SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 2, 1994 was 25,602,200.
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - I-1
March 31, 1994 and December 31, 1993;
Condensed Consolidated Statements of Operations - I-2
Three months ended March 31, 1994 and 1993;
Condensed Consolidated Statements of Cash Flows - I-3
Three months ended March 31, 1994 and 1993
Notes to Condensed Consolidated Financial I-4
Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K II-1
SIGNATURES II-2
<TABLE>
Item 1. Financial Statements
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
March 31, December 31,
ASSETS 1994 1993
(Substantially all pledged on long-term debt) (Unaudited) (See note)
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Current Assets:
Cash...................................................................... $ 1,705 $ 9,098
Accounts receivable, net of allowances for doubtful accounts of $2,076
and $1,771.............................................................. 12,923 12,167
Cellular telephone inventories............................................ 4,703 4,464
Prepaid expenses.......................................................... 1,023 918
Total current assets........................................... 20,354 26,647
Investments (Note 2)........................................................ 205,754 177,415
Property and Equipment, net of accumulated depreciation of $69,370 and
$65,830................................................................... 84,037 71,716
Other Assets, net of accumulated amortization of $1,397 and $4,459.......... 10,517 8,651
Total assets................................................... $ 320,662 $ 284,429
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses.................................. $ 28,223 $ 21,470
Customer deposits ..................................................... 497 481
Total current liabilities...................................... 28,720 21,951
Long-Term Debt.............................................................. 273,652 238,153
Minority Interests ......................................................... 2,422 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,
25,602,200 and 25,598,720 shares issued and outstanding................. 256 256
Common stock, Class B - $.01 par value, 30,000,000 shares authorized,
no shares issued........................................................ -- --
Additional capital in excess of par value................................ 185,987 185,914
Net unrealized holding losses............................................ (3,048) --
Accumulated deficit....................................................... (167,327) (164,272)
Total shareholders' equity..................................... 15,868 21,898
Total liabilities and shareholders' equity..................... $ 320,662 $ 284,429
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
Note: The balance sheet at December 31, 1993 has been derived from
the audited financial statements at that date.
I - 1
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(Dollar amounts in thousands, except per share data)
1994 1993
(Unaudited) (Unaudited)
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Revenues:
Service fees................................................. $ 28,502 $ 20,236
Cellular telephone equipment revenues........................ 3,910 1,446
Other........................................................ 679 --
33,091 21,682
Costs and Expenses:
Cost of service.............................................. 4,800 3,068
Cost of cellular telephone equipment......................... 5,929 1,935
Marketing and selling........................................ 6,792 4,351
General and administrative................................... 9,145 7,753
26,666 17,107
Depreciation and amortization................................ 4,983 6,228
31,649 23,335
Income (Loss) From Operations........................................ 1,442 (1,653)
Net Losses on Dispositions .......................................... (313) (6)
Interest Expense..................................................... (3,984) (3,789)
Other, net........................................................... (205) 42
Loss Before Minority Interests....................................... (3,060) (5,406)
Minority Interests................................................... 5 (30)
Net Loss............................................................. $ (3,055) $ (5,436)
Net Loss Per Share .................................................. $ (0.12) $ (0.22)
Weighted Average Number of Common
Shares Outstanding .................................................. 25,601,264 25,219,422
</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
FOR THE YEARS ENDED MARCH 31, 1994 AND 1993
(Dollar amounts in thousands) 1994 1993
(Unaudited) (Unaudited)
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Cash flows from operating activities:
Net loss................................................................ $ (3,055) $ (5,436)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................................... 4,983 6,228
Amortization of deferred debt issuance costs............................ 297 173
Equity in losses of unconsolidated cellular entities.................... 268 38
Minority interests...................................................... (5) 30
Net loss on dispositions................................................ 313 6
Non-cash compensation for management consulting services................ (353) --
Changes in current items:
Accounts receivable, net.............................................. (756) (1,817)
Cellular telephone inventories........................................ (239) (218)
Account payable and accrued expenses.................................. (4,234) (1,238)
Other, net............................................................ (89) (352)
Net cash used in operating activities.................................. (2,870) (2,586)
Cash flows from investing activities:
Purchase of property and equipment......................................... (5,560) (4,798)
Proceeds from dispositions of property and equipment....................... 22 --
Payments for acquisition of investments.................................... (32,351) (54)
Proceeds from dispositions of cellular interests........................... -- 1,204
Capital contributions to unconsolidated cellular entities.................. (3) (69)
Net cash used in investing activities.................................. (37,892) (3,717)
Cash flows from financing activities:
Principal payments of long-term debt....................................... (1) (9)
Net proceeds from issuance of common stock................................. 73 272
Proceeds of long-term debt................................................. 35,500 10,000
Increase in other assets................................................... (2,203) (199)
Net cash provided by financing activities.............................. 33,369 10,064
Net increase (decrease) in cash................................................ (7,393) 3,761
Cash, beginning of period...................................................... 9,098 9,473
Cash, end of period............................................................ $ 1,705 $ 13,234
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID....................................... $ 4,274 $ 3,725
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
I - 3
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except per share data)
(Unaudited)
_________________________________________________________________
Note 1: Basis of Presentation
The accompanying condensed consolidated financial statements
of Vanguard Cellular Systems, Inc. and Subsidiaries (the Company)
have been prepared without audit pursuant to Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 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 excercise control through majority
ownership have been accounted for using the equity method of
accounting. Ownership interests in cellular 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 ended March 31, 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.
The Company also changed the depreciable lives of certain of its
property and equipment to more closely approximate its historical
<PAGE>
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 quarter ended March 31, 1994 by
approximately $900 or $0.03 per share.
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, is in exchange for $4,400 in cash, the exchange of the Hagerstown,
MD cellular market and ownership interests in one minority owned
cellular market.
On April 26, 1994 to March 31, 1994 the Company completed the
closing of this transaction and as a result, the operations of the
Hagerstown, MD market will not continue to be included in the
operations of the Company and the operations of the Altoona and
Chambersburg markets will subsequently be included in the consolidated
financial results of the Company.
Geotek
In February 1994, the Company purchased for $30,000 from Geotek
Communications, Inc. (Geotek) 2.5 million shares of Geotek common
stock and received options to invest up to $167,000 for an aggregate
of 10 million additional shares. Geotek is a telecommunications
company that is developing a Specialized Mobile Radio (SMR) wireless
communications network in the United States based on its Frequency
Hopping Multiple Access digital technology (FHMATM). Geotek's common
stock is traded on the NASDAQ National Market System.
The options received by the Company were issued in three series
as follows: (i) Series A for 2 million shares at $15 per share; (ii)
Series B for 2 million shares at $16 per share; and (iii) Series C for
3 million shares at $17 per share and 3 million shares at $18 per
share. All options are exercisable immediately. The Series A options
expire on the later of February 23, 1995 or the commercial validation
(as defined) of Geotek's first SMR system using FHMA (the Series A
Expiration Date). The Series B and Series C options expire a year and
2 years, respectively, after the Series A Expiration Date. However,
the Company may extend the Series B and Series C options by six months
and the Series C options by an additional six months and, if any
portion of any series of options expires, all unexercised options
expire immediately.
The Company has also entered into a 5-year management consulting
agreement to provide operational and marketing support in exchange for
300,000 shares of Geotek common stock per year, however, should any
portion of the Series A, B or C options expire, the management
<PAGE>
consulting agreement is immediately terminated. The Company has
earned and recorded as revenue approximately 32,000 shares under the
management agreement with an aggregate value of $353 based upon the
average closing price of Geotek stock during the period.
Note 3: Long-Term Debt
Long term debt consists of the following as of March 31, 1994 and
December 31, 1993:
March 31, December 31,
1994 1993
(Unaudited)
Borrowings under the 1993 loan agreement:
Facility A Loan $ 120,000 $ 120,000
Facility B Loan 103,500 68,000
Facility C Loan 50,000 50,000
Other Long-Term Debt 152 153
$ 273,652 $ 238,153
Note 4: Commitments and Contingencies
Litigation
In June 1989, a suit was filed by a group of former partners in
the San Juan Cellular Settlement Partnership which alleges that the
Company and two of its officers breached fiduciary duties and acted
fraudulently in connection with settlement of licensing proceedings
concerning the san Juan, PR market and certain other markets. The
suit requests $49,000 in compensatory damages, $50,000 in punitive
damages and imposition of a constructive trust upon the Company's
Lancaster, Reading and York, PA cellular operations. The Company
believes that the suit is without merit and intends to vigorously
oppose it and has asserted counterclaims against certain of the
plaintiffs. Discovery is essentially completed. Motions for summary
judgement and responsive pleadings have been filed by the parties and
are pending. No trial date has been set and management is unaware of
when a trial date will be set. Additionally, the Company is involved
in various other legal proceedings arising in the normal course of
business. In the opinion of management, the outcome of the above
legal proceedings will not have a material adverse effect on the
consolidated financial position of the Company.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except per share data)
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 March 31, 1994 and 1993:
March 31,
Cellular Markets 1994 1993
Pennsylvania 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 90.3 73.8
State College, PA 97.0 91.0
Hagerstown, MD 90.8 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 --
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
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1994 and 1993
In 1994, the Company reclassified certain pass-through items
previously recognized as service revenue in its Statements of
Operations to offset the related cost of service expenses to conform
with industry practice. These reclassified items relate to charges
associated with the Company's subscribers roaming into adjacent
cellular markets. Appropriate reclassifications have been made in
each period presented in the accompanying financial statements.
Service fee revenues increased by $8,266 or 41% primarily as a
result of a 51% increase in the number of subscribers in majority
owned markets to approximately 150,000 as of March 31, 1994 as
compared to the end of the first 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
17,700 during the first quarter of 1994 as compared to 7,200 in the
first quarter of 1993. This 146% increase in the growth rate of net
subscriber additions is the result of an increase in productivity by
sales personnel which the Company believes has been augmented by
increased sales training and the growing acceptance of cellular
communications. The growth in net subscriber additions also reflects
the number of agents in the Company's indirect distribution channels
combined with moderate economic recovery in the Company's operating
regions. Average monthly service revenue per subscriber decreased 4%
to $67 for the three months ended March 31, 1994 from $70 during the
same period in 1993.
Cost of service expenses increased as a percentage of service
fees to 17% for the three months ended March 31, 1994 as compared to
15% for the same period in 1993. In many instances in 1993, 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 provisions of these services. The
rapid subscriber growth which has occurred in the past year has made
this larger virtual service area available to significantly more
customers which has caused greater net costs to be incurred by the
Company. The Company is continuing its efforts to reduce these costs
through the continued negotiation of more favorable roaming agreements
with both wireline and non-wireline cellular service providers. In
addition, the continued negotiation of more favorable interconnection
agreements with local exchange carriers should contribute to stability
in cost of service as a percentage of service fees.
Marketing and selling expenses increased 56% to $6,792 during the
three months ended March 31, 1994 as compared to the same period in
1993 and as a percentage of service fees these expenses increased to
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24% from 22%. Marketing and selling equipment including the net loss
on subscriber equipment increased to $8,811 from $4,840 during the
three months ended March 31, 1993. The higher rate of growth in net
subscriber additions described above for the 1994 period as compared
to the 1993 period and the resulting increase in salaries and
commissions contributed to the increase in marketing and selling
expenses. The increased growth rate in net subscriber additions also
caused marketing and selling expenses per net subscriber addition,
including the loss on cellular equipment, to decline 26% to $498 in
1994 from $672 during the three months ended March 31, 1993.
General and administrative expenses increased 18% or $1,392
during the three months ended March 31, 1994 but decreased as a
percentage of service fees to 32% from 38% 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 substantial increases in general and
administrative overhead.
Depreciation and amortization decreased $1,245 or 20% during the
three months ended March 31, 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 March 31, 1994
by approximately $900 or $0.03 per share. In addition, a portion of
the Company's property and equipment became fully depreciated during
1993 and, as such, these assets do not have a continuing effect on
depreciation and amortization or net income.
Interest expense increased $195 or 5% during the three months
ended March 31, 1994 as a result of increased average borrowings of
approximately $50,000 offset in part by a decline in average interest
rates charged during 1994.
Net loss decreased from $5,436 or $(0.22) per share for the three
months ended March 31, 1993 to $3,055 or $(0.12) per share in the 1994
period. Contributing to the decrease in net loss per share are
primarily an increase in "Operating Cash Flow" (income (loss)from
operations before depreciation and amortization) and lower
depreciation and amortization resulting from the changes in estimated
useful lives of certain of the Company's property and equipment.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to acquire, construct, operate and
expand its cellular systems and to fund operating losses and payments
on indebtedness. In the past, the Company has met these requirements
primarily through private and public sales of its Class A common
stock, seller financing and bank and vendor financing.
On April 21, 1993, the Company completed the closing of a
$290,000 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
$390,000 in February 1994. The 1993 Loan Agreement was used to repay
and terminate the Company's previously existing $275,000 credit
facility closed April 1989 (the "1989 Credit Facility"). As security
for borrowings under the 1993 Loan Agreement, the Company has pledged
substantially all of the tangible and intangible assets of the Company
and its subsidiaries. The purpose of this refinancing was to provide
the Company with additional financial and operating flexibility and
enable it to pursue business opportunities that may arise in the
future.
The 1993 Loan Agreement consists of a "Facility A Loan", a
"Facility B Loan", and a "Facility C Loan". The Facility A Loan and
the Facility C Loan, in the amounts of $120,000 and $50,000,
respectively, were to refinance the Company's borrowings under the
1989 Credit Facility. The Facility B Loan is available for capital
expenditures, to acquire cellular franchise interests which are
contiguous to or within 50 miles of any boundary of the Company's
Pennsylvania Supersystem, to make permitted investments, and for
general corporate purposes. In February 1994, the 1993 Loan Agreement
was amended to increase the size of the Facility B Loan to $220,000.
As of March 31, 1994, $116,500 was available for future expenditures
under the amended Facility B Loan.
The Facility A Loan and the Facility B Loan bear interest at a
rate equal to the Company's choice of the Prime Rate, CD Rate or
Eurodollar Rate plus an applicable margin based upon a leverage ratio
for the most recent fiscal quarter. The leverage ratio, which is
computed as the ratio of Total Debt (as defined) to Adjusted Cash Flow
(as defined), currently is at such a level as to cause the applicable
margins on the borrowings to be 1.5%, 2.6% and 2.5% per annum for the
Prime Rate, CD Rate and Eurodollar Rate, respectively, Under the
Facility C Loan, the prescribed rate is the Eurodollar Rate plus a
margin of 3.0% per annum.
The outstanding amount of the Facility A Loan as of March 31,
1996 is to be repaid in quarterly installments commencing on June 30,
1996 and terminating at the Facility's maturity date of March 31,
2001. The Facility B Loan operates as a revolving credit facility
with available borrowings reduced on a quarterly basis commencing on
June 30, 1996 and terminating on March 31, 2001. At the time of each
quarterly reduction, the outstanding borrowings must be repaid to the
extent that they exceed the then available commitment. Outstanding
<PAGE>
borrowings under the Facility C Loan as of March 31, 2001 shall be
repaid in two equal installments on June 30, 2001 and September 30,
2001, the Facility C Loan Maturity Date.
The 1993 Loan Agreement requires maintenance of certain covenants
including but not limited to maintenance of certain financial ratios
and prescribed amounts of interest rate protection. Additionally, the
1993 Loan Agreement restricts, among other things, the creation of
certain additional indebtedness, disposition of certain assets,
payment of cash dividends, capital expenditures and acquisitions and
other uses of proceeds. The requirements of the 1993 Loan Agreement
were established in relation to the Company's projected capital and
projected results of operations. These requirements generally were
designed to require continued improvement in the Company's operating
performance such that its operating cash flow would be sufficient to
begin servicing the debt as repayments are required. The Company is
in compliance with all requirements of the 1993 Loan Agreement and
expects to remain in compliance through December 31, 1994 and beyond.
The Company's operating strategy has been to acquire controlling
ownership interests and build and operate networked cellular telephone
systems in its five regional metro-clusters. On April 26, 1994, the
Company completed the acquisition of two cellular markets contiguous
to its Pennsylvania Supersystem in exchange for $4,400 in cash, the
exchange of the Hagerstown, MD cellular market and the ownership
interest in one minority owned cellular market.
As of March 31, 1994 the Company had approximately $153,000 of
property and equipment placed in service. During the first quarter of
1994, the Company purchased approximately $6,000 of capital equipment.
The Company has incurred capital expenditures primarily based upon
capacity needs in its existing markets resulting from continued
subscriber growth. During 1994 and 1995, the Company plans to
accelerate its cellular network buildout by constructing approximately
55 new cell sites in 1994 and 35 new cell sites in 1995. This network
expansion will increase geographic coverage and provide for increased
portable usage in the Company's cellular markets. As the result of
this network expansion, the Company anticipates purchasing
approximately $45,000 of capital equipment during the remainder of
1994.
In February 1994, the Company purchased for $30,000 from Geotek
Communications, Inc. (Geotek) 2.5 million shares of Geotek
common stock and received options to invest up to $167,000 for an
aggregate of 10 million additional shares. Geotek is a
telecommunications company that is developing a Specialized Mobile
Radio (SMR) wireless communications network in the United States based
on its Frequency Hopping Multiple Access digital technology (FHMATM).
Geotek's common stock is traded on the NASDAQ National Market System.
The options received by the Company were issued in three series
as follows: (i) Series A for 2 million shares at $15 per share; (ii)
Series B for 2 million shares at $16 per share; and (iii) Series C for
3 million shares at $17 per share and 3 million shares at $18 per
<PAGE>
share. All options are immediately exercisable. The Series A options
expire on the later of February 23, 1995 or the commercial validation
(as defined) of Geotek's first SMR system using FHMA (the Series A
Expiration Date). The Series B and Series C options expire 1 year and
2 years, respectively, after the Series A Expiration Date. However,
the Company may extend the Series B and Series C options by six months
and the Series C options by an additional six months and, if any
portion of any series of options expires, all unexercised options
expire immediately.
The Company has also entered into a 5 year management consulting
agreement to provide operational and marketing support in exchange for
300,000 shares of Geotek common stock per year. However, should any
portion of the Series A, B or C options expire, the management
consulting agreement is immediately terminated. During the first
quarter of 1994, approximately 32,000 shares have been earned under
this management agreement.
If all options are exercised and all shares are earned and
received under the management consulting agreement, the Company would
own an aggregate of approximately 20% of Geotek's common stock on a
fully diluted basis. Under the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", which are effective for 1994, this
investment is classified as "available for sale". As such, the
investment is recorded at its market value and any unrealized gains or
losses are recognized as a separate component of shareholders' equity,
but do not affect results of operations.
The Company funded its initial $30,000 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 lender approval for borrowings under the Facility B Loan or
other financing alternatives.
Operating cash flow improved $1,850 to $6,425 during the three
months ended March 31, 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.
<PAGE>
Although there can be no assurance that any of the foregoing
growth goals will be achieved, the Company believes that its
internally generated funds and its available bank lines of credit will
be sufficient during the next several years to complete its capital
equipment expansion, fund operating expenses and debt service.
INFLATION
The Company believes that inflation affects its business no more
that 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) There have been no reports filed on Form 8-K during the period.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has fully caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VANGUARD CELLULAR SYSTEMS, INC.
Date: May 13, 1994 By: /s/ Haynes G. Griffin
Haynes G. Griffin
President
and
Chief Executive Officer
Date: May 13, 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.
*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.
<PAGE>
*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.
*Incorporated by reference to the statement or report indicated.
