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, 1997
-----------------------------------
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)
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NORTH CAROLINA 56-1549590
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2002 Pisgah Church Road, Suite 300
Greensboro, North Carolina 27455-3314
(Address of principal executive offices) (Zip Code)
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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 30,
1997 was 40,279,502.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - I-1
March 31, 1997 and December 31, 1996.
Condensed Consolidated Statements of Operations - I-2
Three months ended March 31, 1997 and 1996.
Condensed Consolidated Statements of Cash Flows - I-3
Three months ended March 31, 1997 and 1996.
Notes to Condensed Consolidated Financial I-4
Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K II-1
SIGNATURES II-2
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Item 1. Financial Statements
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
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MARCH 31, DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
(Substantially all pledged on long-term debt) (UNAUDITED) (SEE NOTE)
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Current Assets:
Cash $ 3,647 $ 11,180
Accounts receivable, net of allowances for doubtful accounts of $4,957
and $4,617 29,779 29,907
Cellular telephone inventories 14,071 15,921
Deferred income tax asset 3,877 2,149
Prepaid expenses 4,439 2,057
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 55,813 61,214
- -----------------------------------------------------------------------------------------------------------------------------
Investments 322,212 333,371
Property and Equipment, net of accumulated depreciation of $130,984 and
$119,470 340,459 313,800
Other Assets, net of accumulated amortization of $7,980 and $6,965 23,636 22,196
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 742,120 $ 730,581
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long term debt $ 6,229 $ -
Accounts payable and accrued expenses 67,149 65,497
Customer deposits 1,998 1,679
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 75,376 67,176
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 644,728 629,954
- -----------------------------------------------------------------------------------------------------------------------------
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,
40,765 and 41,085 shares issued and outstanding 408 411
Common stock, Class B - $.01 par value, 30,000 shares authorized,
no shares issued -- --
Additional capital in excess of par value 235,789 237,640
Net unrealized holding losses (21,479) (14,570)
Accumulated deficit (192,702) (190,030)
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 22,016 33,451
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 742,120 $ 730,581
- -----------------------------------------------------------------------------------------------------------------------------
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THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE BALANCE SHEETS.
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1996 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE.
I-1
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Amounts in thousands, except per share data)
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1997 1996
- ------------------------------------------------------------------------------------------------------------
(UNAUDITED) (Unaudited)
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Revenues:
Service revenue $ 75,109 $ 62,168
Cellular telephone equipment revenue 4,754 3,182
Other 452 667
- ------------------------------------------------------------------------------------------------------------
80,315 66,017
- ------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of service 7,869 9,391
Cost of cellular telephone equipment 8,643 4,649
General and administrative 23,275 17,312
Marketing and selling 14,494 12,469
Depreciation and amortization 14,952 10,324
- ------------------------------------------------------------------------------------------------------------
69,233 54,145
- ------------------------------------------------------------------------------------------------------------
Income From Operations 11,082 11,872
Net Loss on Dispositions (189) (365)
Interest Expense (12,401) (10,099)
Equity in Earnings (Losses) of Unconsolidated Affiliates (2,852) 794
Other, net 588 406
- ------------------------------------------------------------------------------------------------------------
Income (Loss) Before Taxes (3,772) 2,608
Income Tax Benefit 4,000 --
- ------------------------------------------------------------------------------------------------------------
Income Before Minority Interests 228 2,608
Minority Interests -- 13
- ------------------------------------------------------------------------------------------------------------
Net Income $ 228 $ 2,621
- ------------------------------------------------------------------------------------------------------------
Net Income Per Share $ 0.01 $ 0.06
- ------------------------------------------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding 40,824 41,313
- ------------------------------------------------------------------------------------------------------------
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THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
I-2
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Dollar amounts in thousands)
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1997 1996
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(UNAUDITED) (Unaudited)
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Cash flows from operating activities:
Net income $ 228 $ 2,621
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 14,952 10,324
Amortization of deferred debt issuance costs 471 311
Equity method (income) loss of unconsolidated entities 2,852 (794)
Amortization of bond investment discount (456) --
Minority interests -- (13)
Net loss on dispositions 189 365
Income tax benefit (4,020) --
Noncash compensation for management consulting services -- (667)
Changes in current items:
Accounts receivable, net 128 6,685
Cellular telephone inventories 1,849 795
Accounts payable and accrued expenses (3,339) (9,730)
Other, net (2,063) (758)
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Net cash provided by operating activities 10,791 9,139
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Cash flows from investing activities:
Purchases of property and equipment (34,432) (24,954)
Proceeds from dispositions of property and equipment 51 64
Payments for acquisition of investments (31) (6,177)
Capital contributions to unconsolidated cellular entities -- (195)
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Net cash used in investing activities (34,412) (31,262)
------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments of long-term debt (4,002) (1)
Repurchase of common stock (4,754) --
Net proceeds from issuance of common stock -- 22
Proceeds of long-term debt 25,000 20,000
Increase in other assets (156) (116)
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Net cash provided by financing activities 16,088 19,905
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Net decrease in cash (7,533) (2,218)
Cash, beginning of period 11,180 8,085
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Cash, end of period $ 3,647 $ 5,867
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SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ 7,184 $ 10,627
SUPPLEMENTAL DISCLOSURE OF INCOME TAXES PAID 20 --
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THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
I-3
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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, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's 1996 annual
report on Form 10-K and Form 10-K/A.
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries and entities in which the Company holds a majority
ownership interest. Investments in entities in which the Company exercises
significant influence but does not exercise control through majority ownership
have been accounted for using the equity method of accounting. Ownership
interests in entities in which the Company does not exercise significant
influence and does not control through majority ownership and for which there is
no readily determinable fair value have been accounted for using the cost method
of accounting. Ownership interests in entities in which the Company does not
control through majority ownership and does not exercise significant influence
and for which there is a readily determinable fair value have been accounted for
as available for sale pursuant to the requirements of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". All significant intercompany accounts and transactions have
been eliminated.
I-4
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NOTE 2: INVESTMENTS
March 31, December 31,
1997 1996
INVESTMENTS IN CELLULAR ENTITIES:
Consolidated entities
License cost $ 300,811 $ 300,780
Accumulated amortization (37,998) (36,113)
--------- ---------
262,813 264,667
--------- ---------
Entities carried on the equity method
Cost 10,193 10,193
Accumulated share of earnings 1,594 2,056
--------- ---------
11,787 12,249
--------- ---------
Entities carried on the cost method 9,993 9,993
--------- ---------
284,593 286,909
--------- ---------
INVESTMENTS IN NONCELLULAR ENTITIES:
Entities carried on the equity method
Cost 23,823 23,823
Accumulated share of losses (20,629) (18,239)
--------- ---------
3,194 5,584
--------- ---------
Investments carried as "available for sale"
Cost 37,736 37,736
Net unrealized holding losses (21,479) (14,570)
--------- ---------
16,257 23,166
--------- ---------
Investment in debentures
At par 18,000 18,000
Discount (7,933) (8,389)
--------- ---------
10,067 9,611
--------- ---------
Other investments, at cost 8,101 8,101
--------- ---------
37,619 46,462
--------- ---------
$ 322,212 $ 333,371
========= =========
CELLULAR ENTITIES
The Company continues to expand its ownership of cellular markets through
strategic acquisitions. The Company explores, on an ongoing basis, possible
acquisitions of additional cellular systems and licenses. The Company currently
has no agreements in principle regarding any such acquisition.
I-5
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NONCELLULAR INVESTMENTS
International Wireless Communications Holdings, Inc. and Foreign Investments
The Company owns approximately 36% of the outstanding stock of IWC and has
invested an aggregate of $13.8 million. IWC is a development stage Company
specializing in securing, building and operating wireless businesses generally
other than cellular telephone systems primarily in Asia and Latin America. The
Company records its proportionate share of these losses under the equity method
of accounting. During 1996 and 1995, the Company recognized an amount of losses
on the equity method from IWC that is equal to the Company's equity investment
in IWC. As a result, the Company has suspended the recognition of losses
attributable to IWC until such time that the equity method income is available
to offset the Company's share of IWC's future losses.
During the first quarter of 1997, the Company entered into a stock purchase
agreement to purchase from an unrelated third party 7% of the outstanding shares
of Star Digitel Limited ("SDL"), a Hong Kong Company whose principal business
activities relate to the provision and development of cellular
telecommunications services in the People's Republic of China. Pursuant to the
stock purchase agreement, the Company's purchase of such shares will occur in
two closings, which are subject to the satisfaction of certain conditions, for
an aggregate cash consideration of $8.4 million. IWC also recently acquired and
maintains a 40% ownership interest in SDL. Subsequent to March 31, 1997 the
Company made an initial investment of $3.5 million.
Inter(bullet)Act Systems, Incorporated.
As of March 31, 1997, the Company had invested $10.0 million in 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 of a retail outlet through an interactive
multi-media system utilizing ATM-like terminals. The Company records its
proportionate share of these losses under the equity method of accounting. The
Company anticipates that during the second quarter of 1997 its cumulative
proportionate share of Inter(bullet)Act losses will exceed the remaining
portion of its investment in Inter(bullet)Act. Accordingly the Company will
suspend the recognition of losses attributable to Inter(bullet)Act until such
time that the equity method income is available to offset the Company's share
of Inter(bullet)Act's future losses.
In addition to the current ownership held by the Company, certain officers,
directors and entities affiliated with certain directors of the Company maintain
an additional 27% ownership interest in Inter(bullet)Act.
I-6
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During 1996, Inter(bullet)Act completed the sale of 142,000 units ("Units") of
14% Senior Discount Notes due 2003, which have been exchanged for identical
notes registered with the SEC and warrants to purchase shares of common stock at
$.01 per share. The Company purchased for $12.0 million a total of 18,000 Units
consisting of $18.0 million principal amount at maturity of these 14% Senior
Discount Notes and warrants to purchase 132,012 shares of common stock. At
issuance, the Company allocated, based upon the estimated fair values, $8.9
million and $3.1 million to the debentures and warrants purchased by the
Company, respectively. The shares issuable upon the exercise of these warrants
currently 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 common stock of
Inter(bullet)Act.
Financial Information of Equity Method Investees
Combined financial position and operating results of the Company's equity method
investees, IWC, Inter(bullet)Act, and its Eastern North Carolina Joint Venture
for the first three months of 1997 and 1996 are as follows (in thousands):
1997 1996
----------- ------------
Revenues............................... $ 4,276 $ 3,566
Gross profit........................... 408 1,559
Loss from operations................... (15,786) (4,700)
Net loss............................... (22,733) (4,533)
Information for each investee is summarized from the available financial
information for each entity.
NOTE 3: LONG-TERM DEBT
The Company's long-term financing arrangements consist primarily of a $675
million Credit Facility and $200 million of Senior Debentures due 2006. The
Credit Facility is senior to the Senior Debentures through the use of structured
subordination whereby Vanguard is the borrower on the Senior Debentures and
Vanguard Cellular Financial Corp. ("VCFC"), Vanguard's only direct subsidiary,
is the primary obligor on the Credit Facility.
Long-term debt consists of the following as of March 31, 1997 and December 31,
1996 (in thousands):
I-7
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March 31, December 31,
1997 1996
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Debt of VCFC:
Borrowings under the Credit Facility:
Term Loan........................................................................$ 325,000 $325,000
Revolving Loan ................................................................... 126,000 105,000
Other Long-Term Debt ................................................................ 135 137
-------- --------
451,135 430,137
Less Current Portion ............................................................. 6,229 --
-------- --------
444,906 430,137
Debt of Vanguard:
Senior Debentures due 2006, net of
unamortized discount of $178 and $183 ...................................... 199,822 199,817
-------- --------
$644,728 $629,954
======== ========
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CREDIT FACILITY OF VCFC.
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 prior credit facility. The Revolving Loan, in the amount of up to $350
million, is available for capital expenditures, to make acquisitions of and
investments in cellular and other wireless communication interests, and for
other general corporate purposes. As of March 31, 1997, $126 million had been
borrowed under the Revolving Loan and the terms of these agreements limit
additional available borrowing during the second quarter of 1997 to $83.4
million. See Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources section
for further information.
INTEREST RATE PROTECTION. The Company maintains interest rate swaps and interest
rate caps which provide protection against interest rate risk. At March 31, 1997
the Company had interest rate cap agreements in place covering a notional amount
of $200 million. The interest rate cap agreements provide protection to the
extent that LIBOR exceeds the strike level through the expiration date as
follows (in thousands):
Strike Level Notional Amount Expiration Date
9.00% $ 50,000 December 1997
9.75 50,000 December 1997
7.50 50,000 February 1999
7.50 50,000 February 1999
---------
$ 200,000
The cost of these interest rate cap agreements of $545,000 has been recorded in
other
I-8
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assets in the accompanying 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 6.01% on a notional amount of $50 million through July
1997. Under these swap agreements, the Company benefits if LIBOR interest rates
increase above the fixed rates and incurs additional interest expense if rates
remain below the fixed rates. Any amounts received or paid under these
agreements are reflected as interest expense over the period covered.
On December 9, 1996, the Company entered into two 10 year reverse interest rate
swaps with notional amounts totaling $75 million. The reverse swaps effectively
convert $75 million of the Debentures into floating rate debt with interest
payable at the six month LIBOR rate plus 3.1%. Simultaneous with this
transaction, the Company purchased an interest rate cap that limits the total
interest on the $75 million to 10% for the first three years should interest
rates rise. The all-in-rate for the first six month period is 8.64% or .735%
below the coupon rate on the Debentures. Additionally, during the first quarter
of 1997, the Company entered into two 9 year reverse interest rate swaps with
notional amounts totaling $25 million. The reverse swaps effectively convert $25
million of the Debentures into floating rate debt with interest payable at the
six-month LIBOR rate plus 2.61%. Simultaneously with this transaction, the
Company purchased an interest rate cap that limits the total interest on the $25
million to 10% for the first three years. The all-in-rate for the first six
month period is 8.61% or .765% below the coupon rate on the Debentures.
The effect of interest rate protection agreements on the operating results of
the Company was to decrease interest expense in the first quarter of 1997 by
$42,000 and increase interest expense by $134,000 in the same period in 1996.
The Company does not hold or issue financial instruments for trading purposes.
- --------------------------------------------------------------------------------
NOTE 4: CAPITAL STOCK
On November 4, 1996, the Company's Board of Directors authorized the repurchase
of up to 2,500,000 shares of its Class A Common Stock from time to time in open
market or other transactions. As of December 31, 1996 the Company had
repurchased 255,000 shares at an average price per share of approximately
$17.00. Through March 31, 1997, the Company had repurchased 320,000 additional
shares at an average price per share of approximately $14.85. Subsequent to
March 31, 1997, the Company repurchased an additional 500,000 shares at an
average price of $13.565 per share.
In January 1997, the Compensation Committee of the Board of Directors authorized
the cancellation of certain options with
I-9
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higher exercise prices and the reissuance of fewer options at a lower exercise
price. Options for 2,299,750 shares with exercise prices ranging from $21.50 to
$25.125 were canceled and new options for 1,980,575 shares with an exercise
price of $15.69 were issued (the "January 1997 Options"). The exercise price for
all of these new options reflects the fair market value at the time of issuance.
In April 1997, the Compensation Committee authorized amendment of certain
options, nearly all of which were January 1997 Options, to lower the exercise
price to $10.00, the fair market value at that time.
I-10
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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,
1997 and 1996. This table does not include any ownership interests that were
contracted for at these dates.
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March 31,
CELLULAR MARKETS 1997 1996
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MID-ATLANTIC SUPERSYSTEM:
Allentown, PA/NJ 100.0% 100.0%
Wilkes-Barre/Scranton, PA 100.0 100.0
Harrisburg, PA 100.0 100.0
Lancaster, PA 100.0 100.0
York, PA 100.0 100.0
Reading, PA 100.0 100.0
Altoona, PA 100.0 100.0
State College, PA 100.0 97.0
Williamsport, PA 100.0 93.3
Union, PA (PA-8 RSA) 100.0 100.0
Chambersburg, PA (PA-10 East RSA) 100.0 92.1
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
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
Mason, WV (WV-1 RSA) 100.0 100.0
Logan, WV (WV-6 RSA) 100.0 --
Parkersburg-Marietta, WV/OH 100.0 --
Ross, OH (OH-9 RSA) 100.0 --
Perry, OH (OH-10 South RSA) 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
</TABLE>
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<PAGE>
RESULTS OF OPERATIONS
The following is a discussion and analysis of the historical financial condition
and results of operations of the Company and factors affecting the Company's
financial resources. This discussion should be read in conjunction with the
Company's condensed consolidated financial statements, including the notes
thereto.
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Service revenue in the first quarter of 1997 rose 21% to $75.1 million from
$62.2 million in the same period in 1996. This increase was primarily the result
of a 27,000 or 13% increase in the number of subscribers in majority-owned
markets to approximately 540,000 in the first three months of 1997, as compared
to approximately 405,000 in the same period in 1996. Penetration, computed as a
percentage of the Company's subscribers to total POPs in majority owned cellular
markets, increased to 7.1% in the first quarter of 1997 from 5.7% in the same
period last year. The increase in subscribers is the result of the growing
acceptance of cellular communications and the Company's efforts to capitalize on
this increasing acceptance through an expanded sales and distribution network.
This increase was affected slightly by a decrease in "churn" to 2.1% in the
first quarter of 1997 from 2.2% in the same period last year. 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 24% during the first quarter of 1997 to $65.7 million as
compared to $52.8 million in first quarter of 1996. Average monthly Local
Revenue per subscriber declined 7% to $42 in the first quarter of 1997 compared
to $45 in the same period in the prior year. This decline was primarily due to
the continued pattern of increased incremental penetration into the segment of
consumers who generally use their cellular phones less frequently. Service
revenue generated by nonsubscribers roaming into the Company's markets increased
less than 1% to $9.4 million in the first quarter of 1997 as compared to $9.3
million in the prior year period. This slight increase resulted from increased
usage offset by continued reductions in daily access and usage rates which are
occurring in the industry with increasing frequency. 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 first quarter of 1997 of $48, a
decline of 10% from $53 in the prior year period.
Cost of service as a percentage of service revenue decreased to 10% during the
first quarter of 1997 from 15% during the same period in 1996 primarily as a
result of the Company's continuing effort to reduce the charges associated with
roamer fraud. The Company estimates that charges associated with roamer fraud
included in cost of service
I-12
<PAGE>
decreased from approximately 3% of service revenue in the first quarter of 1996
to less than 1% during the first quarter of 1997. To address the industry wide
increase in fraud, the Company continues its use of detection procedures such as
computerized systems which trigger alarms when cellular usage conflicts with
subscriber profiles. In addition, implementation of additional technology
designed to authenticate valid users will assist the Company in preventing fraud
in the future. The costs of these continued detection efforts and implementation
of new technologies are expected to be approximately $1.5 million in 1997.
Cellular fraud is expected to be a significant industry issue for the
foreseeable future.
General and administrative expenses increased 34% or $6.0 million during the
first quarter of 1997 as compared to the same period in 1996. General and
administrative expenses as a percentage of service revenue remained constant at
31% when compared to the fourth quarter of 1996, but increased from 28% in the
first quarter of 1996. This increase is due primarily to compensation expense
resulting from increases in the Company's employee base generally in the areas
of technical services, customer operations, and new product development. The
Company does not anticipate significantly expanding its employee base for the
remainder of the year and believes that general and administrative expenses
will stabilize as a percentage of service revenue over the remainder of the
year.
Marketing and selling expenses increased 16% to $14.5 million during the first
quarter of 1997, compared to $12.5 million in the same period in 1996. As a
percentage of service revenue, these expenses decreased from 20% in the first
quarter of 1996 to 19% in the 1997 period. During the first quarter of 1997,
marketing and selling expenses including the net loss on cellular equipment
("Combined Marketing and Selling Expenses") increased to $18.4 million from
$13.9 million in the same period in 1996. Combined Marketing and Selling
Expenses per net subscriber addition (excluding subscribers gained through
acquisitions) increased 17% to $681 in the first quarter of 1997 from $581
during the first quarter of 1996. This increase is primarily due to an increase
in the net loss on cellular equipment. Net loss on cellular equipment increased
from $1.5 million in the first quarter of 1996 to $3.9 million in the first
quarter of 1997, an increase of $2.4 million. The Company continues to sell
telephones at or below cost for marketing purposes, and has become more
aggressive with phone pricing in response to competitive pressures. Combined
Marketing and Selling Expenses per gross subscriber addition (excluding
subscribers gained through acquisitions) increased to $312 in the first quarter
of 1997 from $277 in the same period in 1996.
Depreciation and amortization expenses increased $4.6 million or 45% during the
first quarter of 1997 as compared to 1996. Property and equipment placed in
service since April 1, 1996 of approximately $126.5 million accounted for
substantially all of this increase.
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<PAGE>
Interest expense increased $2.3 million or 23% during the first quarter of 1997.
This increase primarily resulted from an increase in average borrowings of
approximately $112.5 million, and an increase in interest rates on $200 million
of borrowings represented by the Debentures, and, to a lesser extent, an
increase in average interest rates charged.
Equity in losses of unconsolidated investments increased by $3.6 million. This
increase resulted primarily from higher operating, amortization and interest
expenses incurred by Inter(bullet)Act as a result of expanding operations which
were made possible by a high yield debt financing completed during the third
quarter of 1996 for approximately $200 million. See "Liquidity and Capital
Resources." As of December 31, 1996, the Company had recognized an amount of
losses equal to its investment in IWC and accordingly has suspended recognition
of losses on IWC. Similarly, the Company expects to do so for Inter(bullet)Act
during 1997.
In the first quarter of 1997, the Company recognized a deferred income tax
benefit of $4.0 million, offset by current income tax expense of $20,000. In the
fourth quarter of 1996, the Company recognized a deferred income tax benefit of
$5.0 million, offset by current income tax expense of $891,000. Management
concluded that it is "more likely than not" that a portion of the Company's net
deferred income tax assets will be realized. This assessment considered the
Company's historical operating trends, current forecasts and certain other
factors. Prior to the fourth quarter of 1996, the Company made the assessment
that realization of its net deferred income tax assets was uncertain due
primarily to its history of operating losses. See "Liquidity and Capital
Resources -- Income Taxes".
Net income for the period was $228,000, or $0.01 per share, compared with net
income of $2.6 million, or $0.06 per share, reported for the same period a year
ago. Net income in the first quarter included an income tax benefit of $4.0
million, or $0.10 per share, resulting from recognition of deferred income tax
assets. The Company's first quarter results also included non-operating expenses
of $2.3 million, substantially all of which are attributable to the Company's
estimate of its proportionate share of losses of Inter(bullet)Act. The Company
anticipates recording additional proportionate losses totaling $3.2 million from
its investment in Inter(bullet)Act, all of which are expected to be incurred in
the second quarter of 1997.
I-14
<PAGE>
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 $38.8 million and exchanged
certain cellular assets in connection with acquisitions in 1996 and spent
approximately $130.8 million on total capital expenditures in 1996. During the
three months ended March 31, 1997 the Company incurred approximately $39.4
million in capital expenditures.
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 $26.0 million during the first three months of 1997
from $22.2 million in the same period in 1996. Net cash provided by operating
activities as shown on the Statement of Cash Flows increased to $10.8 million in
the first three months of 1997 as compared to $9.1 million in the same period in
1996. Net cash provided by operating activities in the first three months of
1997 reflects a $2.3 million increase in interest expense, and a change in
working capital items of $3.4 million. Investing activities, primarily purchases
of property and equipment and acquisitions of investments, used net cash of
$34.4 million and $31.3 million in the first three months of 1997 and 1996,
respectively. Financing activities provided net cash of $16.1 million and $19.9
million in 1997 and 1996, 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-
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<PAGE>
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, 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. As of March 31,
1997, $451 million had been borrowed under the Credit Facility, and the Company
had available borrowings, subject to certain limitations, under the Revolving
Loan portion of the Credit Facility of approximately $224 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. As of March
31, 1997, the current portion of long-term debt borrowed under the Credit
Facility was $6.2 million.
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, 1997, the applicable margins on the borrowings were
0.0% and 1.125% 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.
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<PAGE>
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.
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 unsecured obligations of the Company.
ACQUISITIONS. The Company continues to expand its ownership of cellular markets
through strategic acquisitions. The Company explores, on an ongoing basis,
possible acquisitions of additional cellular systems and licenses. The Company
currently has no agreements in principle regarding any such acquisition.
International Wireless Communication Holdings, Inc. and Foreign Investments. As
of March 31, 1996, the Company had invested $13.8 million in International
Wireless Communication Holdings, Inc. ("IWC") and owns approximately 36% of the
outstanding 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 Asia and Latin America.
During 1996, IWC completed the sale of 14% Senior Secured Discount Notes Due
2001, which have been exchanged for identical notes registered with the
Securities and Exchange Commission ("SEC"), and warrants to purchase shares of
IWC common stock. IWC received approximately $100 million in net proceeds from
this financing which will be used to fund existing projects and the exploration
of other opportunities. As existing and new projects are in the network buildout
phase, the losses of IWC are expected to grow significantly in future years. The
Company records its proportionate share of these losses under the equity method
of accounting. During 1995 and 1996, the Company recognized on the equity method
an amount of losses from IWC that is equal to the Company's equity
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<PAGE>
investment in IWC. As a result, the Company has suspended the recognition of
losses attributable to IWC until such time that the equity method income is
available to offset the Company's share of IWC's future losses.
In the first quarter of 1997, the Company entered into a stock purchase
agreement to purchase from an unrelated third party 7% of the outstanding shares
of Star Digitel Limited ("SDL"), a Hong Kong Company whose principal business
activities relate to the provision and development of cellular
telecommunications services in the People's Republic of China. Pursuant to the
stock purchase agreement, the Company's purchase of such shares will occur in
two closings, which are subject to the satisfaction of certain conditions, for
an aggregate cash consideration of $8.4 million. IWC also recently acquired and
maintains a 40% ownership interest in SDL. Subsequent to March 31, 1997, the
Company made an initial investment of $3.5 million.
Inter(bullet)Act Systems, Incorporated. As of March 31, 1997, the Company had
invested $10.0 million in Inter(bullet)Act Systems, Incorporated
("Inter(bullet)Act") for an ownership interest of approximately 26% of
Inter(bullet)Act's outstanding common stock. 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 of a retail outlet through an interactive
multi-media system utilizing ATM-like terminals.
During 1996, Inter(bullet)Act completed the sale of 142,000 units ("Units") of
14% Senior Discount Notes Due 2003, which have been exchanged for identical
notes registered with the SEC, and warrants to purchase shares of common stock
at $.01 per share. The Company purchased for $12.0 million a total of 18,000
Units consisting of $18.0 million principal amount at maturity of these 14%
Senior Discount Notes and warrants to purchase 132,012 shares of common stock.
These warrant 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
common stock of Inter(bullet)Act. Inter(bullet)Act has incurred net losses since
its inception.
Inter(bullet)Act received approximately $91 million in net proceeds from the
above financing which will be used to accelerate the roll-out of its systems in
retail supermarkets and, as a result, the net losses incurred by
Inter(bullet)Act are expected to grow significantly in future years. The Company
records its proportionate share of these losses under the equity method of
accounting. The Company anticipates that during the second quarter of 1997 its
cumulative proportionate share of Inter(bullet)Act losses will exceed the
remaining portion of its investment in Inter(bullet)Act. Accordingly the Company
will suspend the recognition of losses attributable to Inter(bullet)Act until
such time that the equity method income is available to offset the
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<PAGE>
Company's share of Inter(bullet)Act's future losses.
Geotek Communications, Inc. In 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 and
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. Geotek is a telecommunications Company that is developing a wireless
communications network in certain metropolitan markets in the United States
based on its FHMA digital technology. Its common stock is traded on the NASDAQ
National Market System. In September 1995, the Company purchased for $5.0
million in cash 531,463 shares of convertible preferred stock of Geotek with a
stated value of $9.408 per share. On September 15, 1996, the Company allowed the
initial series of options to expire unexercised, and as a result, all other
options and the management consulting agreement also expired.
CAPITAL EXPENDITURES. As of March 31, 1997, the Company had $409.3 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. In order to increase geographic
coverage and provide for additional portable usage the Company continues to
increase the number of sites and add additional capacity to existing sites as it
has done over the past few years. As a result of this accelerated network
buildout and the continued growth of the Company's subscriber base, capital
expenditures were $130.8 million during 1996.
During 1997, the Company plans to continue this accelerated buildout. Capital
expenditures for 1997 are estimated to be approximately $120 million and are
expected to be funded primarily through internally generated funds.
Approximately $90 million of those capital expenditures will be for cellular
network equipment, and the remainder will be primarily for rental telephones and
computer equipment. During the first quarter of 1997, the Company incurred
approximately $39.4 million in capital expenditures.
CAPITAL STOCK. On November 4, 1996, the Company's Board of Directors authorized
the repurchase of up to 2,500,000 shares of its Class A Common Stock from time
to time in open market or other transactions. As of December 31, 1996 the
Company had repurchased 255,000 shares at an average price per share of
approximately $17.00. Through March 31, 1997, the Company had repurchased
320,000 additional shares at an average price per share of approximately $14.85.
Subsequent to March 31, 1997, the Company repurchased an additional 500,000
shares at an average repurchase price of $13.565 per share.
INCOME TAXES. The Company accounts for income taxes in accordance with Statement
of
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<PAGE>
Financial Accounting Standards No. 109--"Accounting for Income Taxes." This
standard requires, among other things, the recognition of future tax benefits,
measured by enacted tax rates, attributable to deductible temporary differences
between financial statement and income tax bases of assets and liabilities and
to tax NOLs, to the extent that realization of such benefits is more likely than
not. Prior to 1996, the Company incurred significant financial reporting and tax
losses primarily as a result of substantial depreciation, amortization and
interest expenses associated with acquiring and developing its cellular markets
and substantial marketing and other operating costs associated with building its
subscriber base. Although substantial net deferred income tax assets were
generated, these assets and the associated income were not recognized for
financial reporting purposes and a valuation allowance equal to the unrecognized
asset was established. Management's assessment was that the Company's historical
operating results did not make future profitability certain enough for it to
recognize any part of the asset and related income.
Since inception, the Company has steadily increased its subscriber base and
improved its revenues and operating results at rates consistent with
management's annual internal forecasts. The Company achieved profitability in
1996 for financial reporting purposes, and management expects improvements in
operating results in 1997 and future periods. Although the Company's ongoing
operations have generated Federal taxable losses since inception, it expects
taxable income in future periods. There can be no assurance that the Company
will achieve improvements in its results of operations. See the "Safe Harbor"
statement below for a description of certain risks and uncertainties that may
affect the Company. Because of these risks and uncertainties, management
concluded that forecasts could be made with enough certainty to recognize net
deferred income tax assets only over a relatively short-term period. Therefore,
the Company recognized only $5.0 million of its $104.2 million net deferred
income tax assets at December 31, 1996 and maintained a valuation allowance for
the remainder of the Company's $99.2 million of net deferred income tax assets.
In the first quarter of 1997, the Company recognized an additional $4.0 million
of its net deferred income tax assets. The Company will continue to assess the
recognition of additional net deferred tax assets based on its ongoing
evaluation of its actual performance and ability to estimate future performance.
For Federal income tax reporting purposes, the Company had net operating loss
carryforwards of approximately $315 million at December 31, 1996. These losses
may be used to reduce future taxable income, if any, and expire through 2010.
The primary differences between the accumulated deficit for financial reporting
purposes and the income tax loss carryforwards relate to the differences in the
treatment of certain deferred cellular license acquisition costs, certain gains
on dispositions of cellular interests, partnership losses, depreciation methods,
estimated useful lives and compensation earned under stock compensation plans.
These carryforwards may be subject to annual limitation in the future
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<PAGE>
in accordance with the Tax Reform Act of 1986 and the ability to use these
carryforwards could be significantly impacted by a future "change in control" of
the Company. The limitations, if any, arising from such future "change in
control" cannot be known at this time.
GENERAL. Although no assurance can be given that such will be the case, the
Company believes that its internally generated funds and available borrowing
capacity under the Credit Facility will be sufficient during the next several
years to complete its planned network expansion, to fund debt service, to
provide flexibility, to repurchase shares, to pursue acquisitions and other
business opportunities that might arise in the future, and to meet working
capital and general corporate needs. The Company also may issue additional
shares of Class A Common Stock.
INFLATION
The Company believes that inflation affects its business no more than it
generally affects other similar businesses.
"Safe Harbor" Statement under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended:
Except for the historical information presented, the matters disclosed in this
release include forward-looking statements. These statements represent the
Company's judgment on the future and are subject to risks and uncertainties that
could cause actual results to differ materially. Such factors include, without
limitation: (i) the substantial leverage of the Company which may adversely
affect the Company's ability to finance its future operations, to compete
effectively against better capitalized competitors and to withstand downturns in
its business or the economy generally; (ii) a change in economic conditions in
the markets served by the Company which could effect demand for cellular
services; (iii) greater than anticipated competition from PCS and ESMR companies
that provide services and features in addition to those currently provided by
cellular companies, and the risk that the Company will not be able to provide
such services and features or that it will not be able to do so on a timely or
profitable basis; (iv) technological developments that make the Company's
existing analog networks and planned digital networks uncompetitive or obsolete
such as the risk that the Company's choice of Time Division Multiple Access
("TDMA") as its digital technology leaves it at a competitive disadvantage if
other digital technologies, including Code Division Multiple Access ("CDMA"),
ultimately provide substantial advantages over TDMA or analog technology and
competitive pressures force the Company to implement CDMA or another digital
technology at substantially increased cost; and (v) higher than anticipated
costs due to unauthorized use of its networks and the development and
implementation of measures to curtail such fraudulent use. See the Company's
Form 8-K dated March 31, 1997 and the Company's subsequent filings and
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<PAGE>
reports with the Securities and Exchange Commission for a further description of
these risks.
I-22
<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 March 31, 1997, the Company filed a Form 8-K reporting "Item 5. Other
Information," which Item 5 contained a "safe harbor" statement under
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, with respect to any
forward-looking statements that the Company may make in its filings with
the Securities and Exchange Commission, press releases and other
disclosures.
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<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, 1997 By: /s/ Stephen R. Leeolou
--------------------------------
Stephen R. Leeolou
President
and
Co-Chief Executive Officer
Date: May 15, 1997 By: /s/ Stephen L. Holcombe
-------------------------------
Stephen L. Holcombe
Executive Vice President
and
Chief Financial Officer
(principal accounting and
principal financial officer)
II-2
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
*3(a) Articles of Incorporation of Registrant as amended through
July 25,1995, filed as Exhibit 1 to the Registrant's Form
8-A/A dated July 25, 1995.
*3(b) Bylaws of Registrant (compilation of July 25, 1995), filed as
Exhibit 2 to the Registrant's Form 8-A/A dated July 25, 1995.
*4(a) Specimen Common Stock Certificate, filed as Exhibit 2 to the
Registrant's Form 8- A/A dated July 25, 1995.
*4(b)(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(b)(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(b)(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(b)(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(b)(5) First Amendment to Second Amended and Restated Loan Agreement
between Vanguard Cellular Operating Corp. and various lenders
led by the Bank of New York and the Toronto-Dominion Bank as
agents, dated as of July 31, 1996, filed as Exhibit 4(d)(5) to
the Registrant's Form 10-Q dated September 30, 1996 and
confirmed electronically as Exhibit 4(d)(5) to the
Registrant's 10-Q/A dated September 30, 1996.
*4(b)(6) Second Amendment to Second Amended and Restated Loan Agreement
between
<PAGE>
Vanguard Cellular Operating Corp. and various lenders led by
the Bank of New York and The Toronto-Dominion Bank as agents,
dated as of October 9, 1996, filed as Exhibit 4(d)(6) to the
Registrant's Form 10-Q dated September 30, 1996 and confirmed
electronically as Exhibit 4(d)(6) to the Registrant's 10-Q/A
dated September 30, 1996.
4(b)(7) Third Amendment to Second Amended and Restated Loan
Agreement between Vanguard Celluar Operating Corp. and various
lenders led by the Bank of New York and The Toronto-Dominion
Bank as agents, dated as of March 31, 1997.
*4(c)(1) Indenture dated as of April 1, 1996 between Registrant and The
Bank of New York as Trustee, filed as Exhibit 4(e)(1) to the
Registrant's Form 10-Q/A dated March 31, 1996.
*4(c)(2) First Supplemental Indenture, dated as of April 1, 1996
between Registrant and The Bank of New York as Trustee, filed
as Exhibit 4(e)(2) to the Registrant's Form 10-Q/A dated March
31, 1996.
11 Calculation of fully diluted earnings per share for the three
months ended March 31, 1997 and 1996.
27 Financial Data Schedule.
- -------------------------
* Incorporated by reference to the statement or report indicated.
<PAGE>
<PAGE>
EXHIBIT 4(b)(7)
THIRD AMENDMENT TO
SECOND AMENDED AND RESTATED LOAN AGREEMENT
This THIRD AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT (this
"Amendment") dated as of the 31st day of March, 1997 (the "Amendment Date"), by
and among VANGUARD CELLULAR FINANCIAL CORP., a North Carolina corporation (the
"Borrower"); and THE TORONTO-DOMINION BANK, THE BANK OF NEW YORK, CIBC, INC.,
LTCB TRUST COMPANY, NATIONSBANK, N.A., THE BANK OF NOVA SCOTIA, BARCLAYS BANK
plc, BANK OF MONTREAL, CHICAGO BRANCH, BANQUE NATIONAL DE PARIS, CREDIT
LYONNAIS CAYMAN ISLAND BRANCH, THE FIRST NATIONAL BANK OF MARYLAND, FIRST UNION
NATIONAL BANK OF NORTH CAROLINA, FLEET NATIONAL BANK, THE FIRST NATIONAL BANK OF
BOSTON, ROYAL BANK OF CANADA, BANK OF TOKYO-MITSUBISHI TRUST COMPANY,
SOCIETE GENERALE, ABN AMRO BANK N.V., BANK OF HAWAII, CORESTATES
BANK, N.A., CORESTATES BANK, N.A. f/k/a MERIDIAN BANK, FLEET BANK, N.A., THE
SUMITOMO TRUST & BANKING CO., LTD., NEW YORK BRANCH, BANQUE PARIBAS, UNION BANK
OF CALIFORNIA, N.A., CoBANK, ACB and FIRST HAWAIIAN BANK (collectively and
together with any financial institution which subsequently becomes a 'Lender'
under the Loan Agreement, as such term is defined therein, the "Lenders"), and
for purposes of acknowledging notice of this Amendment, CIBC INC., LTCB TRUST
COMPANY, NATIONSBANK, N.A., THE BANK OF NOVA SCOTIA and THE FIRST NATIONAL BANK
OF BOSTON, as co-agents (collectively, in such capacity, the "Co- Agents"); THE
BANK OF NEW YORK and THE TORONTO-DOMINION BANK, as managing agents
(collectively, in such capacity, the "Managing Agents"); THE BANK OF NEW YORK,
as administrative agent (in such capacity, the "Administrative Agent"); THE
TORONTO-DOMINION BANK, as documentation/review agent (in such capacity, the
"Documentation Agent"); and TORONTO DOMINION (TEXAS), INC., as collateral agent
(the "Collateral Agent"; the Collateral Agent, the Documentation Agent, the
Administrative Agent, the Managing Agents and the Co-Agents are collectively
referred to as the "Agents"),
W I T N E S S E T H:
WHEREAS, the Borrower (as successor by assignment to Vanguard Cellular
Operating Corp.), the Lenders and the Agents are parties to that certain Second
Amended and Restated Loan Agreement dated as of April 10, 1996, as amended by
the First Amendment to Second Amended and Restated Loan Agreement dated as of
July 31, 1996, and the Second Amendment to Second Amended and Restated Loan
Agreement dated as of October 9, 1996 (as so amended, the "Loan Agreement"); and
WHEREAS, the Borrower has requested, and the Lenders have agreed, subject
to the terms hereof, to amend the Loan Agreement as more fully set forth herein;
<PAGE>
NOW, THEREFORE, in consideration of the premises set forth above, the
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree that all capitalized terms used and not defined herein
shall have the meanings ascribed thereto in the Loan Agreement, and further
agree as follows:
1. Amendments to Article 7.
(a) Amendment to Section 7.5. Section 7.5 of the Loan Agreement,
Limitation on Guarantees, is hereby amended (i) by deleting the word "or" at the
end of existing subsection (b), (ii) by deleting the period at the end of
existing subsection (c) and (iii) adding the following as a new subsection (d)
thereof:
"or (d) Investments permitted by Section 7.6 hereof in
the form of Guarantees in an aggregate amount at any
time outstanding not to exceed $5,000,000.00."
(b) Amendment to Section 7.9. Section 7.9 of the Loan Agreement, Fixed
Charge Ratio, is hereby amended by deleting the existing Section 7.9 in its
entirety and by substituting the following therefor:
"Section 7.9. Fixed Charge Ratio. The Borrower shall
not at any time permit the Fixed Charge Ratio to be less
than the ratios set forth below during the periods
indicated:
Period Ratio
July 1, 1999 through
June 30, 2000 1.00:1
July 1, 2000 and
thereafter 1.05:1"
(c) Amendment to Section 7.10. Section 7.10 of the Loan Agreement,
Consolidated Leverage Ratio, is hereby amended by deleting the existing Section
7.10 in its entirety and by substituting the following therefor:
"Section 7.10. Consolidated Leverage Ratio. (a) Prior
to any Acquisition or Investment pursuant to Section
7.6(d)(F) hereof, the Borrower shall not at any time permit
the Consolidated Leverage Ratio to exceed the ratios set
forth below during the periods indicated:
-2-
<PAGE>
Period Ratio
January 1, 1997 through
June 29, 1997 7.50:1
June 30, 1997 through
September 29, 1997 7.00:1
September 30, 1997 through
June 29, 1998 6.50:1
June 30, 1998 through
September 29, 1998 6.00:1
September 30, 1998 through
June 29, 1999 5.50:1
June 30, 1999 and
thereafter 5.00:1
(b) At all times after any Acquisition or Investment pursuant to
Section 7.6(d)(F) hereof, the Borrower shall not at any time permit the
Consolidated Leverage Ratio to exceed (i) from the date of any such
Acquisition or Investment through June 29, 1999, 5.50:1 and (ii) from June
30, 1999 and thereafter, 5.00:1."
(d) Amendment to Section 7.11. Section 7.11 of the Loan Agreement, Senior
Leverage Ratio, is hereby amended by deleting the existing Section 7.11 in its
entirety and by substituting the following therefor:
"Section 7.11. Senior Leverage Ratio. (a) Prior to any
Acquisition or Investment pursuant to Section 7.6(d)(F)
hereof, the Borrower shall not at any time permit the Senior
Leverage Ratio to exceed the ratios set forth below during
the periods indicated:
Period Ratio
January 1, 1997 through
June 29, 1997 5.50:1
June 30, 1997 through
September 29, 1997 5.00:1
September 30, 1997 through
June 29, 1998 4.50:1
June 30, 1998 through
June 29, 1999 4.00:1
-3-
<PAGE>
Period Ratio
June 30, 1999 and
thereafter 3.50:1
(b) At all times after any Acquisition or Investment pursuant to
Section 7.6(d)(F) hereof, the Borrower shall not at any time permit the
Senior Leverage Ratio to exceed (i) from the date of such Acquisition or
Investment through June 29, 1999, 4.00:1 and (ii) from June 30, 1999 and
thereafter, 3.50:1."
(e) Amendment to Section 7.13. Section 7.13 of the Loan Agreement, Capital
Expenditures, is hereby amended by deleting the existing Section 7.13 in its
entirety and by substituting the following therefor:
"Section 7.13 Capital Expenditures. The Borrower shall not permit the
aggregate Capital Expenditures for the Borrower and its Subsidiaries to
exceed the following as of the end of the calendar years (or 6-month period
in the case of 1999) indicated:
Total
Capital
Period Expenditures
At December 31, 1996 $150,000,000.00
At December 31, 1997 $125,000,000.00
At December 31, 1998 $125,000,000.00
At June 30, 1999 $ 62,500,000.00
To the extent not used in any calendar year (or 6-month period in the case
of 1999), an amount equal to (a) the lesser of the unused Total Capital
Expenditure availability (exclusive of any carry forwards from prior
periods) for such calendar year (or 6-month period in the case of 1999) and
(b) 25% of the Total Capital Expenditure limit shown above (exclusive of
any carry forwards from prior periods) for such calendar year (or 6-month
period in the case of 1999), may be carried forward to the next succeeding
calendar year."
2. No Other Amendment or Waiver. Notwithstanding the agreement of the
Lenders to the terms and provisions of this
-4-
<PAGE>
Amendment, the Borrower acknowledges and expressly agrees that this Amendment is
limited to the extent expressly set forth herein and shall not constitute a
modification of the Loan Agreement or any other Loan Documents or a course of
dealing at variance with the terms of the Loan Agreement or any other Loan
Documents (other than as expressly set forth above) so as to require further
notice by the Agents or the Lenders, or any of them, of its or their intent to
require strict adherence to the terms of the Loan Agreement and the other Loan
Documents in the future. All of the terms, conditions, provisions and covenants
of the Loan Agreement and the other Loan Documents shall remain unaltered and in
full force and effect except as expressly modified by this Amendment.
3. Representations and Warranties. The Borrower hereby
represents and warrants in favor of each Agent and each Lender as
follows:
a. The Borrower has the corporate power and authority
(i) to enter into this Amendment and (ii) to do all other acts
and things as are required or contemplated hereunder to be done,
observed and performed by it;
b. This Amendment has been duly authorized, validly executed and
delivered by one or more Authorized Signatories of the Borrower and constitutes
the legal, valid and binding obligation of the Borrower, enforceable against it
in accordance with its terms;
c. The execution and delivery of this Amendment and the performance by
the Borrower under the Loan Agreement and the other Loan Documents to which it
is a party, as amended hereby, do not and will not require the consent or
approval of any regulatory authority or governmental authority or agency having
jurisdiction over the Borrower or any of its Subsidiaries which has not already
been obtained, nor is in contravention of or in conflict with the articles of
incorporation, by-laws or partnership agreements of the Borrower or any of its
Subsidiaries, or any provision of any statute, judgment, order, indenture,
instrument, agreement, or undertaking to which the Borrower or any of its
Subsidiaries is a party or by which any of their respective assets or properties
is or may become bound; and
d. The representations and warranties contained in Section 4.1 of the
Loan Agreement and contained in the other Loan Documents remain true and correct
as of the date hereof, both before and after giving effect to this Amendment,
except to the extent previously fulfilled in accordance with the terms of the
Loan Agreement or such other Loan Document, as applicable, or to
-5-
<PAGE>
the extent relating specifically to the Agreement Date. No Default now exists or
will be caused hereby.
4. Conditions Precedent. The effectiveness of this Amendment is subject to
the receipt by the Agents of counterparts hereof executed by the Majority
Lenders and the Borrower and of all documents, instruments, consents or items
which the Managing Agents shall deem appropriate in connection herewith.
5. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
separate counterparts shall together constitute one and the same instrument.
6. Loan Documents. Each reference in the Loan Agreement or any other Loan
Document to the term "Loan Agreement" shall hereafter mean and refer to the Loan
Agreement as amended hereby and as the same may hereafter be amended.
7. Governing Law. This Amendment shall be construed in accordance with and
governed by the internal laws of the State of New York, applicable to agreements
made and to be performed in New York.
8. Effective Date. Upon satisfaction of the conditions precedent referred
to in Section 4 above, this Amendment shall be effective as of March 31, 1997.
[Remainder of Page Intentionally Left Blank]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment or
caused it to be executed under seal by their duly authorized officers, all as of
the day and year first above written.
BORROWER: VANGUARD CELLULAR FINANCIAL CORP., a
North Carolina corporation
By: /s/ L. Richardson Preyer, Jr.
Name: L. Richardson Preyer, Jr.
Title: Executive Vice President
[CORPORATE SEAL]
Attest: /s/ Richard C. Rowlenson
Name: Richard C. Rowlenson
Title: Assistant Secretary
<PAGE>
TORONTO DOMINION (TEXAS), INC., as
Collateral Agent
By: /s/ Sophia D. Sgarbi
Name: Sophia D. Sgarbi
Title: Vice President
<PAGE>
THE BANK OF NEW YORK, as Administrative
Agent, a Managing Agent and a Lender
By: /s/ Gerry Granovsky
Name: Gerry Granovsky
Title: Assistant Vice President
<PAGE>
THE TORONTO-DOMINION BANK, as
Documentation Agent, a Managing Agent
and a Lender
By: /s/ Neva Nesbitt
Name: Neva Nesbitt
Title: Mgr Cr Admin.
<PAGE>
CIBC, INC., as a Co-Agent and a Lender
By: /s/ Harold Birk
Name: Harold Birk
Title: Director, CIBC Wood Gundy
Securities Corp., as agent
<PAGE>
LTCB TRUST COMPANY, as a Co-Agent and a
Lender
By: /s/ John J. Sullivan
Name: John J. Sullivan
Title: Executive Vice President
<PAGE>
NATIONSBANK, N.A., as a Co-Agent and a
Lender
By: /s/ Keith M. Wilson
Name: Keith M. Wilson
Title: Vice President
<PAGE>
THE BANK OF NOVA SCOTIA, as a Co-Agent
and a Lender
By: /s/ Vincent Fitzgerald, Jr.
Name: Vincent Fitzgerald, Jr.
Title: Authorized Signatory
<PAGE>
THE FIRST NATIONAL BANK OF BOSTON, as a
Co-Agent and a Lender
By: /s/ Julie V. Jalelian
Name: Julie V. Jalelian
Title: Vice President
<PAGE>
ABN AMRO BANK N.V., as a Lender
By: /s/ Steven Farley
Name: Steven Farley
Title: Vice President
By: /s/ Steven Hipsman
Name: Steven Hipsman
Title: Vice President
<PAGE>
UNION BANK OF CALIFORNIA, N.A., as a
Lender
By: /s/ J. Kevin Sampson
Name: J. Kevin Sampson
Title: Vice President
<PAGE>
BANK OF HAWAII, as a Lender
By: /s/ Elizabeth O. MacLean
Name: Elizabeth O. MacLean
Title: Vice President
<PAGE>
BANK OF MONTREAL, CHICAGO BRANCH, as a
Lender
By: /s/ Allegra Griffiths
Name: Allegra Griffiths
Title: Director
<PAGE>
BANK OF TOKYO-MITSUBISHI TRUST COMPANY,
as a Lender
By: /s/ John P. Judge
Name: John P. Judge
Title: VP & Co-Head
<PAGE>
BANQUE NATIONALE DE PARIS, as a Lender
By: /s/ Serge Desrayaud
Name: Serge Desrayaud
Title: VP / Team Leader
By: /s/ Pamela Lucash
Name: Pamela Lucash
Title: Assistant Treasurer
<PAGE>
BANQUE PARIBAS, as a Lender
By: /s/ Nicole Cawley
Name: Nicole Cawley
Title: Vice President
By: N/A
Name:
Title:
<PAGE>
BARCLAYS BANK PLC, as a Lender
By: /s/ James K. Downey
Name: James K. Downey
Title: Associate Director
<PAGE>
CoBANK, ACB, as a Lender
By: /s/ Thomas A. Smith
Name: Thomas A. Smith
Title: Senior Vice President
<PAGE>
CORESTATES BANK, N.A., as a Lender
By: /s/ Charles Brinley
Name: Charles Brinley
Title: Commercial Officer
<PAGE>
CREDIT LYONNAIS CAYMAN ISLAND BRANCH, as
a Lender
By: /s/ James E. Morris
Name: James E. Morris
Title: Authorized Signature
<PAGE>
FIRST HAWAIIAN BANK, as a Lender
By: /s/ Kathryn A. Plumb
Name: Kathryn A. Plumb
Title: Vice President
<PAGE>
THE FIRST NATIONAL BANK OF MARYLAND, as
a Lender
By: /s/ Timothy A. Knabe
Name: Timothy A. Knabe
Title: Vice President
<PAGE>
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA, as a Lender
By: /s/ Jim Redman
Name: Jim Redman
Title: Senior Vice President
<PAGE>
FLEET BANK, N.A., as a Lender
By: /s/ Cynthia Terwilliger
Name: Cynthia Terwilliger
Title: Associate Vice President
<PAGE>
FLEET NATIONAL BANK, as a Lender
By: /s/ Paula H. Lang
Name: Paula H. Lang
Title: Senior Vice President
<PAGE>
CORESTATES BANK, N.A. f/k/a Meridian
Bank, as a Lender
By: /s/ Charles Brinley
Name: Charles Brinley
Title: Commercial Officer
<PAGE>
ROYAL BANK OF CANADA, as a Lender
By: /s/ Thomas M. Byrne
Name: Thomas M. Byrne
Title: Senior Manager
<PAGE>
SOCIETE GENERALE, as a Lender
By: /s/ John Sadik-Khan
Name: John Sadik-Khan
Title: Vice President
<PAGE>
THE SUMITOMO TRUST & BANKING CO., LTD.,
NEW YORK BRANCH, as a Lender
By: /s/ Suraj P. Bhatia
Name: Suraj P. Bhatia
Title: Senior Vice President
Manager, Corporate Finance Dept.
<PAGE>
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 MARCH 31,
- -------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income $ 228 $ 2,621
- ------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 40,824 41,313
Adjustments necessary to reflect weighted average number
of common shares outstanding on a fully diluted basis 57 1,057
- ------------------------------------------------------------------------------------------------------------
40,881 42,370
- ------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share $ 0.01 $ 0.06
- ------------------------------------------------------------------------------------------------------------
</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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,647
<SECURITIES> 0
<RECEIVABLES> 35,223
<ALLOWANCES> 5,444
<INVENTORY> 14,071
<CURRENT-ASSETS> 55,813
<PP&E> 471,443
<DEPRECIATION> 130,984
<TOTAL-ASSETS> 742,120
<CURRENT-LIABILITIES> 75,376
<BONDS> 199,822
0
0
<COMMON> 408
<OTHER-SE> 21,608
<TOTAL-LIABILITY-AND-EQUITY> 742,120
<SALES> 75,109
<TOTAL-REVENUES> 80,315
<CGS> 7,869
<TOTAL-COSTS> 16,512
<OTHER-EXPENSES> 52,721
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,401
<INCOME-PRETAX> (3,772)
<INCOME-TAX> (4,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 228
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
