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, 1996
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION A3 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-16560
Vanguard Cellular Systems, Inc.
(Exact name of registrant as specified in its charter)
North Carolina 56-1549590
(State or other jurisdiction (I.R.S.Employer Identification No.)
of incorporation or organization)
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 (910) 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 August 1,
1996 was 41,339,243.
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - I-1
June 30, 1996 and
December 31, 1995.
Condensed Consolidated Statements of Operations - I-2
Three and six months ended June 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows - I-3
Six months ended June 30, 1996 and 1995
Notes to Condensed Consolidated Financial I-4
Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders II-1
Item 6. Exhibits and Reports on Form 8-K II-2
SIGNATURES II-3
</TABLE>
<PAGE>
Item 1. Financial Statements
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data)
June 30, December 31,
ASSETS 1996 1995
(Substantially all pledged on long-term debt) (Unaudited) (See note)
<S> <C> <C>
Current Assets:
Cash $ 4,375 $ 8,085
Accounts receivable, net of allowances for doubtful accounts
of $5,852 and $5,823 30,875 31,270
Cellular telephone inventories 9,125 8,957
Prepaid expenses 1,778 1,498
Total current assets 46,153 49,810
Investments 335,494 306,760
Property and Equipment, net of accumulated depreciation of
$108,205 and $94,057 265,743 225,206
Other Assets, net of accumulated amortization of $5,146 and $3,390 19,775 14,801
Total assets $667,165 $596,577
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 39,643 $43,147
Customer deposits 1,172 1,666
Total current liabilities 40,815 44,813
Long-Term Debt 565,947 522,143
Minority Interests 525 573
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,
41,339 and 41,312 shares issued and outstanding 413 413
Common stock, Class B - $.01 par value, 30,000 shares authorized,
no shares issued -- --
Additional capital in excess of par value 239,110 238,662
Net unrealized holding gains (losses) 6,594 (16,395)
Accumulated deficit (186,239) (193,632)
Total shareholders' equity 59,878 29,048
Total liabilities and shareholders' equity $667,165 $596,577
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these balance sheets.
Note: The balance sheet at December 31, 1995 has been derived from the
financial statements at that date.
I-1
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Service revenue $70,595 $53,980 $132,763 $97,847
Cellular telephone equipment revenue 3,398 4,059 6,580 9,101
Other 1,628 715 2,295 1,623
75,621 58,754 141,638 108,571
Costs and Expenses:
Cost of service 8,021 5,528 17,412 11,502
Cost of cellular telephone equipment 5,457 7,208 10,106 16,255
General and administrative 19,232 14,738 36,544 27,485
Marketing and selling 14,831 14,577 27,300 26,603
Depreciation and amortization 11,219 8,775 21,543 16,835
58,760 50,826 112,905 98,680
Income From Operations 16,861 7,928 28,733 9,891
Net Loss on Dispositions (265) (18) (630) (11)
Interest Expense (11,622) (9,408) (21,721) (17,982)
Other, net (225) 323 975 (207)
Income (Loss) Before Minority Interests 4,749 (1,175) 7,357 (8,309)
Minority Interests 23 (152) 36 (175)
Net Income (Loss) $4,772 $ (1,327) $ 7,393 $(8,484)
Net Income (Loss) Per Share $ 0.12 $ (0.03) $ 0.18 $ (0.21)
Weighted Average Number of Common
Shares Outstanding 41,322 41,189 41,317 40,939
</TABLE>
The accompanying notes to condensed financial statements are an integral
part of these statements.
I-2
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $7,393 $(8,498)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 21,544 16,835
Amortization of deferred debt issuance costs 803 687
Equity method (income) loss of unconsolidated
entities (393) 53
Minority interests (37) 175
Net loss on dispositions 630 11
Noncash compensation for management consulting
services (1,557) (1,229)
Changes in current items:
Accounts receivable, net 395 (2,585)
Cellular telephone inventories (168) 2,681
Account payable and accrued expenses (4,614) (6,050)
Other, net (772) (973)
Net cash provided by operating activities 23,224 1,121
Cash flows from investing activities:
Purchases of property and equipment (57,477) (57,979)
Proceeds from dispositions of property and
equipment 78 71
Payments for acquisition of investments (6,852) (54,938)
Capital contributions of unconsolidated cellular
entities (203) (110)
Net cash used in investing activities (64,454) (112,956)
Cash flows from financing activities:
Principal payments of long-term debt (186,003) (3)
Net proceeds from issuance of common stock 448 1,709
Proceeds of long-term debt 229,802 110,500
Debt issuance costs (6,755) (88)
Decrease (Increase) in other assets 28 (283)
Net cash provided by financing activities 37,520 111,835
Net increase (decrease) in cash (3,710) 0
Cash, beginning of period 8,085 5,745
Cash, end of period $ 4,375 $ 5,745
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $20,066 $15,821
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
1-3
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
(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, 1996
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's 1995 annual
report on Form 10-K.
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries and entities in which the Company holds a majority
ownership interest. Investments in entities in which the Company exercises
significant influence but does not exercise control through majority ownership
have been accounted for using the equity method of accounting. Ownership
interests in entities in which the Company does not exercise significant
influence and does not control through majority ownership and for which there is
no readily determinable fair value have been accounted for using the cost method
of accounting. Ownership interests in entities in which the Company does not
control through majority ownership and does not exercise significant influence
and for which there is a readily determinable fair value have been accounted for
as available for sale pursuant to the requirements of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". All significant intercompany accounts and transactions have
been eliminated.
Note 2: Investments
Cellular Entities
The Company continues to expand its ownership of cellular markets through
strategic acquisitions. On August 12, 1996, the Company acquired the Logan, WV
RSA ("WV-6 RSA") for a cash purchase price of $16.7 million. The WV-6 RSA is
contiguous to the Company's West Virginia markets and its operations will
be managed as part of its West Virginia metro-cluster.
I-4
<PAGE>
In June of 1996, the Company entered into an agreement to acquire four cellular
markets contiguous to its West Virginia Metro-Cluster. The acquisition of these
four markets, OH-9 RSA, OH-10 RSA (excluding Perry and Hocking counties),
Parkersburg-Marietta, WV-OH MSA, and the remaining county in the WV-1 RSA, is in
exchange for the Company's Orange County, NY cellular market and ownership
interests in several minority owned cellular markets. The disposition
represents 324,000 of Pops in Orange County and 71,000 of Pops in minority
owned markets, and the acquisition adds 542,000 Pops to the West Virginia
Metro-Cluster. This exchange is expected to be consummated in the fourth
quarter of 1996 and is subject to receipt of regulatory approvals.
The markets discussed above are all operational cellular systems.
Noncellular Investments
Geotek Communications, Inc.
In February 1994, the Company purchased from Geotek Communications, Inc.
("Geotek") 2.5 million shares of Geotek common stock for $30 million and
received a series of options to purchase additional shares in Geotek. Geotek is
a telecommunications company that is developing an Enhanced Specialized Mobile
Radio wireless communications network in the United States based on its
Frequency Hopping Multiple Access digital technology. Geotek's common stock is
traded on the NASDAQ National Market System. In addition, the Company entered
into a five year management consulting agreement to provide operational and
marketing support in exchange for 300,000 shares of Geotek common stock per
year. In the first six months of 1996, the Company earned and recorded as
revenue approximately 150,000 shares under the management agreement with an
aggregate value of approximately $1.6 million based upon the average closing
price of Geotek common shares during the periods held. During the same period in
1995, the Company earned and recorded as revenue Geotek common shares with an
aggregate value of $1.2 million. This investment in Geotek common shares is
accounted for as available for sale.
The Company purchased in September 1995 for $5 million in cash 531,463 shares of
convertible preferred shares of Geotek. These shares have a quarterly dividend
of 7 1/2% per annum payable in quarterly installments, at Geotek's option, in
cash or additional preferred shares and all are convertible at the Company's
option into common shares of Geotek at a conversion price of $9.408 per share,
subject to certain adjustments. The Company received $219,000 in cash dividends
in the first six months of 1996. The investment in Geotek preferred shares is
accounted for on the cost method. The options to purchase common shares
previously granted to the Company by Geotek in 1994 have been amended to extend
their expiration dates and reduce the number of shares subject to the options
such that the Company will have the right to invest up to an aggregate of $86.1
million for 5,285,500 shares at specified prices as follows:
I-5
<PAGE>
Per Share
Option Series Shares Exercise Price Expiration Date
A 1,000,000 $15 September 1, 1996
B 1,714,200 16 September 1, 1996
C 2,571,300 17 September 1, 1997
The Company may elect to extend both the Series B and Series C Options by six
months and the Series C Option by an additional six months. If any portion of
any series of options expires, all unexpired options and the management
agreement will immediately expire.
International Wireless Communications, Inc.
The Company owns approximately 35% of the outstanding stock of International
Wireless Communications, Inc. ("IWC") and has invested an aggregate of $13.5
million. IWC is a development stage company specializing in securing, building
and operating wireless businesses other than cellular telephone systems
primarily in Latin America and Southeast Asia. The Company's investment in IWC
is recorded in the accompanying financial statements using the equity method.
Subsequent to June 30, 1996 IWC completed a private offering primarily to
institutional investors of 14% Senior Secured Discount Notes Due 2001 and
warrants to purchase shares of IWC common stock. As a result of its new
financing, IWC will fund existing projects and will continue to explore other
opportunities. As existing and new projects are in the network buildout phase
the losses of IWC are expected to grow significantly. The Company will record
its proportionate share of these losses under the equity method of accounting.
Inter(bullet)Act Systems, Incorporated
As of June 30, 1996, the Company had invested $10.0 million in
Inter(bullet)Act Systems, Incorporated ("Inter(bullet)Act") for an ownership
interest of approximately 26%. Inter(bullet)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 at a retail outlet through an interactive
multi-media system utilizing ATM-like terminals. The Company's investment in
Inter(bullet)Act is recorded using the equity method of accounting.
Subsequent to June 30, Inter(bullet)Act completed a private offering primarily
to institutional investors in which the Company purchased for $12.0 million a
total of 18,000 Units consisting of $18.0 million principal amount at maturity
of 14% Senior Discount Notes Due 2003 and Warrants to purchase 132,012 shares of
common stock at $.01 per share, subject to certain adjustments. These shares
presently represent approximately 2% of Inter(bullet)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 10% of the outstanding stock of
Inter(bullet)Act.
Inter(bullet)Act has incurred net losses since its inception and during its
current fiscal year. As a result of its new financing, Inter(bullet)Act will
accelerate the roll-out of its systems in retail supermarkets and the net losses
incurred by Inter(bullet)Act are expected to grow significantly. The Company
will record its proportionate share of these losses under under the equity
method of accounting.
I-6
<PAGE>
Note 3: Long-Term Debt
Long-term debt consists of the following as of June 30, 1996 and December 31,
1995 (in thousands):
June 30, December 31,
1996 1995
(Unaudited)
Borrowings under the 1994 Credit Facility:
Term Loan $ 325,000 $325,000
Revolving Loan 41,000 197,000
Senior Debentures,
net of unamortized discount of $192 199,808 0
Other Long-Term Debt 139 143
---------- -----------
$565,947 $522,143
========== ===========
Credit Facility. On December 23, 1994, the Company completed the closing of a
$675 million credit facility, pursuant to an Amended and Restated Loan Agreement
(the "Credit Facility"), with various lenders led by The Toronto-Dominion Bank
and The Bank of New York.
The Credit Facility consists of a "Term Loan" and a "Revolving Loan". The Term
Loan, in the amount of $325 million, was used to repay the Company's borrowings
under the Company's previously existing loan agreement. The Revolving Loan, in
the amount of up to $350 million, is available for capital expenditures, to make
acquisitions of and investments in cellular and other wireless communication
interests, and for other general corporate purposes.
Senior Debentures. On April 10, 1996, the Company issued $200 million aggregate
principal amount of 93/8% Senior Debentures due 2006 (the "Debentures") through
an underwritten public offering. The Debentures were issued at a price to the
public of 99.901 for a yield of 9.384%. The net proceeds from the sale of the
Debentures of approximately $194.8 million were used to reduce borrowings under
the Revolving Loan portion of the Credit Facility and pay approximately $844,000
of expenses in connection with an amendment to the Credit Facility. The Credit
Facility was amended to permit issuance of the Debentures and require the
structural subordination of the Debentures by making a subsidiary the primary
obligor of the Credit Facility and all liabilities of the Company (other than
the Debentures) and the owner of all stock and partnership interests of the
Company's operating subsidiaries. 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 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.
I-7
<PAGE>
Interest Rate Protection. The Company maintains interest rate swap and interest
rate cap agreements which provide protection against interest rate risk on the
Credit Facility. At June 30, 1996, the Company had interest rate cap agreements
in place covering a notional amount of $150 million. The interest rate cap
agreements provide protection to the extent that LIBOR exceeds the strike level
through the expiration date as follows:
Strike Level Notional Amount Expiration Date
9.0% $50 Million December, 1996
9.0% 50 Million December, 1997
9.75% 50 Million December, 1997
-----------
$150 Million
The total cost of these interest rate cap agreements of $597,000 has been
recorded in other assets in the consolidated balance sheet and is being
amortized over the lives of the agreements as a component of interest expense.
Additionally, the Company maintains interest rate swap agreements that fix the
LIBOR interest rate at 5.5% on a notional amount of $100 million through
November, 1996. Under these swap agreements, the Company benefits if LIBOR
interest rates increase above the fixed rates, and incurs additional interest
expense if rates remain below the fixed rates. Any amounts received or paid
under these agreements are reflected as interest expense over the period
covered.
The effect of interest rate protection agreements on the operating results of
the Company was to increase interest expense in the second quarter of 1996 by
$241,000 and increase interest expense by $53,000 in the same period in 1995.
I-8
<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, 1996
and 1995. This table does not include any ownership interests that were
contracted for at these dates.
June 30,
CELLULAR MARKETS 1996 1995
- ---------------- ---- ----
MID-ATLANTIC SUPERSYSTEM:
Allentown, PA/NJ 100.0% 100.0%
Wilkes-Barre/Scranton, PA 100.0 100.0
Harrisburg, PA 100.0 86.8
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 97.0 97.0
Williamsport, PA 93.6 91.8
Union, PA (PA-8 RSA) 100.0 100.0
Chambersburg, PA (PA-10 East RSA) 92.3 91.3
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
Orange County, NY 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
WEST VIRGINIA METRO-CLUSTER:
Huntington, WV/KY/OH 100.0 100.0
Charleston, WV 100.0 100.0
Ripley, WV (WV-1 East RSA) 100.0 100.0
CAROLINAS METRO-CLUSTER:
Myrtle Beach, SC (SC-5 RSA) 100.0 100.0
Wilmington, NC 48.0 47.7
Jacksonville, NC 47.8 47.3
I-9
<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 condensed consolidated financial statements, including the notes
thereto.
Three Months Ended June 30, 1996 and 1995
Service revenue in the second quarter rose 31% to $70.6 million from $54.0
million in the same period in 1995. This increase was primarily as a result of a
37% increase in the number of subscribers in majority-owned markets to
approximately 430,000 as of June 30, 1996, as compared to approximately 314,000
in the second quarter of 1995. Penetration increased to 6.0% at June 30, 1996
from 4.4% at June 30, 1995. 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 a highly trained sales force
and an expanded sales and distribution network. This increase was offset
slightly by an increase in "churn" in the second quarter of 1996 to 2.3% from
1.9% in the same period in 1995 due to cyclical economic concerns felt by
certain segments of the Company's subscriber base. Churn is the monthly rate of
customer deactivations expressed as a percentage of the subscriber base.
Service revenue attributable to the Company's own subscribers (local
revenue) increased 35% during the second quarter of 1996 to $58.4 million as
compared to $43.1 million in the same period in 1995. Average monthly local
revenue per subscriber declined 2% to $47 in 1996 compared to $48 in the same
period in the prior year. This decline was primarily due to increased
incremental penetration into the segment of consumers who generally use their
cellular phones less frequently. Service revenue generated by nonsubscribers
roaming into the Company's markets increased 12% to $12.2 million in the 1996
period as compared to $10.9 million in the prior year period. This increase was
the result of increased usage and was partially offset by continued reductions
in daily access and usage rates of approximately 30% initiated by the Company
and agreed to by certain other cellular providers in its Mid-Atlantic
SuperSystem beginning early in 1995. The reduced rates affect the Company both
as a provider and purchaser of roaming services. The revenue from the Company's
customers combined with roaming revenue resulted in overall average monthly
revenue per subscriber for the quarter of $56, a decline of 8% from $61 in the
prior year period.
Cellular telephone equipment revenue decreased $661,000 or 16% to $3.4 million
for the second quarter of 1996 as compared to the same period in 1995. This
decrease was primarily due to the continuing decline in the retail price of
cellular telephone equipment
I-10
<PAGE>
charged to the Company's subscribers. Cost of cellular telephone equipment
decreased 24% to $5.5 million during the same period due to increased activity
in the Company's rental phone program and a corresponding reduction in sales.
Net loss on cellular equipment was $2.1 million, a decrease of 32% from $3.1
million net loss on cellular equipment experienced in the second quarter of
1995. The Company continues to sell telephones at or below cost for marketing
purposes in response to competitive pressures and also continues the
availability of its rental program.
Cost of service as a percentage of service revenue increased to 11% during the
second quarter of 1996 from 10% during the same period in 1995 primarily as a
result of the effects of roaming fraud experienced by the Company in the second
quarter of 1996. The Company estimates that charges associated with roamer fraud
included in cost of service increased from less than 1% of service revenue in
the second quarter of 1995 to approximately % during the second quarter of 1996,
but declined from approximately 4% of service revenue in the fourth quarter of
1995. The Company continues its implementation of additional technology and
procedures to address the industry wide increase in fraud through the use of
computerized systems which trigger alarms when cellular usage conflicts with
subscriber profiles, and by dedicating additional resources to the effort. The
costs of these efforts are expected to be approximately $1.0 million in 1996.
Cellular fraud is expected to be a significant industry issue for the
foreseeable future.
General and administrative expenses increased 30% or $4.5 million during the
second quarter of 1996 as compared to the same period in 1995, but as a
percentage of service revenue remained constant at 27% during the second
quarters of 1996 and 1995. General and administrative expenses are expected to
decline slowly as a percentage of service revenue as the Company adds more
subscribers without commensurate increases in general and administrative
overhead and experiences higher utilization of the Company's existing personnel
and systems.
Marketing and selling expenses increased 2% to $14.8 million during the second
quarter of 1996, compared to $14.6 million in 1995. As a percentage of service
revenue, these expenses decreased to 21% in 1996 from 27% in the 1995 period.
During 1996, marketing and selling expenses, including the net loss on
subscriber equipment, decreased to $16.9 million from $17.7 million in 1995.
Marketing and selling expenses (including the loss on cellular equipment) per
net subscriber addition, increased 30% to $676 in the second quarter of 1996
from $521 during the same period in 1995. This increase was primarily due to an
increase in churn to 2.3% in the second quarter of 1996 as compared to 1.9% in
the same period last year. Marketing and selling expenses (including the loss on
cellular equipment) per gross subscriber addition decreased to $316 in the
second quarter of 1996 from $379 in the same period in 1995.
I-11
<PAGE>
Depreciation and amortization expenses increased $2.4 million or 28% during the
second quarter of 1996 as compared to 1995. Property and equipment placed in
service since July 1, 1995 of approximately $127.7 million accounted for
substantially all of this increase.
Interest expense increased $2.2 million or 24% during the second quarter of
1996. This increase primarily resulted from an increase in average borrowings of
approximately $113.2 million, and, to a lesser extent, from interest expense
incurred in connection with an amendment to the Credit Facility necessary to
allow the issuance of the Debentures.
The Company reported net income of $4.8 million or $0.12 per share for the
second quarter as compared to a net loss of $(1.3) million or $(0.03) per share
for 1995. This $6.1 million positive change in net income is due to the rate of
revenue growth exceeding the rate of growth in related operating expenses as
discussed above.
Six Months Ended June 30, 1996 and 1995
Service revenue in the first six months of 1996 rose 36% to $132.8 million from
$97.8 million in the same period in 1995 primarily as a result of a 37% increase
in the number of subscribers served in the 1996 period. Average monthly revenue
per subscriber for the six months ended June 30, 1996 was $55 , a decline of 5%
from $58 in the prior year period.
Cost of service as a percentage of service revenue increased to 13% during the
first six months of 1996 from 12% during the same period in 1995 primarily as a
result of the effects of roaming fraud experienced by the Company in the 1996
period.
General and administrative expenses increased 33% or $9.1 million during the
first six months of 1996 as compared to the same period in 1995, but remained
constant as a percentage of service revenue at 28% in both periods.
Marketing and selling expenses increased 3% to $27.3 million during the first
six months of 1996, compared to $26.6 million in 1995. As a percentage of
service revenue, these expenses decreased to 21% in 1996 from 27% in the 1995
period. Marketing and selling expenses (including the loss on cellular
equipment) per net subscriber addition, but excluding the number of subscribers
in acquired markets in 1995 at the time of acquisition, increased 12% to $629 in
the first six months of 1996 from $563 during the same period in 1995. This
increase was primarily due to an increase in the churn rate as previously
discussed. Marketing and selling (including the loss on cellular equipment) per
gross subscriber addition decreased to $297 in the first six months of 1996 from
$385 in the same period in 1995.
Depreciation and amortization expenses increased $4.7 million or 28% during the
first six
I-12
<PAGE>
months of 1996 as compared to 1995. Property and equipment placed in service
since July 1, 1995 of approximately $127.7 million accounted for substantially
all of this increase.
Interest expense increased $3.7 million or 21% during the 1996 period. This
increase primarily resulted from an increase in average borrowings of
approximately $117.7 million and was partially offset by a decrease in the
interest rates charged.
The Company reported net income of $7.4 million or $0.18 per share as compared
to a net loss of $(8.5) million or $(0.21) per share for 1995. This $15.9
million positive change in net income is due to the rate of revenue growth
exceeding the rate of growth in related operating expenses as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to acquire, construct, operate and expand its
cellular systems. The Company also explores, on an ongoing basis, possible
acquisitions of cellular systems and properties as well as other investment
opportunities, some of which may involve significant expenditures or
commitments. In addition, although the initial buildout of its cellular system
is complete, the Company will continue to construct additional cell sites and
purchase cellular equipment to increase capacity as subscribers are added and
usage increases, to expand geographic coverage, and to provide for increased
portable usage. The Company spent approximately $69.9 million and exchanged
certain cellular assets in connection with acquisitions in 1995 and spent $129.9
million on total capital expenditures in 1995 and $29.8 million during the
second quarter of 1996.
The specific capital requirements of the Company will depend primarily on the
timing and size of any additional acquisitions and other investments as well as
property and equipment needs. EBITDA has been a growing source of internal
funding in recent years, but the Company does not expect EBITDA to grow
sufficiently to meet both its property and equipment and debt service
requirements for at least the next two years. The Company has met its capital
requirements primarily through bank financing, issuance of public debentures,
private issuances of its Class A Common Stock and internally generated funds,
and the Company intends to continue to use external financing sources in the
future.
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 $28.1 million in the second quarter of 1996 from
$16.7 million in the same period in 1995. Net cash provided by operating
activities as shown on the Statement of Cash Flows increased to $23.2 million in
the first six months of 1996 as compared to $1.1 million in the same period
I-13
<PAGE>
in 1995. Net cash provided by operating activities in the first six months of
1996 reflects a $4.2 increase in interest expense and a smaller decrease in the
change in working capital items of $1.6 million. Investing activities, primarily
purchases of property and equipment and acquisitions, used net cash of $64.5
million and $113.0 million in the first six months of 1996 and 1995,
respectively. Financing activities provided net cash of $37.5 million and $111.8
million in 1996 and 1995, respectively.
Long-Term Debt. The Company's long-term debt consists primarily of a $675
million credit facility (the "Credit Facility") and $200 million of 93/8% senior
debentures (the "Debentures"). On December 23, 1994, the Company completed the
closing of its Credit Facility, pursuant to an Amended and Restated Loan
Agreement, with various lenders led by The Toronto- Dominion Bank and The Bank
of New York. The Credit Facility, which refinanced the Company's $390 million
1993 Loan Agreement, consists of a $325 million term loan ("Term Loan") and a
$350 million revolving loan ("Revolving Loan"). The Revolving Loan is available
for capital expenditures, acquisitions of and investments in cellular and other
wireless communication interests, and for other general corporate purposes. As
of June 30, 1996, $366 million had been borrowed under the Credit Facility, and
the Company had available borrowings under the Revolving Loan portion of the
Credit Facility of approximately $193.3 million.
According to the terms of the Credit Facility, the outstanding amount of the
Term Loan as of March 30, 1998 is to be repaid in increasing quarterly
installments commencing on March 31, 1998 and terminating at maturity on
December 23, 2003. The quarterly installment payments begin at 1.875% of the
outstanding principal amount at March 30, 1998 and gradually increase to 5.625%
of the principal amount at March 31, 2003, at which time the Term Loan will be
repaid. The available borrowings under the Revolving Loan will also be reduced
on a quarterly basis commencing on March 31, 1998 and terminating on December
31, 2003. The quarterly reduction begins at 1.875% of the Revolving Loan
commitment at March 30, 1998 and gradually increases to 5.625% of the commitment
on March 31, 2003 at which time the Revolving Loan will be repaid.
The Term Loan and the Revolving Loan bear interest at a rate equal to the
Company's choice of the Prime Rate (as defined) or Eurodollar Rate (as defined)
plus an applicable margin based upon a leverage ratio for the most recent fiscal
quarter. As of June 30, 1996, the applicable margins on the borrowings were .25%
and 1.5% per annum for the Prime Rate and Eurodollar Rate, respectively.
Among other restrictions, the Credit Facility restricts the payment of cash
dividends, limits the use of borrowings, limits the creation of additional
long-term indebtedness and requires the maintenance of certain financial ratios.
The requirements of the Credit Facility have been established in relation to the
Company's projected capital needs, projected results of
I-14
<PAGE>
operations and cash flow. These requirements 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
Credit Facility and the Indenture.
On April 10, 1996, the Company issued $200 million aggregate principal amount of
93/8% Senior Debentures due 2006 through an underwritten public offering and
entered into a related amendment to the Credit Facility. The Credit Facility was
amended to permit the issuance of the Debentures and require the structural
subordination of the Debentures by making a subsidiary the primary obligor of
the Credit Facility and all liabilities of the Company (other than the
Debentures) and the owner of all stock and partnership interests of the
Company's operating subsidiaries. The net proceeds of the sale of the Debentures
were approximately $194.8 million.
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 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.
Borrowings under the Credit Facility are secured by substantially all of the
tangible and intangible assets and future cash flows of the Company. The
Debentures are senior unsecured obligations of the Company.
Acquisitions. The Company continues to expand its ownership of cellular markets
through strategic acquisitions.
On August 12, 1996, the Company acquired the Logan, WV RSA ("WV-6 RSA") for a
cash purchase price of $16.7 million. The WV-6 RSA is an operating cellular
system and is contiguous to the Company's West Virginia markets and its
operations will be managed as part of its West Virginia metro-cluster.
In June of 1996, the Company entered into an agreement to acquire four cellular
markets
I-15
<PAGE>
contiguous to its West Virginia Metro-Cluster. The acquisition of these four
markets, OH-9 RSA, OH-10 RSA (excluding Perry and Hocking counties),
Parkersburg-Marietta, WV-OH MSA, and the remaining county in the WV-1 RSA, is in
exchange for the Company's Orange County, NY cellular market and ownership
interests in several minority owned cellular markets. This exchange is expected
to be consummated in the fourth quarter of 1996 and is subject to receipt of
regulatory approvals.
The markets discussed above are all operational cellular systems.
Geotek Communications. In February 1994, the Company purchased from Geotek
Communications, Inc. ("Geotek") 2.5 million shares of Geotek common stock for
$30.0 million and received a series of options to purchase additional shares in
Geotek in three linked transactions. In addition, the Company entered into a
five-year management consulting agreement to provide operational and marketing
support in exchange for 300,000 shares of Geotek common stock per year. On
September 1, 1995 the Company purchased for $5.0 million in cash 531,463 shares
of convertible preferred stock of Geotek with a stated value of $9.408 per share
(the "Geotek Preferred Stock"). In connection with the purchase of Geotek
Preferred Stock, the stock options previously granted to the Company by Geotek
in 1994 were amended to extend their expiration dates and reduce the number of
shares subject to the options such that the Company will have the right to
1,000,000 shares of Geotek Common Stock at $15 per share ("Series A Option") and
1,714,200 additional shares at $16 per share ("Series B Option") until September
1, 1996 and 2,571,400 additional shares at $17 per share until 12 months from
the expiration date of the Series B Option ("Series C Option"). The Company may
extend the Series B and Series C Options by six months, and the Series C Option
by an additional six months. If any portion of any series of options expires,
all unexercised options will expire immediately.
International Wireless Communications, Inc. As of June 30, 1996, the Company had
invested $13.5 million in International Wireless Communications, Inc. ("IWC")
and owns approximately 35% of the outstanding common preferred stock of IWC. IWC
is a development stage company specializing in securing, building and operating
wireless businesses generally other than cellular telephone systems primarily in
Latin America and Asia. The Company's investment in IWC is recorded using the
equity method of accounting.
Subsequent to June 30, 1996 IWC completed a private offering primarily to
institutional investors of 14% Senior Secured Discount Notes Due 2001 and
warrants to purchase shares of IWC common stock. As a result of its new
financing, IWC will fund existing projects and will continue to explore other
opportunities. As existing and new projects are in the network buildout phase
the losses of IWC are expected to grow significantly. The Company will record
its proportionate share of these losses under the equity method of accounting.
Inter(bullet)Act Systems, Incorporated. As of June 30, 1996, the Company had
invested $10.0 million in Inter(bullet)Act Systems, Incorporated
("Inter(bullet)Act") for an ownership interest of approximately 26%.
Inter(bullet)Act is a development stage company that provides consumer
products manufacturers and retailers (currently supermarkets) the ability to
offer targeted promotions to retail customers at the point of entry at a retail
outlet through an interactive multi-media system utilizing ATM-like terminals.
The Company's investment in Inter(bullet)Act is recorded using the equity
method of accounting.
Subsequent to June 30, Inter(bullet)Act completed a private offering primarily
to institutional investors in which the Company purchased for $12.0 million a
total of 18,000 Units consisting of $18.0 million principal amount at maturity
of 14% Senior Discount Notes Due 2003 and Warrants to purchase 132,012 shares of
common stock at $.01 per share, subject to certain adjustments. These shares
presently represent approximately 2% of Inter(bullet)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 10% of the outstanding stock of
Inter(bullet)Act.
Inter(bullet)Act has incurred net losses since its inception and during its
current fiscal year. As a result of its new financing, Inter(bullet)Act will
accelerate the roll-out of its systems in retail supermarkets and the net losses
incurred by Inter(bullet)Act are expected to grow significantly. The Company
will record its proportionate share of these losses under under the equity
method of accounting.
I-16
<PAGE>
Capital Expenditures. As of June 30, 1996, the Company had $334.2 million of
property and equipment in service. The Company historically has incurred capital
expenditures primarily based upon capacity needs in its existing markets
resulting from continued subscriber growth. During 1994, the Company initiated a
plan to double the number of cell sites in order to increase geographic coverage
and provide for additional portable usage in the Company's cellular markets. As
a result of this accelerated network buildout and the continued growth of the
Company's subscriber base, capital expenditures were approximately $29.8 million
and $34.8 million during the second quarter of 1996 and 1995, respectively, and
$58.6 million and $59.4 million during the first six months of 1996 and 1995,
respectively. Capital expenditures for 1996 are estimated to be approximately
$127 million and are expected to be funded primarily through internally
generated funds. Approximately $100 million of those capital expenditures will
be for cellular network equipment, and the remainder will be primarily for
rental telephones and computer equipment.
Although no assurance can be given that such will be the case, the Company
believes that its internally generated funds and available borrowing capacity
under the amended Credit Facility will be sufficient during the next several
years to complete its planned network expansion, to fund debt service, to
provide flexibility to pursue acquisitions and other business opportunities that
might arise in the future, and to meet working capital and general corporate
needs. The Company also may issue additional shares of Class A Common Stock.
INFLATION
The Company believes that inflation affects its business no more than it
generally affects other similar business.
I-17
<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 15, 1996. The proposals voted upon and the results of the voting were
as follows:
1. Election of Class III Directors for a three-year term.
<TABLE>
<CAPTION>
Broker
Non-
For Against Abstentions Withheld Votes
------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Robert M. DeMichele 23,927,443 -- -- 117,750 --
Stephen R. Leeolou 23,934,398 -- -- 110,795 --
L. Richardson Preyer, Jr. 23,934,398 -- -- 110,795 --
</TABLE>
2. Proposal to approve and adopt the 1996 Stock Option Plan for Non-Employee
Directors as described in the Company's Proxy Statement dated April 15, 1996.
BROKER
NON-
FOR AGAINST ABSTENTIONS WITHHELD VOTES
------ --------- ------------- ---------- --------
22,797,640 997,631 129,522 -- -0-
3. Proposal to approve ratification of Arthur Andersen LLP as independent
auditors for 1996.
BROKER
NON-
FOR AGAINST ABSTENTIONS WITHHELD VOTES
------ --------- ------------- ---------- --------
23,990,972 12,529 41,692 -- -0-
II-1
<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 April 4, 1996, the Registrant filed a Current Report on Form 8-K
to provide certain exhibits related to the underwritten public offering
of its 93/8% Senior Debentures due 2006.
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: August 14, 1996 By: /s/ HAYNES G. GRIFFIN
Haynes G. Griffin
President
and
Chief Executive Officer
Date: August 14, 1996 By: /s/ STEPHEN L. HOLCOMBE
Stephen L. Holcombe
Senior Vice President
and
Chief Financial Officer
(principal accounting and
principal financial officer)
II-3
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
* 4 (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.
* 4 (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 (c) Specimen Common Stock Certificate, filed as Exhibit 2 to the
Registrant's Form 8- A/A dated July 25, 1995.
* 4(d)(1) 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(d)(2) 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(d)(3) 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(d)(4) 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(e)(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(e)(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, 1996 and 1995.
27 Financial Data Schedule.
<PAGE>
- -------------------------
* Incorporated by reference to the statement or report indicated.
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income (Loss) $ 4,772 $ (1,327) $ 7,393 $ (8,484)
- ------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding 41,322 41,189 41,317 40,939
Adjustments necessary to reflect weighted average
number of common shares outstanding on a fully
diluted basis 730 829 674 1,169
- ------------------------------------------------------------------------------------------------------------------
42,052 42,018 41,991 42,108
- ------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share $ 0.11 $ (0.03) $ 0.18 $ (0.20)
- ------------------------------------------------------------------------------------------------------------------
</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 financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,375,000
<SECURITIES> 0
<RECEIVABLES> 36,727,000
<ALLOWANCES> 5,852,000
<INVENTORY> 9,125,000
<CURRENT-ASSETS> 46,153,000
<PP&E> 373,948,000
<DEPRECIATION> 108,205
<TOTAL-ASSETS> 667,165,000
<CURRENT-LIABILITIES> 40,815,000
<BONDS> 200,000,000
0
0
<COMMON> 413,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 667,165,000
<SALES> 132,763,000
<TOTAL-REVENUES> 141,638,000
<CGS> 17,412,000
<TOTAL-COSTS> 27,518,000
<OTHER-EXPENSES> 85,387,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,721,000
<INCOME-PRETAX> 7,393,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,393,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,393,000
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
