UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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)
NORTH CAROLINA 56-1549590
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2002 Pisgah Church Road, Suite 300 27455-3314
Greensboro, North Carolina (Zip Code)
(Address of principal executive offices)
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 July 8, 1997
was 40,279,772.
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets = I-1
June 30, 1997 and December 31, 1996.
Condensed Consolidated Statements of Operations = I-2
Three months and six months ended June 30, 1997 and 1996.
Condensed Consolidated Statements of Cash Flows = I-3
Three months and six months ended June 30, 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 4. Submission of Matters to a Vote of Security Holders II-1
Item 6. Exhibits and Reports on Form 8-K II-2
SIGNATURES II-3
ITEM 1. FINANCIAL STATEMENTS
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
JUNE 30, DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- ----------------------------------------------------------------------------------------------------------
(Substantially all pledged on long-term debt) (UNAUDITED) (SEE NOTE)
Current Assets:
Cash $ 5,286 $ 11,180
Accounts receivable, net of allowances for doubtful accounts of $5,345
and $4,617 53,955 29,907
Cellular telephone inventories 15,539 15,921
Deferred income tax asset 5,596 2,149
Prepaid expenses 3,399 2,057
- ----------------------------------------------------------------------------------------------------------
Total current assets 83,775 61,214
- ----------------------------------------------------------------------------------------------------------
Investments 323,900 333,371
Property and Equipment, net of accumulated depreciation of $141,195 and
$119,470 368,483 313,800
Other Assets, net of accumulated amortization of $9,006 and $6,965 24,936 22,196
- ----------------------------------------------------------------------------------------------------------
Total assets $ 801,094 $ 730,581
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long term debt $ 12,321 $ -
Accounts payable and accrued expenses 59,379 65,497
Customer deposits 1,711 1,679
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 73,411 67,176
- ----------------------------------------------------------------------------------------------------------
Long-Term Debt 709,639 629,954
- ----------------------------------------------------------------------------------------------------------
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,
40,280 and 41,085 shares issued and outstanding 403 411
Common stock, Class B - $.01 par value, 30,000 shares authorized,
no shares issued -- --
Additional capital in excess of par value 232,932 237,640
Net unrealized holding losses (20,057) (14,570)
Accumulated deficit (195,234) (190,030)
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 18,044 33,451
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 801,094 $ 730,581
- ----------------------------------------------------------------------------------------------------------
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
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- ------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Service revenue $ 88,348 $ 70,595 $ 163,457 $ 132,763
Cellular telephone equipment revenue 5,347 3,398 10,101 6,580
Other 453 1,628 905 2,295
- ------------------------------------------------------------------------------------------------------------------
94,148 75,621 174,463 141,638
- ------------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of service 8,000 8,021 15,869 17,412
Cost of cellular telephone equipment 9,256 5,457 17,899 10,106
General and administrative 25,229 19,232 48,504 36,544
Marketing and selling 20,185 14,831 34,679 27,300
Depreciation and amortization 16,185 11,219 31,137 21,543
- ------------------------------------------------------------------------------------------------------------------
78,855 58,760 148,088 112,905
- ------------------------------------------------------------------------------------------------------------------
Income From Operations 15,293 16,861 26,375 28,733
Net Loss on Dispositions (2,247) (265) (2,436) (630)
Interest Expense (14,224) (11,622) (26,625) (21,721)
Equity in Earnings (Losses) of Unconsolidated
Affiliates (3,431) (401) (6,283) 393
Other, net 683 176 1,271 582
- ------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Taxes (3,926) 4,749 (7,698) 7,357
Income Tax Benefit 4,000 - 8,000 -
- ------------------------------------------------------------------------------------------------------------------
Income Before Minority Interests 74 4,749 302 7,357
Minority Interests - 23 - 36
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 74 $ 4,772 $ 302 $ 7,393
- ------------------------------------------------------------------------------------------------------------------
Net Income Per Share $ 0.00 $ 0.12 $ 0.01 $ 0.18
- ------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding 40,298 41,322 40,560 41,317
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
I-2
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Dollar amounts in thousands)
- ---------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 302 $ 7,393
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 31,137 21,544
Amortization of deferred debt issuance costs 967 803
Equity method (income) loss of unconsolidated entities 6,283 (393)
Amortization of bond investment discount (925) --
Minority interests -- (37)
Net loss on dispositions 2,436 630
Deferred Income tax benefit (8,000) --
Noncash compensation for management consulting services -- (1,557)
Changes in current items:
Accounts receivable, net (24,048) 395
Cellular telephone inventories 382 (168)
Accounts payable and accrued expenses 879 (4,614)
Other, net (1,310) (772)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,103 23,224
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (90,471) (57,477)
Proceeds from dispositions of property and equipment 78 78
Payments for acquisition of investments (5,144) (6,852)
Capital contributions to unconsolidated cellular entities -- (203)
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (95,537) (64,454)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments of long-term debt (4,004) (186,003)
Repurchase of common stock (10,257) --
Net proceeds from issuance of common stock 35 448
Proceeds of long-term debt 96,000 229,802
Debt issuance cost -- (6,755)
Decrease (Increase) in other assets (234) 28
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 81,540 37,520
- ---------------------------------------------------------------------------------------------------
Net decrease in cash (5,894) (3,710)
Cash, beginning of period 11,180 8,085
- ---------------------------------------------------------------------------------------------------
Cash, end of period 5,286 $ 4,375
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID 23,820 $ 20,066
SUPPLEMENTAL DISCLOSURE OF INCOME TAXES PAID 20 --
- ---------------------------------------------------------------------------------------------------
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
I - 3
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Vanguard
Cellular Systems, Inc. and Subsidiaries (the Company) have been prepared without
audit pursuant to Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission ("SEC"). Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 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
NOTE 2: INVESTMENTS
June 30, December 31,
1997 1996
INVESTMENTS IN DOMESTIC CELLULAR ENTITIES:
Consolidated entities
License cost $ 300,805 $ 300,780
Accumulated amortization (39,883) (36,113)
--------------- ------------
260,922 264,667
--------------- -----------
Entities carried on the equity method
Cost 10,193 10,193
Accumulated share of earnings 1,358 2,056
--------------- ------------
11,551 12,249
--------------- ------------
Entities carried on the cost method 9,993 9,993
--------------- ------------
282,466 286,909
--------------- ------------
INVESTMENTS IN OTHER ENTITIES:
Entities carried on the equity method
Cost 23,823 23,823
Accumulated share of losses (23,823) (18,239)
--------------- ------------
0 5,584
--------------- ------------
Investments carried as "available for sale"
Cost 37,736 37,736
Net unrealized holding losses (20,057) (14,570)
--------------- ------------
17,679 23,166
--------------- ------------
Investment in debentures
At par 18,000 18,000
Discount (7,463) (8,389)
--------------- ------------
10,537 9,611
--------------- ------------
Other investments, at cost 13,218 8,101
--------------- ------------
41,434 46,462
--------------- ------------
$ 323,900 $ 333,371
=============== ============
DOMESTIC 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
OTHER 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 or until such time that
the Company makes additional financial commitments to IWC.
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. Through June 30, 1997, the Company
has invested $5.1 million in SDL.
In August, 1997, the Company entered into an agreement to purchase from an
unrelated third party a 6% indirect ownership interest in Pakistan Mobile
Communications, Ltd. ("PMCL"), a company whose principal business activity
is operating a nationwide cellular telecommunications system in Pakistan.
Pursuant to the agreement, the Company will purchase this ownership interest
for $7.1 million in cash. Simultaneous with the closing of this transaction,
IWC will purchase a 20% indirect ownership interest in PMCL for $22.0
million under substantially the same terms as the Company. In addition, the
Company will advance to IWC $2.9 million to fund a portion of its investment
in PMCL. The Company will account for its investment using the equity method
of accounting.
INTER(BULLET)ACT SYSTEMS, INCORPORATED
As of June 30, 1997, the Company had invested $10.0 million in Inter(bullet)Act
common stock 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.
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.
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
I-6
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.
The Company records its proportionate share of the losses of Inter(bullet)Act
under the equity method of accounting. During the second quarter of 1997, the
Company's cumulative proportionate share of Inter(bullet)Act losses exceeded
the remaining portion of its common stock investment in Inter(bullet)Act.
Subsequent to June 30, 1997, the Company determined it will use the modified
equity method of accounting and will recognize its proportionate share of
losses attributable to its $12.0 million investment in Inter(bullet)Act
notes and warrants based on its ownership interest in Inter(bullet)Act
common stock.
FINANCIAL INFORMATION OF EQUITY METHOD INVESTEES
Combined financial position and operating results of the Company's equity method
investees, IWC, Inter(bullet)Act, and its Eastern North Carolina Joint Venture
for the first six months of 1997 and 1996 are as follows (in thousands):
1997 1996
------------------------
Revenues................................................$ 8,758 $ 8,009
Gross profit............................................ 1,282 3,120
Loss from operations.................................... (36,133) (11,916)
Net loss................................................ (49,350) (11,523)
Information for each investee is summarized from the available financial
information for each entity.
I-7
NOTE 3: LONG-TERM DEBT
The Company's long-term financing arrangements consist primarily of a $675
million Credit Facility and $200 million of Senior Debentures due 2006. The
Credit Facility is senior to the Senior Debentures through the use of structured
subordination whereby Vanguard is the borrower on the Senior Debentures and
Vanguard Cellular Financial Corp. ("VCFC"), Vanguard's only direct subsidiary,
is the primary obligor on the Credit Facility.
Long-term debt consists of the following as of June 30, 1997 and December 31,
1996 (in thousands):
June 30, December 31,
1997 1996
----------- -----------
Debt of VCFC:
Borrowings under the Credit Facility:
Term Loan......................................$ 325,000 $ 325,000
Revolving Loan................................. 197,000 105,000
Other Long-Term Debt.............................. 133 137
---------------------------
522,133 430,137
Less Current Portion........................... 12,321 --
----------- -----------
509,812 430,137
Debt of Vanguard:
Senior Debentures due 2006, net of
unamortized discount of $173 and $183.......... 199,827 199,817
---------- -----------
$ 709,639 $ 629,954
========== ===========
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 June 30, 1997, $197 million had been borrowed under the Revolving Loan and
the terms of these agreements limit additional available borrowing during the
third quarter of 1997 to $65 million. See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" for further information.
INTEREST RATE PROTECTION. The Company maintains interest rate swaps and interest
rate caps which provide protection against interest rate risk. At June 30, 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):
I-8
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 assets in the accompanying consolidated balance sheet and is being
amortized over the lives of the agreements as a component of interest expense.
Subsequent to June 30, 1997, the Company purchased a two year interest rate
cap with an 8% strike level covering a $25 million notional amount which
expires in August, 1999.
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 ending April 15, 1997
was 8.64% or .735% below the coupon rate on the Debentures. The all-in-rate for
the six month period ending October 15, 1997 is 9.1% or .275% 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 increase interest expense in the second quarter of 1997 by
$44,000 and increase interest expense by $241,000 in the same period in 1996,
and in the six month period ending June 30, 1997 and 1996, interest expense
increased $2,000 and $375,000 respectively. The Company does not hold or issue
financial instruments for trading purposes.
I-9
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. During the six months ended June 30, 1997, the Company repurchased
820,000 additional shares at an average price per share of approximately $12.50.
In January 1997, the Compensation Committee of the Board of Directors authorized
the cancellation of certain options with 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
reflected the fair market value at the time of issuance. In April 1997, the
Compensation Committee authorized the 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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a summary of the Company's ownership interests in cellular
markets in which the Company's ownership interests exceeded 20% at June 30, 1997
and 1996. This table does not include any ownership interests that were
contracted for at these dates.
June 30,
CELLULAR MARKETS 1997 1996
- ---------------- ---- ----
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 93.6
Union, PA (PA-8 RSA) 100.0 100.0
Chambersburg, PA (PA-10 East RSA) 100.0 92.3
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
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 48.0
Jacksonville, NC 47.8 47.8
I-11
RESULTS OF OPERATIONS
The following is a discussion and analysis of the historical financial condition
and results of operations of the Company and factors affecting the Company's
financial resources. This discussion should be read in conjunction with the
Company's condensed consolidated financial statements, including the notes
thereto.
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Service revenue in the second quarter of 1997 rose 25% to $88.3 million from
$70.6 million in the same period in 1996. This increase was primarily the result
of a 150,000 or 35% increase in the number of subscribers in majority-owned
markets to approximately 580,000 in the second quarter of 1997, as compared to
approximately 430,000 in the same period in 1996. With the exception of recent
fourth quarter holiday seasons, this 40,000 net subscriber gain represents the
best quarter the Company has ever experienced. Penetration, computed as a
percentage of the Company's subscribers to total POPs in majority owned cellular
markets, increased to 7.7% in the second quarter of 1997 from 6.0% 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. A
decrease in "churn" from 2.3% in the second quarter of 1996 to 1.8% in the
second quarter of 1997 contributed positively to the net increase in subscribers
and resulted in part from a renewed emphasis on customer service and a change in
billing procedures. 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 28% during the second quarter of 1997 to $74.6 million as
compared to $58.4 million in second quarter of 1996. This increase is a result
of the increase in subscribers discussed above. Average monthly Local Revenue
per subscriber declined 5% to $44 in the second quarter of 1997 compared to $47
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
12% to $13.7 million in the second quarter of 1997 as compared to $12.2 million
in the prior year period. This 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. Local Revenue
combined with roaming revenue resulted in overall average monthly
revenue per subscriber for the second quarter of 1997 of $53, a decline of 7%
from $56 in the prior year period.
I-12
Cost of service as a percentage of service revenue decreased to 9% during the
second quarter of 1997 from 11% during the same period in 1996 primarily as a
result of the Company's continuing effort to reduce the charges associated with
roamer fraud, and a reduction in interconnect costs. The Company estimates that
charges associated with roamer fraud included in cost of service decreased from
approximately 2% of service revenue in the second quarter of 1996 to less than
1% during the second 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 31% or $6.0 million during the
second quarter of 1997 as compared to the same period in 1996. General and
administrative expenses as a percentage of service revenue increased from 27% in
the second quarter of 1996 to 29% in the second quarter of 1997. 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 36% to $20.2 million during the second
quarter of 1997, compared to $14.8 million in the same period in 1996. As a
percentage of service revenue, these expenses increased from 21% in the second
quarter of 1996 to 23% in the 1997 period. During the second quarter of 1997,
marketing and selling expenses including the net loss on cellular equipment
("Combined Marketing and Selling Expenses") increased to $24.1 million from
$16.9 million in the same period in 1996. Combined Marketing and Selling
Expenses per net subscriber addition decreased 11% to $602 in the second quarter
of 1997 from $676 during the second quarter of 1996 primarily as a result of
the decrease in churn. Net loss on cellular equipment increased from $2.1
million in the second quarter of 1996 to $3.9 million in the second quarter
of 1997, an increase of $1.8 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 increased to
$352 in the second quarter of 1997 from $316 in the same period in 1996
primarily as a result of increased advertising expense incurred as the
Company took advantage of what it considered to be a good marketing
opportunity during the quarter. While the Company has benefited from the
increased success of external distribution channels, the Company
continues to emphasize internal distribution channels, which it believes
result in higher
I-13
long-term profit margins. The Company has discontinued its agent relationship
with the Radio Shack chain, effective January 1, 1997. The Company has chosen to
do so as a result of the escalating per activation commission charges which
Radio Shack would have required had the relationship continued. The loss of the
60 Radio Shack locations from the retail distribution channel is an important
event but management believes that its own increasing presence in the retail
marketplace will help mitigate any effect on gross subscriber additions. In
addition, management believes that attracting new subscribers through its own
internal retail channel at a cost that is more reasonable is in the best
long-term interest of the Company.
Depreciation and amortization expenses increased $5.0 million or 44% during the
second quarter of 1997 as compared to 1996. Property and equipment placed in
service since July 1, 1996 of approximately $139.6 million accounted for
substantially all of this increase.
Interest expense increased $2.6 million or 22% during the second quarter of
1997. This increase primarily resulted from an increase in average borrowings of
approximately $140 million, and, to a lesser extent, an increase in interest
rates on $200 million of borrowings represented by 9 % Senior Debentures due
2006 offset slightly by a decrease in average interest rates charged under the
Company's credit facility. Contributing to the second quarter increase in
average borrowings are a change in the Company's billing practices from billing
monthly access fees in advance to billing these fees in arrears resulting in
additional borrowings, and the Company's repurchase of 500,000 shares of its
common stock.
Equity in losses of unconsolidated investments increased by $3.0 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 $100 million. See "Liquidity and Capital
Resources".
Net loss on dispositions increased by $2.0 million, substantially all of which
is related to the Company's adjustment of the value of its rental phone assets.
In the second quarter of 1997, the Company recognized a deferred income tax
benefit of $4.0 million increasing the total recognized deferred income tax
asset to $13.0 million. 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".
I-14
Net income for the second quarter was $74,000, or $0.00 per share, compared with
net income of $4.8 million, or $0.12 per share, reported for the same period a
year ago. The decline in net income in the second quarter resulted from
increases in losses associated with the Company's investment in
Inter(bullet)Act, depreciation expense, disposition losses, and an overall
increase in operating expenses which were partially offset by the recognition of
deferred income tax assets, all as discussed above.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Service revenue in the first six months of 1997 rose 23% to $163.5 million from
$132.8 million in the same period in 1996 primarily as a result of a 35%
increase in the number of subscribers served in the 1997 period. Average monthly
revenue per subscriber for the six months ended June 30, 1997 was $50, a decline
of 8% from $55 in the prior year period. Local Revenue increased 26% to $140.4
million during the first six months of 1997 as compared to $111.2 million in the
same period last year. Average monthly Local Revenue per subscriber declined 6%
to $43 in the first six months of 1997 as compared to $46 in the 1996 period.
Cost of service as a percentage of service revenue decreased from 13% in the
first six months of 1996 to 10% in the 1997 period primarily as a result of the
Company's continued effort to reduce the charges associated with roamer fraud.
General and administrative expenses increased 33% or $12.0 million during the
first six months of 1997 as compared to the same period in 1996, and increased
as a percentage of service revenue to 30% during 1997 as compared to 28% during
the same period in 1996. The increase is primarily related to compensation
expense as discussed above.
Marketing and selling expenses increased 27% to $34.7 million during the first
six months of 1997, compared to $27.3 million in 1996. As a percentage of
service revenue, these expenses remained constant at 21% in the 1997 and 1996
period. Combined Marketing and Selling Expenses per net subscriber addition
increased 1% to $634 in the first six months of 1997 from $629 during the same
period in 1996. The decrease in churn previously discussed has slowed the growth
of this expense. Combined Marketing and Selling Expenses per gross subscriber
addition decreased to $334 in the first six months of 1996 from $297 in the same
period in 1996.
Depreciation and amortization expenses increased $9.6 million or 45% during the
first six months of 1997 as compared to 1996. Property and equipment placed in
service since July 1, 1996 of approximately $139.6 million accounted for
substantially all of this increase.
Interest expense increased $4.9 million or 23% during the 1997 period. This
increase
I-15
primarily resulted from an increase in average borrowings as previously
discussed, and an increase in interest rates on $200 million of borrowings
represented by the Debentures.
The Company reported net income of $302,000 or $0.01 per share as compared to
$7.4 million or $0.18 per share for 1996. This $7.1 million decrease in net
income is substantially due to a $ 6.7 million increase in recognition of the
Company's proportionate share of losses of its unconsolidated subsidiaries and
increased depreciation expense as discussed above, partially offset by
recognition of deferred income tax assets of approximately $8.0 million.
I-16
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, to provide for increased
portable usage, and to upgrade its cellular system in preparation for digital
conversion and the implementation of new services. 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 six months ended June 30, 1997 the
Company incurred approximately $83.5 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 $31.5 million during the second quarter of 1997 from
$28.1 million in the same period in 1996. Net cash provided by operating
activities as shown on the Statement of Cash Flows decreased to $8.1 million in
the first six months of 1997 as compared to $23.2 million in the same period in
1996. Net cash provided by operating activities in the first six months of 1997
reflects a $3.8 million increase in interest expense, and a change in working
capital items of $18.9 million. Investing activities, primarily purchases of
property and equipment and acquisitions of investments, used net cash of $95.5
million and $64.5 million in the first six months of 1997 and 1996,
respectively. Financing activities provided net cash of $81.5 million and $37.5
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 9 % senior
debentures (the "Debentures"). On December 23, 1994, the Company completed the
closing of its Credit Facility, pursuant
I-17
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, the Company issued $200
million aggregate principal amount of 9 3/8% 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 June 30,
1997, $197 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 $65 million.
Additional borrowings in the second quarter resulting from a change in the
Company's billing practices are estimated to be approximately $16.0 million.
Historically, the Company billed subscriber access fees in advance. To reduce
customer confusion upon receipt of the first bill and to remain competitive, the
Company changed its billing policy and now bills access fees in arrears. This
change had no impact on the Company's revenue recognition, but did affect the
in-flow of cash from bill payments in the second quarter resulting in increased
borrowings. In addition, the Company borrowed approximately $5.5 million to
re-purchase 500,000 shares of its common stock.
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 June
30, 1997, the current portion of long-term debt borrowed under the Credit
Facility was $12.3 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 June 30, 1997,
I-18
the applicable margins on the borrowings were 0.25% and 1.5% 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.
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 June 30, 1997, 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.
I-19
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 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 or until such time that
the Company makes additional financial commitments to IWC.
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. Through June 30, 1997, the Company
has invested $5.1 million in SDL.
In August, 1997, the Company entered into an agreement to purchase from an
unrelated third party a 6% indirect ownership interest in Pakistan Mobile
Communications, Ltd. ("PMCL"), a company whose principal business activity is
operating a nationwide cellular telecommunications system in Pakistan. Pursuant
to the agreement, the Company will purchase this ownership interest for $7.1
million in cash. Simultaneous with the closing of this transaction, IWC will
purchase a 20% indirect ownership interest in PMCL for $22.0 million under
substantially the same terms as the Company. In addition, the Company will
advance to IWC $2.9 million to fund a portion of its investment in PMCL.
The Company will account for its investment using the equity method of
accounting.
INTER(BULLET)ACT SYSTEMS, INCORPORATED. As of June 30, 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
I-20
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 the losses of Inter(bullet)Act
under the equity method of accounting. During the second quarter of 1997, the
Company's cumulative proportionate share of Inter(bullet)Act losses exceeded
the remaining portion of its common stock investment in Inter(bullet)Act.
Subsequent to June 30, 1997, the Company determined it will use the modified
equity method of accounting and will recognize its proportionate share of
losses attributable to its $12.0 million investment in Inter(bullet)Act
notes and warrants based on its ownership interest in Inter(bullet)Act
common stock.
CAPITAL EXPENDITURES. As of June 30, 1997, the Company had $448.8 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 to expand system coverage and capacity, and
to upgrade its cellular system in preparation for digital conversion and the
implementation of new services.
I-21
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 second quarter of 1997, the Company incurred
approximately $83.5 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. During the six months ended June 30, 1997, the Company
repurchased 820,000 additional shares at an average price per share of
approximately $12.50.
INCOME TAXES. The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109--"Accounting for Income Taxes." This
standard requires, among other things, the recognition of future tax benefits,
measured by enacted tax rates, attributable to deductible temporary differences
between financial statement and income tax bases of assets and liabilities and
to tax NOLs, to the extent that realization of such benefits is more likely than
not. Prior to 1996, the Company incurred significant financial reporting and tax
losses primarily as a result of substantial depreciation, amortization and
interest expenses associated with acquiring and developing its cellular markets
and substantial marketing and other operating costs associated with building its
subscriber base. Although substantial net deferred income tax assets were
generated, these assets and the associated income 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. 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 these improvements. 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
I-22
valuation allowance for the remainder of the Company's $99.2 million of net
deferred income tax assets. In the first six months of 1997, the Company
recognized an additional $8.0 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 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)
I-23
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 reports
with the Securities and Exchange Commission for a further description of these
risks.
I-24
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Vanguard Cellular Systems, Inc. Annual Meeting of Shareholders was held May 20,
1997. The proposals voted upon and the results of the voting were as follows:
1. Election of Class I Directors for a three-year term.
Broker
Non-
For Against Abstentions Withheld Votes
Doris R. Bray 37,375,810 -- 145,975 -- --
Stuart S. Richardson 37,375,878 -- 145,907 -- --
Robert A. Silverberg 37,377,610 -- 144,175 -- --
2. Proposal to approve and adopt the 1997 Employee Stock Purchase Plan as
described in the Company's Proxy Statement dated April 21, 1997.
Broker
Non-
For Against Abstentions Withheld Votes
31,039,908 1,920,486 82,238 -- --
3. Proposal to approve and adopt the Amended and Restated 1994 Long-Term
Incentive Plan as described in the Company's Proxy Statement dated April 21,
1997.
Broker
Non-
For Against Abstentions Withheld Votes
22,716,392 10,142,695 126,296 -- --
4. Proposal to approve ratification of Arthur Andersen LLP as independent
auditors for 1997.
Broker
Non-
For Against Abstentions Withheld Votes
37,499,073 12,095 10,617 -- --
II-1
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) There have been no reports filed on Form 8-K during the period.
II-2
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VANGUARD CELLULAR SYSTEMS, INC.
Date: August 14, 1997 By: /s/ Stephen R. Leeolou
-------------------------------------
Stephen R. Leeolou
President
and
Co-Chief Executive Officer
Date: August 14, 1997 By: /s/ Stephen L. Holcombe
------------------------------------
Stephen L. Holcombe
Executive Vice President
and
Chief Financial Officer
(principal accounting and
principal financial officer)
II-3
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 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 Cellular Operating Corp. and
various lenders led by the Bank of New York and The Toronto-Dominion Bank as agents, dated as of March 31, 1997,
filed as Exhibit 4(b)(7) to the Registrant's Form 10-Q dated 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 and six months ended June 30, 1997 and 1996.
27 Financial Data Schedule.
* Incorporated by reference to the statement or report indicated.