(c).
"Code" means the Internal Revenue Code of 1986, as amended, and the
regulations promulgated thereunder.
"Communications Act" means the Communications Act of 1934, as amended,
and the regulations promulgated by the FCC thereunder.
"Consents" means the FCC Consents, the filings required under the HSR
Act, and the other consents, waivers, permits, and approvals of third parties,
including without limitation those by Governmental Authorities, necessary to
transfer the Assets to Buyer or otherwise to consummate the transactions
contemplated hereby, which Consents are set forth in Seller's Disclosure
Schedule.
"Contracts" means all contracts, leases (for real or personal
property), non-governmental licenses, commitments, understandings and other
agreements, including any amendments or other modifications thereto, to which
Seller is a party, that relate to the operation of the Systems, including those
described in Seller's Disclosure Schedule, together with any additions thereto
between the date hereof and the Closing Date, but excluding Excluded Assets.
"Current Assets" means the following current Assets, excluding the
Excluded Assets, calculated in accordance with GAAP, of Seller presented on the
Closing Date Balance Sheet: (a) Cash and Cash Equivalents; (b) Accounts
Receivable, (c) Inventory for new cellular telephones, pagers and accessories
and refurbished or used cellular telephones, pagers and accessories reflected at
the lower of cost or fair market value in accordance with GAAP; and (d) prepaid
items and deposits that Buyer will receive the benefit of after the Closing.
"Current Liabilities" means the following current Liabilities,
excluding the Excluded Liabilities, calculated in accordance with GAAP, of
Seller as presented on the Closing Date Balance Sheet: (a) subscriber deposits
received; (b) deferred revenue received; and (c) ordinary trade payables
incurred in the normal course of business excluding any payables owed by Seller
to any Affiliate.
"Damages" shall have the meaning assigned to it in Section 13.2.
"Effective Order" shall have the meaning assigned to it as in Section
9.1(b).
"Effective Time" means 12:01 a.m., Washington, D.C. time, on the
Closing Date.
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"Employee Plans" means all Benefit Arrangements, Multi-employer Plans,
Pension Plans and Welfare Plans, which Employee Plans are set forth in Seller's
Disclosure Schedule.
"Encumbrance" means any conditional sales contract (except for the sale
of cellular telephone service), claim, lien, pledge, option, charge, easement,
security interest, mortgage, deed of trust, right-of-way, encumbrance or adverse
interest of any kind or character, other than Permitted Encumbrances, relating
to the Systems.
"Environmental Laws" shall have the meaning assigned to it in Section
4.22.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the regulations promulgated thereunder.
"ERISA Affiliate" means any entity which is (or at any relevant time
was) a member of a "controlled group of corporations" with, under "common
control" with, or a member of an "affiliated service group" with Seller as
defined in Section 413(b), (c), (m), or (o) of the Code.
"Escrow Agent" shall have the meaning assigned to it in Section 2.7.
"Escrow Agreement" shall have the meaning assigned to it in Section
2.7.
"Escrow Amount" shall have the meaning assigned to it in Section 2.7.
"Excluded Assets" means the following assets of Seller which are
retained by Seller and are not being sold or assigned to Buyer hereunder:
(a). the corporate charter, qualifications to conduct business
as a foreign corporation, arrangements with registered agents relating to
foreign qualifications, tax payer and other identification numbers, seals,
minute books, stock transfer books, stock certificates (including blanks), and
other documents relating to the organization, maintenance, and existence of
Seller as a corporation;
(b). any of the rights of Seller under this Agreement and
other documents executed by the parties as contemplated herein or under any
other agreement between Seller on the one hand and Buyer on the other hand
entered into on or after the date of this Agreement;
(c). all trademarks and tradenames used in connection with the
operation of the Systems other than the agreement which permits the Seller to
use the "Cellular One" trade name.
"FCC" means the Federal Communications Commission.
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"FCC Authorizations" means those authorizations issued by the FCC to
operate the non-wireline cellular radio telephone systems and related
point-to-point microwave facilities in the Markets, which FCC Authorizations are
set forth in Seller's Disclosure Schedule.
"FCC Consents" means actions by the FCC granting its consent to the
consummation of the transactions contemplated by this Agreement.
"Final Order" means a written action or order issued by the FCC or
other Governmental Authority (i) which has not been reversed, stayed, enjoined,
set aside, annulled, or suspended and (ii) with respect to which (A) no requests
have been filed and are still pending for administrative or judicial review,
reconsideration, appeal, or stay, and the time for filing any such requests and
the time for the FCC or other Governmental Authority to set aside the action on
its own motion have expired, (B) in the event of review, reconsideration, or
appeal, the time for further review, reconsideration, or appeal has expired, and
(C) in the event of a stay, such stay has been dismissed and the time for
review, reconsideration or appeal thereof has expired.
"Financial Statements" means the balance sheets and related statements
of income of Seller as of and for the three month period ended as of March 31,
1998 and the twelve month periods ended as of December 31, 1997 and 1996, all of
which are contained in Seller's Disclosure Schedule.
"FTC" means the Federal Trade Commission.
"Governmental Authority" means those federal, state and local
government agencies or organizations with regulatory or licensing jurisdiction
over the Seller's business and the operation of the Systems.
"GAAP" means generally accepted accounting principles as in effect from
time-to-time.
"Governmental Authorizations" means all licenses, permits, franchises,
and other authorizations (except for local business licenses and occupancy
permits) issued by Governmental Authorities in connection with the operation of
the Systems (including the FCC Authorizations), and all applications for
modification, extension or renewal thereof, which Governmental Authorizations
are set forth in Seller's Disclosure Schedule.
"Holdback" shall have the meaning assigned to it in Section 2.3.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Indemnitor" shall have the meaning assigned to it in Section 13.5.
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"Independent Accountant" shall have the meaning assigned to it in
Section 2.5(c).
"Initial Adjustment Amount" shall have the meaning assigned to it in
Section 2.5(b).
"Intangibles" means any and all copyrights, trademarks, trade names,
trade secrets, licenses, patents, permits, privileges, proprietary information,
technical information and data, machinery and equipment warranties, customer and
supplier lists, and other intangible property rights and interests applied for,
issued to, or owned by Seller or under which Seller is licensed or franchised
and used or useful in the operation of the Systems including the FCC
Authorizations, other than Excluded Assets but otherwise including without
limitation those listed in Seller's Disclosure Schedule, together with any
additions thereto between the date hereof and the Closing Date pursuant to
Section 8.7.
"Inventory" means all new cellular telephones and pagers and related
accessories and all used or refurbished cellular telephones or pagers and
related accessories, which Buyer agrees to purchase.
"Liabilities" means liabilities, obligations or commitments of any
nature, whether absolute, accrued, contingent or otherwise, known or unknown,
whether matured or unmatured, as reflected on the Financial Statements.
"Markets" means the Fort Walton Beach, Florida MSA (Market No. 265A)
and the Pensacola, Florida MSA (Market No. 127A), as defined by the FCC.
"Multi-employer Plan" means any "multi-employer plan" as defined in
Section 4001(a)(3) or (3)(37) of ERISA, (i) which Seller or its ERISA Affiliate
maintains, administers, contributes to or is required to contribute to, or after
September 25, 1980, maintained, administered, contributed to or was required to
contribute to, or under which Seller or its ERISA Affiliate may incur any
liability and (ii) which covers any employee or former employee of Seller or its
ERISA Affiliate (with respect to their relationship with such entities).
"Net Working Capital" shall have meaning assigned to it in Section
2.5(a).
"Objection Notice" shall have the meaning assigned to it in Section
2.5(c).
"Partnership Interests Assignment Agreement" shall have the meaning
assigned to it in Section 2.8.
"Partnership Interests Assignment Payment" shall have the meaning
assigned to it in Section 2.8.
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"Partnership Interests" means those certain minority partnership
interests in certain cellular telephone markets identified on Schedule 2 hereof.
"Pension Plan" means any "employee pension benefit plan" as defined in
Section 3(2) of ERISA (other than a Multi-employer Plan) (i) which Seller or its
ERISA Affiliate maintains, administers, contributes to or is required to
contribute to, or, within the five years prior to the Closing Date, maintained,
administered, contributed to or was required to contribute to, or under which
Seller or its ERISA Affiliate may incur any liability and (ii) which covers any
employee or former employee of Seller or its ERISA Affiliate (with respect to
their relationship with such entities).
"Permitted Encumbrances" means (i) any liens for Taxes, assessments, or
other governmental charges or levies that are not yet due and payable or which
are being contested in good faith in appropriate proceedings and which are
reflected as a Liability on the Closing Date Balance Sheet, (ii) easements,
rights of way and other similar property rights which do not and would not
reasonably be expected to have a material adverse effect on Seller's continued
use of any particular parcel of Real Property in the same manner to operate the
Systems and (iii) materialman and workman's liens which have not been filed but
have been created by operation of law in the ordinary course of Seller's
business which in each case would not reasonably be expected to have a material
adverse effect on Seller's continued use of the Asset to which the lien relates.
"Person" means any person or entity, whether an individual, trustee,
corporation, general partnership, limited partnership, limited liability
company, trust, unincorporated organization, business association, firm, joint
venture, governmental agency or authority.
"Personal Property" means any and all machinery, equipment, radios,
transmitters, towers, antennas, lines, switching equipment, test equipment,
cellular telephone inventory, tools, vehicles, furniture, leasehold
improvements, office equipment, plant, inventory, and other tangible personal
property owned or held by Seller and used or useful in the operation of the
Systems other than Excluded Assets, but otherwise including without limitation
the property identified and described as part of the Personal Property in
Seller's Disclosure Schedule, together with any additions thereto between the
date hereof and the Closing Date.
"Pollutant" shall mean any hazardous or toxic substances, including
without limitation, petroleum products or by-products, any flammable explosives,
radioactive materials, hazardous materials, hazardous wastes, petroleum or
petroleum by-product, asbestos, PCBs, phosphates, lead or other heavy metals,
chlorine, radon gas, "hazardous substance" as defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), "hazardous material" as defined in the Hazardous Materials
Transportation Act, as amended, "hazardous waste" as defined in the Resource
Conservation and Recovery Act, as amended, and regulations adopted and
publications promulgated pursuant to said laws.
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"Pro-Forma Closing Balance Sheet" shall have the meaning assigned to it
in Section 2.5(b).
"Purchase Price" shall have the meaning assigned to it in Section 2.2.
"Purchase Price Adjustment" shall have the meaning assigned to it in
Section 2.5(a).
"Real Property" means all real estate and all interests in real
property, including all fee interests, all leaseholds, easements, licenses,
rights to access, and rights of way, and all improvements thereon, owned or held
by Seller and used or useful in the operation of the Systems, which Real
Property is identified and described in Seller's Disclosure Schedule, together
with any additions thereto between the date hereof and the Closing Date.
"Real Property Leases" shall have the meaning assigned to it in Section
4.8.
"Resolution Period" shall have the meaning assigned to it in Section
2.5(c).
"Restoration Actions" shall have the meaning assigned to it in Section
6.3.
"SEC" means the Securities and Exchange Commission.
"Seller's Closing Certificate" shall have the meaning assigned to it in
Section 9.1(a).
"Seller's Disclosure Schedule" means Seller's Disclosure Schedule,
attached hereto and incorporated herein by reference.
"Subscriber Agreements" means Seller's agreements for the provision of
cellular telephone and paging service and/or cellular telephone and paging
equipment to end users.
"Systems" means the non-wireline cellular radio telephone systems and
related point-to-point microwave facilities that are owned and operated by
Seller in the Markets.
"Taxes" means all taxes, charges, fees, levies or other assessments,
including without limitation, income, excise, use, transfer, payroll, occupancy,
property, sales, franchise, unemployment and withholding taxes, imposed by any
Governmental Authority, and any assessments against the Real Property, together
with any interest, penalties or additional taxes attributable to such taxes and
other assessments.
"Termination Notice" shall have the meaning assigned to it as in
Section 12.1(b).
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"To Buyer's knowledge" or "to the best of Buyer's knowledge" or words
of similar effect means the actual knowledge of Buyer through the following
executive employees: John A. Dwyer, James A. Dwyer, III, and Patricia M. Heath.
"To Seller's knowledge" or "to the best of Seller's knowledge" or words
of similar effect means the actual knowledge of Seller through the following
executive employees: Shannon Sincell-Norden, Tom Prestwood, Dennis Francis and
Tim Biltz.
"Welfare Plan" means any "employee welfare benefit plan" as defined in
Section 3(l) of ERISA, (i) which Seller or its ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or under which
Seller or its ERISA Affiliate may incur any liability and (ii) which covers any
employee or former employee of Seller or its ERISA Affiliate (with respect to
their relationship with such entities).
SECTION 2. PURCHASE OF ASSETS; CONSIDERATION.
2.1 Purchase of Assets. Subject to the terms and conditions set forth herein, on
the Closing Date, Seller shall sell, assign, transfer and convey to Buyer, and
Buyer shall purchase from Seller, all of the Assets, free and clear of all
Encumbrances. Seller will retain, and Buyer will not purchase, the Excluded
Assets.
2.2 Purchase Price. Subject to adjustment as provided in Section 2.5 below, the
total purchase price (the "Purchase Price") to be paid for the Assets shall be
ONE HUNDRED SEVENTY-TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($172,500,000.00).
2.3 Payment of Purchase Price. Subject to adjustment as provided in Section 2.5,
Buyer shall pay to Seller at Closing (a) 95% of the Purchase Price in
immediately available U.S. funds and (b) 5% of the Purchase Price (the
"Holdback") shall be held by the Escrow Agent to secure (i) any payments of
amounts due Buyer from Seller hereunder such as the Purchase Price Adjustment
and (ii) indemnification obligations of Seller under Section 13.2. The Holdback,
less amounts being contested, shall be released pursuant to the terms of the
Escrow Agreement as follows: (x) amounts due Buyer under the Purchase Price
Adjustment, not to exceed $250,000, shall be released to Buyer when the Purchase
Price Adjustment is finally known under Section 2.5(c) and (y) the balance one
(1) year after the Closing Date.
2.4 Capital Expenditure Payment. In addition to the Purchase Price, Buyer shall
pay to Seller at Closing, in immediately available U.S. funds, the sum of (a)
Seller's capital expenditures made on or after April 30, 1998, as set forth in
Schedule 2.4, and then made by Seller and (b) any other capital expenditures
made on or after the date hereof with respect to the Systems and approved in
writing by Buyer (collectively, the "Capital Expenditures Payment") to be
reflected in the capital expenditures summary (the "Capital Expenditures
Summary"), to be delivered by Seller to Buyer at Closing.
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2.5 Purchase Price Adjustment.
(a). The Purchase Price shall be increased or decreased (the "Purchase
Price Adjustment") on a dollar-for-dollar basis (positive or negative) for the
cumulative net adjustment required by the following: an amount equal to the Net
Working Capital of Seller on the Closing Date. In addition, the Purchase Price
may be reduced if as of September 30, 1998 the number of actual ending Qualified
Subscribers for the Systems ("Actual Qualified Subscriber Number") is less than
54,668, subject to adjustment (for a period of up to thirty (30) days prior or
subsequent to September 30, 1998) downwards of twenty (20) subscribers per day
for each day prior to such date or upwards of twenty (20) subscribers per day
for each day after such date, to reflect the date on which the Closing actually
occurs (the "Minimum Qualified Subscriber Number"), by deducting from the
Purchase Price an amount equal to Three Hundred Dollars ($300.00) times the
difference between the Minimum Qualified Subscriber Number for the Systems as of
the month prior to Closing and the Actual Qualified Subscriber Number. As used
herein, the term "Net Working Capital" shall mean (y) Current Assets minus (z)
Current Liabilities, as such amounts are reflected on the Closing Date Balance
Sheet (as hereinafter defined). Notwithstanding the foregoing, for purposes of
determining the value of the Accounts Receivable, the Accounts Receivable shall
be valued as follows: 100% for those less than 31 days old, 85% for those
between 31 and 60 days old, 40% for those between 61 and 90 days old, and 0% for
those over 90 days old. Inventory shall be valued in accordance with GAAP.
Additionally, all Contracts (including Accounts Receivable) between Seller and
Affiliates of Seller shall be eliminated and therefore no credits or debits
made.
(b). The initial adjustments to the Purchase Price based on Net Working
Capital will be made at the Closing using a good faith estimate by Seller of the
Net Working Capital of Seller (the "Initial Adjustment Amount") based upon an
unaudited balance sheet (the "Pro-Forma Closing Balance Sheet") to be prepared
by Seller as of the end of the month immediately preceding the Closing Date if
the Closing Date is on or after the tenth (10th) day of the month or otherwise
as of the end of the next preceding month or, at Seller's discretion, as of such
other interim date for which the necessary information is available, such
estimate to be delivered by Seller to Buyer at least five (5) Business Days
prior to Closing along with the Pro-Forma Closing Balance Sheet. Buyer will
present any good faith objections to the Pro-Forma Closing Balance Sheet,
stating in reasonable detail the basis for such objections, to Seller within two
(2) Business Days prior to Closing and Seller shall, when it deems appropriate
in good faith, make adjustments to the Pro-Forma Closing Balance Sheet, prior to
the Closing Date.
(c). As promptly as practicable after the Closing Date (but in no event
later than sixty (60) days thereafter) Seller shall prepare and deliver to Buyer
for its review and comment (i) a balance sheet dated as of the close of business
on the Closing Date (the "Closing Date Balance Sheet") and (ii) an accompanying
closing statement (the "Closing Statement") reasonably detailing as of the close
of business on the Closing
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Date Seller's determination of each element of the Purchase Price Adjustment.
The Closing Date Balance Sheet shall fairly present the actual financial
position of the Seller as at the close of business on the Closing Date. If Buyer
objects to any amount reflected on the Closing Date Balance Sheet or the Closing
Statement, Buyer must, within thirty (30) days after Buyer's receipt of the
Closing Date Balance Sheet and Closing Statement, give written notice (the
"Objection Notice") to Seller specifying in reasonable detail its objections, or
Seller's determination of the Purchase Price Adjustment shall be final, binding
and conclusive on the parties. With respect to any disputed amounts, the parties
shall meet in person to negotiate in good faith during the thirty (30) day
period (the "Resolution Period") after the date of Seller's receipt of the
Objection Notice to resolve any such disputes. If the parties are unable to
resolve all such disputes within the Resolution Period, then within five (5)
Business Days after the expiration of the Resolution Period, all disputes shall
be submitted to Ernst & Young or, if such firm is unavailable or unwilling to
resolve such disputes, to another nationally recognized accounting firm mutually
acceptable to Buyer and Seller (the "Independent Accountant") who shall be
engaged to provide a final and conclusive resolution of all unresolved disputes
within thirty (30) days after such engagement. The Independent Accountant shall
only determine the values of the disputed item(s) and shall not ascribe a value
therefore which is higher or lower than the figures presented by the parties.
Buyer and Seller each represent and warrant, with respect to itself and its
Affiliates, that neither itself nor its Affiliates have retained during the
prior three (3) years or currently retain the Independent Accountant to provide
accounting or other services and agrees on behalf of itself and its Affiliates
not to retain such firm until a final determination of the Purchase Price
Adjustment has been made. The determination of the Independent Accountant shall
be final, binding and conclusive on the parties hereto, and the fees and
expenses of the Independent Accountant shall be borne equally by the parties.
From and after the Closing Date, Buyer will provide Seller with access to the
books, records and personnel of Buyer that Seller reasonably requests.
(d). If the Purchase Price Adjustment (as finally determined in
accordance with the provisions set forth above) less the Initial Adjustment
Amount is a positive (negative) amount, then, within five (5) Business Days
after such final determination, Buyer (Seller) shall pay to Seller (Buyer) such
amount in immediately available funds. Any amounts resolved by the Independent
Accountant which differ from the losing party's position by more than 10%
(measured from that party's position) shall bear interest at the rate of 12% per
year. Any payments not made after ten (10) days of the due date shall bear
interest at the annual rate of 12% per year, together with payment of all
reasonable attorneys' fees for costs of collection.
(e). To the extent that any Taxes, assessments or other governmental
levies that are being contested in good faith by Seller in appropriate
proceedings are reflected as a Liability on the Closing Date Balance Sheet and
are not finally determined to be due and owing or not paid by Buyer within two
(2) years of the Closing Date, Buyer shall reimburse such amounts to Seller.
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2.6 Taxes. Except for Taxes which are not yet due (for which the
Closing Date Balance Sheet shall reflect appropriate amounts) all Taxes
(including gross receipts, Federal excise, sales, payroll and income taxes) and
other assessments on the Assets which are due and payable shall be paid by
Seller as of the Closing Date.
2.7 Escrow. Concurrently with the execution of this Agreement, Buyer
shall deliver to CORESTATES Bank, N.A., as escrow agent (the "Escrow Agent"),
the amount of 10% of the Purchase Price ($17,250,000.00) in immediately-
available funds, which amount (including, unless otherwise stated herein, all
interest earned on such sum thereafter, the "Escrow Amount") shall be held by
the Escrow Agent pursuant to the terms of a certain escrow agreement of even
date herewith (the "Escrow Agreement") in the form of Exhibit 2.7. In the event
of a termination of this Agreement by Seller in accordance with the terms of
Section 12.1(b)(ii), Seller shall be entitled to retain the entire Escrow
Amount; provided, however, that Seller shall not be entitled to retain the
Escrow Amount if Buyer also has the right to terminate the Agreement under
section 12.1(b)(ii) or any other Section of this Agreement. At Closing, the
Escrow Amount shall be applied against the Purchase Price. In the event that the
Agreement is terminated by Seller under Section 12.1(b)(ii) and Buyer does not
have the right to terminate the Agreement, the Escrow Amount shall be considered
liquidated damages and shall be the sole and only recourse against Buyer and its
Affiliates.
2.8 Assignment of Certain Partnership Interests. On the Closing Date,
in consideration of the payment of the Purchase Price, subject to the terms and
conditions of a certain partnership interests assignment agreement in the form
of Exhibit 2.8 (the "Partnership Interests Assignment Agreement"), Seller shall
cause Seller's Affiliate, Assignor, to sell, assign, transfer and convey to
Buyer the Partnership Interests .
2.9 Purchase of Inventory. Seller shall provide a list of inventory to
Buyer twenty (20) days prior to the Closing Date and Seller shall elect within
five (5) days of receipt thereof which items of Inventory it elects to purchase.
SECTION 3. ASSUMPTION OF OBLIGATIONS.
3.1 Assumption of Obligations. From and after the Closing Date, Buyer shall
assume and undertake to pay, satisfy or discharge solely and only (a) the
Current Liabilities ( but not including the current portion of long term
liabilities including accrued interest thereon) of Seller on and as of the
Closing Date, and (b) the Liabilities, obligations and commitments of Seller
arising on or after the Closing Date relating to periods after the Closing Date
under: (i) the Contracts listed in Seller's Disclosure Schedule; and (ii) the
Subscriber Agreements. Buyer shall also assume and be responsible for (y) all
Liabilities arising from the ownership and use of the Assets and the operation
of the Systems on and after the Closing Date relating to periods after the
Closing Date and (z) all Taxes and assessments (including, but not limited to
those relating to federal and state universal service funds) for which and to
the extent accruals are reflected on the Closing Date Balance Sheet relating to
periods prior to Closing or arising from the ownership and use of the Assets and
the operation of the Systems
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on and after the Closing Date. Each of the obligations set forth in this Section
3.1 is individually referred to herein as an "Assumed Liability" and are
collectively referred to herein as "Assumed Liabilities."
3.2 Limitation. Except as expressly set forth in Section 3.1 hereof, Buyer shall
not assume, or otherwise be responsible for, any liabilities or obligations of
Seller, whether actual or contingent, matured or unmatured, liquidated or
unliquidated, known or unknown, whether arising out of occurrences prior to, at
or after the date hereof, which include, without limitation:
(a). any liability or obligation for legal, accounting and audit fees
and any other expenses incurred by Seller in connection with the preparation of,
negotiation of, and performance under, this Agreement;
(b). any liability or obligation of Seller with respect of any
employees or former employees of Seller including without limitation (i) any
employment agreement, whether or not written, between Seller and any Person,
(ii) any liability under any Employee Plan at any time maintained, contributed
to or required to be contributed to by or with respect to Seller, or under which
Seller may incur liability, or any contributions, benefits or liabilities
therefor, or any liability with respect to Seller's withdrawal or partial
withdrawal from or termination of any Employee Plan and (iii) any claim under
any state unemployment compensation or worker's compensation law, which shall
have been asserted on or prior to the Closing Date or is based on acts or
omissions which occurred prior to the Closing Date;
(c). any liability or obligation of Seller in respect of any Taxes or
assessments arising from or with respect to the Assets incurred or attributable
to any period prior to the Closing Date for which and to the extent accruals are
not reflected on the Closing Date Balance Sheet;
(d). any liability or obligation of Seller resulting from any Action
against Seller for which Seller is not entitled to indemnification pursuant to
Section 13.3;
(e). any liability or obligation of Seller or its Parent or Affiliates
resulting from entering into, performing its obligations pursuant to or
consummating the transactions contemplated by, this Agreement, including any
liability to any broker, finder or other financial intermediary; and
(f). any liability or obligation under any material Contract not listed
in Seller's Disclosure Schedule. For purposes of the foregoing, "material"
Contracts shall be those that provide for payments by either party in excess of
Ten Thousand Dollars $10,000) annually and One Hundred Thousand Dollars
($100,000) in the aggregate.
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SECTION 4. REPRESENTATIONS AND WARRANTIES OF SELLER.
Parent and Seller, jointly and severally, represent and warrant to
Buyer as follows:
4.1 Authority. Seller is a corporation duly organized and validly existing under
the laws of the State of North Carolina and has the requisite corporate power
and authority required to acquire, own, lease, and operate the Assets and to
carry on the business of the Systems as now being conducted. Seller has the
requisite power and authority to execute, deliver, and perform this Agreement
and the documents contemplated hereby according to their respective terms.
Seller is not a participant in any joint venture or partnership, management
agreement or other similar arrangement with any other Person relating to the
Systems. Seller is in good standing under the laws of North Carolina and as a
foreign corporation in Florida.
4.2 Authorization and Binding Obligation. Each of Parent and Seller has taken
all corporate action necessary to enter into this Agreement and consummate the
transactions contemplated hereby and perform its obligations hereunder. This
Agreement and each of the other agreements and documents to be delivered
hereunder when executed and delivered by each of Parent and Seller will have
been duly executed by each of Parent and Seller and constitute a legal, valid,
and binding obligation of each of Parent and Seller, enforceable against each of
Parent and Seller in accordance with its terms, except for the effect thereon of
any applicable bankruptcy, insolvency, reorganization, moratorium, and similar
laws of public policy or policies affecting the rights of creditors generally.
4.3 Absence of Certain Changes or Events. To Seller's knowledge (except with
respect to items 4.3(b), (e) and (i) which are not qualified by knowledge),
since the Balance Sheet Date, unless otherwise indicated in Seller's Disclosure
Schedule, there has not been any:
(a). (i) increase in compensation payable or to become payable to any
of the employees of Seller or any bonus payment made or promised to any such
employee other than in the ordinary course of business and consistent with past
practices (other than an increase in the compensation of the general manager in
accordance with the practices of Seller's and its Affiliates as a group), or
(ii) material change in personnel policies, insurance, retirement, health or
other employee benefits or any other compensation arrangements affecting such
employees;
(b). sale, assignment or transfer of any of the Assets, singly or in
the aggregate (other than in the ordinary course of business and consistent with
past practice when replaced by assets of substantially equivalent value and
function);
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(c). cancellation of any indebtedness or waiver of any rights of
material value to Seller, except in the ordinary course of business and
consistent with past practice;
(d). amendment, cancellation or termination of any Contract,
Governmental Authorization or other instrument material to the operation of the
Systems;
(e). change in accounting methods or practices by Seller;
(f). damage, destruction or loss not covered by insurance, materially
and adversely affecting the Assets;
(g). imposition of any material Encumbrance on any of the Assets;
(h). capital expenditures by Seller, or incurrence of an obligation to
make any capital expenditures, involving payments in excess of $250,000 in the
aggregate, other than as (i) set forth in the Capital Expenditures Summary, (ii)
required in order to replace damaged or inoperable equipment which is necessary
to the continued operation of the Systems as currently configured or (iii)
authorized by Buyer in writing (which shall not be unreasonably conditioned or
withheld);
(i). amendment of Seller's Articles of Incorporation or Bylaws; or
(j). payment, discharge or satisfaction of Liabilities, other than in
the ordinary course of business and consistent with past practice.
4.4 Sufficiency of Assets. Other than the Excluded Assets and except for certain
assets used in connection with billing and other consolidated administrative and
technical support services set forth on Schedule 4.4, the Assets set forth in
Seller's Disclosure Schedule constitute all of the assets, rights and
properties, tangible or intangible, real or personal which are utilized in the
operation of the Systems as they are presently conducted and are necessary and
useful for the conduct of the business as presently conducted.
4.5 No Conflict or Violation. The execution, delivery, and performance by Seller
of this Agreement and the documents contemplated hereby and the consummation of
the transactions contemplated hereby: (i) will not conflict with any provision
of each of Parent and Seller's Articles of Incorporation or Bylaws; (ii) will
not conflict with or constitute a violation of any applicable statute, law,
rule, code, judgment, order, ordinance, writ, injunction, regulation, decree,
award or ruling of any court or other governmental instrumentality or result in
an event which with notice, lapse of time or both, would result in any such
conflict or violation; (iii) provided the FCC Consents are obtained, will not
conflict with, constitute grounds for termination of, result in a breach of,
constitute a default under, or accelerate or permit the acceleration of any
performance required by the terms of any Contract, Governmental Authorization,
or other agreement, instrument, license, or permit to which Seller is a party or
by which
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Seller is bound or subject, which relates to operation of the Systems, or result
in an event which with notice, lapse of time or both, would result in any such
conflict, grounds, breach, default, or acceleration; and (iv) will not result in
the imposition of any Encumbrance upon the Assets or any material restriction or
charge on the Systems, or result in an event which with notice, lapse of time or
both would result in any such imposition, restriction or charge.
4.6 Consents. Except for the Consents set forth in Seller's Disclosure Schedule
and as otherwise agreed to in this Agreement, no consent, approval, permit, or
authorization of, declaration to or filing or registration with any governmental
or regulatory authority or any other party (including without limitation any
Consent necessary for the valid assignment of any Contract) is required to be
made or obtained in connection with the execution, delivery and performance of
this Agreement by Seller and the transactions contemplated hereby, including
enabling Buyer to own the Assets and operate the Systems.
4.7 Governmental Authorizations. Seller's Disclosure Schedule contains a true
and complete list of the Governmental Authorizations related to the ownership
and operation of the Systems. Seller has delivered to Buyer true and complete
copies of the Governmental Authorizations. To the best of Seller's knowledge,
the Governmental Authorizations comprise all the licenses, permits, and other
authorizations required from Governmental Authorities for the lawful conduct of
the operation of the Systems as they are currently being operated. The
Governmental Authorizations are in full force and effect and are unimpaired by
any acts or omissions of Seller, and are valid for the balance of the current
license term, if any, applicable generally to each such Governmental
Authorization. To the best of Seller's knowledge, Seller has operated the
Systems in compliance with all terms and conditions of the Governmental
Authorizations and of any renewals thereof applicable to the Systems except
where the failure to so comply would not have a material adverse effect on
Seller's rights to ownership and use of the Assets, or on its operation of the
Systems. Seller is the exclusive holder of the FCC Authorizations. There are no
pending or, to the best of Seller's knowledge, threatened proceedings by or
before the FCC which would result in the revocation, cancellation, suspension or
adverse modification of the FCC Authorizations or the imposition of any
forfeiture; nor to the best of Seller's knowledge are there any facts that would
give rise to or form the basis for such a proceeding. Provided the FCC Consents
are obtained and become Final Orders, Seller has (and on the Closing Date will
have) the right, power and authority under the Communications Act to transfer
the Assets to Buyer upon consummation of the transactions contemplated hereby.
To the best of Seller's knowledge, no renewal of any FCC Authorization would
constitute a major environmental action under the current rules of the FCC. The
FCC actions granting the current FCC Authorizations together with all underlying
construction permits, are Final Orders of the FCC. Seller is not aware of any
reason why (i) those of the FCC Authorizations subject to expiration would not
be renewed in the ordinary course of business or (ii) any of the FCC
Authorizations would be revoked. None of the Governmental Authorizations is
subject to any Encumbrance,
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other than any liens securing Seller indebtedness, all of which liens shall be
extinguished by Seller prior to or at Closing.
4.8 Real Property. Seller's Disclosure Schedule contains a complete description
of all of Seller's interests and rights in Real Property used or useful in the
operation of the Systems as currently being operated. Seller leases all of its
other Real Property pursuant to one or more of the Contracts (the "Real Property
Leases"), and each leased Cell Site that is part of the Assets is the subject of
a Real Property Lease. To the best knowledge of Seller, there are no pending or
threatened condemnation proceedings relating to any of the Real Property. To
Seller's knowledge, all towers and other structures on the Real Property which
are part of the Assets are marked in accordance with the requirements of the FCC
Authorizations and all applicable state and local laws. Seller has not received
any written notice for assessments for public improvements against any Real
Property which remains unpaid. Except as set forth in Seller's Disclosure
Schedule, Seller has not granted any oral or written lease, sublease or license
granting to any Person any right to the possession, use, occupancy or enjoyment
of any of the Real Property. Seller has good title to the Real Property and none
of the Real Property is subject to any Encumbrance, other than any liens
securing Seller indebtedness, all of which liens shall be extinguished by Seller
prior to or at Closing. Seller has delivered to Buyer true and complete copies
of all Real Property Leases.
4.9 Personal Property. Seller's Disclosure Schedule contains descriptions of all
Seller's material Personal Property. Seller owns and has good title to each item
of Personal Property, except for the Personal Property that is specifically
identified in Seller's Disclosure Schedule as leased pursuant to one of the
Contracts. None of the PersonaI Property is subject to any Encumbrance, except
for any liens securing Seller indebtedness, all of which shall be extinguished
by Seller prior to or at Closing, and Permitted Encumbrances. The Personal
Property is sufficient to permit the Systems to operate in all material respects
in accordance with the terms of the FCC Authorizations. The Personal Property is
in good operating condition, normal wear and tear excepted. The Assets
constitute all the assets used in the conduct of the business as currently
conducted (except for Excluded Assets).
4.10 Subscribers and Suppliers. Copies of all unexpired Subscriber Agreements
are contained in Seller's Books and Records. As of the Balance Sheet Date,
Seller had approximately 51,296 Qualified Subscribers, each telephone number
being a separate Qualified Subscriber. Except as set forth in Seller's
Disclosure Schedule, Seller has not entered into any Subscriber Agreements
outside the ordinary course of business or for consideration other than cash. As
used herein, "Qualified Subscribers" means cellular accounts that (a) are active
in both Seller's switch and billing subscriber data bases, (b) are suspended
(not in excess of one hundred and twenty (120) days) and active (suspended not
to exceed ten percent (10%) of the aggregate of the number of active and
suspended subscribers), (c) are not a result of any special promotions
instituted on or after the date hereof by Seller outside of the ordinary course
of business consistent
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with past practice unless approved in writing by Buyer (which approval shall not
be unreasonably withheld), and (d) are not agent or employee accounts.
4.11 Resale Agreements. Seller is a party to certain resale agreements for
paging services which are listed in the Seller's Disclosure Schedule and such
agreements are included in the Contracts. Seller has no resale agreements for
cellular services.
4.12 Financial Statements. The Financial Statements are contained in Seller's
Disclosure Schedule. The Financial Statements, the Pro-Forma Closing Date
Balance Sheet and the Closing Financial Statements do and will, as appropriate,
fairly present the Assets, Liabilities and financial condition and results of
the System's operations indicated in accordance with GAAP consistently applied,
subject to normal year-end adjustments in the case of any interim financial
statements.
4.13 Contracts. The Contracts listed in Seller's Disclosure Schedule comprise
all of Seller's material Contracts (including Real Property Leases). Seller has
delivered to Buyer true and complete copies of all such Contracts, together with
all amendments and extensions to date. To the best of Seller's knowledge, all
such Contracts are in full force and effect, are valid, binding, and enforceable
in accordance with their terms, are paid currently, and have not been materially
impaired by any acts or omissions of Seller. Except as set forth in Seller's
Disclosure Schedule, no material Contract requires the consent of any other
contracting party to the transactions contemplated by this Agreement. To
Seller's knowledge, there is not under any Contract any material default by any
party thereto or any event that, after notice or lapse of time or both, would
constitute such a material default. For purposes of the foregoing, "material"
Contracts shall be those that provide for payments by either party in excess of
Ten Thousand Dollars ($10,000) annually and One Hundred Thousand Dollars
($100,000) in the aggregate.
4.14 Intangibles. Seller's Disclosure Schedule contains a true and complete list
of Seller's Intangibles, all of which are valid, in good standing, and, to the
best of Seller's knowledge, uncontested. Except as set forth in Seller's
Disclosure Schedule, Seller has no licenses granted by or to it or any other
agreements to which it is a party, relating in whole or in part to any of the
Intangibles. Seller owns and has good title to the Intangibles free and clear of
any Encumbrance, except for any liens securing Seller indebtedness, all of which
liens shall be extinguished by Seller prior to or at Closing. Seller has
delivered to Buyer copies of all documents establishing the Intangibles.
4.15 Taxes.
(a). Filing of Tax Returns. Seller has timely filed with the
appropriate taxing authorities all returns (including, without limitation,
information returns and other material information) in respect to all taxes and
other assessments and levies (including all interest and penalties), in respect
of Taxes required to be filed through the date hereof and will timely file any
such returns required to be filed on or prior to the Closing
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Date unless otherwise contested in good faith by Seller with notice thereof
being given to Buyer. To Seller's knowledge, the tax returns and other
information filed are complete and accurate in all material respects.
(b). Payment of Taxes. All Taxes, in respect of periods beginning
before the Closing Date, have been timely paid, or will be timely paid, or an
adequate accrual has been or will be established therefor, as set forth in the
Financial Statements or the Closing Statement, and Seller does not have any
material liability for Taxes in excess of the amounts so paid or accrual so
established.
(c). Audits, Investigations or Claims. The federal income tax returns
of Seller have not been audited by the Internal Revenue Service, and no material
deficiencies for Taxes have been claimed, proposed or assessed by any taxing or
other Governmental Authority against Seller. Except as specified on Seller's
Disclosure Schedule, there are no pending or, to the best of Seller's knowledge,
threatened audits, investigations or claims for or relating to any material
additional liability in respect of Taxes.
(d). Liens. There are no liens for Taxes (other than for current Taxes
not yet due and payable) on the Assets.
(e). Foreign Person. Seller is not a person other than a United States
person within the meaning of the Code.
4.16 Insurance. Seller's Disclosure Schedule contains a complete and accurate
list of all policies and binders of insurance (showing as to each policy and
binder the carrier, policy number, coverage limits, expiration dates, annual
premiums and a general description of the types of coverage provided) maintained
by Seller. All of such policies are sufficient for compliance with all
requirements of law and all of the Contracts. Seller is not in default under any
of such policies or binders and has not failed to give any notice or to present
any claim under any such policy or binder in a due and timely fashion. Such
policies or binders provide replacement cost insurance coverage for all Personal
Property and all improvements upon the Real Property. Such policies and binders
are in full force and effect on the date hereof and shall be kept in full force
and effect by Seller through the Closing Date.
4.17 Labor Matters. Seller (i) is not a party to any labor agreement with
respect to its employees with any labor organization, group or association, and
(ii) has not been notified at any time during the past three (3) years of any
attempt by organized labor or its representatives to make Seller conform to
demands of organized labor relating to its employees or to enter into a binding
agreement with organized labor that would cover the employees of Seller.
4.18 Employee Benefit Plans. All Employee Plans that cover or have covered
employees of Seller are set forth in Seller's Disclosure Schedule. All Employee
Plans maintained by Seller conform in all respects with the provisions of ERISA
and have
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been administered in compliance with the terms of such plans and with all
filing, reporting and disclosure requirements of the Code and ERISA. There is no
pending or, to the best of Seller's knowledge, threatened litigation, claim or
assessment against any such Employee Plan. Each Employee Plan that is a "Pension
Plan" is qualified under Section 4001 of the Code. Seller has not, and no plan
fiduciary of any such Employee Plan has, engaged in any transaction in violation
of Section 406(a) or (b) of ERISA or any "prohibited transaction" (as defined in
Section 4975(c)(1) of the Code) for which no exemption exists under Section
4975(d) of the Code. None of Parent or Seller's current or past employees has
been a participant in a Seller-sponsored Multi-employer Plan. Parent or Seller
has not been subject to any "withdrawal liability" (as defined in Section 4201
of ERISA) at any time assessed against Seller with respect to any Multi-employer
Plan. Seller has maintained all Employee Plans with respect to its employees in
a manner that will not give rise to any successor liability to Buyer under ERISA
or the Code.
4.19 Litigation. Except for legal or administrative proceedings affecting the
cellular telephone or paging industries generally, there is no action, suit,
claim, arbitration or other legal or administrative proceeding (collectively,
"Actions") pending or, to the best of Seller's knowledge, threatened against
Seller with respect to the Assets or the Systems, except as set forth on
Schedule 4.19.
4.20 Compliance With Laws. Except as set forth on Seller's Disclosure Schedule,
Seller is in compliance with all laws, regulations and governmental orders
applicable to the Assets and the operation of the Systems, the failure to comply
with which, individually or in the aggregate, could reasonably be expected to
have a material adverse effect on the Assets or the operation of the Systems.
Seller is not in default with respect to any judgment, order, injunction or
decree of any court, administrative agency or other Governmental Authority or
any tribunal duly authorized to resolve disputes in any respect material to the
transactions contemplated hereby.
4.21 Bankruptcy. No insolvency proceedings of any character, including without
limitation, bankruptcy, receivership, reorganization, composition or arrangement
with creditors, voluntary or involuntary, affecting Seller (other than as a
creditor) or any of the Assets, are pending, or to the best of Seller's
knowledge, threatened, and Seller has not made any assignment for the benefit of
creditors or taken any action in contemplation of or which would constitute the
basis for the institution of such insolvency proceedings.
4.22 Environmental and Safety Compliance. To the best of Seller's knowledge,
neither the operation of the Systems nor the Assets violates in any respect any
applicable Federal, state or local law, rule, regulation or order relating to
air, water or noise pollution, employee health and safety, or the production,
storage, labeling, transportation or disposition of waste or hazardous or toxic
substances (collectively, "Environmental Laws"). To the best of Seller's
knowledge, there has been no release or discharge of Pollutants into the soil,
surface waters, groundwater, drinking water
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supplies, navigable waters, land, surface or subsurface strata, or ambient air
which has resulted or could result in any material damage, loss, cost, expense,
claim, demand, order or liability to or against Seller or Buyer by a
Governmental Authority or other party relating to or resulting from the
operation of the Systems, the Assets or otherwise relating to the Real Property,
irrespective of the cause of such condition. Seller has not received any notice
from any Governmental Authority or private or public entity advising Seller that
it is potentially responsible for response costs with respect to a release or
threatened release of any Pollutant. Seller has not received any notice of
violation of any Environmental Law or zoning or land use ordinance, law or
regulation relating to the operation of the Systems or the Assets including, but
not limited to, CERCLA, the Toxic Substance Control Act of 1976, as amended, the
Resource Conservation and Recovery Act of 1976, as amended, the Clean Air Act,
as amended, the Federal Water Pollution Control Act, as amended, or the
Occupational Safety and Health Act of 1970, as amended. Seller's Disclosure
Schedule also contains a list and brief description of all filings by Seller
with, notices to Seller from, and related material reports to all Governmental
Authorities administering Environmental Laws, within three years prior to the
date hereof, including without limitation, filings made, corrective action
taken, or citations received by Seller. Except as set forth in Seller's
Disclosure Schedule, no written environmental assessments or impact statements
or reports relating to the Real Property have been prepared for, or received by,
Seller prior to the date hereof.
4.23 Broker. Except for Wasserstein, Perella & Co., Inc. (for whose commission
and other fees and costs Seller shall be responsible), Seller has not employed
the services of any broker or any similar Person that will require the payment
of any finder's fee, commission or similar payment in connection with this
Agreement or any matter related hereto.
4.24 Partnership Interests. Assignor has good and marketable title to the
Partnership Interests, free and clear of all Encumbrances (including the absence
of any Permitted Encumbrances). The Partnership Interests are not subject to any
options, warrants, claims or rights of first refusal by any Person. The
partnership agreements relating to the Partnership Interests are in full force
and effect, with no breach or default, or alleged breach or default, by
Assignor, and Assignor has made all capital calls required to be made and is not
aware of any calls for additional capital. To Seller's knowledge, Assignor has
not received any distributions from any such partnerships to which it is not
entitled and owes no sums, and to Seller's knowledge is owed no sums, whether as
a consultant, manager, partner or otherwise from any of said partnerships. All
information provided by Seller and Assignor to Buyer with respect to such
partnerships (i.e. financial statements, etc.) is, to Seller's best knowledge,
accurate and complete in all material respects. Assignor is a corporation duly
organized and validly existing and has the requisite corporate power and
authority required to own the Partnership Interests. Assignor has the requisite
power and authority to execute, deliver, and perform the Partnership Interests
Assignment Agreement and the documents contemplated hereby according to their
respective terms. Assignor is not a party to any other agreement relating to the
transfer or assignment of the Partnership Interests. Assignor has taken
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all corporate action necessary to enter into this Agreement and consummate the
transactions contemplated hereby and perform its obligations hereunder. The
Partnership Interests Assignment Agreement and each of the other agreements and
documents to be delivered hereunder when executed and delivered by Assignor will
have been duly executed by Assignor and constitute a legal, valid and binding
obligation of Assignor, enforceable against Assignor in accordance with its
terms, except for the effect thereon of any applicable bankruptcy, insolvency,
reorganization, moratorium, and similar laws of public policy or policies
affecting the rights of creditors generally.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer represents and warrants to Seller as follows:
5.1 Organization, Standing and Authority. Buyer is a limited partnership duly
formed and in good standing under the laws of the State of Delaware. Buyer has
the requisite corporate power and authority to execute, deliver, and perform
this Agreement and the documents contemplated hereby according to their
respective terms.
5.2 Authorization and Binding Obligation. Buyer has taken all action necessary
to enter into this Agreement, consummate the transactions contemplated hereby
and perform its obligations hereunder. This Agreement and each of the other
agreements and documents to be delivered hereunder when executed and delivered
by Seller will have been duly executed and delivered by Buyer, and constitute a
legal, valid, and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms, except for the effect thereon of any applicable
bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting
the rights of creditors generally.
5.3 No Conflict or Violation. The execution, delivery, and performance by Buyer
of this Agreement and the documents contemplated hereby and the consummation of
the transactions contemplated hereby: (i) will not conflict with the Limited
Partnership Agreement of Buyer, (ii) will not conflict with or result in a
violation of any applicable statute, law, rule, code, judgment, order,
ordinance, writ, injunction, regulation, decree, award or ruling of any court or
Governmental Authority or result in an event which with notice, lapse of time or
both, would result in any such conflict or violation, or (iii) provided the
Consents are obtained, will not conflict with, constitute grounds for
termination of, result in a breach of, constitute a default under, or accelerate
or permit the acceleration of any performance required by the terms of, any
agreement, instrument, license, permit, franchise or other authorization issued
by Federal, state, or local governmental authorities to which Buyer is a party
or by which Buyer is bound or subject, or result in an event which with notice,
lapse of time or both, would result in any such conflict, grounds, breach,
default, or acceleration.
5.4 Consents. Except for the Consents and as otherwise agreed to in this
Agreement, no consent, approval, permit or authorization of, declaration to or
filing or
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registration with any Governmental Authority or any other third party is
required to be made or obtained by Buyer in connection with the execution,
delivery and performance of this Agreement and the transactions contemplated
hereby, including enabling Buyer to own the Assets and operate the Systems.
5.5 Buyer Qualifications. Buyer is legally, technically, financially and
otherwise qualified to hold the FCC Authorizations and to consummate the
transactions contemplated hereby. Buyer has no knowledge of any fact that would,
under existing law (including the Communications Act), disqualify Buyer as an
assignee of the FCC Authorizations. Buyer's acquisition of the FCC licenses will
not make Buyer subject to divestiture of any radio spectrum pursuant to the
spectrum cap provisions of 47 U.S.C. ss. 20.6.
5.6 Litigation. Buyer is not subject to any judgment, award, order, writ,
injunction, arbitration decision or decree which could materially adversely
affect Buyer's ability to perform its obligations hereunder. There is no
litigation, proceeding or investigation pending or, to the best of Buyer's
knowledge, threatened against Buyer in any Federal, state or local court, or
before any administrative agency or arbitrator or before any other tribunal duly
authorized to resolve disputes which seeks to enjoin or prohibit, or otherwise
questions the validity of, any action taken or to be taken pursuant to or in
connection with this Agreement or which could materially adversely affect
Buyer's ability to perform its obligations under this Agreement.
5.7 Compliance With Laws. Buyer is not in default with respect to any judgment,
order, injunction or decree of any court, administrative agency or other
Governmental Authority or any other tribunal duly authorized to resolve disputes
in any respect material to the transactions contemplated hereby.
5.8 Bankruptcy. No insolvency proceedings of any character, including without
limitation, bankruptcy, receivership, reorganization, composition, or
arrangement with creditors, voluntary or involuntary, affecting Buyer (other
than as a creditor) are pending, or to the best of Buyer's knowledge,
threatened, and Buyer has not made any assignment for the benefit of creditors
or taken any action in contemplation of or which would constitute the basis for
the institution of such insolvency proceedings.
5.9 Broker. Except for Wasserstein, Perella & Co., Inc., for whose commission
Seller shall be responsible, Buyer has not employed the services of any broker
or any similar Person that will require the payment of any finder's fees,
commission or similar payment in connection with this Agreement or any matter
relating hereto. Seller shall not be liable for any commissions, finder's fees,
or similar payments to any Person or entity acting on Buyer's behalf in
connection with this Agreement or any matter related hereto.
5.10 Financial Capability. Buyer currently has available and/or has received
binding commitments for and will have on the Closing Date sufficient funds to
consummate the
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transactions contemplated by this Agreement, including, without limitation,
payment of the Purchase Price and the Capital Expenditures Payment.
5.11 Knowledge of Claims. As of the date hereof, Buyer does not have knowledge
of any breach of the representations and warranties of Seller contained in this
Agreement.
SECTION 6. COVENANTS OF SELLER.
6.1 Pre-Closing Covenants. Seller covenants and agrees with Buyer that for the
period from the date hereof through the Closing:
(a). Maintenance of the Systems. Seller shall use commercially
reasonable efforts to carry on its business in the ordinary course consistent
with past practice. Buyer shall not, directly or indirectly, control, supervise
or direct the operation of the Systems. Seller will continue at all times prior
to the Closing Date to maintain full, complete, actual (de facto) and legal (de
jure) control of, and supervise and direct the operation of the FCC
Authorizations and the Systems in accordance with the requirements of the
Communications Act.
(b). Certain Prohibited Transactions. Without limiting the generality
of subsection (a) above, Seller shall not, without the prior written approval of
Buyer (which approval shall not be unreasonably conditioned or withheld):
(i).mortgage, pledge or otherwise encumber any of its Assets
or sell, transfer or otherwise dispose of any of its Assets except (y) for the
sale or rental of inventory in the ordinary course of business, and (z) for the
sale of cellular telephone operating equipment in the ordinary course of
business and consistent with past practice when replaced by equipment of
substantially equivalent value and function;
(ii).cancel, release or assign any Subscriber Agreements
except in the ordinary course of business;
(iii).except as set forth in Seller's Disclosure Schedule,
enter into, modify or terminate any material contract or commitment relating to
the Systems or the Assets, except for entry into, modification or termination of
Subscriber Agreements in the ordinary course of business, or amend, terminate,
or waive any substantial right under any Contract (including, without
limitation, any lease for real property, tower space or equipment building
space) outside of the ordinary course of business;
(iv).make any material change in any method of accounting or
accounting practice;
(v).enter into any agreement to make any commitment or offer
to provide cellular telephone or paging service to subscribers other than in the
ordinary course of business;
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(vi).waive any material rights relating to the Systems or the
Assets; or
(vii).do any other act (y) that would cause any representation
or warranty of Seller to be or become untrue in any material respect or (z)
related to the operation of the Systems that is not in the ordinary course of
business consistent with past practice; or
(viii).enter into any special sales promotions with respect to
rates or services that would extend beyond the Closing Date at substantially
below market rates.
(c). Governmental Authorizations. Seller shall not cause or, to the
extent within its control, permit, by any act or failure to act, any of the
Governmental Authorizations to expire or to be surrendered or modified, or take
any action that would cause any Governmental Authority to institute proceedings
for the suspension, revocation, or material and adverse modification of any of
the Governmental Authorizations or fail to prosecute with due diligence any
pending applications for any Governmental Authorization in connection with the
operation of the Systems, or take any other action that would result in the
Systems being in noncompliance with the requirements of any Governmental
Authorizations.
(d). Access to Information. Subject to Section 16.11 hereof, Seller
shall give to Buyer and its counsel, accountants, engineers, and other
representatives reasonable access to the Systems, and to all Books and Records
relating thereto, and to the officers, employees, and agents of Seller, and will
furnish or cause to be furnished to Buyer and its representatives all
information relating to the Assets, the Systems, and Seller that they may
reasonably request. Seller shall also use its reasonable efforts to keep all
representations and warranties true and correct and shall promptly notify Buyer
of any breach or inaccuracy thereof.
(e). Monthly Financials. Seller shall provide Buyer with a balance
sheet and related statements of income within thirty (30) calendar days after
the end of each month, which financial statements shall fairly present the
Assets, Liabilities and financial condition and results of the System's
operations in accordance with GAAP consistently applied, subject to normal
year-end adjustments.
(f). Maintenance of Assets. Seller shall take commercially reasonable
actions necessary to maintain all the Assets in good and working order and in
the condition represented in this Agreement, except for obsolescence and
ordinary wear and tear, and will maintain supplies of inventory and spare parts
consistent with past practice. If any loss, damage, impairment, confiscation, or
condemnation to any of the Assets occurs, Seller shall take all commercially
reasonable actions necessary to repair, replace, or restore the Assets to their
prior condition as represented herein as soon thereafter as possible, and the
proceeds of any claim under any insurance policy shall
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be used solely to repair, replace, or restore any of the Assets that are lost,
damaged, impaired, or destroyed.
(g). Compliance With Laws. Seller shall comply in all material respects
with all laws, rules and regulations in connection with the Assets and the
Systems and the matters related to this Agreement. Upon receipt of notice of
violation of any law, rule or regulation, Seller shall contest in good faith or
take action to cure the violation prior to the Closing Date.
(h). Insurance. Seller shall take all action necessary to keep in full
force and effect any existing insurance policies, or obtain comparable coverage,
for the Assets and the Systems as set forth in Seller's Disclosure Schedule.
(i). Taxes. Seller shall take all actions necessary to file in a timely
manner all Federal, state, and local tax and information returns hereafter
required to be filed by Seller relating to or in connection with the Assets and
the operation of the Systems, and will pay all Taxes (and any other charges,
duties, penalties, interest, or fines) which become due pursuant to those
returns or pursuant to any assessment which becomes due and payable unless
otherwise disputed in good faith by Seller with notice thereof being provided to
Buyer.
(j). No Shop. Parent and Seller agree that as long as this Agreement is
in effect, neither Parent nor Seller (nor any of its or their officers,
directors, representatives, employees, agents or Affiliates) will, directly or
indirectly, solicit, initiate, encourage or participate in negotiations with
respect to, or furnish or cause or permit to be furnished any information to any
Person (other than Buyer or its representatives) in connection with any inquiry
or offer for any purchase or sale of the Systems, the Assets or any material
part of the Assets or the stock of Seller.
6.2 Closing Covenant. On the Closing Date, if the conditions set forth in
Section 9.2 have been satisfied, and if this Agreement has not been terminated
pursuant to Section 12, Seller shall transfer, convey, assign, and deliver to
Buyer the Assets and cause Assignor to assign the Partnership Interests as
provided in Section 2 and make the deliveries provided in Section 10.2.
6.3 Title; Risk of Loss. Legal title and risk of loss with respect to the Assets
shall not pass to Buyer or any of its subsidiaries until the Assets are
transferred at Closing. If prior to the Closing Date any of the Assets are
destroyed or damaged by fire, wind or other casualty, Seller may, at its option,
either (a) replace or restore such Assets with Assets of comparable quality or
(b) include an amount equal to a mutually agreed upon cost of completing the
replacement or repair of such property as a deduction in the calculation of the
Purchase Price, or (c) if there are insurance proceeds available to cover such
damage or destruction, assign its rights to such insurance proceeds to Buyer
(the options referred to in (a), (b) and (c) above, collectively, the
"Restoration Actions"); provided, however, that if Seller's and Buyer's agree
upon estimate of the
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costs of the Restoration Actions exceeds ten percent (10%) of the Purchase
Price, either Seller or Buyer may by written notice to the other elect to
terminate this Agreement. Seller shall have the right to implement one or more
of the Restoration Actions concurrently or extend the Closing Date by up to
thirty (30) days to complete the restoration and repair.
SECTION 7. CLOSING COVENANTS OF BUYER.
7.1 Pre-Closing Covenants. Buyer covenants and agrees with Seller that between
the date hereof and the Closing Date, Buyer shall act so that each
representation and warranty in Section 5 shall continue to be true on and as of
the Closing Date in all material respects as if made on and as of the Closing
Date. Buyer shall not take any action that is inconsistent with Buyer's
obligations under this Agreement or that could hinder or delay the consummation
of the transactions contemplated hereby.
7.2 Closing Covenant. On the Closing Date, if the conditions set forth in
Section 9.1 have been satisfied, and if this Agreement has not been terminated
pursuant to Section 12, Buyer shall purchase the Assets from Seller and
Partnership Interests from Assignor as provided in Section 2 and shall make the
deliveries provided in Section 10.3.
SECTION 8. SPECIAL COVENANTS AND AGREEMENTS.
8.1 FCC Consent. The sale of the Assets as contemplated by this Agreement is
subject to the prior consent and approval of the FCC. Not later than ten (10)
Business Days after the date of this Agreement, Buyer and Seller shall file with
the FCC applications for the FCC Consents (the "Assignment Applications"). Buyer
and Seller agree to use their best efforts to: (i) prosecute the Assignment
Applications with all reasonable diligence; (ii) amend the Assignment
Applications as may be required or desirable to effectuate the transactions
contemplated hereunder; (iii) oppose any petition to deny or other opposition
filed against the Assignment Applications; and (iv) otherwise use their best
efforts to obtain a grant of the Assignment Applications as expeditiously as
practicable. Neither Buyer nor Seller shall seek, nor cause any of their agents
to seek, and each shall use its best efforts to oppose, any request for
reconsideration, application for review or any other attempt to seek any form of
review of the FCC Consent. The failure by either party to timely file or
diligently prosecute its portion of the Assignment Applications as required by
this Section shall be a material breach of this Agreement. All fees charged by
the FCC in connection with filing the Assignment Applications shall be paid by
Buyer.
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8.2 Other Consents.
(a). Within ten (10) Business Days after the date of this Agreement,
Seller and Buyer shall join in any applications, filings or registrations
required by any state or local governmental regulatory authority to request
issuance of orders approving the transactions contemplated by this Agreement (if
such orders are requisite to the completion of these transactions) and
diligently and expeditiously take all steps reasonably necessary to prosecute
any such applications. The failure by either party to timely file or diligently
prosecute its portion of any such applications as required by this Section shall
be a material breach of this Agreement. All filing and grant fees charged by
such state regulatory authority in connection with such applications shall be
paid by Buyer .
(b). Seller shall commence, as soon as practicable, all action
reasonably necessary to obtain all other Consents, provided that, such action
does not cause a material adverse change in the terms or conditions of any
Contract or Governmental Authorization that could be materially less
advantageous to the operation of the Systems than those existing under the
Contract or Governmental Authorization as in effect on the date hereof. Seller
shall promptly advise Buyer of any difficulties experienced in obtaining any of
the Consents and of any conditions proposed, considered, or requested for any of
the Consents. Seller shall not agree to any material adverse change in any
provision of any Contract as a condition to obtaining such consent without first
obtaining Buyer's approval for any such change.
8.3 Cooperation. The Parties shall cooperate fully with each other in connection
with any actions required to be taken as part of their obligations under this
Agreement, and will use their best efforts to consummate the transactions
contemplated hereby and to fulfill their obligations hereunder.
8.4 HSR Filings. Within twenty (20) Business Days after the date of this
Agreement, the Parties shall make any and all filings that the parties determine
are required under the HSR Act. All filing and grant fees in connection with
such HSR Act filings shall be paid by Buyer.
8.5 Notification of Certain Matters. Seller and Buyer shall each give prompt
notice to the other party of (i) the occurrence, or failure to occur, of any
event which occurrence or failure would be likely to cause any representation or
warranty of such party contained in this Agreement to be untrue or inaccurate in
any material respect any time from the date hereof to the Closing Date and (ii)
any material failure of such party to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder, and
such party shall use all reasonable efforts to remedy the same.
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8.6 Employees. It is Buyer's current intention to offer employment to some or
all of Seller's employees. Buyer shall provide to Seller a written list, not
less than twenty (20) days prior to the Closing Date, of those employees of
Seller which will be offered a job by Buyer. If Buyer offers employment to any
of Seller's employees, Buyer's offers of employment shall be on terms and
conditions that Buyer shall determine in its sole discretion. Buyer will consult
with Seller prior to any communications with Seller's employees regarding future
employment. Neither Parent, Seller nor any of its Affiliates shall offer any job
or engagement to any employee of Seller prior to indication from Buyer that such
employee will not be offered employment. In addition, Buyer will not terminate
the employment of any employee whose annual compensation in 1998 is (on an
annualized basis) in excess of $40,000, except for termination for cause in the
ordinary course of business consistent with past practice.
8.7 Schedule Revision. Prior to Closing, Seller shall compile a revised Seller's
Disclosure Schedule, which revised Seller's Disclosure Schedule shall reflect
accurate and complete information as of the Closing Date. Any revisions to
Seller's Disclosure Schedule which do not result from actions that are permitted
pursuant to the terms of this Agreement shall constitute breaches of
representations and warranties hereunder.
8.8 Transition Services. Prior to Closing, Buyer and Seller shall negotiate in
good faith a transition services agreement, whereby Seller shall provide, for up
to six (6) months after the Closing, on a month-to-month basis at Seller's
direct operating costs (i) access to the NACN, CDPD and SMS platforms, to the
extent permitted under Seller's Affiliate's existing agreements with the
providers of such services and (ii) such other transition services to the extent
Buyer and Seller mutually agree thereon.
SECTION 9. CONDITIONS TO OBLIGATIONS OF BUYER AND SELLER.
9.1 Conditions to Obligations of Buyer. All obligations of Buyer to purchase the
Assets and to complete the related transactions contemplated by this Agreement
are subject to the satisfaction or waiver (in the discretion of Buyer in respect
to the waiver of such conditions) by Buyer, on or prior to the Closing Date, of
each of the following conditions:
(a). Representation, Warranties and Covenants. All representations and
warranties of Seller contained in this Agreement shall be true and correct in
all material respects at and as of the Closing Date as though such
representations and warranties were made at and as of the Closing Date, and
Seller shall have performed in all material respects all agreements, covenants
and conditions required hereby to be performed by it, prior to or at the Closing
Date except for (a) those representations and warranties set forth in Sections
4.1 and 4.2 which shall be true and correct in all respects and (b) those
representations and warranties already qualified by materiality, and except for
changes permitted by this Agreement or resulting from any transaction expressly
consented to in writing by Buyer; provided that for all purposes under this
Agreement, the existence or occurrence of any events or circumstances that
constitute
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a breach of a representation or warranty of Seller made in this Agreement
(including, without limitation, Seller's Disclosure Schedule) on the date of
such representation or warranty is made shall not constitute a breach of such
representation or warranty if such event or circumstance is cured as provided in
Section 12.2. There shall be delivered to Buyer at Closing a certificate signed
by the President of Seller to the foregoing effect ("Seller's Closing
Certificate").
(b). Consents. The FCC Consents shall have become Final Orders and
shall not contain conditions that are material and adverse to any of the FCC
Authorizations or the Buyer. Notwithstanding anything to the contrary contained
in this Section 9.1, Section 9.2 or otherwise and subject to Section 11.3 of
this Agreement, if no petitions to deny the Assignment Applications have been
filed within the applicable public comment period, and the FCC thereafter grants
said Applications and such grant becomes legally effective by the release of an
FCC Public Notice announcing the grant (the "Effective Order"), Buyer may, with
the written consent of Seller, waive on behalf of the parties the requirement
that the FCC Consents shall have become Final Orders. Consents for the
assignment of all material Real Property Leases and Contracts listed in
Schedules 4.9 and 4.14 of Seller's Disclosure Schedule shall have been obtained
without any change in the terms or conditions of any such Real Property Lease or
Contract, unless with respect to a change which may reasonably be expected to be
material and adverse (i) such Consent is waived by the Buyer, (ii) Seller
agrees, in its sole discretion, to indemnify Buyer for increased costs or other
damages resulting from the failure to obtain such Consent, or (iii) the parties
mutually agree on an alternative course of action to resolving the absence of
any such Consent. Any such Real Property Lease or other Contract for which a
Consent to the assignment from Seller to Buyer is not obtained shall remain the
responsibility of Seller until the necessary Consents have been obtained.
(c). Governmental Authorizations. Seller shall be the holder of all FCC
Authorizations and any other FCC licenses and permits granted on or before the
Closing Date and necessary to operate the Systems as configured on the Closing
Date, and there shall not have been any modification of any of the FCC
Authorizations that could have a material adverse effect on Seller's operation
of the Systems. No proceeding shall be pending the effect of which could be to
revoke, cancel, fail to renew, suspend, or modify adversely in any material
respect any of the Governmental Authorizations.
(d). Deliveries. Seller shall have made all the deliveries to Buyer set
forth in Section 10.2.
(e). Opinions of Counsel. Seller shall have delivered to Buyer one or
more opinions of Seller's counsel, dated as of the Closing Date, addressed to
Buyer and providing substantially as follows:
(i) Seller's existence and qualification are as stated in
Section 4.1 hereof;
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(ii) Seller has full corporate power and authority to
consummate the transactions contemplated by this Agreement as stated in Section
4.1;
(iii) This Agreement and the documents contemplated hereby and
all other agreements and undertakings contained in this Agreement have been duly
authorized, executed and delivered, and all such instruments are valid and
enforceable against Parent and Seller in accordance with their respective terms
except for the effect of bankruptcy, insolvency, reorganization, moratorium and
other similar laws affecting creditors rights generally and the enforceability
of equitable remedies including injunctive relief and specific performance;
(iv) Neither the execution and delivery of this Agreement by
Seller nor the consummation by Seller of the transactions contemplated hereby
(A) will violate, conflict with, or constitute a default under Parent or
Seller's Articles of Incorporation or Bylaws, or, to the best knowledge of such
counsel, any United States Federal law or regulation applicable to Parent or
Seller; or (B) requires the authorization, consent, order, permit or approval
of, or filing with, any United States Federal governmental body under any
statute or rule known to such counsel for consummation by Parent or Seller of
the transactions contemplated hereby other than the filings under the HSR Act
and the Assignment Applications; and
(v) There is no outstanding adverse decree, order or other
ruling that has been issued by the FCC against Seller which would otherwise
prevent consummation of the transactions contemplated by this Agreement, or, to
the best of counsel's knowledge, no complaint, investigation, proceeding,
petition, notice of violation, notice of apparent liability or
mutually-exclusive application pending or threatened by or before the FCC
against Seller's ability to assign the FCC Authorizations.
(vi) All FCC Consents and orders required for assignment of
the FCC Authorizations to Buyer have been duly issued, are in full force and
effect and are Final Orders unless the parties elect to close upon the issuance
of the Effective Order. No further consent, approval, authorization or order of
the FCC not obtained and in effect on the date of the opinion is required to
assign the Governmental Authorizations from Seller to Buyer.
(f). Adverse Changes. Between the date hereof and the Closing Date
there shall have been no event or condition which results in a material adverse
change in the Assets or the condition, financial or otherwise, of the Systems
(excluding matters of public knowledge relating generally to the cellular
telephone industry).
(g). No Governmental Proceeding or Litigation. No suit, action,
investigation, inquiry or other proceeding by any Governmental Authority or
other Person shall have been instituted or threatened that questions the
validity or legality of the transactions contemplated hereby or which would
reasonably be expected to affect materially and adversely the value of the
Assets or the Systems.
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(h). HSR Act. The applicable waiting periods, including any extension
thereof, under the HSR Act shall have expired or shall have been terminated and
neither the U.S. Department of Justice nor the FTC shall have taken any action
to prevent the transactions contemplated by this Agreement.
(i). Non-foreign Affidavit. At Closing, Seller shall furnish to Buyer
an affidavit stating, under penalty of perjury, that the indicated number is its
United States taxpayer identification number and that it is not a foreign
person, pursuant to Section 1445(b)(2) of the Code.
(j). Affiliated Contracts. All Contracts between the Seller and its
Affiliates shall be terminated as of the Closing Date.
9.2 Conditions to Obligations of Seller. The obligations of Seller to sell,
transfer and convey the Assets and complete the related transactions
contemplated by this Agreement are subject to the satisfaction or waiver (in the
discretion of Seller with respect to the waiver of such conditions) by Seller,
on or prior to the Closing Date, of each of the following conditions:
(a). Representations, Warranties and Covenants. All representations and
warranties of Buyer contained in this Agreement shall be true and correct in all
material respects as if such representations and warranties were made at and as
of the Closing Date, and Buyer shall have performed in all material respects all
agreements, covenants and conditions required hereby to be performed by it,
prior to or on the Closing Date. There shall be delivered to Seller at Closing a
certificate of the President of Buyer to the foregoing effect ("Buyer's Closing
Certificate").
(b). Deliveries. Buyer shall have made all the deliveries set forth in
Section 10.3.
(c). Buyer's Opinion. Buyer shall have delivered to Seller one or more
opinions of Buyer's counsel, dated as of the Closing Date, addressed to Seller
and providing substantially as follows:
(i) Buyer's existence, good standing and qualification are as
stated in Section 5.1 hereof;
(ii) Buyer has full limited partnership power and authority to
consummate the transactions contemplated by this Agreement;
(iii) This Agreement and the documents contemplated hereby and
all other agreements and undertakings contained in this Agreement have been duly
authorized, executed and delivered, and all such instruments are valid and
enforceable against Buyer in accordance with their respective terms except for
the effect of bankruptcy, insolvency, reorganization, moratorium and other
similar laws affecting creditors rights
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generally and the enforceability of equitable remedies including injunctive
relief and specific performance;
(iv) Neither the execution and delivery of this Agreement by
Buyer nor the consummation by Buyer of the transactions contemplated hereby (x)
will violate, conflict with, or constitute a default under Buyer's Limited
Partnership Agreement, or, to the best knowledge of such counsel, any United
States Federal law or regulation applicable to Buyer; or (y) requires the
authorization, consent, order, permit or approval of, or filing with, any United
States Federal governmental body under any statute or rule known to such counsel
for consummation by Buyer of the transactions contemplated hereby other than the
filings under the HSR Act and the Assignment Applications; and
(v) There is no outstanding adverse decree, order or other
ruling that has been issued by the FCC against Buyer, or, to the best of
counsel's knowledge, no complaint, investigation, proceeding, petition, notice
of violation, notice of apparent liability or mutually-exclusive application
pending or threatened by or before the FCC against Buyer's qualifications to
hold the FCC Authorizations.
(d). HSR Act. The applicable waiting period, including any extension
thereof, under the HSR Act shall have expired or shall have been terminated and
neither the U.S. Department of Justice nor the FTC shall have taken any action
to prevent the transactions contemplated by this Agreement.
(e). FCC and Other Consents. The FCC Consents shall have been granted.
SECTION 10. CLOSING; CLOSING DELIVERIES.
10.1 Closing; Termination.
(a). Closing Date. The Closing shall take place within five (5) days
after the grant of the FCC Consents becomes a Final Order and the other
conditions the Closing have been satisfied, or on such other date that is agreed
upon in writing by Buyer and Seller.
(b). Closing Place. The Closing shall be held at the offices of Patton
Boggs, L.L.P., 2550 M Street, N.W. in Washington, D.C. or any other place that
is agreed upon in writing by Buyer and Seller.
10.2 Deliveries by Seller. Prior to or on the Closing Date, Seller shall
deliver, or cause to be delivered by its Affiliates or subsidiaries, to Buyer
the following, in form and substance reasonably satisfactory to Buyer and its
counsel:
(a). All deeds and bills of sale, assignments and other instruments of
conveyance and transfer, effecting the sale, transfer, assignment and conveyance
of
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the Assets to Buyer (other than the Excluded Assets or any other assets
specifically excluded herein), including, without limitation, the following:
(i) one or more assignments of lease with respect to the Real
Property Leases;
(ii) one or more bills of conveyance with respect to the
Personal Property;
(iii) one or more assignments with respect to the Contracts
and Subscriber Agreements;
(iv) one or more assignments with respect to the Governmental
Authorizations;
(v) one or more assignments with respect to the Intangibles;
and
(vi) such other instruments as shall be reasonably requested
by Buyer to vest in Buyer title to the Assets free and clear from all
Encumbrances in accordance with the provisions hereof.
(b). the Books and Records;
(c). all Consents required pursuant to Section 9.1(b) and all other
Consents that have been obtained;
(d). evidence of the satisfaction of any Seller indebtedness, if any,
including a payoff letter and UCC-3 termination statements;
(e). Copies of resolutions adopted by the board of directors of Parent
and Seller, duly authorizing and approving the execution of this Agreement and
the consummation of the transactions contemplated hereby, certified by its
Secretary as being true and correct on the Closing Date;
(f). Seller's Closing Certificate;
(g). the opinion described in Section 9.1(e);
(h). certified copies of Seller's Articles of Incorporation and a
Certificate of Good Standing;
(i). a copy of Seller's Bylaws which have been certified by its
Secretary;
(j). all such other documents and instruments as Buyer or its counsel
shall reasonably request and which shall be reasonably required to consummate
the transactions contemplated hereby;
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(k). the Non-foreign Affidavit described in Section 9.1(i);
(l). the Capital Expenditures Summary;
(m). a calculation of the Initial Adjustment Amount pursuant to
Section 2.7;
(n). the Pro-Forma Closing Date Balance Sheet;
(o). a revised Seller's Disclosure Schedule pursuant to Section
8.7;
(p). the Partnership Interests Assignment Agreement; and
(q). the Transition Services Agreement.
10.3 Deliveries by Buyer. Prior to or on the Closing Date, Buyer shall deliver
to Seller the following, in form and substance reasonably satisfactory to Seller
and its counsel:
(a) the Purchase Price, as adjusted pursuant to
Section 2.4, payable on the Closing Date in cash by wire
transfer of immediately available funds to an account
designated by Seller in writing and delivered to Buyer no
later than two (2) Business Days prior to the Closing Date;
(b) the Capital Expenditure's Payment payable on
the Closing Date in cash by wire transfer of immediately
available funds to an account designated by Seller in writing
and delivered to Buyer no later than two (2) Business Days
prior to the Closing Date;
(c) copies of resolutions adopted by the general
and limited partners of Buyer, duly authorizing and approving
the execution of this Agreement and the consummation of the
transactions contemplated hereby, certified by each general
partner as being true and correct on the Closing Date;
(d) Buyer's Closing Certificate;
(e) a certified copy of Buyer's Limited
Partnership Agreement and a Certificate of Good
Standing/Existence, as the case may be;
(f) a copy of Buyer's Operating Agreement or
By-Laws, as the case may be, which has been certified by its
general partners;
(g) an assumption by Buyer of all the Assumed
Liabilities set forth in Section 3.1;
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(h) the opinion described in Section 9.2(c);
(i) all such other documents and instruments as
Seller or its counsel shall reasonably request and which shall
be reasonably required to consummate the transactions
contemplated hereby;
(j) the Partnership Interests Assignment
Agreement; and
(k) the Transition Services Agreement.
10.4 Form of Instruments. All of the foregoing instruments shall be in form and
substance, and executed and delivered in a manner, reasonably satisfactory to
Buyer's counsel and Seller's counsel.
SECTION 11. ACTIONS BY SELLER AND BUYER AFTER THE CLOSING.
11.1 Tax Matters; Payments of Debts and Liabilities.
(a). Books and Records. Each party agrees that it will cooperate with
and make available to the other party, during normal business hours, all Books
and Records, information and employees (without substantial disruption of
employment) retained and remaining in existence after the Closing which are
necessary or useful in connection with any tax inquiry, audit, investigation or
dispute, any litigation or investigation or any other matter requiring any such
Books and Records, information or employees for any reasonable business purpose.
The party requesting any such Books and Records, information or employees shall
bear all of the out-of-pocket costs and expenses (including without limitation
attorneys fees, but excluding reimbursement for salaries and employee benefits)
reasonably incurred in connection with providing such Books and Records,
information or employees. All information received pursuant to this Section
11.1(a) shall be subject to the terms of Section 16.11.
(b). Cooperation and Records Retention. Seller and Buyer shall (i) each
provide the other with such assistance as may reasonably be requested by any of
them in connection with the preparation of any tax return, audit, or other
examination by any taxing authority or judicial or administrative proceedings
relating to liability for Taxes, (ii) each retain and provide the other with any
records or other information that may be relevant to such return, audit or
examination, proceeding or determination, and (iii) each provide the other with
any final determination of any such audit or examination, proceeding, or
determination that affects any amount required to be shown on any tax return of
the other for any period. Without limiting the generality of the foregoing,
Buyer and Seller shall each retain, until the applicable statutes of limitations
(including any extensions) have expired, copies of all tax returns, supporting
work schedules, and other records or information that may be relevant to such
returns for all tax periods or portions thereof ending on or before the Closing
Date and shall not destroy or otherwise
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dispose of any such records without first providing the other party with a
reasonable opportunity to review and copy the same.
(c). Following the Closing Date. Seller shall promptly pay when due all
of its debts and Liabilities, including any liability for income taxes and
excluding any debts and Liabilities expressly assumed by Buyer hereunder;
provided, however, this covenant shall not apply to any debt or Liability or
portion thereof, that Seller is contesting in good faith by appropriate
proceedings; and provided further, that Seller shall pay promptly all or that
portion of such contested debt or Liability that is found to be owing at the
completion of such proceedings.
11.2 Closing Financial Statements. Seller shall deliver the Closing Financial
Statements within sixty (60) days after the Closing Date. Buyer and Seller will
cooperate in the preparation or audit, if deemed necessary by Buyer, at Buyer's
expense, of any Financial Statements.
11.3 Rescission. In the event that Closing occurs on Effective Order and if the
FCC Consents are subsequently withdrawn and if at such time or thereafter the
parties are legally obligated to rescind the transactions contemplated by this
Agreement, the parties shall rescind the transaction in a manner that puts each
party in the position it would have been in as of the Closing Date, had the
transactions contemplated hereby not been consummated. Buyer further covenants
and agrees that in the event of a rescission pursuant to this Section 11.3,
Buyer will transfer, assign and deliver the Assets and the Systems to Seller in
substantially the same condition as the Assets and Systems existed on the
Closing Date, except and, to the extent there is a net diminution in the value
of the Assets, subject to appropriate compensation, except for (i) ordinary wear
and tear, (ii) Assets sold, transferred or otherwise disposed of in the ordinary
course of business and (iii) changes in any Assets (including the loss or
destruction thereof) after the Closing Date to the extent such changes are not
due to the acts or omissions of Buyer or would have occurred absent the Closing
and Seller shall return the Purchase Price to Buyer net of compensation;
provided that, in the event of the loss or destruction of any Assets, Buyer
shall deliver to Seller all insurance proceeds, if any, Buyer receives with
respect thereto and provided, further, that if the acts, omissions or
qualifications of Buyer were the proximate cause of the withdrawal of the FCC
Consents, then Seller shall be permitted to retain an amount equal to ten
percent (10%) of the Purchase Price as damages for the failure of the
transaction to be consummated.
38
<PAGE>
SECTION 12. TERMINATION.
12.1 Grounds for Termination.
(a) This Agreement shall automatically terminate if a Final Order
granting the FCC Consent is not obtained within fifteen (15) months after the
filing of the Assignment Application.
(b) Either party may terminate this Agreement if the terminating party
is not then in material breach hereof, by sending a termination notice (a
"Termination Notice") to the other party declaring that this Agreement shall
terminate and be deemed null and void, upon the occurrence of either of the
following:
(i) On the Closing Date, if any of the conditions precedent
set forth in Section 9 hereof to the obligations of the terminating party have
not been satisfied by the non-terminating party or waived by the terminating
party; or
(ii) If, subject to Section 12.2, the other party has breached
any representations, warranties, covenants or agreements contained herein
(subject to the right to cure set forth in Section 12.2 below); provided,
however, with respect to breaches of representations and warranties which can be
compensated for by the payment of monetary damages, the nonbreaching party shall
not have a right to terminate this Agreement unless the damages reasonably
expected to result from all such breaches exceeds five percent (5%) of the
Purchase Price (calculated without regard to any adjustments); or
(iii) If there shall be in effect any judgment, decree, or
order that would prevent or make the Closing unlawful.
12.2 Breaches and Defaults; Opportunity to Cure. Prior to the exercise by a
party of any termination rights afforded under this Agreement, if either party
(the "Non-Breaching Party") is basing such termination upon a breach by the
other party (the "Breaching Party"), the Non-Breaching Party shall provide the
Breaching Party with written notice specifying in reasonable detail the nature
of such breach, whereupon the Breaching Party shall have thirty (30) days from
the receipt of such notice to cure such breach; provided, however, that if such
breach is not capable of being cured within such period and if the Breaching
Party shall have commenced action to cure such breach within such period and is
diligently attempting to cure such breach, the Breaching Party shall be afforded
an additional reasonable amount of time to cure such breach; provided, further,
however, Buyer shall have no opportunity to cure the breach of its obligation to
deliver any required portion of the Purchase Price to be delivered to Seller at
Closing. If the breach is not cured within such time period, then the Breaching
Party shall be in default hereunder and the Non-Breaching Party
39
<PAGE>
shall be entitled to terminate this Agreement (as provided in Section
12.1(b)(ii)).
SECTION 13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION.
13.1 Representations and Warranties. All representations and warranties of the
parties hereto contained in this Agreement shall be deemed continuing
representations and warranties and shall survive the Closing for a period of one
year from the Closing Date provided, however, that (a) the representations and
warranties contained in Sections 4.1, 4.2, 4.8, (with respect to title matters
only), 4.9 (with respect to title matters only), and 4.23 shall survive until
the expiration of the applicable statute of limitations, (b) there shall be a
two (2) year survival for the representation in Section 4.22 and (c) the
representation in Section 4.15 shall survive for the applicable statute of
limitations period plus three (3) months. Any investigations by or on behalf of
any party hereto shall not constitute a waiver as to enforcement of any
representation, warranty, or covenant contained herein.
13.2 Indemnification by Parent and Seller. Subject to Section 13.4 hereof,
notwithstanding the Closing, Parent and Seller, jointly and severally, hereby
agree to indemnify and hold Buyer harmless against and with respect to, and
shall reimburse Buyer for:
(a). Breach. Any and all losses, Liabilities, or damages (collectively,
"Damages") resulting from any untrue or inaccurate representation, breach of
warranty, or nonfulfillment of any covenant by Seller contained herein or in any
certificate, document, or instrument delivered by Seller to Buyer hereunder; and
(b). Ownership. Any and all Damages resulting from (i) the ownership of
the Assets prior to the Effective Time and (ii) any Liabilities not expressly
assumed by Buyer under Section 3.1; and
(c). Legal Matters. Any and all actions, suits, proceedings, claims,
demands, assessments, judgments, costs, and expenses, including reasonable legal
fees and expenses (collectively, "Claims"), incident to any of the foregoing or
incurred in investigating or attempting to avoid the same or to oppose the
imposition thereof, or in enforcing this indemnity; provided, however, that (i)
Seller shall not be required to indemnify and hold harmless Buyer under this
Section 13.2 with respect to any Damages or Claims arising out of any breach of
the representations and warranties contained in Section 4, unless and until
Damages and/or Claims for which such indemnification is sought under this
Section 13.2 or otherwise shall exceed in the aggregate Five Hundred Thousand
Dollars ($500,000.00), in which event Seller and Parent shall indemnify and hold
Buyer harmless for the full amount of such Damages and/or Claims, provided
further that in no event shall the aggregate collective liability of Seller and
Parent for all Damages and/or Claims arising out of or relating to this
40
<PAGE>
Agreement (including the right to reasonable costs of enforcement including
reasonable attorneys' fees) exceed five percent (5%) of the Purchase Price
(without regard to any adjustments); provided, further, that the cap on
liability shall not apply with respect to breaches or inaccuracies (i) of
Sections 4.1, 4.2, 4.8 (with respect to title matters only), 4.9 (with respect
to title matters only), 4.15 or 4.23, or (ii) caused by the knowing and
intentional misrepresentations of Seller.
13.3 Indemnification by Buyer. Subject to Section 13.4 hereof, notwithstanding
the Closing, Buyer hereby agrees to indemnify and hold Seller harmless against
and with respect to, and shall reimburse Seller for:
(a). Breach. Any and all Damages resulting from any untrue
representation, breach of warranty, or nonfulfillment of any covenant by Buyer
contained herein or in any certificate, document, or instrument delivered by
Buyer to Seller hereunder;
(b). Ownership. Any and all Damages resulting from the ownership of the
Assets after the Effective Time; and
(c). Legal Matters. Any and all Claims, incident to any of the
foregoing or incurred in investigating or attempting to avoid the same or to
oppose the imposition thereof, or in enforcing this indemnity.
(d). Liquidated Damages. If the Agreement is terminated by Seller under
Section 12.1(b) and Buyer does not have the right to terminate the Agreement,
payment of the Escrow Amount shall constitute liquidated damages and be Seller's
sole recourse against Buyer.
13.4 Limitation of Damages. The foregoing obligations described in Sections 13.2
and 13.3 shall be subject to and limited by the following principle and
limitation: any claims asserted after the Claim Period shall be barred.
13.5 Procedure for Indemnification. The procedure for indemnification shall be
as follows:
(a). Notice. The party seeking indemnification (the "Claimant") shall
promptly give notice to the other party (the "Indemnitor") of any Damage or
Claims, whether solely between the parties or brought by another party,
specifying the factual basis for the claim and the amount thereof.
(b). Investigation. With respect to claims between the parties,
following receipt of notice from the Claimant of a claim, the Indemnitor shall
have thirty (30) days to make any investigation of the claim that the Indemnitor
deems necessary or desirable. For the purposes of this investigation, the
Claimant agrees to make available to the Indemnitor and/or its authorized
representatives the information relied upon by the Claimant to substantiate the
claim. If the Claimant and the Indemnitor cannot agree
41
<PAGE>
as to the validity and amount of the claim within the thirty (30) day period (or
any mutually agreed upon extension thereof), the Claimant may seek appropriate
legal remedy.
(c). Control of Claim. With respect to any claim by a third party as to
which the Claimant is entitled to indemnification hereunder, the Indemnitor
shall have the right at its own expense to participate in or assume control of
the defense of the claim provided that (i) Indemnitor promptly assumes the
defense and does not cause any prejudice by any delay and (ii) Indemnitor
acknowledges in writing to Claimant that Indemnitor is reasonable for such Claim
(subject to limits set forth in Section 13.2), and the Claimant shall cooperate
fully with the Indemnitor, subject to reimbursement for actual out-of-pocket
expenses incurred by the Claimant as the result of a request by the Indemnitor.
If the Indemnitor elects to assume control of the defense of any third-party
claim, the Claimant shall have the right to participate in the defense of the
claim at its own expense. In the event that the Claimant assumes the defense of
any third party claim, the Claimant will keep the Indemnitor timely informed of
the progress of any defense, compromise, or settlement. If the Indemnitor does
not elect to assume control or otherwise participate in the defense of any
third-party claim, it shall be bound by the results obtained by the Claimant
with respect to the claim. Notwithstanding the foregoing, in the event of a
defense of a Claim brought by a third party seeking purely injunctive relief
(except for recovery of costs), the Claimant may defend such Action and the
Indemnitor may participate at its own expense.
(d). No Indemnitor shall be liable for any settlement effected without
its written consent.
SECTION 14. REMEDIES.
14.1 By Seller. If Seller has the right to terminate pursuant to Section
12.1(b)(i) or (ii) hereof, Seller may at its sole election (i) waive such right
and close (without waiving its rights to recover Damages pursuant to Section
13); or (ii) terminate the Agreement and seek all remedies to which it is
entitled by law.
14.2 By Buyer. If Buyer has the right to terminate this Agreement pursuant to
Section 12.1(b)(i) or (ii) hereof, Buyer may at its sole election either (i)
waive such right and close (without waiving its rights to recover Damages
pursuant to Section 13); or (ii) terminate the Agreement and seek all remedies
to which it is entitled by law.
14.3 Generally. A termination of this Agreement will not release either party
from breach of this Agreement which occurs prior to such termination, except to
the extent that such party's liability is limited or released as expressly set
forth in this Agreement.
14.4 Specific Performance. The parties recognize that if either party fails or
refuses to perform under the provisions of this Agreement, monetary damages
alone will not be adequate to compensate the other party for its injury.
Therefore, either party shall
42
<PAGE>
therefore be entitled, in addition to any other remedies that may be available,
including money damages, to obtain specific performance of the other party's
obligations under the terms of this Agreement. If any action is brought by
either party against the other party to enforce this Agreement, the other party
shall waive the defense that there is an adequate remedy at law.
SECTION 15. ARBITRATION.
Except with respect to the Purchase Price Adjustment, within ten (10)
days following the date that a dispute arises hereunder, Buyer and Seller shall
select a mutually acceptable arbitrator located in the Washington, D.C.
metropolitan area to resolve such dispute. If the parties are unable to agree
upon the arbitrator within the ten (10) day period, then three arbitrators shall
be selected pursuant to the rules of commercial arbitration of the American
Arbitration Association. Such arbitration shall be conducted in Washington, D.C.
pursuant to the rules of the American Arbitration Association, and shall be
concluded as soon as reasonable practicable. The arbitrators shall render a
written decision, which shall include findings of fact and conclusions of law.
The decision of the arbitrators shall be final, conclusive and binding on the
parties and judgment thereon may be entered in any court having jurisdiction.
The party not prevailing shall be responsible for all fees and expenses,
including attorneys fees, in connection with such arbitration.
SECTION 16. MISCELLANEOUS.
16.1 Allocation of Purchase Price. On or prior to the Closing Date, Buyer and
Seller shall use their best efforts to agree in writing upon the allocation of
the Purchase Price among the Assets. If Buyer and Seller agree upon the
allocation of the Purchase Price, they: (i) shall jointly complete and
separately file in a timely fashion Form 8594 with each of their federal income
tax returns for the year required; and (ii) shall not take any position on any
income, transfer or gains tax return before any governmental agency charged with
the collection of any such tax or in any judicial proceeding that is in any
manner inconsistent with the terms of the agreed upon allocation without the
written consent of the other. Notwithstanding the foregoing, if, despite their
best efforts, there is no agreement between Buyer and Seller upon allocation of
the Purchase Price, the parties shall be free to file their own Form 8594 with
each of their federal income returns for the year required and shall take such
positions therein as they deem to be appropriate.
16.2 Fees and Expenses. Buyer shall pay any transfer taxes (including any bulk
sales taxes), sales taxes, document stamps, or other charges levied by any
governmental entity on account of the transfer and conveyance of the Assets from
Seller to Buyer. Except as otherwise provided in this Agreement, each party
shall pay its own expenses incurred in connection with the authorization,
preparation, execution, and performance of this Agreement, including all fees
and expenses of counsel, accountants, agents, and representatives.
43
<PAGE>
16.3 Notices. All notices, demands, and requests required or permitted to be
given under the provisions of this Agreement shall be in writing and shall be
deemed to have been duly delivered and received (i) on the date of personal
delivery (which shall include delivery by facsimile if received between the
hours of 9:00 AM and 5:00 PM, local time, or by overnight courier on any
Business Day), or (ii) on the date of receipt (as shown on the return receipt)
if mailed by registered or certified mail, postage prepaid and return receipt
requested, in each case addressed as follows:
If to Seller:
Western Florida Cellular Telephone Corp.
2002 Pisgah Church Road
Greensboro, NC 27455
Attention: Richard C. Rowlenson, Vice President and General Counsel
Facsimile: (336)545-2219
With copies (which shall not constitute notice) to:
Paul C. Besozzi, Esq.
Patton Boggs, L.L.P.
2550 M Street, N.W.
Washington, DC 20037
Facsimile: (202) 457-6315
If to Buyer:
Wireless One Network, L.P.
2100 Electronics Lane
Ft. Myers, Florida
Attention: Mr. James A. Dwyer, Jr.
Facsimile: (941) 489-1928
With copies (which shall not constitute notice) to:
Gould & Ratner
222 N. LaSalle St., Suite 800
Chicago, IL 60601
Attention: Fredric D. Tannenbaum, Esq.
Facsimile: (312) 236-3241
or to any other or additional persons and addresses as the parties may from time
to time designate in a writing delivered in accordance with this Section 16.3.
44
<PAGE>
16.4 Further Assurances. The parties shall take any actions and execute any
other documents that reasonably may be necessary or desirable to the implement
and consummation of this Agreement.
16.5 Governing Law. This Agreement shall be governed, construed, and enforced in
accordance with the laws of the State of Delaware, provided, that with respect
to matters relating to the Real Property this Agreement shall be governed,
construed and enforced in accordance with the laws of the State of Florida.
16.6 Headings. The headings herein are included for ease of reference only and
shall not control or affect the meaning or construction of the provisions of
this Agreement.
16.7 Gender and Number. Words used herein, regardless of the gender and number
specifically used, shall be deemed and construed to include any other gender,
masculine, feminine, or neuter, and another number, singular or plural, as the
context requires.
16.8 Entire Agreement. This Agreement, all annexes, schedules and exhibits
hereto, and all certificates and other documents to be delivered by the parties
pursuant hereto, collectively represent the entire understanding and agreement
between the parties with respect to the subject matter hereof. This Agreement
cannot be amended, supplemented, or changed except by an agreement in writing
that makes specific reference to this Agreement and which is signed by the party
against which enforcement of any such amendment, supplement, or modification is
sought.
16.9 Severability. In the event that any one or more of the provisions contained
herein, or the application thereof in any circumstances, is held invalid,
illegal or unenforceable in any respect for any reason, the validity, legality
and enforceability of any such provision in every other respect and of the
remaining provisions hereof shall not be in any way impaired or affected, it
being intended that all the rights and privileges established hereunder shall be
enforceable to the fullest extent permitted by law.
16.10 Benefit and Assignment. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement may not be assigned by either party without
the written consent of the other party, which consent shall not be unreasonably
withheld or delayed.
16.11 Confidential Information. Neither party shall disclose the transaction
contemplated herein until after the date of execution of this Agreement after
which date either party may make a public announcement. Copies of any public
announcements shall be provided to the other party via facsimile the day of such
announcement. In connection with the negotiation of this Agreement and the
preparation for the consummation of the transactions contemplated hereby, each
party acknowledges that
45
<PAGE>
it has had and will have access to confidential information relating to the
other party. Each party shall treat such information as confidential, preserve
the confidentiality thereof and not duplicate or use such information, except to
advisors, consultants and Affiliates in connection with the transactions
contemplated hereby. In the event of the termination of this Agreement for any
reason whatsoever, each party shall return (or destroy with delivery of a
certificate confirming such destruction) to the other all documents, work papers
and other material (including all copies thereof) obtained in connection with
the transactions contemplated hereby and will use all reasonable efforts,
including instructing its employees and others who have had access to such
information, to keep confidential and not to use any such information, unless
such information is now, or is hereafter disclosed, through no act or omission
of such party, in any manner making it available to the general public. The
parties acknowledge, but do not represent or warrant, that portions of the
Assets, including but not limited to subscriber lists and Subscriber Agreements,
constitute trade secrets and confidential business information. Each party
agrees not to disclose any such information to any party other than the other
party unless and until such time as this Agreement is terminated; provided,
however, after the Closing Date, Buyer shall have the right to disclose such
information as it deems appropriate in its sole discretion. This Section 16.11
shall survive Closing for two (2) years.
16.12 Counterparts. This Agreement may be signed in counterparts with the same
effect as if the signature on each counterpart were upon the same instrument.
46
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
BUYER:
ATTEST: WIRELESS ONE NETWORK, L.P.
__/s/ John A. Dwyer_______ By: _______/s/ James A Dwyer, III____________
SELLER:
ATTEST: WESTERN FLORIDA CELLULAR TELEPHONE
CORP.
__/s/ Stephen L. Holcombe__ By: _______/s/ S. Tony Gore III____________
PARENT:
ATTEST: VANGUARD CELLULAR FINANCIAL CORP.
__/s/ Stephen L. Holcombe__ By: _______/s/ Timothy G. Biltz___________
47
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
Seller's Disclosure Schedule
Schedule 1 Excluded Assets
Schedule 2 Partnership Interests
Schedule 2.4 Capital Expenditures
Schedule 4.3 Certain Changes of Events
Schedule 4.4 Assets Used in Connection with Billing,
Administrative and Technical Support Services
Schedule 4.6 Consents
Schedule 4.7 Governmental Authorization
Schedule 4.8 Interests in Real Property
Schedule 4.9 Description of Personal Property
Schedule 4.10 Subscriber Agreements Outside Ordinary Course of
Business
Schedule 4.11 Paging Resale Agreements
Schedule 4.12 Financial Statements
Schedule 4.13 Contracts
Schedule 4.14 Intangibles
Schedule 4.15 Taxes
Schedule 4.16 Insurance
Schedule 4.18 Employee Plans
Schedule 4.19 Litigation
Schedule 4.20 Compliance with Laws
Schedule 4.22 Environmental and Safety Compliance
48
<PAGE>
Exhibit 2.5 Form of Escrow Agreement
Exhibit 2.8 Form of Partnership Assignment Agreement
49
<TABLE>
<CAPTION>
EXHIBIT 11
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CALCULATION OF DILUTED EARNINGS PER SHARE
(Amounts in thousands, except per share data)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30,
<S> <C>
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 63,809 $ 74 $ 43,080 $ 302
- --------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 37,107 40,298 37,474 40,560
Adjustments necessary to reflect weighted average number
of common shares outstanding on a diluted basis 1,519 2,030 1,083 1,202
- --------------------------------------------------------------------------------------------------------------------
38,626 42,328 38,557 41,762
- --------------------------------------------------------------------------------------------------------------------
Diluted net income per common share $ 1.65 $0.00 1.12 $ 0.01
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from
financial statements in the Registrant's Form 10-Q and is qualified in its
entirety by reference to such financail statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 21,732
<SECURITIES> 0
<RECEIVABLES> 66,625
<ALLOWANCES> 10,365
<INVENTORY> 18,094
<CURRENT-ASSETS> 161,608
<PP&E> 543,774
<DEPRECIATION> 184,141
<TOTAL-ASSETS> 820,586
<CURRENT-LIABILITIES> 74,964
<BONDS> 199,846
0
0
<COMMON> 367
<OTHER-SE> 15,730
<TOTAL-LIABILITY-AND-EQUITY> 820,586
<SALES> 191,364
<TOTAL-REVENUES> 210,152
<CGS> 16,231
<TOTAL-COSTS> 39,951
<OTHER-EXPENSES> 138,142
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,806
<INCOME-PRETAX> 88,490
<INCOME-TAX> 41,439
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (3,971)
<CHANGES> 0
<NET-INCOME> 43,080
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.12
</TABLE>
