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 March 31, 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 of (I.R.S.Employer Identification No.)
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 April 15,
1996 was 41,313,443.
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - I-1
March 31, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations - I-2
Three months ended March 31, 1996 and 1995
Condensed Consolidated Statements of Cash Flows - I-3
Three months ended March 31, 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-8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K II-1
SIGNATURES II-2
</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)
March 31, December 31,
ASSETS 1996 1995
(Substantially all pledged on long-term debt) (Unaudited) (See note)
<S> <C> <C>
Current Assets:
Cash $ 5,867 $ 8,085
Accounts receivable, net of allowances for doubtful accounts of $6,306
and $5,823 24,585 31,270
Cellular telephone inventories 8,161 8,957
Prepaid expenses 1,809 1,498
Total current assets 40,422 49,810
Investments 325,154 306,760
Property and Equipment, net of accumulated depreciation of $100,224 and
$ 94,057 245,285 225,206
Other Assets, net of accumulated amortization of $4,177 and $3,390 14,131 14,801
Total assets $ 624,992 $ 596,577
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 37,270 $ 43,147
Customer deposits 1,220 1,666
Total current liabilities 38,490 44,813
Long-Term Debt 542,142 522,143
Minority Interests 560 573
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,
41,313 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 238,683 238,662
Net unrealized holding losses (4,285) (16,395)
Accumulated deficit (191,011) (193,632)
Total shareholders' equity 43,800 29,048
Total liabilities and shareholders' equity $ 624,992 $ 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 audited
financial statements at that date.
I - 1
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
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Revenue:
Service revenue $ 62,168 $ 43,867
Cellular telephone equipment revenue 3,182 5,042
Other 667 908
66,017 49,817
Costs and Expenses:
Cost of service 9,391 5,974
Cost of cellular telephone equipment 4,649 9,047
General and administrative 17,312 12,747
Marketing and selling 12,469 12,026
Depreciation and amortization 10,324 8,060
54,145 47,854
Income From Operations 11,872 1,963
Net Gain (Losses) on Dispositions (365) 7
Interest Expense (10,099) (8,574)
Other, net 1,200 (530)
Income (Loss) Before Minority Interests 2,608 (7,134)
Minority Interests 13 (23)
Net Income (Loss) $ 2,621 $ (7,157)
Net Income (Loss) Per Share $ 0.06 $ (0.18)
Weighted Average Number of Common
Shares Outstanding 41,313 40,686
</TABLE>
The accompanying notes to condensed consolidated 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 THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,621 $ (7,157)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 10,324 8,060
Amortization of deferred debt issuance costs 311 316
Equity method (income) loss of unconsolidated entities (794) 211
Minority interests (13) 23
Net (gain) loss on dispositions 365 (7)
Noncash compensation for management consulting services (667) (598)
Changes in current items:
Accounts receivable, net 6,685 2,670
Cellular telephone inventories 795 655
Account payable and accrued expenses (9,730) (8,539)
Other, net (758) (656)
Net cash provided by (used in) operating activities 9,139 (5,022)
Cash flows from investing activities:
Purchases of property and equipment (24,954) (24,842)
Proceeds from dispositions of property and equipment 64 48
Payments for acquisition of investments (6,177) (51,163)
Capital contributions to unconsolidated cellular entities (195) (67)
Net cash used in investing activities (31,262) (76,024)
Cash flows from financing activities:
Principal payments of long-term debt (1) (1)
Net proceeds from issuance of common stock 22 1,622
Proceeds of long-term debt 20,000 83,500
Increase in other assets (116) (39)
Net cash provided by financing activities 19,905 85,082
Net increase (decrease) in cash (2,218) 4,036
Cash, beginning of period 8,085 5,745
Cash, end of period $ 5,867 $ 9,781
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ 10,627 $ 7,675
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
I-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 three month period ended March 31, 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. The Company has entered into a letter agreement to
acquire the Logan, WV ("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
Charleston and Huntington, West Virginia markets and its operations will be
managed as part of its West Virginia metrocluster. The transaction is expected
to be consummated in the third quarter of 1996 and is subject to customary
conditions, including negotiation of a definitive agreement and receipt of
regulatory approvals.
I-4
<PAGE>
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 three months of 1996, the Company earned and recorded as
revenue approximately 75,000 shares under the management agreement with an
aggregate value of approximately $665,000 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 $600,000. 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 $125,000 in cash dividends
in the first quarter 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:
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.
I-5
<PAGE>
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.
Inter(Bullet) Act Systems, Incorporated
As of March 31, 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 targeted promotions to retail customers at the point of entry at
a retail outlet, primarily supermarkets, through a computer-equipped kiosk.
The Company's investment in Inter(Bullet) Act is recorded using the equity
method of accounting.
Note 3: Long-Term Debt
Long-term debt consists of the following as of March 31, 1996 and December 31,
1995 (in thousands):
March 31, December 31,
1996 1995
(Unaudited)
Borrowings under the 1994 Credit Facility:
Term Loan $325,000 $325,000
Revolving Loan 217,000 197,000
Other Long-Term Debt 142 143
-------- --------
$542,142 $522,143
======= ========
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
I-6
<PAGE>
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.
The Company maintains interest rate swap and interest rate cap agreements which
provide protection against interest rate risk on the Credit Facility. At March
31, 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
9.63% - 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 6.1% on a notional amount of $100 million through May,
1996 and 5.5% on a notional amount of $100 million through November, 1996. Under
these swap agreements, the Company benefits if LIBOR interest rates increase
above the fixed rates, and incurs additional interest expense if rates remain
below the fixed rates. Any amounts received or paid under these agreements are
reflected as interest expense over the period covered.
The effect of interest rate protection agreements on the operating results of
the Company was to increase interest expense in the first quarter of 1996 by
$134,000 and increase interest expense by $72,000 in the same period in 1995.
On April 10, 1996, subsequent to the end of the first quarter, the Company
issued $200 million aggregate principal amount of 9 3/8% 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 $194.5 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 necessary to allow the issuance of the
Debentures. 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>
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 March 31,
1996 and 1995. This table does not include any ownership interests that were
contracted for at these dates.
March 31,
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 93.3 91.6
Union, PA (PA-8 RSA) 100.0 100.0
Chambersburg, PA (PA-10 East RSA) 92.1 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-8
<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 March 31, 1996 and 1995
Service revenue in the first quarter rose 42% to $62.2 million from $43.9
million in the same period in 1995. This increase was primarily as a result of a
45% increase in the number of subscribers in majority-owned markets to
approximately 405,000 as of March 31, 1996, as compared to approximately 280,000
in the first quarter 1995. Penetration increased to 5.7% at March 31, 1996 from
3.9% at March 31, 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 more highly trained sales force and an
expanded distribution network. This increase was offset slightly by an increase
in "churn" in the first quarter of 1996 to 2.2% 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 46% during the first three months of 1996 to $52.8 million as compared
to $36.2 million in the same period in 1995. Average monthly local revenue per
subscriber declined 2% to $45 in 1996 compared to $46 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 21% to $9.3 million in the 1996 period as compared
to $7.7 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 $53, a decline of 5% from $56 in the prior year period.
Cellular telephone equipment revenue decreased $1.9 million or 37% to $3.2
million for the first 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 charged to the Company's subscribers. Cost of
cellular telephone equipment decreased
I-9
<PAGE>
49% to $4.6 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 $1.5 million, a decrease of 62% from $4.0 million net
loss on cellular equipment experienced in the first 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 15% during the
first three months of 1996 from 14% during the same period in 1995 primarily as
a result of the effects of roaming fraud experienced by the Company in the first
three months of 1996. The Company estimated that charges associated with roamer
fraud included in cost of service increased from less than 1% of service revenue
in the first quarter of 1995 to approximately 3% during the first 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 36% or $4.6 million during the
first quarter of 1996 as compared to the same period in 1995, but decreased as a
percentage of service revenue to 28% from 29% respectively. General and
administrative expenses are expected to continue to decline as a percentage of
service revenue as the Company adds more subscribers without commensurate
increases in general and administrative overhead and experiences higher
utilization of the Company's existing personnel and systems.
Marketing and selling expenses increased 4% to $12.5 million during the first
quarter of 1996, compared to $12.0 million in 1995. As a percentage of service
revenue, these expenses decreased to 20% in 1996 from 27% in the 1995 period.
During 1996, marketing and selling expenses, including the net loss on
subscriber equipment, decreased to $13.9 million from $16.0 million in 1995.
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, decreased 5.8% to $581 in the first quarter
of 1996 from $617 during the same period in 1995. This decrease was primarily
due to increases in the proportion of total subscriber activations effected
through internal distribution channels and was offset somewhat by a 0.3%
increase in churn in the first quarter of 1996 as compared to the same period
last year.
Depreciation and amortization expenses increased $2.3 million or 28.1% during
the first quarter of 1996 as compared to 1995. Property and equipment placed in
service since April
I-10
<PAGE>
1, 1995 of approximately $70 million accounted for substantially all of the
increase in depreciation expense.
Interest expense increased $1.5 million or 18% during the first quarter of 1996.
This increase primarily resulted from an increase in average borrowings of
approximately $122.2 million.
The Company reported net income of $2.6 million or $0.06 per share as compared
to a net loss of $(7.2) million or $(0.18) per share for 1995. This $9.8 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 $28.8 million during the first
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 $22.2 million in the first quarter of 1996 from $10.0
million in the same period in 1995, and net cash provided by operating
activities as shown on the Statement of Cash Flows increased to $9.1 million in
the first quarter of 1996 as compared to net cash used of $5.0 million in the
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<PAGE>
same period in 1995. Net cash provided by operating activities in the first
quarter of 1996 reflects a $1.2 million increase in interest expense and a
smaller decrease in the change in working capital items of $2.9 million.
Investing activities, primarily purchases of property and equipment and
acquisitions, used net cash of $31.3 million and $76.0 million in the first
three months of 1996 and 1995, respectively. Financing activities provided net
cash of $19.9 million and $85.1 million in 1996 and 1995, respectively.
Long-Term Debt. On December 23, 1994, the Company completed the closing of its
$675 million credit facility (the "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.
On April 10, 1996, subsequent to the end of the first quarter, the Company
issued $200 million aggregate principal amount of 93/8% Senior Debentures due
2006 (the "Debentures") 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.
As of March 31, 1996, $542 million had been borrowed under the Credit Facility.
The net proceeds of the sale of the Debentures on April 10, 1996 were
approximately $194.5 million. After adjustment for the payment of approximately
$884,000 of expenses in connection with the amendment to the Credit Facility and
the reduction of borrowings under the revolving loan portion of the Credit
Facility with the remaining $193.7 million of the net proceeds from the
Debentures, the Company had available borrowings under the Revolving Loan
portion of the Credit Facility of approximately $145.8 million as of March 31,
1996.
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
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<PAGE>
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 March 31, 1996, the applicable margins on the borrowings were
.375% and 1.625% per annum for the Prime Rate and Eurodollar Rate, respectively.
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.
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 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.
Acquisitions. The Company continues to expand its ownership of cellular markets
through strategic acquisitions.
In January 1995, the Company purchased the Union, Pennsylvania (PA-8) RSA for a
cash price of $51.3 million. The PA-8 RSA lies in the center of the Company's
Mid-Atlantic SuperSystem.
I-13
<PAGE>
On December 1, 1995, the Company completed the acquisition of an its additional
ownership interest in the Harrisburg, PA MSA. In exchange for ownership
interests in certain minority owned cellular markets outside its regional
metro-clusters and $2.9 million in cash, the Company received the final 13.24%
ownership interest in the Harrisburg, PA MSA, and now is the sole owner of such
market, which is in the Mid-Atlantic SuperSystem.
All markets that were acquired during 1995 were operational cellular systems.
The Company has entered into an agreement to acquire the Logan, WV ("WV-6 RSA")
for a cash purchase price of $16.7 million. The WV-6 RSA is contiguous to the
Company's Charleston and Huntington, West Virginia markets and will be operated
as part of the West Virginia metro-cluster. The transaction is expected to be
consummated in the third quarter of 1996 and is subject to customary conditions,
including negotiation of a definitive agreement and receipt of regulatory
approvals.
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 March 31, 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.
I-14
<PAGE>
Inter(Bullet) Act Systems, Incorporated. As of March 31, 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 targeted
promotions to retail customers at the point of entry at a retail outlet,
primarily supermarkets, through a computer-equipped kiosk.
Capital Expenditures. As of March 31, 1996, the Company had $303.2 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 $28.8 million
and $24.6 million during the first quarter 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-15
<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
9 3/8% Senior Debentures due 2006.
II-1
<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: May 15, 1996 By: /s/ Haynes G. Griffin
-----------------------------
Haynes G. Griffin
President
and
Chief Executive Officer
Date: May 15, 1996 By: /s/ Stephen L. Holcombe
----------------------------
Stephen L. Holcombe
Senior Vice President
and
Chief Financial Officer
(principal accounting and
principal financial officer)
II-2
<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.
**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.
**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.
**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.
**4(e)(1) Indenture dated as of April 1, 1996 between Registrant and The Bank
of New York as Trustee.
**4(e)(2) First Supplemental Indenture, dated as of April 1, 1996 between
Registrant and The Bank of New York as Trustee.
11 Calculation of fully diluted earnings per share for the three
months ended March 31, 1996 and 1995.
27 Financial Data Schedule.
* Incorporated by reference to the statement or report indicated.
** To be filed under cover of Form SE pursuant to a temporary hardship exemption
in accordance with Rule 201 of Regulation S-T.
The following schedules to the Second Amended and Restated Loan Agreement, filed
as Exhibit 4(d)(1) hereto, have been omitted. The Registrant hereby undertakes
to furnish supplementally a copy of any such omitted schedule to the Commission
upon request.
Exhibit A Form of Assignment of Rights by Partner
Exhibit B Form of Borrower Pledge Agreement
Exhibit C Form of Certificate of Financial Condition
Exhibit D Form of Note Pledge Agreement
Exhibit E Form of Request for Advance
Exhibit F Form of Revolving Loan Note
Exhibit G Form of Security Agreement
Exhibit H Form of Subsidiary Guaranty
Exhibit I Form of Subsidiary Pledge Agreement
Exhibit J Form of Subsidiary Security Agreement
Exhibit K Form of Term Loan Note
Exhibit L Form of VCFC Assumption Agreement
Exhibit M Form of Borrower's Loan Certificate
Exhibit N Form of Subsidiary Loan Certificate
Exhibit O Form of Performance Certificate
Exhibit P Form of Assignment and Assumption Agreement
Schedule 1 Licenses
Schedule 2 Liens of Record as of the Agreement Date
Schedule 3 Subsidiaries
Schedule 4 Litigation
Schedule 5 Agreements with Affiliates
Schedule 6 Investments
The following schedules to the VCOC Security Agreement, filed as Exhibit
4(d)(2) hereto, have been omitted. The Registrant hereby undertakes to furnish
supplementally a copy of such omitted Schedule to the Commission upon request.
Exhibit A Licenses
Exhibit B Contracts
Exhibit C Leases
The following schedules to the Second Amended and Restated Master Subsidiary
Security Agreement, filed as Exhibit 4(d)(3) hereto, have been omitted. The
Registrant hereby undertakes to furnish supplementally a copy of any such
omitted Schedule to the Commission upon request.
Exhibit A Licenses
Exhibit B Contracts
Exhibit C Leases
The following schedules to the Assignment, Bill of Sale and Assumption Agreement
filed as Exhibit 4(d)(4) hereto, have been omitted. The Registrant hereby
undertakes to furnish supplementally a copy of any such omitted Schedule to the
Commission upon request.
Schedule A List of Personal Property Assigned
Schedule B List of Agreements Assigned
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
For The Three Months Ended March 31, 1996 and 1995
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net Income (Loss) $ 2,621 $ (7,157)
Weighted average number of common shares outstanding 41,313 40,686
Adjustments necessary to reflect weighted average number
of common shares outstanding on a fully diluted basis 1,057 1,489
42,370 42,175
Fully diluted earnings per share $ 0.06 $ (0.17)
</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 references to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,867,000
<SECURITIES> 0
<RECEIVABLES> 30,891,000
<ALLOWANCES> 6,306,000
<INVENTORY> 8,161,000
<CURRENT-ASSETS> 40,422,000
<PP&E> 345,509,000
<DEPRECIATION> 100,224,000
<TOTAL-ASSETS> 624,992,000
<CURRENT-LIABILITIES> 38,490,000
<BONDS> 0
0
0
<COMMON> 413,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 624,992,000
<SALES> 62,168,000
<TOTAL-REVENUES> 66,017,000
<CGS> 9,391,000
<TOTAL-COSTS> 14,040,000
<OTHER-EXPENSES> 40,105,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,099,000
<INCOME-PRETAX> 2,621,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,621,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,621,000
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
