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, 1994
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
incorporation or organization) Identification No.)
2002 Pisgah Church Road, Suite 300
Greensboro, North Carolina 27455
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (910) 282-3690
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
The number of shares outstanding of the issuer's common stock as
of August 8, 1994 was 38,579,299 (as adjusted to reflect a 3 for
2 stock split to be effected in the form of a 50% stock dividend
payable on August 23, 1994 to shareholders of record on August 4,
1994).
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - I-1
June 30, 1994 and December 31, 1993
Condensed Consolidated Statements of Operations - I-2
Three months ended June 30, 1994 and 1993, and
Six months ended June 30, 1994 and 1993
Condensed Consolidated Statements of Cash Flows - I-3
Six months ended June 30, 1994 and 1993
Notes to Condensed Consolidated Financial I-4
Statements
Item 2. Management's Discussion and Analysis of I-7
Results of Operations and Financial Condition
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security II-1
Holders
Item 6. Exhibits and Reports on Form 8-K II-1
SIGNATURES II-2
Item 1. Financial Statements
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<Captions>
June 30, December 31,
ASSETS 1994 1993
(Substantially all pledged on long-term debt) (Unaudited) (See note)
Current Assets:
Cash.................................................. $ 3,120 $ 9,098
Accounts receivable, net of allowances for doubtful
accounts of $2,186 and $1,771....................... 19,223 12,167
Cellular telephone inventories........................ 3,827 4,464
Prepaid expenses...................................... 685 918
Total current assets....................... 26,855 26,647
Investments (Note 2).......................................... 200,093 177,415
Property and Equipment, net of accumulated depreciation of
$73,553 and $65,830......................................... 91,328 71,716
Other Assets, net of accumulated amortization of $1,782 and
$4,459...................................................... 10,290 8,651
Total assets............................... $328,566 $ 284,429
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses.................. $ 33,100 $ 21,470
Customer deposits ..................................... 534 481
Total current liabilities................... 33,634 21,951
Long-Term Debt................................................. 286,655 238,153
Minority Interests ............................................ 2,469 2,427
Commitments and Contingencies
Shareholders' Equity:
Preferred stock - $.01 par value, 1,000,000 shares
authorized, no shares issued.......................... -- --
Common stock, Class A - $.01 par value, 60,000,000
shares authorized, 38,558,675 and 38,398,080 shares
issued and outstanding................................ 386 384
Common stock, Class B - $.01 par value, 30,000,000
shares authorized, no shares issued................... -- --
Additional capital in excess of par value.............. 186,383 185,786
Net unrealized holding losses.......................... (12,391) --
Accumulated deficit.................................... (168,570) (164,272)
Total shareholders' equity.................. 5,808 21,898
Total liabilities and shareholders' equity.. $328,566 $ 284,429
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
Note: The balance sheet at December 31, 1993 has been derived from
the audited financial statements at that date.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
<Captions>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1994 1993 1994 1993
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Service fees.............................. $ 35,473 $ 24,412 $ 63,975 $ 44,648
Cellular telephone equipment revenues.... 4,485 2,039 8,395 3,485
Other.................................. 797 -- 1,476 --
40,755 26,451 73,846 48,133
Costs and Expenses:
Cost of service............................... 5,178 3,457 9,978 6,525
Cost of cellular telephone equipment.......... 6,610 2,742 12,539 4,677
Marketing and selling......................... 8,174 5,072 14,966 9,423
General and administrative.................... 11,027 8,595 20,172 16,348
30,989 19,866 57,655 36,973
Income From Operations Before Depreciation 9,766 6,585 16,191 11,160
and Amortization...................................
Depreciation and Amortization....................... (6,336) (6,582) (11,319) (12,809)
Income (Loss) From Operations.......................... 3,430 3 4,872 (1,649)
Net Gain (Loss) on Dispositions ....................... 320 (383) 7 (390)
Interest Expense....................................... (5,137) (3,795) (9,121) (7,584)
Other, net............................................. 191 97 (14) 139
Loss Before Minority Interests and Extraordinary Item.. (1,196) (4,078) (4,256) (9,484)
Minority Interests..................................... (47) 79 (42) 49
Net Loss Before Extraordinary Item..................... (1,243) (3,999) (4,298) (9,435)
Extraordinary Item..................................... -- (3,715) -- (3,715)
Net Loss............................................... $(1,243) $(7,714) $(4,298) $(13,150)
Net Loss Per Share Before Extraordinary Item........... $ (0.03) $ (0.11) $ (0.11) $ (0.25)
Net Loss Per Share .................................... $ (0.03) $ (0.20) $ (0.11) $ (0.35)
Weighted Average Number of Common
Shares Outstanding ..................................38,446,752 37,849,653 38,424,448 37,838,841
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(Dollar amounts in thousands)
1994 1993
(Unaudited (Unaudited)
Cash flows from operating activities:
Net loss......................................................... $ (4,298) $ (13,150)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................. 11,319 12,809
Amortization of deferred debt issuance costs.................. 643 415
Equity in losses of unconsolidated cellular entities.......... 100 17
Minority interests............................................ 42 (49)
Net gain (loss) on dispositions............................... (7) 390
Extraordinary item............................................ -- 3,715
Non-cash compensation for management consulting services...... (1,071) --
Changes in current items:
Accounts receivable, net.................................... (6,803) (2,867)
Cellular telephone inventories.............................. 637 2
Account payable and accrued expenses........................ 11,584 360
Other, net.................................................. 286 (186)
Net cash used in operating activities........................ 12,432 1,456
Cash flows from investing activities:
Purchase of property and equipment............................... (28,677) (10,710)
Proceeds from dispositions of property and equipment............. 51 --
Payments for acquisition of investments.......................... (36,935) (779)
Proceeds from dispositions of cellular interests................. 419 1,204
Capital contributions to unconsolidated cellular entities........ (3) (222)
Net cash used in investing activities........................ (65,145) (10,507)
Cash flows from financing activities:
Principal payments of long-term debt............................. (2) (209,556)
Net proceeds from issuance of common stock....................... 599 291
Proceeds of long-term debt....................................... 48,500 228,500
Debt issuance costs.............................................. (2,203) (8,298)
Increase in other assets......................................... (159) 73
Net cash provided by financing activities.................... 46,735 11,010
Net increase (decrease) in cash.......................................... (5,978) 1,959
Cash, beginning of period................................................ 9,098 9,473
Cash, end of period...................................................... $ 3,120 $ 11,432
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID................................. $ 7,855 $ 7,508
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
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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 six month period ended June 30, 1994 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1994. For further information, refer to
the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K.
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries and cellular entities in which
the Company holds a majority ownership interest. Investments in
entities holding cellular interests 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 or not control through majority
ownership have been accounted for using the cost method of accounting.
The Company maintains an ownership interest in Geotek Communications,
Inc. ("Geotek"), a publicly held company. Under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", which are
effective for 1994, this investment is classified as "available for
sale". As such, the investment is recorded at its market value and
any unrealized gains or losses are recorded as a separate component of
shareholders' equity but do not affect results of operations.
Certain amounts in the statement of operations for the three months
and six months ended June 30, 1993 have been reclassified to conform
to the 1994 presentation. The Company reclassified certain direct
pass through items previously recognized as service revenue in its
Statements of Operations to cost of service expenses to conform with
industry practice. These reclassified items relate to charges
associated with the Company's subscribers roaming into adjacent
cellular markets. The reclassification has had no effect on the
Company's net loss or net loss per share.
Effective January 1, 1994, the Company also changed the depreciable
lives of certain of its property and equipment to more closely
approximate its historical experience and the useful lives of these
assets. These life changes affected assets representing approximately
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30% of the cost of the Company's depreciable assets. This change
reduced depreciation expense and net loss for the three months and six
months ended June 30, 1994 by approximately $900,000 and 1.8 million
or $0.02 and $0.05 per share, respectively.
Note 2: Investments
Cellular Entities
During 1993, the Company entered into an agreement to acquire in 1994,
two cellular markets contiguous to its Pennsylvania Supersystem. The
acquisition of these two markets, Altoona, PA and Chambersburg, PA,
was in exchange for $4.4 million in cash, the exchange of the
Hagerstown, MD cellular market and ownership interests in one minority
owned cellular market. In April, 1994, the Company completed the
closing of this transaction. As a result, the operations of the
Hagerstown, MD market are no longer included in the operations of the
Company and the operations of the Altoona and Chambersburg markets are
included in the consolidated financial results of the Company.
Subsequent to June 30, 1994 the Company entered into agreements to
acquire four cellular markets contiguous to or near its existing
operating regions in exchange for an aggregate purchase price of
approximately $58.5 million in cash or stock. The Company will
purchase for approximately $48.5 million payable in cash or Class A Common
Stock or a combination thereof at the Company's option, a 97.0% ownership
interest in the Binghamton, New York MSA and a 100% ownership interest in the
Elmira, New York MSA. These markets are contiguous to the Company's
Pennsylvania Supersystem, which due to this New York expansion the
Company has been renamed the "Mid-Atlantic Supersystem". In a
separate transaction, the Company will purchase, for $6.7 million in
cash and $3.3 million in the Company's Class A Common Stock, the 100%
ownership interest in the Washington, Maine (ME-4) RSA and a 100%
ownership interest in three of the four counties of the Mason, West
Virginia (WV-1) RSA. The Maine RSA is approximately 40 miles north of
the Portland, Maine MSA, which is already operated by the Company.
The West Virginia RSA is contiguous to the Company's Charleston, West
Virginia MSA. All four markets to be acquired are operational
cellular systems. As of December 31, 1993 the aggregate population
and number of subscribers for these four markets was approximately
527,000 and 10,400, respectively, and service fees for the year then
ended was approximately $7.1 million. These acquisitions are expected
to close by the end of 1994.
Geotek
In February 1994, the Company purchased for $30.0 million from Geotek
Communications, Inc. (Geotek) 2.5 million shares of Geotek common
stock and received options to invest up to $167.0 million for an
aggregate of 10 million additional shares. Geotek is a
I-5
telecommunications company that is developing a Specialized Mobile
Radio (SMR) wireless communications network in the United States based
on its Frequency Hopping Multiple Access digital technology (FHMATM).
Geotek's common stock is traded on the NASDAQ National Market System.
The options received by the Company were issued in three series as
follows: (i) Series A for 2 million shares at $15 per share; (ii)
Series B for 2 million shares at $16 per share; and (iii) Series C for
3 million shares at $17 per share and 3 million shares at $18 per
share. All options are exercisable immediately. The Series A options
expire on the later of February 23, 1995 or the commercial validation
(as defined) of Geotek's first SMR system using FHMA (the Series A
Expiration Date). The Series B and Series C options expire a year and
2 years, respectively, after the Series A Expiration Date. However,
the Company may extend the Series B and Series C options by six months
and the Series C options by an additional six months and, if any
portion of any series of options expires, all unexercised options
expire immediately.
The Company has also entered into a 5-year management consulting
agreement to provide operational and marketing support in exchange for
300,000 shares of Geotek common stock per year, however, should any
portion of the Series A, B or C options expire, the management
consulting agreement is immediately terminated. The Company has
earned and recorded as revenue approximately 105,000 shares under the
management agreement with an aggregate value of $1.1 million based
upon the average closing price of Geotek stock during the periods
held.
Note 3: Long-Term Debt
Long term debt consists of the following as of June 30, 1994 and
December 31, 1993 (in thousands):
June 30, December 31,
1994 1993
(Unaudited)
Borrowings under the 1993 loan agreement:
Facility A Loan $ 120,000 $ 120,000
Facility B Loan 116,500 68,000
Facility C Loan 50,000 50,000
Other Long-Term Debt 155 153
$ 286,655 $ 238,153
I-6
Note 4: Commitments and Contingencies
Litigation
In June 1989, a suit was filed by a group of former partners in the
San Juan Cellular Settlement Partnership which alleges that the
Company and two of its officers breached fiduciary duties and acted
fraudulently in connection with settlement of licensing proceedings
concerning the San Juan, PR market and certain other markets. The
suit requests $49,000 in compensatory damages, $50,000 in punitive
damages and imposition of a constructive trust upon the Company's
Lancaster, Reading and York, PA cellular operations. The Company
believes that the suit is without merit and intends to vigorously
oppose it and has asserted counterclaims against certain of the
plaintiffs. Discovery is essentially completed. Motions for summary
judgement and responsive pleadings have been filed by the parties,
oral argument has been held and the motions are pending. No trial
date has been set and management is unaware of when a trial date will
be set. Additionally, the Company is involved in various other legal
proceedings arising in the normal course of business. In the opinion
of management, the outcome of the above legal proceedings will not
have a material adverse effect on the consolidated financial position
of the Company.
Note 5: Common Stock
In July, 1994, the Board of Directors declared a 3 for 2 stock split
of its Class A Common Stock to be effected in the form of a 50% stock
dividend payable on August 23, 1994 to shareholders of record on
August 4, 1994 with cash to be paid in lieu of the issuance of
fractional shares. The effect of the split has been retroactively
applied to all common stock and per share amounts disclosed in the
accompanying consolidated financial statements and footnotes.
I-7
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
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, 1994 and 1993:
June 30,
Cellular Markets 1994 1993
Mid-Atlantic Supersystem:
Allentown, PA/NJ 100.0% 100.0%
Wilkes-Barre/Scranton, PA 100.0 65.7
Harrisburg, PA 86.8 86.8
Lancaster, PA 100.0 100.0
York, PA 100.0 100.0
Reading, PA 100.0 100.0
Williamsport, PA 90.9 73.8
State College, PA 97.0 91.0
Hagerstown, MD -- 85.5
Orange County, NY 100.0 100.0
Wayne, PA (PA-5 RSA) 100.0 100.0
Mifflin, PA (PA-11 RSA) 100.0 100.0
Lebanon, PA (PA-12 RSA) 100.0 --
Chambersburg, PA (PA-10 East RSA) 98.8 --
Altoona, PA 85.0 3.0
West Virginia Metro-cluster:
Huntington, WV/KY/OH 100.0 100.0
Charleston, WV 100.0 100.0
Florida Metro-cluster:
Pensacola FL 100.0 100.0
Fort Walton Beach, FL 100.0 100.0
Carolinas Metro-cluster:
Myrtle Beach, SC (SC-5 RSA) 100.0 100.0
Wilmington, NC 47.7 47.7
Jacksonville, NC 47.3 47.3
New England Metro-cluster:
Portland, ME 100.0 100.0
Portsmouth, NH/ME 100.0 100.0
I-8
RESULTS OF OPERATIONS
Three Months Ended June 30, 1994 and 1993
In 1994, the Company reclassified certain pass-through items
previously recognized as service revenue in its Statements of
Operations to offset the related cost of service expenses to conform
with industry practice. These reclassified items relate to charges
associated with the Company's subscribers roaming into adjacent
cellular markets. Appropriate reclassifications have been made in
each period presented in the accompanying financial statements.
In July, 1994, the Board of Directors declared a 3 for 2 stock split
of its Class A Common Stock to be effected in the form of a 50% stock
dividend payable on August 23, 1994, to shareholders of record on
August 4, 1994, with cash to be in paid in lieu of the issuance of
fractional shares. The effect of the split has been retroactively
applied to all information herein.
Service fee revenues increased by $11.1 million or 45% primarily as a
result of a 57% increase in the number of subscribers in majority
owned markets to approximately 169,000 as of June 30, 1994 as compared
to the end of the second quarter of 1993. Substantially all of the
increase in the number of subscribers was due to subscriber growth in
markets controlled by the Company in both periods. Total net
subscribers in the Company's majority owned markets increased by
19,000 during the second quarter of 1994 as compared to 8,000 in the
second quarter of 1993. This 138% increase in the growth rate of net
subscriber additions is the result of an increase in productivity by
sales personnel which the Company believes has been augmented by
increased sales training and the growing acceptance of cellular
communications. The growth in net subscriber additions also reflects
the number of agents in the Company's indirect distribution channels
combined with moderate economic recovery in the Company's operating
regions. Average monthly service revenue per subscriber decreased 7%
to $74 for the three months ended June 30, 1994 from $79 during the
same period in 1993.
Cost of service expenses increased as a percentage of service fees to
15% for the three months ended June 30, 1994 as compared to 14% for
the same period in 1993. In many instances in 1994, the Company's
customers who roam into adjacent cellular markets are charged at rates
consistent with those rates the Company charges in its own markets
rather than passing through higher roaming rates customarily charged
by many cellular carriers. This billing practice, while creating a
marketing advantage by providing the customer with a broader virtual
service area, has caused the Company to incur increased net costs
related to the provision of these services. The rapid subscriber
growth which has occurred in the past year has made this larger
virtual service area available to significantly more customers which
has caused greater net costs to be incurred by the Company. The
Company is continuing its efforts to reduce these costs through the
I-9
continued negotiation of more favorable roaming agreements with both
wireline and non-wireline cellular service providers. In addition, the
continued negotiation of more favorable interconnection agreements
with local exchange carriers should contribute to stability in cost of
service as a percentage of service fees.
Marketing and selling expenses increased 61% to $8.2 million during
the three months ended June 30, 1994 as compared to the same period in
1993 and as a percentage of service fees these expenses increased to
23% from 21%. Marketing and selling expenses including the net loss
on subscriber equipment increased to $10.3 million from $5.8 million
during the three months ended June 30, 1994 and 1993, respectively.
The higher rate of growth in net subscriber additions described above
for the 1994 period as compared to the 1993 period and the resulting
increase in salaries and commissions contributed to the increase in
marketing and selling expenses. However, marketing and selling
expenses per net subscriber addition, including the loss on cellular
equipment, declined 25% to $542 in 1994 from $722 during the three
months ended June 30, 1993.
General and administrative expenses increased 28% or $2.4 million
during the three months ended June 30, 1994 but decreased as a
percentage of service fees to 31% from 35% in the same period in 1993.
These expenses declined as a percentage of service fees primarily as a
result of controlled increases of many overhead expenses resulting in
higher utilization of the Company's existing personnel and systems.
General and administrative expenses should continue to decline as a
percentage of service fees as the Company continues to add more
subscribers without commensurate increases in general and
administrative overhead.
Depreciation and amortization decreased $246,000 or 4% during the
three months ended June 30, 1994. The primary reason for this
decrease is that the Company changed the depreciable lives of certain
of its property and equipment to more closely approximate its
historical experience and the estimated useful lives of these assets.
These life changes affected assets representing approximately 30% of
the cost of the Company's depreciable assets. This change reduced
depreciation expense and net loss for the quarter ended June 30, 1994
by approximately $900,000 or $0.03 per share. The remainder of the
decrease is the result of a portion of the Company's property and
equipment becoming fully depreciated during 1993 and, as such, these
assets do not have a continuing effect on depreciation and
amortization or net income.
Interest expense increased $1.3 million or 35% during the three months
ended June 30, 1994, primarily as a result of increased average
borrowings of approximately $65.0 million.
Net loss before extraordinary item decreased from $4.0 million or
$(0.11) per share for the three months ended June 30, 1993 to $1.2
million or $(0.03) per share in the 1994 period. The decrease in net
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loss per share is primarily attributable to an increase in "Operating
Cash Flow" (income (loss)from operations before depreciation and
amortization) of $3.2 million or 48% to $9.8 million.
Six Months Ended June 30, 1994 and 1993
Generally, explanations of changes between specific components of
revenue and costs and expenses contained in the results of operations
for the three month period ended June 30, 1994 apply also to the six
month period ended June 30, 1994.
Service fees for the six months ended June 30, 1994 increased 43% to
$64.0 million primarily as a result of the increase in the number of
subscribers served in the 1994 period. Average monthly revenue per
subscriber was $71 and $74 for the six months ended June 30, 1994 and
1993 respectively.
Cost of service expenses as a percentage of service fees increased to
16% for the six month periods ended June 30, 1994 from 15% in 1993.
As previously explained this increase in the relationship between
service fees and cost of service is largely due to the Company's
subscribers roaming into adjacent cellular markets.
Marketing and selling expenses increased by $5.5 million or 59% and
increased as a percentage of service fees to 23% from 21% during the
six month period ending June 30, 1994 and 1993, respectively. These
increased expenditures are primarily due to increases in advertising
and promotions in 1994. Also contributing were commission expenses
associated with the addition of 36,700 net subscribers during the six
months ended June 30, 1994 as compared to 15,200 during the same
period in 1993.
General and administrative expenses increased $3.8 million or 23% but
declined as a percentage of service fees to 32% during the six months
ended June 30, 1994 from 37% during the same period in 1993.
Depreciation and amortization decreased $1.5 million or 12% during the
six months ended June 30, 1994 as a result of the changes in
depreciable lives of certain of the Company's property and equipment.
The effect of these life changes is to reduce depreciation and
amortization for the six months ended June 30, 194, by $1.8 million or
$0.05 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to acquire, construct, operate and expand
its cellular systems and to fund operating losses and payments on
indebtedness. In the past, the Company has met these requirements
primarily through private and public sales of its Class A common
stock, seller financing and bank and vendor financing.
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On April 21, 1993, the Company completed the closing of a $290 million
credit facility, pursuant to a Loan Agreement (the "1993 Loan
Agreement") with various lenders led by the Bank of New York and the
Toronto-Dominion Bank. This agreement was subsequently expanded to
$390 million in February 1994. The 1993 Loan Agreement was used to
repay and terminate the Company's previously existing $275 million
credit facility closed April 1989 (the "1989 Credit Facility"). As
security for borrowings under the 1993 Loan Agreement, the Company has
pledged substantially all of the tangible and intangible assets of the
Company and its subsidiaries. The purpose of this refinancing was to
provide the Company with additional financial and operating
flexibility and enable it to pursue business opportunities that may
arise in the future.
The 1993 Loan Agreement consists of a "Facility A Loan", a "Facility B
Loan", and a "Facility C Loan". The Facility A Loan and the Facility C
Loan, in the amounts of $120 million and $50 million, respectively,
were to refinance the Company's borrowings under the 1989 Credit
Facility. The Facility B Loan is available for capital expenditures,
to acquire cellular franchise interests which are contiguous to or
within 50 miles of any boundary of the Company's Pennsylvania
Supersystem, to make permitted investments, and for general corporate
purposes. In February 1994, the 1993 Loan Agreement was amended to
increase the size of the Facility B Loan to $220 million. As of June
30, 1994, $103.5 million was available for future expenditures under
the amended Facility B Loan.
The Facility A Loan and the Facility B Loan bear interest at a rate
equal to the Company's choice of the Prime Rate, CD Rate or Eurodollar
Rate plus an applicable margin based upon a leverage ratio for the
most recent fiscal quarter. The leverage ratio, which is computed as
the ratio of Total Debt (as defined) to Adjusted Cash Flow (as
defined), currently is at such a level as to cause the applicable
margins on the borrowings to be 1.5%, 2.6% and 2.5% per annum for the
Prime Rate, CD Rate and Eurodollar Rate, respectively. Under the
Facility C Loan, the prescribed rate is the Eurodollar Rate plus a
margin of 3.0% per annum.
The outstanding amount of the Facility A Loan as of March 31, 1996 is
to be repaid in quarterly installments commencing on June 30, 1996 and
terminating at the Facility's maturity date of March 31, 2001. The
Facility B Loan operates as a revolving credit facility with available
borrowings reduced on a quarterly basis commencing on June 30, 1996
and terminating on March 31, 2001. At the time of each quarterly
reduction, the outstanding borrowings must be repaid to the extent
that they exceed the then available commitment. Outstanding
borrowings under the Facility C Loan as of March 31, 2001 shall be
repaid in two equal installments on June 30, 2001 and September 30,
2001, the Facility C Loan Maturity Date.
The 1993 Loan Agreement requires maintenance of certain covenants
including but not limited to maintenance of certain financial ratios
I-12
and prescribed amounts of interest rate protection. Additionally, the
1993 Loan Agreement restricts, among other things, the creation of
certain additional indebtedness, disposition of certain assets,
payment of cash dividends, capital expenditures and acquisitions and
other uses of proceeds. The requirements of the 1993 Loan Agreement
were established in relation to the Company's projected capital and
projected results of operations. These requirements generally were
designed to require continued improvement in the Company's operating
performance such that its operating cash flow would be sufficient to
begin servicing the debt as repayments are required. The Company is
in compliance with all requirements of the 1993 Loan Agreement and
expects to remain in compliance through December 31, 1994 and beyond.
The Company's operating strategy has been to acquire controlling
ownership interests and build and operate networked cellular telephone
systems in its five regional metro-clusters. On April 26, 1994, the
Company completed the acquisition of two cellular markets contiguous
to its Pennsylvania Supersystem in exchange for $4.4 million in cash,
the exchange of the Hagerstown, MD cellular market and the ownership
interest in one minority owned cellular market. Subsequent to June 30,
1994 the Company entered into agreements to acquire four cellular
markets contiguous to or near its existing operating regions in
exchange for an aggregate purchase price of approximately $58.5
million in cash or stock. The Company will purchase for approximately $48.5
million payable in cash or the Company's Class A Common Stock or a combination
thereof at the Company's option, a 97.0% ownership interest in the Binghamton,
New York MSA and a 100% ownership interest in the Elmira, New York MSA. These
markets are contiguous to the Company's Pennsylvania Supersystem,
which due to this New York expansion the Company has been renamed the
"Mid-Atlantic Supersystem". In a separate transaction, the Company
will purchase, for $6.7 million in cash and $3.3 million in the
Company's Class A Common Stock, the 100% ownership interest in the
Washington, Maine (ME-4) RSA and a 100% ownership interest in three of
the four counties of the Mason, West Virginia (WV-1) RSA. The Maine
RSA is appro-ximately 40 miles north of the Portland, Maine MSA, which
is already operated by the Company. The West Virginia RSA is
contiguous to the Company's Charleston, West Virginia MSA. All four
markets to be acquired are operational cellular systems. As of
December 31, 1993 the aggregate population and number of subscribers
for these four markets was approximately 527,000 and 10,400,
respectively, and service fees for the year then ended was
approximately $7.1 million. These acquisitions are expected to close
by the end of 1994.
As of June 30, 1994 the Company had approximately $165.0 million of
property and equipment placed in service. The Company has
historically incurred capital expenditures primarily based upon
capacity needs in its existing markets resulting from continued
subscriber growth. During the six months ended June 30, 1994, the
Company has accelerated its cellular network buildout through the
purchase of approximately $29.0 million of capital equipment which
included construction of approximately 30 cell sites. During the
remainder of 1994 and during 1995, the Company plans to continue its
I-13
accelerated cellular network buildout by constructing approximately 20
additional cell sites in 1994 and 35 additional cell sites in 1995.
This expansion will increase geographic coverage and provide for
increased portable usage in the Company's cellular markets. The
Company anticipates purchasing approximately $20.0 million and $40.0
million of capital equipment during the remainder of 1994 and during
1995, respectively.
In February 1994, the Company purchased for $30.0 million from Geotek
Communications, Inc. (Geotek) 2.5 million shares of Geotek
common stock and received options to invest up to $167.0 million for
an aggregate of 10 million additional shares. Geotek is a
telecommunications company that is developing a Specialized Mobile
Radio (SMR) wireless communications network in the United States based
on its Frequency Hopping Multiple Access digital technology (FHMATM).
Geotek's common stock is traded on the NASDAQ National Market System.
The options received by the Company were issued in three series as
follows: (i) Series A for 2 million shares at $15 per share; (ii)
Series B for 2 million shares at $16 per share; and (iii) Series C for
3 million shares at $17 per share and 3 million shares at $18 per
share. All options are immediately exercisable. The Series A options
expire on the later of February 23, 1995 or the commercial validation
(as defined) of Geotek's first SMR system using FHMA (the Series A
Expiration Date). The Series B and Series C options expire 1 year and
2 years, respectively, after the Series A Expiration Date. However,
the Company may extend the Series B and Series C options by six months
and the Series C options by an additional six months and, if any
portion of any series of options expires, all unexercised options
expire immediately.
The Company has also entered into a 5 year management consulting
agreement to provide operational and marketing support in exchange for
300,000 shares of Geotek common stock per year. However, should any
portion of the Series A, B or C options expire, the management
consulting agreement is immediately terminated. Approximately 105,000
shares have been earned under this management agreement.
If all options are exercised and all shares are earned and received
under the management consulting agreement, the Company would own an
aggregate of approximately 20% of Geotek's common stock on a fully
diluted basis. Under the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", which are effective for 1994, this
investment is classified as "available for sale". As such, the
investment is recorded at its market value and any unrealized gains or
losses are recognized as a separate component of shareholders' equity,
but do not affect results of operations.
The Company funded its initial $30.0 million investment in Geotek
using borrowings under its Facility B Loan, which also permits
borrowings to fund the exercise of the Series A options. In order to
I-14
exercise any of the Series B or C options, the Company will be
required to seek additional lender approval for borrowings under the
Facility B Loan or other financing alternatives.
Operating cash flow improved $5.0 million to $16.2 million during the
six months ended June 30, 1994. The Company's primary goal over the
next several years will be to generate sufficient operating cash flow
to fund its capital expenditures, interest and debt repayment
requirements. In order to continue to improve operating cash flow,
the Company's service fees must continue to increase at a faster rate
than operating expenses. Increases in service fees will be dependent
upon continuing growth in the number of net subscribers and minimizing
declines in revenue per subscriber. The Company believes its business
strategy and sales force will generate continued net subscriber growth
and that its focus on higher revenue customers, principally business
users, will assist in supporting revenue per subscriber. The Company
has substantially completed the development of its managerial,
administrative and marketing functions, as well as the primary
buildout of the cellular networks in its existing markets, and
believes that the rate of service fee growth will exceed the rate of
growth of operating expenses.
Although there can be no assurance that any of the foregoing growth
goals will be achieved, the Company believes that its internally
generated funds and its available bank lines of credit will be
sufficient during the next several years to complete its capital
equipment expansion, fund operating expenses and debt service.
INFLATION
The Company believes that inflation affects its business no more than
it generally affects other similar businesses.
I-15
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 4, 1994. The proposals voted upon and the results of
voting were as follows:
(1) Election of Class I Directors for a three-year term
Votes Votes
for Withheld
Stuart S. Richardson 19,340,335 136,198
Robert A. Silverberg 19,333,378 143,155
Doris R. Bray 19,331,428 145,105
(2) Proposal to approve 1994 Long-Term Incentive Plan
Votes for: 14,779,136
Votes Against: 1,867,490
Abstained: 208,026
(3) Proposal to approve ratification of Arthur Andersen & Co. as
independent auditors for 1994
Votes for: 19,425,643
Votes against: 13,989
Abstained: 36,901
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-1
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 11, 1994 By: /s/ Haynes G. Griffin
Haynes G. Griffin
President
and
Chief Executive Officer
Date: August 11, 1994 By: /s/ Stephen L. Holcombe
Stephen L. Holcombe
Senior Vice President
and
Chief Financial Officer
(principal accounting and
principal financial officer)
INDEX TO EXHIBITS
Exhibit Sequential
No. Description Page No.
2(a) Stock Purchase Agreement by and among
Registrant, Crowley Cellular Telecom-
munications Limited Partnership and
Crowley Cellular Telecommunications
Binghamton, Inc. dated August 5, 1994.
The following schedules to the Stock
Purchase Agreement have been omitted.
The registrant hereby undertakes to
furnish supplementally a copy of any
such omitted exhibit or schedule to the
Commission upon request.
Exhibit A Capital Budget
Exhibit B Opinion of Buyer's Counsel
Exhibit C Opinion of Seller's Counsel
Schedule 1 Organization of Seller
Schedule 2 Organization of Company
Schedule 3 Organization of the
Licensee
Schedule 6 Absence of Certain Changes
or Events
Schedule 7 Title to Assets, Etc.
Schedule 9 Contracts and Commitments
Schedule 10 Authorizations
Schedule 12 Consents and Approvals
Schedule 13 Financial Statements
Schedule 14 Litigation
Schedule 16 Liabilities
Schedule 20 Proprietary Rights
Schedule 21 Employee Benefit Plans
Schedule 23 Tax Matters
Schedule 25 Insurance
Schedule 28 Customers and Suppliers
*4(a) Charter of the Registrant, filed as
Exhibit 3(a) to the Registrant's
Registration Statement on Form S-1
(File No. 33-18067).
*4(b) Articles of Amendment to Charter of
the Registrant dated May 12, 1989,
filed as Exhibit 3(b) to the
Registrant's Registration Statement on
Form S-4 (File No. 33-35054).
*4(c)(1) Amended and Restated Bylaws of the
Registrant, filed as Exhibit 4(b) to
the Registrant's Form 10-Q for the
quarter ended September 30, 1990.
*4(c)(2) Amendment to the Bylaws adopted
September 11, 1991, filed as Exhibit
4(c)(2) to the Registrant's Form 8
Amendment to the Registrant's Form 10-
Q for the quarter ended June 30, 1991.
*4(d) Specimen Common Stock Certificate,
filed as Exhibit 4(a) to the
Registrant's Registration Statement on
Form S-1 (File No. 33-18067).
*4(e)(1) Loan Agreement between the Registrant
and various lenders led by The Bank of
New York and The Toronto-Dominion
Bank, as managing agents, dated as of
April 21, 1993, filed as Exhibit 2(a)
to the Registrant's Current Report on
Form 8-K dated as of April 21, 1993.
*4(e)(2) Security Agreement between the
Registrant and various lenders led by
The Bank of New York and The Toronto-
Dominion Bank, as Secured Party, dated
as of April 21, 1993, filed as Exhibit
2(b) to the Registrant's Current
Report on Form 8-K dated as of April
21, 1993.
*4(e)(3) Master Subsidiary Security Agreement
between the Registrant, certain of its
subsidiaries and various lenders led
by The Bank of New York and the
Toronto-Dominion Bank, as Secured
Party, dated as of April 21, 1993
filed as Exhibit 2(c) to the
Registrant's Current Report on Form 8-
K dated as of April 21, 1993.
*4(e)(4) Amendment No. 1 dated as of January
31, 1994 to the Loan Agreement among
Registrant and various lenders led by
The Bank of New York and The Toronto-
Dominion Bank, as managing agents,
filed as Exhibit 8 to Amendment 1 of
Schedule 13D dated February 23, 1994
with respect to the common stock of
Geotek Communications, Inc.
4(e)(5) Amendment No. 2 dated as of June 30,
1994 among Registrant and various
lenders led by The Bank of New York
and The Toronto-Dominion Bank, as
managing agents, filed as Exhibit 8 to
Amendment 1 of Schedule 13D dated
February 23, 1994 with respect to the
common stock of Geotek Communications,
Inc.
____________
*Incorporated by reference to the statement or report indicated.