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 September 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 November 11, 1994, 1994 was 38,758,160.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - I-1
September 30,1994 and December 31, 1993
Condensed Consolidated Statements of Operations - I-2
Three months ended September 30, 1994 and 1993,
and Nine months ended September 30, 1994 and
1993
Condensed Consolidated Statements of Cash Flows - I-3
Nine months ended September 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 6. Exhibits and Reports on Form 8-K II-1
SIGNATURES II-2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
September 30, December 31,
ASSETS 1994 1993
(Substantially all pledged on long-term debt) (Unaudited) (See note)
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Current Assets:
Cash...................................................................... $ 5,515 $ 9,098
Accounts receivable, net of allowances for doubtful accounts of $2,614
and $1,771.............................................................. 19,498 12,167
Cellular telephone inventories............................................ 5,946 4,464
Prepaid expenses.......................................................... 759 918
Total current assets........................................... 31,718 26,647
Investments (Note 2)......................................................... 209,080 177,415
Property and Equipment, net of accumulated depreciation of $78,249 and
$65,830.................................................................... 96,367 71,716
Other Assets, net of accumulated amortization of $2,168 and $4,459........... 9,732 8,651
Total assets................................................... $ 346,897 $ 284,429
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses..................................... 26,411 21,470
Customer deposits ........................................................ 551 481
Total current liabilities....................................... 26,962 21,951
Long-Term Debt............................................................... 302,647 238,153
Minority Interests .......................................................... 2,548 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,
38,594,299 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................................. 186,724 185,786
Net unrealized holding losses............................................. (3,537) --
Accumulated deficit....................................................... (168,833) (164,272)
Total shareholders' equity...................................... 14,740 21,898
Total liabilities and shareholders' equity...................... $ 346,897 $ 284,429
</TABLE>
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.
I - 1
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollar amounts in thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1994 1993 1994 1993
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
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Revenues:
Service fees........................................ $ 40,101 $ 27,694 $ 104,076 $ 72,342
Cellular telephone equipment revenues............... 3,851 2,467 12,246 5,953
Other............................................... 765 -- 2,241 --
44,717 30,161 118,563 78,295
Costs and Expenses:
Cost of service..................................... 5,956 4,246 15,934 10,771
Cost of cellular telephone equipment................ 6,680 3,358 19,219 8,035
Marketing and selling............................... 9,004 5,202 23,970 14,625
General and administrative.......................... 11,048 8,739 31,220 25,088
Depreciation and amortization....................... 6,040 6,866 17,359 19,675
38,728 28,411 107,702 78,194
Income From Operations................................. 5,989 1,750 10,861 101
Net Loss on Dispositions .............................. (219) (200) (212) (590)
Interest Expense....................................... (5,992) (3,850) (15,113) (11,434)
Other, net............................................. 84 595 70 734
Loss Before Minority Interests and Extraordinary Item.. (138) (1,705) (4,394) (11,189)
Minority Interests..................................... (125) (121) (167) (72)
Net Loss Before Extraordinary Item..................... (263) (1,826) (4,561) (11,261)
Extraordinary Item..................................... -- -- -- (3,715)
Net Loss............................................... $ (263) $ (1,826) $ (4,561) $ (14,976)
Net Loss Per Share Before Extraordinary Item........... $ (0.01) $ (0.05) $ (0.12) $ (0.30)
Net Loss Per Share .................................... $ (0.01) $ (0.05) $ (0.12) $ (0.39)
Weighted Average Number of Common
Shares Outstanding .................................. 38,581,748 38,071,827 38,477,457 37,917,355
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
I - 2
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
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(Dollar amounts in thousands) 1994 1993
(Unaudited) (Unaudited)
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Cash flows from operating activities:
Net loss................................................................... $ (4,561) $ (14,976)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................................... 17,359 19,675
Amortization of deferred debt issuance costs............................ 988 674
Equity in (earnings) losses of unconsolidated cellular entities......... 167 72
Net loss on dispositions................................................ 212 590
Extraordinary item...................................................... -- 3,715
Non-cash compensation for management consulting services................ (1,831) --
Changes in current items:
Accounts receivable, net.............................................. (7,083) (4,928)
Cellular telephone inventories........................................ (1,482) 23
Account payable and accrued expenses.................................. 5,264 (656)
Other, net............................................................ 229 (519)
Net cash provided by operating activities.............................. 9,326 3,174
Cash flows from investing activities:
Purchase of property and equipment......................................... (38,912) (14,535)
Proceeds from dispositions of property and equipment....................... 85 17
Payments for acquisition of investments.................................... (37,300) (2,011)
Proceeds from dispositions of cellular interests........................... 431 1,204
Capital contributions to unconsolidated cellular entities.................. (458) (258)
Net cash used in investing activities.................................. (76,154) (15,583)
Cash flows from financing activities:
Principal payments of long-term debt....................................... (3,006) (212,557)
Net proceeds from issuance of common stock................................. 940 589
Proceeds of long-term debt................................................. 67,500 235,000
Debt issuance costs........................................................ (2,203) (8,112)
Decrease (increase) in other assets........................................ 14 (193)
Net cash provided by financing activities.............................. 63,245 14,727
Net increase (decrease) in cash................................................ (3,583) 2,318
Cash, beginning of period...................................................... 9,098 9,473
Cash, end of period............................................................ $ 5,515 $ 11,791
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID....................................... $ 13,941 $ 9,656
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In August, 1993, the Company exchanged cash and 309,376 shares
of its Class A Common Stock valued as $9,680 for the PA-12 RSA.
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
I - 3
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
(Unaudited)
Note 1: Basis of Presentation
The accompanying condensed consolidated financial statements of
Vanguard Cellular Systems, Inc. and Subsidiaries (the Company)
have been prepared without audit pursuant to Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 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 nine months ended September 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
30% of the cost of the Company's depreciable assets. This change
reduced depreciation expense and net loss for the three months and
nine months ended September 30, 1994 by approximately $900,000 and
$2.7 million or $0.02 and $0.07 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.
The Company purchased in October 1994, 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.
As of October 31, 1994, the acquisition of three cellular markets
remain pending. In one transaction the Company will purchase for
approximately $48.5 million, payable at the Company's option in cash,
the Company's Class A Common Stock or any combination thereof, 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 Mid-Atlantic Supersystem. This
transaction is expected to close by the end of 1994.
In a separate transaction the Company will purchase the 100% ownership
interest in the Union, Pennsylvania (PA-8) RSA for an aggregate
purchase price of $50.0 million consisting of $15 million in cash with
the remainder payable at the Company's option in cash, the Company's
Class A Common Stock or any combination thereof. The PA-8 RSA lies in
the center of the Company's Mid-Atlantic Supersystem. The Company
expects to complete the closing on this transaction in the first
quarter of 1995.
Geotek
In February 1994, the Company purchased for $30.0 million from 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
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.
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 ESMR 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 180,000 shares under the
management agreement with an aggregate value of $1.8 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 September 30, 1994 and
December 31, 1993 (in thousands):
September 30, December 31,
1994 1993
(Unaudited)
Borrowings under the 1993 loan agreement:
Facility A Loan $ 120,000 $ 120,000
Facility B Loan 132,500 68,000
Facility C Loan 50,000 50,000
Other Long-Term Debt 147 153
$ 302,647 $ 238,153
As of September 30, 1994, the Company maintains agreements which
provide interest rate protection for $120 million of outstanding
borrowings. At a cost of approximately $275,000 the borrowings are
protected to the extent that the LIBOR interest rate exceeds a cap
rate of 5.5% through July, 1995.
For further information on the terms and conditions of the 1993
Loan Agreement refer to Management's Discussion and Analysis of
Results of Operations and Financial Condition - Liquidity and Capital
Resources.
______________________________________________________________________
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 compensatory damages, punitive damages and imposition of
a constructive trust upon the Company's Lancaster, Reading and York,
PA cellular operations. The Company has either settled with, or has
agreements in principle to settle with all but three of the
plaintiffs. It is anticipated that all of the agreements in principle
to settle will be reduced to writing, executed and submitted for Court
approval in November 1994. The financial impact of the settlements is
not material to the Company. The Court has ordered the three
remaining plaintiffs to enter into Court-supervised settlement
negotiations with the Company in December 1994. 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 affect
on the consolidated financial position of the Company.
Note 5: 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.
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 September 30, 1994 and 1993. This table does not include any
ownership interests that were contracted for at these dates.
September 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 90.5 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) 91.1 --
Altoona, PA 100.0 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
RESULTS OF OPERATIONS
Three Months Ended September 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. 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. These reclassifications were made
to conform the treatment in the Company's financial statements to the
accounting treatment common in the industry.
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 $12.4 million or 45% primarily as a
result of a 64% increase in the number of subscribers in majority
owned markets to approximately 190,000 as of September 30, 1994 as
compared to the end of the third 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
21,000 during the third quarter of 1994 as compared to 8,700 in the
third quarter of 1993. This 141% 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. Service revenues attributable to the Company's own
subscribers increased 52% during the third quarter of 1994 to $28.7
million as compared to the same period in 1993 while service revenues
from customers from the cellular markets roaming into the Company's
markets increased 29% to $11.4 million. When combining revenue from
the Company's customers with roaming revenue, overall average monthly
revenue per subscriber for the quarter declined 10% to $74 from $83 a
year ago. Substantially all of this decline is the result of the
Company's subscriber growth rate exceeding the rate exceeding the rate
of growth for roaming revenues.
Cellular equipment revenues increased $1.4 million or 56% to $3.9
million for the three months ended September 30, 1994 as compared to
the same period in 1993. This is primarily due to the 141% increase
in net subscriber additions in the 1994 period. Cost of cellular
equipment increased 99% to $6.7 million during the 1994 period. 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 remained constant as a percentage of service
fees at 15% for the three months ended September 30, 1994 and 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 net cost associated with this billing
practice was $2.0 million for the three months ended September 30,
1994 as compared to $1.8 million during the same period in 1993. The
rapid subscriber growth that 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 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 73% to $9.0 million during
the three months ended September 30, 1994 as compared to the same
period in 1993 and as a percentage of service fees these expenses
increased to 22% from 19%. Marketing and selling expenses, including
the net loss on subscriber equipment, increased to $11.8 million from
$6.1 million during the three months ended September 30, 1994 and
1993, respectively. The increase is primarily attributable to 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. Marketing and selling expenses
per net subscriber addition, including the loss on cellular equipment,
declined 20% to $563 in 1994 from $700 during the three months ended
September 30, 1993.
General and administrative expenses increased 26% or $2.3 million
during the three months ended September 30, 1994 but decreased as a
percentage of service fees to 28% from 32% 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 $826,000 or 12% during the
three months ended September 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 September 30,
1994 by approximately $900,000 or $0.02 per share. This effect of the
depreciable life changes was offset in part by approximately $48.0
million of new property and equipment placed in service during the
twelve month period ending September 30, 1994.
Interest expense increased $2.1 million or 56% during the three months
ended September 30, 1994, as a result of increased average borrowings
of approximately $74.2 million and to a lesser extent an increase in
average interest rates charged.
Net loss before extraordinary item decreased from $1.8 million or
$0.05 per share for the three months ended September 30, 1993 to
$263,000 or $0.01 per share in the 1994 period. The decrease in net
loss per share is primarily attributable to an increase in "Operating
Cash Flow-EBITDA" (income from operations before depreciation and
amortization) of $3.4 million or 40% to $12.0 million.
Nine Months Ended September 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 September 30, 1994 apply also to the
nine month period ended September 30, 1994.
Service revenues for the nine months ended September 30, 1994
increased 44% to $104.1 million primarily as a result of the increase
in the number of subscribers served in the 1994 period. Service
revenues from Company subscribers increased 48% to $77.2 million while
roaming revenues increased 34% to $26.8 million. Combined average
monthly service revenue per subscriber was $72 and $77 for the nine
months ended September 30, 1994 and 1993, respectively.
Cellular equipment revenues increased $6.3 or 106% to $12.2 million
for the nine months ended September 30, 1994 as compared to the same
period in 1993. This is primarily due to the increase in net
subscriber additions in the 1994 period. Cost of cellular equipment
increased 139% to $19.2 million during the 1994 period.
Cost of service expenses as a percentage of service fees remained
constant at 15% for the nine month periods ended September 30, 1994
and 1993. As previously discussed there has been an increase in
volume of the Company's subscribers roaming into adjacent cellular
markets. The net cost of the Company charging subscribers at lower
rates than it is charged was $5.8 million during the nine month period
ended September 30, 1994 as compared to $3.8 million during the same
period in 1993.
Marketing and selling expenses increased by $9.3 million or 64% and
increased as a percentage of service fees to 23% from 20% during the
nine month period ending September 30, 1994 and 1993, respectively.
These increased expenditures are primarily due to the increased
subscriber growth during the period. Also contributing were
commission expenses associated with the addition of 57,700 net
subscribers during the nine months ended September 30, 1994 as
compared to 23,900 during the same period in 1993. Marketing and
selling per net subscriber addition, including the loss on cellular
equipment, declined 28% to $536 in 1994 from $741 during the nine
months ended September 30, 1993.
General and administrative expenses increased $6.1 million or 24% but
declined as a percentage of service fees to 30% during the nine months
ended September 30, 1994 from 35% during the same period in 1993.
Depreciation and amortization decreased $2.3 million or 12% during the
nine months ended September 30, 1994 as a result of the changes in
depreciable lives of certain of the Company's property and equipment.
These life changes reduced depreciation and amortization for the nine
months ended September 30, 1994, by $2.7 million or $0.07 per share.
Interest expense increased $3.7 million or 32% during the nine months
ended September 30, 1994, as a result of increased average borrowings
of approximately $66.2 million and an increase in average interest
rates charged.
Net loss before extraordinary item decreased from $11.3 million or
$0.30 per share for the nine months ended September 30, 1993 to $4.6
million or $0.12 per share in the 1994 period. The decrease in net
loss per share is primarily attributable to an increase in "Operating
Cash Flow-EBITDA" (income from operations before depreciation and
amortization) of $8.4 million or 43% to $28.2 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to acquire, construct, operate and expand
its cellular systems and to service its debt. The Company intends to
continue to pursue acquisitions of cellular markets 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 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 few years. In the past, the Company has met its
capital requirements primarily through private and public sales of its
Class A Common Stock, seller financing and bank financing.
1993 Loan Agreement. 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 as they arose.
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 Mid-Atlantic
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
September 30, 1994, $87.5 million was available for future
expenditures under the amended Facility B Loan, subject to the
specific limitations on capital expenditures and acquisitions noted
above which can be exceeded only upon lender approval.
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. At a cost of $275,000, the Company has
entered into agreements which limit its interest rate exposure until
July 1995 for $120 million of borrowings under the 1993 Loan Agreement
to the extent that the 90-day LIBOR rate exceeds 5.5%.
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 dates.
The 1993 Loan Agreement requires maintenance of certain covenants
including but not limited to maintenance of certain financial ratios
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 - EBITDA would be
sufficient to begin servicing the debt as repayments are required.
The Company is in compliance with all covenants under the 1993 Loan
Agreement.
Acquisitions. The Company has several recently completed and pending
acquisitions. On April 26, 1994, the Company completed the
acquisition of two cellular markets 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 $6.7 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.
As of October 31, 1994, the acquisition of three cellular markets
remain pending. In one transaction the Company will purchase for
approximately $48.5 million, payable, at the Company's option in cash,
the Company's Class A Common Stock or any combination thereof a 97.0%
ownership interest in the Binghamton, New York MSA and a 100%
ownership interest in the Elmira, New York MSA ("Binghamton/Elmira
Transaction"). These markets are contiguous to the Company's Mid-
Atlantic Supersystem. This transaction is expected to close by the
end of 1994.
In a separate transaction the Company will purchase the 100% ownership
interest in the Union, Pennsylvania (PA-8) RSA for an aggregate
purchase price of $50.0 million consisting of $15 million in cash with
the remainder payable at the Company's option in cash, the Company's
Class A Common Stock or any combination thereof ("PA-8 Transaction").
The PA-8 RSA lies in the center of the Company's Mid-Atlantic
Supersystem. The Company expects to complete the closing on this
transaction in the first quarter of 1995.
In order to complete the pending acquisitions the Company must obtain
a waiver from its lenders of the 1993 Loan Agreement covenant
restricting acquisitions or seek other financing alternatives. All
seven markets which have been acquired or are to be acquired are
operational cellular systems. As of December 31, 1993 the aggregate
population and number of subscribers for these seven markets was
approximately 1.2 million and 17,000, respectively, and service fees
for the year then ended was approximately $12.4 million.
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
telecommunications company that is developing a Enhanced Specialized
Mobile Radio (ESMR) wireless communications network in the United
States based on its proprietary 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 ESMR 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 five-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. During the first nine
months of 1994, approximately 180,000 shares were 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
exercise any of the Series B or C options, the Company will be
required to seek additional sources of financing.
Capital Expenditures. As of September 30, 1994 the Company had
approximately $180.0 million of property and equipment placed in
service. The Company historically has incurred capital expenditures
primarily based upon capacity needs in its existing markets resulting
from continued subscriber growth. During 1994, the Company initiated a
plan to double the number of cell sites in order to increase
geographic coverage and provide for additional portable usage in the
Company's cellular markets. As a result of this accelerated network
buildout and the continued growth of the Company's subscriber base,
capital expenditures were approximately $40.0 million during the first
nine months of 1994 and should approximate $20.0 million during the
remainder of 1994. Depending upon the anticipated rate of future
subscriber growth and the availability of financing the Company
intends to increase its level of capital expenditures in 1995. The
Company will require lender approval under the terms of the 1993 Loan
Agreement for capital expenditures exceeding $50.0 million and $37.5
million in 1994 and 1995, respectively, or seek other financing
alternatives.
Refinancing. The Company has received preliminary commitments from
its two lead agent banks to refinance its existing credit facility
with a substantially larger facility. The purpose of this proposed
refinancing is to provide the Company with additional financial and
operating flexibility, enable it to accelerate its cellular network
buildout, complete its pending acquisitions and enable it to pursue
business opportunities that might arise in the future. The proposed
new facility would extend the time period before principal payments
are required to be made and extend the final maturity. If the
contemplated refinancing is completed, the write-off of the
unamortized deferred financing costs will result in an extraordinary
loss of approximately $8.7 million in that period. There can be no
assurance that this refinancing will be completed.
Cash Flow Goals. Operating cash flow improved $8.4 million to $28.2
million during the nine months ended September 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 and planned bank lines of credit
will be sufficient during the next several years to complete its
planned capital equipment 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. If the planned bank line of credit is not consummated the
Company will require waivers under its 1993 Loan Agreement to meet
short term liquidity requirements and additional sources of funding to
meet the Company's long-term needs.
INFLATION
The Company believes that inflation affects its business no more than
it generally affects other similar businesses.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits to this Form 10-Q are listed in the accompanying
Index to exhibits.
(b) On September 30, 1994, the Registrant filed a Form 8-K reporting
Item 5 optional information with respect to i) a stock purchase
agreement dated August 4, 1994, entered into by the Registrant
with Crowley Cellular Telecommunications Limited Partnership, and
Crowley Cellular Telecommunications Binghamton, Inc. ("Crowley
Inc.") to acquire all of the outstanding stock of Crowley, Inc.
for approximately $48.5 million, and ii) an Asset Purchase
Agreement between the Registrant and Sunshine Cellular
("Sunshine"), dated September 26, 1994, to acquire all of the
assets of Sunshine for a purchase price of approximately $50.0
million. Crowley Inc. is the license holder for the Elmira, New
York MSA and is the 97% owner of the partnership that is the
license holder for the Binghamton, New York MSA. Sunshine is the
license holder for the Union, Pennsylvania (PA-8)RSA.
The Form 8-K included the following Financial Statements.
Crowley Inc. and Subsidiary.
Consolidated Balance Sheets dated December 31, 1993 and June
30, 1993 and 1994.
Consolidated Statements of Operations for the year ended
December 31, 1993 and the six months ended June 30, 1993 and
1994.
Consolidated Statements of Cash Flows for the year ended
December 31, 1993 and the six months ended June 30, 1993 and
1994.
Notes to the Consolidated Financial Statements for the year
ended December 31, 1993 and the six months ended June 30,
1993 and 1994.
Report of Independent Public Auditors.
Vanguard Cellular Systems, Inc. and Subsidiaries.
Unaudited Pro Forma Consolidated Financial Information
(giving effect to the pending acquisition of Crowley Inc.).
Notes to the Consolidated Financial Information.
Financial information for the Sunshine Transaction was not
available and will be filed at another date.
I - 1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has fully caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
VANGUARD CELLULAR SYSTEMS, INC.
Date: November 14, 1994 By: /s/ Haynes G. Griffin
Haynes G. Griffin
President
and
Chief Executive Officer
Date: November 14, 1994 By: /s/ Stephen L. Holcombe
Stephen L. Holcombe
Senior Vice President
and
Chief Financial Officer
(principal accounting and
principal financial officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit Sequential
No. Description Page No.
*2(a) Stock Purchase Agreement by and among
Crowley Cellular Telecommunications
Limited Partnership, Crowley Cellular
Telecommunications Binghamton, Inc.
and Vanguard Cellular Systems, Inc.,
dated as of August 5, 1994 filed as
Exhibit 2(a) to the Registrant's Form
10-Q for the quarter ended June 30,
1994.
*2(b)
Asset Purchase Agreement dated
September 26, 1994 by and between
Vanguard Cellular Systems, Inc. and
Sunshine Cellular filed as Exhibit
2(b) to the Registrant's Current
Report on Form 8-K dated as of
September 30, 1994.
*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.
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