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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-K/A
(Amendment No. 4)
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------- --------------------
Commission file number 0-16560
VANGUARD CELLULAR SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
North Carolina 56-1549590
(STATE OR OTHER JURISDICTION OF INCORPORATION 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)
</TABLE>
Registrant's telephone number, including area code: (910) 282-3690
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
(TITLE OF CLASS)
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
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the registrant's Common Stock held by those
other than executive officers and directors March 17, 1999, based on the NASDAQ
closing sale price for the Registrant's Common Stock as of such date, was
approximately $1,009,579,570
--------------.
The number of shares outstanding of the issuer's common stock as of March
17, 1999 was 40,165,330
------------------.
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules.
The financial statements and supplemental schedules listed
in the accompanying Index to Financial Statements and
Schedules are filed as a part of this report.
(a)(3) Exhibits. Exhibits to this report are listed in the
accompanying Index to Exhibits.
(b) Reports on Form 8-K. There were no reports filed on Form
8-K during the fourth quarter of 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VANGUARD CELLULAR SYSTEMS, INC.
By: /s/ Stephen L. Holcombe
-----------------------------
Stephen L. Holcombe
Executive Vice President and
Chief Financial Officer
Date: March 24, 1999
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
<S> <C>
Page
----
Vanguard Cellular Systems, Inc. and Subsidiaries
Consolidated Balance Sheets, December 31, 1997 and 1996 ............. *
Consolidated Statements of Operations for the Years ended December
31, 1997, 1996 and 1995 ......................................... *
Consolidated Statements of Changes in Shareholders' Equity for the
Years ended December 31, 1997, 1996 and 1995 .................... *
Consolidated Statements of Cash Flows for the Years ended December
31, 1997, 1996 and 1995 ......................................... *
Notes to Consolidated Financial Statements .......................... *
Report of Independent Public Accountants ............................ *
Schedule I -- Condensed Financial Information of the Registrant ..... *
Schedule II -- Valuation and Qualifying Accounts .................... *
Financial Statements of Certain 50% or less Owned Persons ............... F-2**
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
- ---------
* Previously filed as Financial Statements and Schedules of Form 10-K.
** The Registrant is filing this amendment to its Form 10-K to update and
replace the financial statements and related independent auditors'
report for Eastern North Carolina Cellular Joint Venture to reflect
subsequent events that have occurred since the filing of the
Registrant's Form 10-K/A (Amendment No. 3). All other Financial
Statements of Certain 50% or less Owned Persons were previously filed as
Financial Statements and Schedules of Form 10-K, Form 10-K/A (Amendment
No. 1) and Form 10-K/A (Amendment No. 2) and Form 10-K/A (Amendment No.
3).
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eastern North Carolina Cellular Joint Venture:
We have audited the accompanying consolidated balance sheets of EASTERN NORTH
CAROLINA CELLULAR JOINT VENTURE (a Delaware partnership) AND SUBSIDIARIES as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in partners' capital, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eastern North Carolina Cellular
Joint Venture and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
Atlanta, Georgia
March 27, 1998
F-2
<PAGE>
EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(In Thousands)
ASSETS 1997 1996
- --------------------------------------------------------- ------- -------
CURRENT ASSETS:
Cash $ 2 $ 2
Accounts receivable--trade, net of allowance for
doubtful accounts of $229 and $199 in 1997 and
1996, respectively 1,842 2,424
Inventories 46 484
Deferred income tax assets 75 92
Other current assets 248 277
------- -------
Total current assets 2,213 3,279
------- -------
PROPERTY AND EQUIPMENT, at cost:
Land 393 393
Buildings and towers 6,186 5,623
Equipment 15,458 13,596
Furniture and fixtures 188 188
Assets under construction 42 771
------- -------
22,267 20,571
Less accumulated depreciation 7,913 6,052
------- -------
Net property and equipment 14,354 14,519
------- -------
OTHER ASSETS, net:
FCC license, net of accumulated amortization of $7,951
and $6,884 in 1997 and 1996, respectively 34,735 35,802
Other 4 4
------- -------
Total other assets, net 34,739 35,806
------- -------
Total assets $51,306 $53,604
======= =======
LIABILITIES AND PARTNERS' CAPITAL
-------
CURRENT LIABILITIES:
Accounts payable--construction and trade 606 439
Accounts payable--affiliates 71 314
Due to managing partner 2,199 5,119
Federal income taxes payable 341 188
Accrued software license fee 300 --
Other accrued liabilities 540 565
------- -------
Total current liabilities 4,057 6,625
------- -------
LONG-TERM OBLIGATIONS:
Postretirement benefit obligation 70 69
Deferred income tax liabilities 1,182 893
------- -------
Total long-term obligations 1,252 962
------- -------
MINORITY INTERESTS 481 435
------- -------
PARTNERS' CAPITAL 45,516 45,582
------- -------
Total liabilities and partners' capital $51,306 $53,604
======= =======
The accompanying notes are an integral part
of these consolidated balance sheets.
F-3
<PAGE>
EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In Thousands)
1997 1996 1995
-------- -------- --------
REVENUES:
Service $ 13,842 $ 15,023 $ 12,975
Equipment 559 605 583
Other 460 604 382
-------- -------- --------
Total revenues 14,861 16,232 13,940
-------- -------- --------
OPERATING EXPENSES:
Sales and marketing 5,476 3,857 4,484
Cost of equipment 1,598 1,966 1,797
Operations support 1,114 1,785 1,380
Network 3,502 2,771 2,014
General and administrative 1,259 1,857 1,437
Amortization 1,067 1,067 1,067
-------- -------- --------
Total operating expenses 14,016 13,303 12,179
-------- -------- --------
OPERATING INCOME 845 2,929 1,761
INTEREST EXPENSE, NET (149) (235) (180)
-------- -------- --------
NET INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 696 2,694 1,581
MINORITY INTERESTS (46) (100) (80)
-------- -------- --------
NET INCOME BEFORE INCOME TAXES 650 2,594 1,501
PROVISION FOR INCOME TAXES (716) (1,386) (785)
-------- -------- --------
NET (LOSS) INCOME $ (66) $ 1,208 $ 716
======== ======== ========
The accompanying notes are an integral part
of these consolidated statements.
F-4
<PAGE>
EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In Thousands)
<TABLE>
<CAPTION>
GTE Mobilnet North Carolina
of Eastern Cellular Vanguard
North Carolina Holding Cellular
Incorporated Corp. Systems, Inc. Total
============== =============== ============= =========
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 $ 21,829 $ -- $ 21,829 $ 43,658
Net income for the year ended
December 31, 1995 358 -- 358 716
-------- -------- -------- --------
BALANCE, December 31, 1995 22,187 -- 22,187 44,374
Transfer of partnership interests -- 22,634 (22,634) --
Net income for the year ended
December 31, 1996 604 157 447 1,208
-------- -------- -------- --------
BALANCE, December 31, 1996 22,791 22,791 -- 45,582
Net loss for the year ended
December 31, 1997 (33) (33) -- (66)
-------- -------- -------- --------
BALANCE, December 31, 1997 $ 22,758 $ 22,758 $ -- $ 45,516
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
F-5
<PAGE>
EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (66) $ 1,208 $ 716
Adjustments to reconcile net (loss) income to net cash
provided by operating
activities:
Depreciation and amortization 2,994 2,663 2,095
Deferred income tax expenses 306 686 379
Minority interests in earnings 46 100 80
Changes in current assets and current liabilities:
Accounts receivable 582 5 (957)
Inventories 438 (319) 297
Other current assets 29 (88) (111)
Accounts payable, net of capital expenditures (34) 11 (73)
Other current liabilities 428 (50) 291
Other, net 3 (23) 41
------- ------- -------
Net cash provided by operating activities 4,726 4,193 2,758
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,806) (3,597) (4,735)
Purchase of minority interest -- -- (146)
------- ------- -------
Net cash used in investing activities (1,806) (3,597) (4,881)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to managing partner (2,920) (595) 2,123
------- ------- -------
Net cash (used in) provided by financing activities (2,920) (595) 2,123
------- ------- -------
INCREASE IN CASH -- 1 --
CASH AT BEGINNING OF YEAR 2 1 1
CASH AT END OF YEAR $ 2 $ 2 $ 1
======= ======= =======
SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Cash payments for income taxes $ 347 $ 791 $ 261
======= ======= =======
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
F-6
<PAGE>
EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND MANAGEMENT
Eastern North Carolina Cellular Joint Venture (the "Joint Venture") was
formed on July 10, 1990 and operates in accordance with the provisions of
the Delaware Revised Uniform Limited Partnership Act. The Joint Venture
provides cellular telephone services for the Jacksonville and Wilmington,
North Carolina Metropolitan Statistical Areas ("MSAs").
The partners and their respective ownership percentages as of December 31,
1997 were as follows:
Managing General Partner:
GTE Mobilnet of Eastern North Carolina Incorporated 50%
General Partner:
North Carolina Cellular Holding Corp. 50%
Effective September 27, 1996, Vanguard Cellular Systems, Inc. assigned its
interest in the Joint Venture to a subsidiary, North Carolina Cellular
Holding Corp.
Effective January 22, 1996, W&J Metronet, Inc. changed its name to GTE
Mobilnet of Eastern North Carolina Incorporated.
The Joint Venture's ownership interest in the Wilmington, North Carolina
MSA was 95.9% as of December 31, 1997 and 1996. The Joint Venture's
ownership interest in the Jacksonville, North Carolina MSA was 95.6% as of
December 31, 1997 and 1996.
The managing partner is responsible for managing and operating the Joint
Venture. The partners make capital contributions to, share in the
operating results of and receive distributions from the Joint Venture in
accordance with their respective ownership percentage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Joint Venture prepares its financial statements in accordance with
generally accepted accounting principles which require that management
make estimates and assumptions that affect reported amounts. Actual
results could differ from these estimates.
F-7
<PAGE>
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Principles of Consolidation
The accompanying financial statements include the accounts of the Joint
Venture and its majority-owned corporations and partnerships. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition
The Joint Venture earns service revenues primarily by providing access to
the cellular network (access revenue) and for usage of the cellular
network (airtime and toll revenues). Access revenues are recognized when
earned. Airtime (including roaming) and toll revenues are recognized when
the services are rendered. Other service revenues are recognized after
services are performed and include activation and custom calling feature
revenues. Equipment sales are recognized upon delivery of the equipment to
the customer. Other revenues include landline call termination revenues
and paging revenues, which are recognized when services are rendered.
In 1996 and 1995, the Joint Venture also earned revenue by leasing its
switch to an affiliate. In September 1996, the affiliate discontinued its
switch sharing agreement with the Joint Venture. These revenues were based
on a charge per port and are included in other revenues in the
accompanying statements of operations. Refer to Note 4 for additional
discussion of affiliated transactions.
Operating Expenses
Operating expenses include expenses incurred directly by the Joint
Venture, as well as an allocation of area administrative expenses and
other costs incurred by the managing partner or its affiliates. Refer to
Note 4 for additional discussion of allocated and affiliated expenses.
Customer Acquisition Costs
The Joint Venture defers certain customer acquisition costs for
approximately two weeks and recognizes these costs when the associated
revenue stream begins. These deferred costs were $85 thousand and $169
thousand at December 31, 1997 and 1996, respectively, and are included in
other current assets in the accompanying balance sheets.
Advertising Costs
The Joint Venture expenses the cost of advertising as incurred.
Advertising expense was $701 thousand, $375 thousand and $413 thousand for
1997, 1996 and 1995, respectively, and is included as a component of sales
and marketing expense in the accompanying statements of operations.
F-8
<PAGE>
Interest Expense, Net
The statements of operations reflect total interest expense, net of
interest expense capitalized during construction and interest income as
follows (in thousands):
1997 1996 1995
----- ----- -----
Interest expense $(394) $(311) $(299)
Interest capitalized 4 40 115
Interest income 241 36 4
----- ----- -----
Interest expense, net $(149) $(235) $(180)
===== ===== =====
Interest expense and income include charges to the Joint Venture and its
subsidiaries for funds advanced by the managing partner and credits to the
Joint Venture and its subsidiaries for funds advanced to the managing
partner. The interest rate on funds advanced to or from the Joint Venture
is equivalent to the managing partner's incremental borrowing rate, which
fluctuated between 5.44% and 5.80% in 1997, 5.44% and 6.07% in 1996 and
5.98% and 6.26% in 1995.
Income Taxes
A provision for income taxes is recorded on the subsidiary corporations of
the Joint Venture relating to income of these corporations. The
consolidated financial statements also include certain partnerships for
which, according to the Internal Revenue Code and applicable state
statutes, income and expenses are not separately taxable to the
partnerships, but rather accrue directly to the partners. Accordingly, no
provision for income taxes is made for such entities.
Deferred income taxes are recorded using enacted tax law and rates for the
years in which the taxes are expected to be paid. Deferred income taxes
are provided for items when there is a temporary difference in recording
such items for financial reporting and income tax reporting.
Inventories
Inventories include cellular telephones, pagers and accessories held for
sale and are valued at the lower of cost or market. Cost is determined
using the specific identification method. Inventories are net of reserves
for obsolescence.
Property and Equipment
Property and equipment are recorded at cost. The Joint Venture records
depreciation using the straight-line method over the estimated useful
lives of the assets, which are primarily twenty years for buildings and
towers, seven to ten years for cell and switching equipment and three to
five years for furniture and fixtures and other equipment. When property
is retired, the cost of the property and the related accumulated
depreciation are removed from the balance sheet and any gain or loss on
the transaction is included in income.
F-9
<PAGE>
Assets under construction represent costs incurred for the construction of
cell sites and include, if applicable, capitalized interest. When these
assets are placed in service, the costs are recorded to the appropriate
property and equipment accounts and depreciation begins. Depreciation
expense for the years ended December 31, 1997, 1996 and 1995 was $1,927
thousand, $1,596 thousand and $1,028 thousand.
Other Assets, Net
Other assets, net, consist primarily of deferred cellular license costs,
which represent the fair value of the cellular market ownership interest
contributed to the Joint Venture by the partners, which is being amortized
over forty years.
Long-Lived Assets
The Joint Venture periodically reviews the values assigned to long-lived
assets, such as cellular license costs and property and equipment, to
determine whether any impairments exist that are other than temporary.
Management believes that the long-lived assets in the accompanying balance
sheets are appropriately valued.
Credit Risk
The Joint Venture's accounts receivable subject the Joint Venture to
credit risk, as collateral is generally not required. The Joint Venture's
risk of loss is limited due to advance billings to certain customers for
services and the ability to terminate access on delinquent accounts. The
concentration of credit risk is mitigated by the large number of customers
comprising the customer base. The carrying amount of the Joint Venture's
receivables approximates their fair value.
Sources of Supplies
The Joint Venture relies on local telephone companies and other companies
to provide certain communication services. Although management feels
alternative telecommunications facilities could be found in a timely
manner, any disruption of these services could potentially have an adverse
effect on operating results.
Although the Joint Venture attempts to maintain multiple vendors for each
required product, its inventory and equipment, which are important
components of its operations, are each currently acquired from only a few
sources. If the suppliers are unable to meet the Joint Venture's needs as
it builds out its network infrastructure and sells service and equipment,
delays and increased costs in the expansion of the Joint Venture's network
infrastructure or losses of potential customers could result, which would
adversely affect operating results.
F-10
<PAGE>
3. COMMITMENTS AND CONTINGENCIES
Leases
The Joint Venture leases office space and network sites under long-term
operating leases. These leases have options for renewal with provisions
for increased rent upon renewal. Rent expense for the years ended December
31, 1997, 1996 and 1995 was $355 thousand, $288 thousand and $190
thousand, respectively, and is included in sales and marketing costs,
operation support costs, network costs and general and administrative
costs in the accompanying statements of operations.
As of December 31, 1997, future minimum lease payments under noncancelable
operating leases with initial or remaining periods in excess of one year
were as follows (in thousands):
1998 $ 276
1999 270
2000 266
2001 161
2002 110
Subsequent years 272
--------
Total $ 1,355
========
Contingencies
In July 1997, a class action lawsuit was filed on behalf of all former and
present GTE cellular subscribers nationwide. The plaintiffs claim that GTE
committed fraud by its practice of charging for airtime in full minute
increments. The complaint alleges violations of federal RICO laws, fraud,
and violation of Florida's Unfair and Deceptive Trade Practices Act. The
plaintiffs seek to maintain the suit as class action and request
compensatory damages, treble damages, injunctive relief, costs and
attorneys' fees.
The ultimate outcome of the preceding litigation cannot be determined at
the present time. Accordingly, no provision for any liability that might
result from this matter has been made in the accompanying financial
statements.
The Joint Venture and managing partner face exposure from actual and
potential claims and legal proceedings arising in the normal course of
business. As of December 31, 1997, the managing partner is not aware of
any other asserted or pending litigation or claims that could potentially
have a material adverse effect on the Joint Venture's financial position
or results of operations.
4. RELATED-PARTY TRANSACTIONS
All transactions of the Joint Venture are authorized by the managing
partner. Many management and administrative services are performed by an
affiliated service corporation (the "Service Corporation") and GTE
Wireless Incorporated. Services provided to the Joint Venture include
support in major functional areas, such as accounting, information and
cash management, human resources, legal, marketing,
F-11
<PAGE>
technology planning, billing and customer care. In accordance with a
management agreement, only certain area costs that are attributable to
these support functions are included in sales and marketing costs,
operation support costs, network costs and general and administrative
costs. Costs allocated to the Joint Venture for these services were $1,076
thousand, $1,534 thousand and $1,254 thousand in 1997, 1996 and 1995,
respectively.
Amounts paid by the Joint Venture to the Service Corporation for inventory
purchases, net of transfers, amounted to $1,160 thousand, $1,497 thousand
and $1,463 thousand in 1997, 1996 and 1995, respectively.
The managing partner either advances funds to or borrows funds from the
Joint Venture and its subsidiaries. Funds advanced to the Joint Venture
are used to cover construction and working capital requirements. The
advances and borrowings are netted and are reflected in due to managing
partner in the accompanying balance sheets. Interest is calculated on this
balance as described in Note 2.
Prior to September 1996, the Joint Venture recorded revenue from an
affiliate for use of its switch. This revenue amounted to $209 thousand
and $254 thousand in 1996 and 1995, respectively.
The Joint Venture makes payments to an affiliate of the managing partner
for construction of cell sites and other system property. The amounts
capitalized were $376 thousand and $371 thousand in 1997 and 1996,
respectively, and are included in assets under construction and other
property and equipment.
The Joint Venture purchases roamer administration, advertising and other
operating services from affiliates whose business is the provision of such
services. The managing partner believes the cost of these services to the
Joint Venture of $414 thousand, $145 thousand and $154 thousand in 1997,
1996 and 1995, respectively, was equivalent to the cost charged by the
affiliates to any of their customers.
5. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes as well as
tax credit and loss carryforwards. The significant components of the Joint
Venture's deferred tax assets and liabilities at December 31, 1997 and
1996 were as follows (in thousands):
F-12
<PAGE>
1997 1996
------ ------
Deferred tax assets:
Loss carryforwards $ 270 $ 414
AMT credit carryforwards 844 667
Provision for bad debts 63 85
Postretirement and other benefits 30 29
Other 176 37
------ ------
Total deferred tax assets 1,383 1,232
Deferred tax liabilities:
Accelerated depreciation 2,490 2,033
------ ------
Net deferred tax liabilities 1,107 801
Deferred tax asset--current 75 92
------ ------
Deferred tax liability--noncurrent $1,182 $ 893
====== ======
The federal net operating loss carryforwards expire from 2003 to 2009
unless utilized. All state net operating loss carryforwards were utilized
as of December 31, 1997. The alternative minimum tax ("AMT") credit
carryforwards do not expire. Based on recent operating results, no
valuation allowance has been recorded as of December 31, 1997. Although
realization is not assured, management believes it is more likely than not
that the related deferred tax assets will be realized through future
taxable earnings.
The provision for income taxes consists of the following (in thousands):
1997 1996 1995
------- ------- -------
Current taxes $ 410 $ 866 $ 771
Deferred taxes 306 686 379
Reversal of valuation allowance -- (166) (365)
------- ------- -------
Provision for income taxes $ 716 $ 1,386 $ 785
======= ======= =======
A reconciliation of the income tax provision computed at the statutory tax
rate to the Joint Venture's effective tax rate is as follows for the years
ended December 31, 1997, 1996 and 1995:
1997 1996 1995
----- ----- -----
Income tax provision at the statutory rate 35.0% 35.0% 35.0%
FCC license amortization 57.4 14.4 24.9
State income taxes, net of U.S. federal benefit 13.8 8.1 5.0
Minority interests 4.6 2.2 2.1
Other taxes -- -- 4.8
Other, net (0.6) 0.1 4.8
Reduction in valuation allowance -- (6.4) (24.3)
----- ----- -----
Provision for income tax 110.2% 53.4% 52.3%
===== ===== =====
F-13
<PAGE>
6. SUBSEQUENT EVENT
In March 1998, North Carolina Cellular Holding Corp. entered into an
agreement with United States Cellular to sell its interest in the cellular
operations of the Wilmington and Jacksonville, North Carolina MSAs.
7. SUBSEQUENT EVENT (UNAUDITED)
Sale of Joint Venture Interest
During 1998, a subsidiary of Vanguard Cellular Systems, Inc. and GTE
Mobilnet of Eastern North Carolina Incorporated ("GTEM") sold their
respective interests in the Joint Venture to United State Cellular.
Contingencies
In October 1998, certain partners in the Wilmington Cellular Partnership
("Wilmington Partnership") filed suit alleging that the sale of GTEM's
interest in the Joint Venture by GTEM was a breach of the partnership
agreement. Plaintiffs seek, among other remedies, damages, an accounting
and dissolution of the Wilmington Partnership.
A vendor is alleging that the Joint Venture has breached certain
contracts and seeks payment of these contracts.
The ultimate outcome of the preceding litigation cannot be determined at
the present time.
F-14
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
*3(a) Articles of Incorporation of Registrant as amended through July
25, 1995, filed as Exhibit 1 to the Registrant's Form 8-K/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-K/A dated July 25, 1995.
*4(a) Specimen Common Stock Certificate, filed as Exhibit 4(a) to the
Registrant's Registration Statement on Form S-1(File No. 33-18067).
*4(b)(1) Amended and Restated Loan Agreement between the Registrant and
various lenders led by The Bank of New York and The
Toronto-Dominion Bank as agents, dated as of December 23, 1994,
filed as Exhibit 2(a) to the Registrant's Current Report on Form
8-K dated as of December 23, 1994.
*4(b)(2) Security Agreement between the Registrant and various lenders led
by The Bank of New York and The Toronto-Dominion Bank, as Secured
Party, dated as of December 23, 1994, filed as Exhibit 2(b) to the
Registrant's Current Report on Form 8-K dated as of December 23,
1994.
*4(b)(3) Master Subsidiary Security Agreement between the Registrant,
certain of its subsidiaries and various lenders led by The Bank of
New York and The Toronto-Dominion Bank, as Secured Party, dated as
of December 23, 1994, filed as Exhibit 2(c) to the Registrant's
Current Report on Form 8-K dated as of December 23, 1994.
*4(b)(4) Second Amended and Restated Loan Agreement between Vanguard
Cellular Operating Corp. and various lenders led by The Bank of New
York and The Toronto-Dominion Bank as agents, dated as of April 10,
1996, filed as Exhibit 4(d)(1) to the Registrant's Form 10-Q/A
dated March 31, 1996.
*4(b)(5) VCOC Security Agreement between Vanguard Cellular Operating Corp.
and various lenders led by The Bank of New York and The
Toronto-Dominion Bank as Secured Party, dated as of April 10, 1996,
filed as Exhibit 4(d)(2) to the Registrant's Form 10-Q/A dated
March 31, 1996.
*4(b)(6) Second Amended and Restated Master Subsidiary Security Agreement
between certain subsidiaries of the Registrant and various lenders
led by The Bank of New York and The Toronto-Dominion Bank, as
Secured Party, dated as of April 10, 1996, filed as Exhibit 4(d)(3)
to the Registrant's Form 10-Q/A dated March 31, 1996.
*4(b)(7) Assignment, Bill of Sale and Assumption Agreement by and between
Registrant and Vanguard Cellular Financial Corp., dated as of April
10, 1996, filed as Exhibit 4(d)(4) to the Registrant's Form 10-Q/A
dated March 31, 1996.
*4(b)(8) 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(b)(9) 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.
<PAGE>
*4(b)(10) First Amendment to Second Amended and Restated Loan Agreement
between Vanguard Operation Corp. and various lenders led by the
Bank of New York and The Toronto-Dominion Bank as agents, dated as
of July 31, 1996, filed as Exhibit 4(d)(5) to the Registrant's Form
10-Q dated September 30, 1996 and confirmed electronically as
Exhibit 4(d)(5) to the Registrant's 10-Q/A dated September 30,
1996.
*4(b)(11) Second Amendment to Second Amended and Restated Loan Agreement
between Vanguard Cellular Operating Corp. and various lenders led
by the Bank of New York and The Toronto-Dominion Bank as agents,
dated as of October 30, 1996 and confirmed electronically as
Exhibit 4(d)(6) to the Registrant's 10-Q/A dated September 30,
1996.
*4(b)(12) Third Amendment to Second Amended and Restated Loan Agreement
between Vanguard Cellular Operating Corp. and various lenders led
by the Bank of New York and The Toronto-Dominion Bank as agents,
dated as of March 31, 1997 and filed as Exhibit 4(b)(7) to the
Registrant's Form 10-Q dated September 30, 1996.
*4(b)(13) 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)(14) Facility B Loan Agreement between Vanguard Cellular Financial Corp.
and various letters 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)(15) 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)(16) VCOC Guaranty between Vanguard Cellular Operating Corp. and various
lenders led by The Bank of New York, and The Toronto- Dominion
Bank, and NationsBank of Texas, N.A. as Secured Parties, dated
February 20, 1998, filed as Exhibit 4(b)(11) to the Registrant's
Form 10-Q dated March 31, 1998.
*4(b)(17) 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)(18) 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.
*10(a)(1) Amended and Restated Stock Compensation Plan of the Registrant
approved April 22, 1987 by the Shareholders of the Registrant, with
forms of stock bonus and stock option agreements attached, filed as
Exhibit 10 (a) to the Registrant's Registration Statement, on Form
S-1 (File No. 33-18067).
*10(a)(2) Amendment to Amended and Restated Stock Compensation Plan of the
<PAGE>
Registrant approved May 2, 1989 by the Shareholders of the
Registrant, filed as Exhibit 4(h)(2) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1989.
*10(a)(3) Form of Restricted Stock Bonus Agreements dated March 23, 1987
between the Registrant and Stuart S. Richardson, Haynes G. Griffin,
L. Richardson Preyer, Jr., Stephen R. Leeolou and Stephen L.
Holcombe, and form of amendments dated October 12, 1987 to
agreements with Messrs. Richardson, Griffin, Preyer and Leeolou,
filed as Exhibit 10(a)(3) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1988.
*10(a)(4) Form of Restricted Stock Bonus Agreements dated October 12, 1987
between the Registrant and Haynes G. Griffin, Stephen R. Leeolou
and L. Richardson Preyer, Jr., filed as Exhibit 10(a)(4) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.
*10(a)(5) Form of Amendment to Restricted Stock Bonus Plan Agreements dated
as of March 1, 1990 by and between Haynes G. Griffin, L. Richardson
Preyer, Jr., Stephen R. Leeolou, and Stephen L. Holcombe and the
Registrant, amending the Restricted Stock Bonus Plan Agreements
dated as March 23, 1987, filed as Exhibit 10(a)(5) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.
*10(a)(6) Form of Amendment to Restricted Stock Bonus Plan Agreements dated
as of March 1, 1990 by and between Haynes G. Griffin, L. Richardson
Preyer, Jr. and Stephen R. Leeolou and the Registrant, amending the
Restricted Stock Bonus Plan Agreements dated as October 12, 1987,
filed as Exhibit 10(a)(6) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1990.
*10(a)(7) Form of Second Amendment to Restricted Stock Bonus Plan Agreements
dated February 22, 1991 between the Registrant and Haynes G.
Griffin, Stephen R. Leeolou, and L. Richardson Preyer, Jr.,
amending the Restricted Stockx Bonus Agreements dated October 12,
1987, filed as Exhibit 10(a)(7) to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1990.
*10(a)(8) Form of Third Amendment to Restricted Stock Bonus Plan Agreements
dated February 22, 1991 between the Registrant and Haynes G.
Griffin, Stephen R. Leeolou, L. Richardson Preyer, Jr., and Stephen
L. Holcombe, amending the Restricted Stock Bonus Agreements dated
March 23, 1987, filed as Exhibit 10(a)(8) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1990.
*10(a)(9) Form of Third Amendment to Restricted Stock Bonus Plan Agreement
dated February 22, 1991 between the Registrant and Stuart S.
Richardson, amending the Restricted Stock Bonus Plan Agreement
dated March 23, 1987, filed as Exhibit 10(a)(9) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1990.
*10(a)(10) Employment Agreement dated March 1, 1995 by and between the
Registrant and Haynes G. Griffin, filed as Exhibit 10(a)(10) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
*10(a)(11) Employment Agreement dated March 1, 1995 by and between the
Registrant and L. Richardson Preyer, Jr., filed as Exhibit
10(a)(11) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
<PAGE>
*10(a)(12) Employment Agreement dated March 1, 1995 by and between the
Registrant and Stephen R. Leeolou, filed as Exhibit 10(a)(12) to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
*10(a)(13) Executive Officer Long-Term Incentive Compensation Plan adopted
October 1, 1990 by the Registrant, filed as Exhibit 10(a)(13) to
the Registrant's Annual Report on Form 10-K to the fiscal year
ended December 31, 1990.
*10(a)(14) Form on Nonqualified Option Agreements dated October 12, 1987
between the Registrant and Stephen L. Holcombe, Ralph E. Hiskey,
John F. Dille, Jr., Charles T. Hagel, L. Richardson Preyer, Sr. and
Robert A. Silverberg, filed as Exhibit 10(a)(5) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1988.
*10(a)(15) Nonqualified Option Agreements dated October 12, 1987 between the
Registrant and Robert M. DeMichele, John F. Dille, Jr., L.
Richardson Preyer, Sr., Robert A. Silverberg and Thomas I. Storrs,
filed as Exhibit 10(a)(8) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1988.
*10(a)(16) Form of Incentive Stock Option Agreements dated March 3, 1988
between the Registrant and Stephen L. Holcombe and Richard C.
Rowlenson, filed as Exhibit 10(a)(9) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988.
*10(a)(17) Form of Incentive Stock Option Agreements dated June 23, 1988
between the Registrant and Charles T. Hagel, Haynes G. Griffin, L.
Richardson Preyer, Jr., and Stephen R. Leeolou, filed as Exhibit
10(a)(10) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988.
*10(a)(18) Amended and restated 1994 Long-Term Incentive Plan, approved by the
Registrant's Board of Directors on February 26, 1997.
*10(a)(19) Senior Management Severance Plan of the Registrant adopted March 8,
1995, filed as Exhibit 10(a)(19) to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994.
*10(a)(20) Form of Severance Agreement for Senior Management Employees of the
Registrant, filed as Exhibit 10(a)(20) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
*10(a)(21) Form of Incentive Stock Agreement dated March 7, 1995 between the
Registrant and Haynes G. Griffin, Steven L. Holcombe, Richard C.
Rowlenson and Stuart S. Richardson filed as Exhibit 10(a)(21) to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1995.
*10(a)(22) Form of Nonqualified Option Agreement dated March 7, 1995 between
the Registrant and Haynes G. Griffin, Stephen R. Leeolou, L.
Richardson Preyer, Jr., Stephen L. Holcombe, Richard C. Rowlenson
and Stuart S. Richardson, filed as Exhibit 10(a)(22) to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995.
*10(b))(1) Loan Agreement between the Registrant and various lenders led by
The Bank of New York and The Toronto-Dominion Bank as agents, dated
as of December 23, 1994, filed as Exhibit 2(a) to the Registrant's
Current Report on Form 8-K dated as of December 23, 1994.
*10(b)(2) Security Agreement between the Registrant and various lenders led
by The Bank
<PAGE>
of New York and The Toronto-Dominion Bank, as Secured Party, dated
as of December 23, 1994, filed as Exhibit 2(b) to the Registrant's
Current Report on Form 8-K dated as of December 23, 1994.
*10(b)(3) Master Subsidiary Security Agreement between the Registrant,
certain of its subsidiaries and various lenders led by The Bank of
New York and The Toronto-Dominion Bank, as Secured Party, dated as
of December 23, 1994 filed as Exhibit 2(c) to the Registrant's
Current Report on Form 8-K dated as of December 23, 1994.
*10(d))(1) 1989 Stock Option Plan of the Registrant approved by the Board of
Directors of the Registrant on December 21, 1989, and approved by
Shareholders at a meeting held on May 10, 1990, filed as Exhibit
10(h)(1) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989.
*10(d)(2) Form of Nonqualified Stock Option Agreements dated March 1, 1990
between the Registrant and Haynes G. Griffin, L. Richardson Preyer,
Jr., Stephen R. Leeolou, Stephen L. Holcombe and Stuart S.
Richardson, filed as Exhibit 10(h)(2) to the Registrant's annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
*10(d)(3) Form of Incentive Stock Option Agreement dated March 1, 1990
between the Registrant and Richard C. Rowlenson, filed as Exhibit
10(h)(2) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989.
*10(d)(4) Form of Incentive Stock Option Agreement dated July 30, 1990
between the Registrant and Stephen L. Holcombe, Richard C.
Rowlenson, Sunir Kochhar and Timothy G. Biltz, filed as Exhibit
10(f)(4) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990.
*10(d)(5) Stock Option Agreement dated November 28, 1990 between the
Registrant and Stuart Smith Richardson, filed as Exhibit 10(f)(5)
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990.
*10(d)(6) Form of Stock Option Agreements dated November 28, 1990 between the
Registrant and Haynes G. Griffin, Stephen R. Leeolou, L. Richardson
Preyer, Jr. and Stephen L. Holcombe, filed as Exhibit 10(f)(6) to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990.
*10(d)(7) Incentive Stock Option Agreements dated November 28, 1990 between
the Registrant and Richard C. Rowlenson, filed as Exhibit 10(f)(7)
to the Registrant's December 31, 1990.
*10(e)(1) Joint Venture Agreement by and among W&J Metronet, Inc., Vanguard
Cellular Systems of Coastal Carolina, Inc., Providence Journal
Telecommunications and the Registrant dated as of January 19, 1990,
filed as Exhibit 10(j) to the Registrant's Registration Statement
on Form S-4 (File No. 33-35054).
*10(e)(2) First Amendment and Assumption Agreement dated as of the 28th day
of December, 1990 to Joint Venture Agreement by and among W&J
Metronet, Inc., Vanguard Cellular Systems of Coastal Carolina,
Inc., Providence Journal Telecommunications and the Registrant
dated as of January 19, 1990, filed as Exhibit 10(g)(2) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.
*10(f)(1) Stockholders Voting Agreement dated as of February 23, 1994, filed
as Exhibit 7
<PAGE>
to Amendment 1 of Schedule 13D dated February 23, 1994 with respect
to the Common Stock of Geotek Communications,
*10(g)(1) Nonqualified Deferred Compensation Plan with Form of Salary
Reduction Agreement filed as Exhibit 10(g(1) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
**11 Calculation of diluted net income per share for the years ended
December 31, 1997, 1996, and 1995.
**22 Subsidiaries of the Registrant.
**23(a) Consent of Arthur Andersen LLP
**23(b) Consent of KPMG LLP
**23(c) Consent of Prasetio, Utomo & Co.
**23(d) Consent of KPMG LLP
**23(e) Consent of Arthur Andersen & Co.
**23(f) Consent of Arthur Andersen LLP
23(g) Consent of Arthur Andersen LLP
**27 Financial Data Schedule.
- ------------------
* Incorporated by reference to the statement or report indicated.
** Previously filed as Exhibits to Form 10-K.
Exhibit 23 (g)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated March 27, 1998 on the financial statements of Eastern North
Carolina Cellular Joint Venture, included in this Form 10-K/A, into Vanguard
Cellular Systems, Inc.'s previously filed Form S-4 Registration Statement No.
33-35054, Form S-3 Registration Statement No. 33-61295, Form S-8 Registration
Statement No. 33-22866, Form S-8 Registration Statement No. 33-36986, Form S-8
Registration Statement No. 33-53559, Form S-8 Registration Statement No.
33-69824, Form S-8 Registration Statement No. 333-34771, Form S-8 Registration
Statement No. 333-34785, and Form S-8 Registration Statement No. 333-34787.
Arthur Andersen LLP
Atlanta, Georgia
March 22, 1999
