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, 1995
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 3,
1995 was 41,192,158.
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - I-1
June 30, 1995 and December 31, 1994
Condensed Consolidated Statements of Operations - I-2
Three months and six months ended June 30, 1995
and 1994
Condensed Consolidated Statements of Cash Flows - I-3
Six months ended June 30, 1995 and 1994
Notes to Condensed Consolidated Financial I-4
Statements
Item 2. Management's Discussion and Analysis of I-9
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-2
SIGNATURES II-3
Item 1. Financial Statements
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
June 30, December 31,
ASSETS 1995 1994
(Substantially all pledged on long-term debt) (Unaudited) (See note)
Current Assets:
Cash......................................... $ 5,745 $ 5,745
Accounts receivable, net of allowances for
doubtful accounts of $3,666 and $2,761...... 25,605 22,664
Cellular telephone inventories............... 7,925 10,417
Prepaid expenses............................. 2,059 717
Total current assets.............. 41,334 39,543
Investments (Note 2).......................... 301,901 257,203
Property and Equipment, net of accumulated
depreciation of $88,355 and $80,022.......... 175,365 120,325
Other Assets, net of accumulated amortization
of $2,208 and $635........................... 16,139 14,640
Total assets...................... $534,739 $431,711
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses........ $ 39,443 $ 40,689
Customer deposits ........................... 1,149 632
Total current liabilities........... 40,592 41,321
Long-Term Debt................................ 459,146 348,649
Minority Interests ........................... 2,688 2,534
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,
250,000,000 shares authorized, 41,190,848
and 40,529,334 shares issued and
outstanding................................. 412 405
Common stock, Class B - $.01 par value,
30,000,000 shares authorized, no shares
issued...................................... -- --
Additional capital in excess of par value.... 236,433 234,731
Net unrealized holding losses................ (9,429) (9,310)
Accumulated deficit.......................... (195,103) (186,619)
Total shareholders' equity......... 32,313 39,207
Total liabilities and shareholders'
equity............................ $534,739 $431,711
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
Note: The balance sheet at December 31, 1994 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)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1995 1994 1995 1994
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Service fees........................................ $53,980 $35,473 $97,847 $63,975
Cellular telephone equipment revenues............... 4,059 4,485 9,101 8,395
Other............................................... 715 797 1,623 1,476
58,754 40,755 108,571 73,846
Costs and Expenses:
Cost of service..................................... 5,528 5,178 11,502 9,978
Cost of cellular telephone equipment................ 7,208 6,610 16,255 12,539
General and administrative.......................... 14,738 11,027 27,485 20,172
Marketing and selling............................... 14,577 8,174 26,603 14,966
Depreciation and Amortization....................... 8,775 6,336 16,835 11,319
50,826 37,325 98,680 68,974
Income From Operations............................... 7,928 3,430 9,891 4,872
Net Gain (Loss) on Dispositions ....................... (18) 320 (11) 7
Interest Expense....................................... (9,408) (5,137) (17,982) (9,121)
Other, net............................................. 323 191 (207) (14)
Loss Before Minority Interests......................... (1,175) (1,196) (8,309) (4,256)
Minority Interests..................................... (152) (47) (175) (42)
Net Loss............................................... $(1,327) $(1,243) $(8,484) $(4,298)
Net Loss Per Share .................................... $ (0.03) $ (0.03) $ (0.21) $ (0.11)
Weighted Average Number of Common
Shares Outstanding .................................41,189,163 38,446,752 40,939,169 38,424,448
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, 1995 AND 1994
(Dollar amounts in thousands) 1995 1994
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss.............................................. $ (8,484) $ (4,298)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization....................... 16,835 11,319
Amortization of deferred debt issuance costs........ 687 643
Equity in losses of unconsolidated cellular
entities........................................... 53 100
Minority interests.................................. 175 42
Net gain (loss) on dispositions..................... 11 (7)
Non-cash compensation for management consulting
services........................................... (1,229) (1,071)
Changes in current items:
Accounts receivable, net.......................... (2,585) (6,803)
Cellular telephone inventories.................... 2,681 637
Account payable and accrued expenses.............. (6,050) 11,584
Other, net........................................ (973) 286
Net cash provided by operating activities........... 1,121 12,432
Cash flows from investing activities:
Purchase of property and equipment.................... (57,979) (28,677)
Proceeds from dispositions of property and equipment.. 71 51
Payments for acquisition of investments............... (54,938) (36,935)
Proceeds from dispositions of cellular interests...... -- 419
Capital contributions to unconsolidated cellular
entities............................................. (110) (3)
Net cash used in investing activities.............. (112,956) (65,145)
Cash flows from financing activities:
Principal payments of long-term debt.................. (3) (2)
Net proceeds from issuance of common stock............ 1,709 599
Proceeds of long-term debt............................ 110,500 48,500
Debt issuance costs................................... (88) (2,203)
Increase in other assets.............................. (283) (159)
Net cash provided by financing activities.......... 111,835 46,735
Net increase (decrease) in cash........................ 0 (5,978)
Cash, beginning of period.............................. 5,745 9,098
Cash, end of period.................................... $ 5,745 $ 3,120
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID............... $ 15,821 $ 7,855
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 three month and six month period ended
June 30, 1995 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1995. 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 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 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.
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", 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.
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Note 2: Investments
Cellular Entities
The Company continues to expand its ownership of cellular markets through
strategic acquisitions. The Company's significant activity relating to its
cellular investments during the first six months of 1995 was as follows:
In January 1995, the Company purchased the Union, Pennsylvania (PA-8) RSA for a
cash price of $51.3 million with borrowings under its 1994 Credit Facility. The
PA-8 RSA lies in the center of the Company's Mid-Atlantic Supersystem.
Pro forma consolidated results of operations, as if the acquisition of the PA-8
RSA had occurred January 1, 1994, are as follows (in thousands, except per share
data):
Six Months
Ended June 30,
1995 1994
Revenues................................. $109,078 $76,301
Net loss................................. (8,725) (6,240)
Net loss per share....................... (0.21) (0.16)
Geotek Communications, Inc.
In February 1994, the Company and Geotek Communications, Inc. ("Geotek") formed
a strategic alliance whereby the Company purchased from Geotek 2.5 million
shares of Geotek common stock for $30 million and received a series of options
to purchase additional shares in Geotek in three separately linked transactions.
Geotek is a telecommunications company that is developing an Enhanced
Specialized Mobile Radio (ESMR) 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.
In addition, the Company 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. In the first six months of 1995, the Company
earned and recorded as revenue approximately 150,000 shares under the management
agreement with an aggregate value of $1.2 million based upon the average closing
price of Geotek stock during the periods held. During the same period in 1994,
the Company earned and recorded as revenue 105,000 shares with an aggregate
value of $1.1 million. The rights to future shares under the management
agreement are subject to continued exercise of options to purchase stock
discussed below.
I-5
On May 25, 1995, the Company and Toronto Dominion Investments ("TDI"), a
subsidiary of Toronto Dominion Bank, entered into an agreement with Geotek
pursuant to which the Company and TDI each agreed to purchase for $5.0 million
in cash 531,163 shares of Series L Convertible Preferred Stock of Geotek with
a stated value of $9.408 per share (the "Geotek Preferred Stock"). Under the
agreement, TDI completed its $5.0 million investment in Geotek Preferred
Stock on May 25, 1995, and the Company is to fund to its purchase on September
1, 1995. Dividends on the shares are payable quarterly at a rate of 7-1/2% per
annum, in cash or preferred shares. The shares are convertible into common
shares of Geotek at a conversion price of $9.408 per share subject to certain
adjustments.
Pursuant to the May 25, 1995 agreement with Geotek, the stock options previously
granted to the Company by Geotek in 1994 have been amended to extend their
expiration dates and reduce the number of shares subject to the options such
that the Company will have the right to purchase 1,000,000 shares of Geotek
Common Stock at $15 per share ("Series A Option") and 1,714,200 additional
shares at $16 per share ("Series B Option") until September 1, 1996 and
2,571,300 additional shares at $17 per share until 12 months from the expiration
date of the Series B Option ("Series C Option"). The Company may extend the
Series B and Series C Options by six months and the Series C Option by an
additional six months and, if any portion of any series of options expires, all
unexercised options will expire immediately. In addition, the Company's
five-year management agreement with Geotek has been amended to provide that,
if the Series C Option is exercised prior to the fourth anniversary date of the
Agreement, the 300,000 shares issuable on the fifth anniversary date would be
issuable on the fourth anniversary date of the Agreement. TDI has received from
Geotek an option to purchase 1,000,000 shares at $15 per share, 285,800 shares
at $16 per share and 428,700 shares at $17 per share, each with the same term as
the Company's Series A, Series B and Series C Options, respectively.
International Wireless Communications, Inc. The Company owns 19.9% of the
outstanding stock of International Wireless Communications, Inc. ("IWC")
and has invested an aggregate of $8.1 million. IWC is a development
stage company specializing in securing, building and operating wireless
businesses other than cellular telephone systems primarily in Latin America and
Southeast Asia. The Company's investment in IWC is carried at cost in the
accompanying financial statements.
In April 1995, the Company agreed to merge its ownership interests and rights to
acquire ownership interests in certain international projects where IWC and the
Company have agreed to co-invest. In exchange for the contribution of these
interests the Company will receive an amount of IWC stock to increase its
minority interest
I-6
in IWC. The exchange is expected to close in the third quarter of 1995.
Note 3: Long-Term Debt
Long-term debt consists of the following as of June 30, 1995 and December 31,
1994 (in thousands):
June 30, December 31,
1995 1994
(Unaudited)
Borrowings under the 1994 Credit
Facility:
Term Loan $ 325,000 $ 325,000
Revolving Loan 134,000 23,500
Other Long-Term Debt 146 149
$ 459,146 $ 348,649
On December 23, 1994, the Company completed the closing of a $675 million credit
facility, pursuant to an Amended and Restated Loan Agreement (the "1994 Credit
Facility"), with various lenders led by The Toronto-Dominion Bank and The Bank
of New York.
The 1994 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 1993 Loan Agreement. The Revolving Loan, in the amount of
up to $350 million, is available for capital expenditures, to make acquisitions
of and investments in cellular and other wireless communication interests, and
for other general corporate purposes.
The Company maintains interest rate swap and interest rate cap agreements which
provide protection against interest rate risk. At June 30, 1995, the Company
had interest rate cap agreements in place covering a notional amount of $270
million. The interest rate cap agreements provide protection to the extent that
LIBOR exceeds the strike level through the expiration date as follows:
Strike Level Notional Amount Expiration Date
5.5% $120 Million July, 1995
9.0% 50 Million December, 1996
9.0% 50 Million December, 1997
7.63% - 9.75% 50 Million December, 1997
$270 Million
I-7
The total cost of these interest rate cap agreements of $897,000 has been
recorded in other assets in the consolidated balance sheet and is being
amortized over the lives of the agreements as a component of interest expense.
Additionally, the Company maintains an interest rate swap agreement that fixes
the LIBOR interest rate at 6.1% on a notional amount of $100 million through
May, 1996. Under the swap agreement, the Company benefits if LIBOR interest
rates increase above the fixed rate, and incurs additional interest expense if
rates remain below the fixed rate. Any amounts received or paid under the
agreement are reflected as interest expense over the period covered.
The effect of interest rate protection agreements on the operating results of
the Company was to decrease interest expense in the second quarter of 1995 by
$2,000 and increase interest expense by $34,000 in the same period in 1994.
Interest expense for the six months ended June 30, 1995 and 1994 increased by
$30,000 and $68,000, respectively.
For further information on the terms and conditions of the 1994 Credit Facility
refer to Management's Discussion and Analysis of Results of Operations and
Financial Conditions - Liquidity and Capital Resources.
Note 4: Common Stock
The Company effected a 3 for 2 stock split of its Class A Common Stock in the
form of a 50% stock dividend paid on August 24, 1994. 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.
Effective May 10, 1995, the number of shares of Class A Common Stock authorized
to be issued was increased from 60 million to 250 million.
I-8
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,
1995 and 1994. This table does not include any ownership interests that were
contracted for at these dates.
June 30,
Cellular Markets 1995 1994
MID-ATLANTIC SUPERSYSTEM:
Allentown, PA/NJ 100.0% 100.0%
Wilkes-Barre/Scranton, PA 100.0 100.0
Harrisburg, PA 86.8 86.8
Lancaster, PA 100.0 100.0
York, PA 100.0 100.0
Reading, PA 100.0 100.0
Altoona, PA 100.0 99.9
State College, PA 97.0 97.0
Williamsport, PA 91.8 90.9
Union, PA (PA-8 RSA) 100.0 --
Chambersburg, PA (PA-10 East RSA) 91.3 90.8
Lebanon, PA (PA-12 RSA) 100.0 100.0
Mifflin, PA (PA-11 RSA) 100.0 100.0
Wayne, PA (PA-5 RSA) 100.0 100.0
Orange County, NY 100.0 100.0
Binghamton, NY 100.0 1.0
Elmira, NY 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 --
FLORIDA METRO-CLUSTER:
Pensacola, FL 100.0 100.0
Fort Walton Beach, FL 100.0 100.0
WEST VIRGINIA METRO-CLUSTER:
Huntington, WV/KY/OH 100.0 100.0
Charleston, WV 100.0 100.0
Ripley, WV (WV-1 East RSA) 100.0 --
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
I-9
RESULTS OF OPERATIONS
Three Months Ended June 30, 1995 and 1994
Unless otherwise indicated all information in this report has been adjusted
for the Company's 3 for 2 stock split paid in the form of a stock dividend on
August 24, 1994.
Service revenues increased by $18.5 million or 52% primarily as a result of an
86% increase in the number of subscribers in majority owned markets to
approximately 314,000 as of June 30, 1995, as compared to the end of the
second quarter of 1994. Approximately 81% of the increase in the number of
subscribers was due to subscriber growth in markets controlled by the Company
in both periods, and the remainder was due to subscribers added as a result of
acquisitions.
Total net subscribers in the Company's majority owned markets increased by
34,000 during the second quarter of 1995 as compared to 19,000 in the second
quarter of 1994. This 79% 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 an increase in the number of agents in the
Company's indirect distribution channels combined with moderate economic
growth in the Company's operating regions.
Service revenues attributable to the Company's own subscribers increased 65%
during the second quarter of 1995 to $43.1 million as compared to the same
period in 1994. Average monthly local revenue per subscriber declined 11% to
$48 compared to $54 a year ago. Approximately 25% of this decline was due to
the acquisition of markets with existing subscribers who produce lower local
revenue. The balance of this decline was due to increased incremental
penetration into the segment of consumers who generally use their cellular
phones less frequently. Service revenues generated by customers of other
cellular providers roaming into the Company's markets increased 16% to $10.9
million as compared to $9.4 million a year ago. This increase was the result
of increased usage and is partially offset by daily access and usage rate
reductions of 30-40% initiated by the Company and entered into with certain
other cellular providers in the Mid-Atlantic Region of the United States in
1995. The reduced rates charged to other cellular carriers is the result of
negotiations in which the Company also pays lower rates. When combining
revenue from the Company's customers with roaming revenue, overall average
monthly revenue per subscriber for the quarter declined 18% to $61 from $74 a
year ago.
Cellular equipment revenues decreased $426,000 or 9% to $4.1 million for the
three months ended June 30, 1995 as compared to
I-10
the same period in 1994. This decrease was primarily due to the continuing
decline in the retail price of cellular equipment charged to the Company's
subscribers. Cost of cellular equipment increased 9% to $7.2 million during
the 1995 period due to the increase in net subscriber additions. The Company
continues to sell telephones at or below cost in response to competitive
pressures and also continues the availability of its rental program.
Cost of service expenses as a percentage of service fees improved from 15%
during the second quarter of 1994 to 10% during the second quarter of 1995
primarily as a result of the intercarrier roaming rate reductions described
above. The balance of the decrease was due to the continued negotiation of
more favorable long distance and interconnection agreements and, to a lesser
extent, the higher utilization of the Company's cellular systems.
General and administrative expenses increased 34% or $3.7 million during the
three months ended June 30, 1995 but decreased as a percentage of service fees
to 27% from 31% in the same period in 1994. 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.
Marketing and selling expenses increased 78% to $14.6 million during the three
months ended June 30,1995, as compared to the same period in 1994. As a
percentage of service fees, these expenses increased to 27% from 23%. During
the three months ended June 30, 1995 marketing and selling expenses, including
the net loss on subscriber equipment, increased to $17.7 million from $10.3
million for the same period in 1994. This increase was primarily attributable
to the higher rate of growth in net subscriber additions described above for
the 1995 period as compared to the 1994 period and the resulting increase in
salaries and commissions. Marketing and selling expenses per net subscriber
addition including the loss on cellular equipment decreased 4% to $521 in 1995
from $542 during the same period in 1994. This decrease was primarily a
result of higher utilization of existing sales and marketing management and
programs.
Depreciation and amortization increased $2.4 million or 38% during the three
months ended June 30, 1995 as compared with the same period in 1994. The
addition of approximately $80.3 million of new property and equipment placed
in service during the twelve months ended June 30, 1995, accounts for
approximately $2.1 million of the increase. The balance of the increase is
the
I-11
result of the amortization of licenses and customer base acquired through
acquisitions during the same period.
Interest expense increased $4.3 million or 83% during the three months ended
June 30, 1995. This increase resulted primarily from an increase in average
borrowings of approximately $161.8 million, and to a lesser extent an increase
in average interest rates charged.
Net loss increased from $1.2 million or $.03 per share for the three months
ended June 30, 1994 to $1.3 million or $.03 per share in the 1995 period. The
increase in net loss is primarily attributable to the increases in
depreciation, amortization, and interest expense as discussed above which
offset an increase in income from operations before depreciation and
amortization (EBITDA).
Six Months Ended June 30, 1995 and 1994
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, 1995 apply also to the six month period ended June 30,
1995.
Service fees for the six months ended June 30, 1995 increased 53% to $97.8
million primarily as a result of the increase in the number of subscribers
served in the 1995 period. Average monthly revenue per subscriber was $58 and
$71 for the six months ended June 30, 1995 and 1994, respectively.
Cost of service expenses as a percentage of service fees decreased to 12% for
the six month period ended June 30, 1995 from 16% in 1994. As previously
explained, this decrease in the relationship between service fees and cost of
service is largely due to more favorable negotiated roaming agreements
associated with the specific billing practice described previously.
General and administrative expenses increased $7.3 million or 36% but declined
as a percentage of service fees to 28% during the six months ended June 30,
1995 as compared to 32% during the same period in 1994.
Marketing and selling expenses increased by $11.6 million or 78% and increased
as a percentage of service fees to 27% from 23% during the six month periods
ending June 30, 1995 and 1994, respectively. These increased expenditures
were primarily due to increases in commission expenses associated with the
addition of 69,000 net subscribers during the six months ended June 30, 1995
as compared to 36,700 during the same period in 1994. Also contributing were
advertising and promotions in 1995. Marketing and selling expenses per net
subscriber addition including the loss on cellular equipment decreased 6% to
$489 in 1995 from $521
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during the same period in 1994. This decrease was
primarily a result of higher utilization of existing sales and marketing
management and programs.
Depreciation and amortization increased $5.5 million or 49% during the six
months ended June 30, 1995 as compared to the same period in 1994. The
addition of approximately $80.3 million of new property and equipment placed
in service during the twelve months ended June 30, 1995, accounts for
approximately $4.1 million of the increase. The balance of the increase is
the result of the amortization of licenses and customer base acquired through
acquisitions during the same period.
Interest expense increased $8.9 million or 97% during the six months ended
June 30, 1995. This increase resulted primarily from an increase in average
borrowings of approximately $157.6 million, and to a lesser extent an increase
in the interest rates charged.
I-13
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to acquire, construct, and expand its cellular
systems. The Company intends to continue to pursue acquisitions of cellular
systems and properties as well as other investment opportunities. In addition,
although the primary buildout of its cellular system is complete, the Company
will continue to construct additional cell sites and purchase cellular
equipment to increase capacity as subscribers are added and usage increases,
to expand geographic coverage and to provide for increased portable usage.
The 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 associated with the rate of subscriber growth.
Operating Cash Flow (or EBITDA) has been a significant source of internal
funding in recent years, but the Company does not expect Operating Cash Flow
to grow sufficiently to meet both its property and equipment and debt service
requirements for at least the next two years. In recent years, the Company has
met its capital requirements for property and equipment purchases primarily
through bank financing. Acquisitions and other investments have been financed
through a combination of bank borrowings and issuances of Class A Common
Stock.
1994 CREDIT FACILITY. On December 23, 1994, the Company completed the closing
of a $675 million credit facility, pursuant to an Amended and Restated Loan
Agreement (the "1994 Credit Facility"), with various lenders led by The
Toronto-Dominion Bank and The Bank of New York. The 1994 Credit Facility
provides the Company with additional financial and operating flexibility and
enables the Company to accelerate its cellular network buildout and pursue
business opportunities that may arise in the future. The 1994 Credit Facility
refinanced the 1993 Loan Agreement. The 1993 Loan Agreement closed in April
1993 and refinanced the Company's previously existing credit facility. The
1994 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 1993 Loan Agreement. The Revolving Loan, in the amount of
up to $350 million, is available for capital expenditures, to make
acquisitions of and investments in cellular and other wireless communication
interests, and for other general corporate purposes.
As security for borrowings under the 1994 Credit Facility, the Company has
pledged substantially all of its tangible and intangible assets and future
cash flows. Among other restrictions, the 1994 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
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of certain financial ratios. The requirements of the 1994 Credit
Facility were established in relation to the Company's projected
capital needs and projected results of operations and cash flow. 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 continue servicing the debt as repayments are required. The
Company is in compliance with all loan covenants.
As of June 30, 1995, $459 million had been borrowed under the 1994 Credit
Facility. Under the restrictive covenants of the facility, future borrowing
availability generally increases as the Company's operating performance
improves. The Company does not expect these covenants to curtail planned
borrowings. As of June 30, 1995, the most restrictive of these covenants would
limit additional available borrowings during the third quarter of 1995 to
$100.6 million.
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 its maturity date of December 31, 2003. The quarterly
installment payments begin at 1.875% of the outstanding principal amount at
March 30, 1998 and gradually increase to 5.625% at March 31, 2003. The
available borrowings under the Revolving Loan shall be reduced on a quarterly
basis also 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% on March 31, 2003.
The Term Loan and the Revolving Loan bear interest at a rate equal to the
Company's choice of the Prime Rate or Eurodollar Rate plus an applicable
margin based upon a leverage ratio for the most recent fiscal quarter. As of
June 30, 1995 the leverage ratio, which is computed as the ratio of Total Debt
(as defined) to Adjusted Cash Flow (as defined), was at such a level as to cause
the applicable margins on the borrowings to be 0.75% and 2.00% per annum for
the Prime Rate and Eurodollar Rate, respectively.
ACQUISITIONS. The Company completed several acquisitions in 1994 and early
1995. On April 26, 1994, the Company completed the acquisition of the Altoona,
PA MSA and the Chambersburg, PA (PA-10 East) RSA, which are contiguous to its
Mid-Atlantic Supersystem in exchange for $4.4 million in cash, the exchange of
the Hagerstown, MD cellular market and the Company's minority ownership
interest in one cellular market.
The Company purchased in October 1994, for $6.9 million in cash and 125,285
shares of the Company's Class A Common Stock, the Washington, Maine (ME-4) RSA
and three of the four counties of the Mason, West Virginia (WV-1) RSA. The
Maine RSA is
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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.
On December 14, 1994, the Company purchased the Binghamton, New York MSA and
the Elmira, New York MSA ("Binghamton/Elmira Transaction") for a purchase
price of approximately 1.8 million shares of the Company's Class A Common
Stock and $6.1 million in cash borrowed under its credit facility. These
markets are contiguous to the Company's Mid-Atlantic Supersystem.
In January 1995, the Company purchased the Union, Pennsylvania (PA-8) RSA for
a cash price of $51.3 million with borrowings under its 1994 Credit Facility.
The PA-8 RSA lies in the center of the Company's Mid-Atlantic Supersystem and
is an operational cellular system. Condensed pro forma financial information
for PA-8 as of June 30, 1995, is contained in Note 2 to the condensed
consolidated financial statements.
GEOTEK COMMUNICATIONS, INC. In February 1994, the Company and Geotek
Communications, Inc. ("Geotek") formed a strategic alliance whereby the
Company purchased from Geotek 2.5 million shares of Geotek common stock for
$30 million and received a series of options to purchase additional shares in
Geotek in three separately linked transactions. Geotek is a tele-communications
company that is developing an Enhanced Specialized Mobile Radio
(ESMR) 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. In addition, the
Company 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. In the first six months of 1995, the Company earned
and recorded as revenue approximately 150,000 shares under the management
agreement with an aggregate value of $1.2 million based upon the average
closing price of Geotek stock during the periods held. During the same period
in 1994, the Company earned and recorded as revenue 105,000 shares with an
aggregate value of $1.1 million. The rights to future shares under the
management agreement are subject to continued exercise of options to purchase
stock discussed below.
On May 25, 1995, the Company and Toronto Dominion Investments ("TDI"), a
subsidiary of Toronto Dominion Bank, entered into an agreement with Geotek
pursuant to which the Company and TDI each agreed to purchase for $5.0 million
in cash 531,163 shares of Series L Convertible Preferred Stock of Geotek with
a stated value of $9.408 per share (the "Geotek Preferred Stock"). Under the
agreement, TDI completed its $5.0 million investment in Geotek Preferred Stock
on May 25, 1995, and the Company is to fund to its purchase on September 1,
1995. Dividends on the shares are payable quarterly at a rate of 7-1/2% per
annum, in
I-16
cash or preferred shares. The shares are convertible into common
shares of Geotek at a conversion price of $9.408 per share subject to certain
adjustments.
Pursuant to the May 25, 1995 agreement with Geotek, the stock options
previously granted to the Company by Geotek in 1994 have been amended to
extend their expiration dates and reduce the number of shares subject to the
options such that the Company will have the right to purchase 1,000,000 shares
of Geotek Common Stock at $15 per share ("Series A Option") and 1,714,200
additional shares at $16 per share ("Series B Option") until September 1, 1996
and 2,571,300 additional shares at $17 per share until 12 months from the
expiration date of the Series B Option ("Series C Option"). The Company may
extend the Series B and Series C Options by six months and the Series C Option
by an additional six months and, if any portion of any series of options
expires, all unexercised options will expire immediately. In addition, the
Company's five-year management agreement with Geotek has been amended to
provide that, if the Series C Option is exercised prior to the fourth
anniversary date of the Agreement, the 300,000 shares issuable on the fifth
anniversary date would be issuable on the fourth anniversary date of the
Agreement. TDI has received from Geotek an option to purchase 1,000,000
shares at $15 per share, 285,800 shares at $16 per share and 428,700 shares at
$17 per share, each with the same term as the Company's Series A, Series B and
Series C Options, respectively.
INTERNATIONAL WIRELESS COMMUNICATIONS, INC. The Company owns 19.9% of the
outstanding stock of International Wireless Communications, Inc. ("IWC")
and has invested an aggregate of $8.1 million. IWC is a development
stage company specializing in securing, building and operating wireless
businesses other than cellular telephone systems primarily in Latin America
and Southeast Asia. The Company's investment in IWC is carried at cost in the
accompanying financial statements.
In April 1995, the Company agreed to merge its ownership interests and rights
to acquire ownership interests in certain international projects where IWC and
the Company have agreed to co-invest. In exchange for the contribution of these
interests the Company will receive an amount of IWC stock to increase its
minority interest in IWC. The exchange is expected to close in the third
quarter of 1995.
CAPITAL EXPENDITURES. As of June 30, 1995, the Company had approximately
$231.0 million of property and equipment placed in
I-17
service. The Company historically has incurred capital expenditures primarily
based upon capacity needs in its existing markets resulting from continued
subscriber growth. During 1994, the Company initiated a plan to double the
number of cell sites in order to increase geographic coverage and provide for
additional portable usage in the Company's cellular markets. As a result of
this accelerated network buildout and the continued growth of the Company's
subscriber base, capital expenditures were approximately $58.0 million during
the first six months of 1995. Capital expenditures for the remainder of 1995
are estimated to be approximately $72.0 million and are expected to be funded
primarily with proceeds from the 1994 Credit Facility.
CASH FLOW GOALS. Operating Cash Flow improved $10.5 million to $26.7 million
during the six months ended June 30, 1995 as compared to the same period last
year. The Company's primary goal over the next several years will be to
maximize Operating Cash Flow. In order to do so the Company must minimize
decreases in monthly revenue per subscriber and have continued rapid subscriber
growth with low incremental marketing and sales costs.
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 planned network expansion and acquisitions, to fund
operating expenses and debt service described above and to provide flexibility
to pursue business opportunities that might arise in the future.
INFLATION. The Company believes that inflation affects its business no more
than it generally affects other similar businesses.
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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 10, 1995. The proposals voted upon and the results of the voting were as
follows:
1. Election of Class II Directors for a three-year term.
Broker
Non-
For Against Abstentions Withheld Votes
F. Cooper Brantley 26,704,481 -- -- 45,815 --
Haynes G. Griffin 26,702,792 -- -- 45,504 --
L. Richardson Preyer, Sr. 26,695,041 -- -- 55,255 --
2. Proposal to approve Articles of Amendment to Articles of Incorporation
whereby the number of shares of Class A Common Stock of the Corporation
authorized to be issued was increased from 60,000,000 to 250,000,000.
Broker
Non-
For Against Abstentions Withheld Votes
23,612,681 3,108,857 28,758 -- 0
3. Proposal to approve ratification of Arthur Andersen LLP as independent
auditors for 1995.
Broker
Non-
For Against Abstentions Withheld Votes
26,719,126 22,824 8,346 -- 0
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, 1995 By: /s/ Haynes G. Griffin
Haynes G. Griffin
President
and
Chief Executive Officer
Date: August 14, 1995 By: /s/ Stephen L. Holcombe
Stephen L. Holcombe
Senior Vice President
and
Chief Financial Officer
(principal accounting and
principal financial officer)
II-3
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
* 4 (a) Articles of Incorporation of Registrant as amended through
July 25, 1995, filed as Exhibit 1 to the Registrant's
Form 8-A/A dated July 25, 1995.
* 4 (b) Bylaws of Registrant (compilation of July 25, 1995), filed as
Exhibit 2 to the Registrant's Form 8-A/A dated July 25, 1995.
11 Calculation of fully diluted net loss per share for the three
months and six months ended June 30, 1995 and 1994.
27 Financial Data Schedule.
* Incorporated by reference to the statement or report indicated.