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, 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 November 1,
1995 was 41,311,993.
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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, 1995 and December 31, 1994
Condensed Consolidated Statements of Operations - I-2
Three months and nine months ended September 30, 1995
and 1994
Condensed Consolidated Statements of Cash Flows - I-3
Nine months ended September 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 6. Exhibits and Reports on Form 8-K II-1
SIGNATURES II-2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1995 1994
(Substantially all pledged on long-term debt) (Unaudited) (See note)
<S> <C> <C>
Current Assets:
Cash...................................................................... $ 8,706 $ 5,745
Accounts receivable, net of allowances for doubtful accounts of $4,547
and $2,761.............................................................. 30,080 22,664
Cellular telephone inventories............................................ 6,054 10,417
Prepaid expenses.......................................................... 1,252 717
Total current assets........................................... 46,092 39,543
Investments (Note 2)......................................................... 311,236 257,203
Property and Equipment, net of accumulated depreciation of $94,436 and
$80,022.................................................................... 219,764 120,325
Other Assets, net of accumulated amortization of $3,002 and $635............. 15,449 14,640
Total assets................................................... $ 592,541 $ 431,711
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................................... 54,567 $ 40,689
Customer deposits ........................................................ 1,671 632
Total current liabilities....................................... 56,238 41,321
Long-Term Debt............................................................... 495,145 348,649
Minority Interests .......................................................... 2,665 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,
41,272,430 and 40,529,334 shares issued and outstanding................. 413 405
Common stock, Class B - $.01 par value, 30,000,000 shares authorized,
no shares issued........................................................ -- --
Additional capital in excess of par value................................. 237,832 234,731
Net unrealized holding losses............................................. (7,940) (9,310)
Accumulated deficit....................................................... (191,812) (186,619)
Total shareholders' equity...................................... 38,493 39,207
Total liabilities and shareholders' equity...................... $ 592,541 $ 431,711
</TABLE>
The accompanying notes to condensed consolidated financial statements
the audited financial statements at that date.
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
<TABLE>
<CAPTION>
(Dollar amounts in thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1995 1994 1995 1994
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Service fees................................$ 58,823 $ 40,101 $ 156,670 $ 104,076
Cellular telephone equipment revenues....... 3,130 3,851 12,231 12,246
Other....................................... 751 765 2,374 2,241
62,704 44,717 171,275 118,563
Costs and Expenses:
Cost of service............................. 6,150 5,956 17,652 15,934
Cost of cellular telephone equipment........ 4,961 6,680 21,216 19,219
General and administrative.................. 15,824 11,048 43,309 31,220
Marketing and selling....................... 12,375 9,004 38,978 23,970
Depreciation and amortization............... 9,589 6,040 26,424 17,359
48,899 38,728 147,579 107,702
Income From Operations......................... 13,805 5,989 23,696 10,861
Net Loss on Dispositions ...................... (134) (219) (145) (212)
Interest Expense............................... (9,853) (5,992) (27,835) (15,113)
Other, net..................................... (517) 84 (724) 70
Income (Loss) Before Minority Interests ....... 3,301 (138) (5,008) (4,394)
Minority Interests............................. (10) (125) (185) (167)
Net Income (Loss)..............................$ 3,291 $ (263) $ (5,193) $ (4,561)
Net Income (Loss) Per Share ...................$ 0.08 $ (0.01) $ (0.13) $ (0.12)
Weighted Average Number of Common
Shares Outstanding .......................... 41,207,035 38,581,748 41,029,439 38,477,457
</TABLE>
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
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1995 1994
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss..............................................................$ (5,193) $ (4,561)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization...................................... 26,424 17,359
Amortization of deferred debt issuance costs....................... 748 988
Equity in losses of unconsolidated entities........................ 685 64
Minority interests................................................. 185 167
Net loss on dispositions........................................... 145 212
Non-cash compensation for management consulting services........... (1,874) (1,831)
Changes in current items:
Accounts receivable, net......................................... (7,059) (7,083)
Cellular telephone inventories................................... 4,552 (1,482)
Account payable and accrued expenses............................. (6,068) 5,264
Other, net....................................................... (70) 229
Net cash provided by operating activities................. 12,475 9,326
Cash flows from investing activities:
Purchase of property and equipment.................................... (94,629) (38,912)
Proceeds from dispositions of property and equipment.................. 95 85
Payments for acquisition of investments............................... (64,038) (37,300)
Proceeds from dispositions of cellular interests...................... -- 431
Capital contributions to unconsolidated cellular entities............. (318) (458)
Net cash used in investing activities..................... (158,890) (76,154)
Cash flows from financing activities:
Principal payments of long-term debt.................................. (4) (3,006)
Net proceeds from issuance of common stock............................ 3,108 940
Proceeds of long-term debt............................................ 146,500 67,500
Debt issuance costs................................................... (88) (2,203)
Decrease (increase) in other assets................................... (140) 14
Net cash provided by financing activities................. 149,376 63,245
Net increase (decrease) in cash........................................... 2,961 (3,583)
Cash, beginning of period................................................. 5,745 9,098
Cash, end of period.......................................................$ 8,706 $ 5,515
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID..................................$ 23,058 $ 13,941
</TABLE>
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 nine month periods
ended September 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.
- - ------------------------------------------------------------
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 nine months of 1995 was as follows:
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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):
Nine Months
Ended September 30,
1995 1994
Revenues................................. $171,782 $122,550
Net loss................................. (5,434) (7,412)
Net loss per share....................... (.13) (.19)
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 nine months of 1995, the Company
earned and recorded as revenue approximately 225,000 shares under the management
agreement with an aggregate value of $1.9 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 180,000 shares with an aggregate
value of $1.8 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 completed its investment 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
I-5
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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.
Other Investments
The Company owns approximately 22% of the outstanding stock of International
Wireless Communications, Inc. ("IWC") and has invested an aggregate of $12.1
million, including $5.5 million invested during 1995. 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 recorded in the accompanying financial
statements using the equity method.
On July 31, 1995 the Company agreed to merge its subsidiary company, Vanguard
International Telecommunications, Inc., into IWC in exchange for 99,306 shares
of IWC Series E Preferred Stock. (The 99,306 shares represent 100% of the issued
and outstanding Series E shares.) In addition, the Company will convert notes
for $1.49 million and $1.485 million into Series F Preferred Stock. The exchange
is expected to close in the fourth quarter of 1995.
The Company has invested approximately $3 million in
Inter(Bullet)Act Systems, Incorporated and has entered into an
agreement with Inter(Bullet)Act whereby the Company will invest up
to an additional $7 million, subject to Inter(Bullet)Act raising an
additional $7 million from other investors. Inter(Bullet)Act is a
development stage company that provides targeted product promotions
to retail customers at the
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point of entry of a retail outlet, primarily supermarkets, through a
computer-equipped kiosk. The Company's investment is recorded using the equity
method in the accompanying financial statements.
- - ------------------------------------------------------------
Note 3: Long-Term Debt
Long-term debt consists of the following as of September 30, 1995 and December
31, 1994 (in thousands):
September 30, December 31,
1995 1994
(Unaudited)
Borrowings under the 1994 Credit Facility:
Term Loan $ 325,000 $ 325,000
Revolving Loan 170,000 23,500
Other Long-Term Debt 145 149
------- ---------
$ 495,145 $ 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 September 30, 1995, the
Company had interest rate cap agreements in place covering a notional amount of
$150 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
9.0% 50 Million December, 1996
9.0% 50 Million December, 1997
7.63% - 9.75% 50 Million December, 1997
-----------
$150 Million
The total cost of these interest rate cap agreements of $597,000 has been
recorded in other assets in the consolidated balance
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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 third quarter of 1995 by
$125,000 and increase interest expense by $34,000 in the same period in 1994.
The interest rate protection agreements decreased interest expense by $94,000
for the nine months ended September 30, 1995 and increased interest expense
$103,000 in the same period in 1994.
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
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
<PAGE>
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,
1995 and 1994. This table does not include any ownership interests that were
contracted for at these dates.
September 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 92.5 90.9
Union, PA (PA-8 RSA) 100.0 --
Chambersburg, PA (PA-10 East RSA) 91.6 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
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 1995 and 1994
Service revenues increased by $18.7 million or 47% primarily as a result of a
79% increase in the number of subscribers in majority owned markets to
approximately 340,000 as of September 30, 1995, as compared to the end of the
third quarter of 1994. Approximately 80% 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 the acquisition of new markets and
subsequent subscriber additions in those markets.
Total net subscribers in the Company's majority owned markets increased by
26,000 during the third quarter of 1995 as compared to 21,000 in the third
quarter of 1994. This 24% 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. As discussed below, the Company added 95,000 net
subscribers in the first nine months of 1995, a 65% increase in the number of
subscriber additions during the first nine months of 1994. The Company believes
that the decrease in the subscriber growth rate in the third quarter of 1995 was
the result of the Company's decision to reduce the level of discretionary
advertising and promotional expenses during the quarter while continuing to
explore more cost effective distribution channels.
Service revenues attributable to the Company's own subscribers increased 62%
during the third quarter of 1995 to $46.4 million as compared to the same period
in 1994. Average monthly local revenue per subscriber declined 11% to $47
compared to $53 a year ago. Approximately one-fifth of this decline was due to
the acquisition of markets with 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 9% to $12.4 million as compared to $11.4 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
MidAtlantic 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,
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overall average monthly revenue per subscriber for the quarter declined 19% to
$60 from $74 a year ago.
Cellular equipment revenues decreased $721,000 or 19% to $3.1 million for the
three months ended September 30, 1995 as compared to 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 decreased 26% to $5.0 million during the 1995 period due to increased
activity in the rental phone program. 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 third quarter of 1994 to 10% during the third 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 43% or $4.8 million during the
three months ended September 30, 1995 but decreased as a percentage of service
fees to 27% from 28% 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 37% to $12.4 million during the three
months ended September 30,1995, as compared to the same period in 1994. As a
percentage of service fees, these expenses decreased to 21% from 22%. During the
three months ended September 30, 1995, marketing and selling expenses, including
the net loss on subscriber equipment, increased to $14.2 million from $11.8
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 3% to $546 in 1995
from $563 during the same period in 1994. This decrease was primarily a result
of the Company's decision to reduce the level of discretionary advertising and
promotional expenses as discussed above.
Depreciation and amortization increased $3.5 million or 59%
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during the three months ended September 30, 1995 as compared with the same
period in 1994. The addition of approximately $100 million of new property and
equipment placed in service during the twelve months ended September 30, 1995,
accounts for approximately $2.2 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 $3.9 million or 64% during the three months ended
September 30, 1995. This increase resulted primarily from an increase in average
borrowings of approximately $186.5 million, and to a lesser extent an increase
in average interest rates charged.
In the third quarter of 1995, the Company reported net income of $3.3 million or
$.08 per share as compared to a net loss of $263,000 or $.01 per share for the
same period in 1994. The increase in net income is due to the rate of revenue
growth exceeding the rate of growth in related operating expenses as discussed
above.
Nine Months Ended September 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 September 30, 1995 apply also to the nine month period ended
September 30, 1995.
Service fees for the nine months ended September 30, 1995 increased 51% to
$156.7 million primarily as a result of the increase in the number of
subscribers served in the 1995 period. Total net subscribers in the Company's
majority owned markets increased by 95,000 during the first nine months of 1995
as compared to 57,700 in the first nine months of 1994, representing a 65%
increase in the growth rate of net subscriber additions. Average monthly revenue
per subscriber was $60 and $72 for the nine months ended September 30, 1995 and
1994, respectively.
Cost of service expenses as a percentage of service fees decreased to 11% for
the nine month period ended September 30, 1995 from 15% 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 $12.1 million or 39% but declined
as a percentage of service fees to 28% during the nine months ended September
30, 1995 as compared to 30% during the same period in 1994.
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Marketing and selling expenses increased by $15 million or 63% and increased as
a percentage of service fees to 25% from 23% during the nine month periods
ending September 30, 1995 and 1994, respectively. These increased expenditures
were primarily due to increases in commission expenses associated with the
addition of 95,000 net subscribers during the nine months ended September 30,
1995 as compared to 57,700 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
$505 in 1995 from $536 during the same period in 1994. This decrease was
primarily a result of the Company's decision to reduce the level of
discretionary advertising and promotional expenses during the quarter while
continuing to explore more cost effective distribution channels.
Depreciation and amortization increased $9 million or 52% during the nine months
ended September 30, 1995 as compared to the same period in 1994. The addition of
approximately $100 million of new property and equipment placed in service
during the twelve months ended September 30, 1995, accounts for approximately
$4.6 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 $12.7 million or 84% during the nine months ended
September 30, 1995. This increase resulted primarily from an increase in average
borrowings of approximately $167.2 million, and to a lesser extent an increase
in the interest rates charged.
Net loss increased from $4.6 million or $.12 per share for the nine months ended
September 30, 1994 to $5.2 million or $.13 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.
I-13
<PAGE>
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 of certain
financial ratios. The requirements of the 1994 Credit
I-14
<PAGE>
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 September 30, 1995, $495 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 September 30, 1995, the most restrictive of these covenants
would limit additional available borrowings during the fourth quarter of 1995 to
$147 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 September
30, 1995 the leverage ratio, which is computed as the ratio of Total Debt (as
defined) to Adjusted Cash Flow (as defined), was at a level such that the
applicable margins on the borrowings will be reduced to 0.375% and 1.625% per
annum for the Prime Rate and Eurodollar Rate, respectively, during the fourth
quarter of 1995.
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 approximately 40 miles north of the Portland, Maine MSA, which
I-15
<PAGE>
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 September 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 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 nine months of 1995, the Company earned and recorded as revenue
approximately 225,000 shares under the management agreement with an aggregate
value of $1.9 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 180,000 shares with an aggregate value of $1.8 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 completed its investment 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
I-16
<PAGE>
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.
OTHER INVESTMENTS. The Company owns approximately 22% of the outstanding stock
of International Wireless Communications, Inc. ("IWC") and has invested an
aggregate of $12.1 million, including $5.5 million invested during 1995. 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 is recorded in the
accompanying financial statements using the equity method.
On July 31, 1995 the Company agreed to merge its subsidiary company, Vanguard
International Telecommunications, Inc., into IWC in exchange for 99,306 shares
of IWC Series E Preferred Stock. (The 99,306 shares represent 100% of the issued
and outstanding Series E shares.) In addition, the Company will convert notes
for $1.49 million and $1.485 million into Series F Preferred Stock. The exchange
is expected to close in the fourth quarter of 1995.
The Company has invested approximately $3 million in Inter|X|Act Systems,
Incorporated and has entered into an agreement with Inter|X|Act whereby the
Company will invest up to an additional $7 million, subject to Inter|X|Act
raising an additional $7 million from other investors. Inter|X|Act is a
development stage company that provides targeted product promotions to retail
customers at
I-17
<PAGE>
the point of entry of a retail outlet, primarily supermarkets, through a
computer-equipped kiosk. The Company's investment is recorded using the equity
method in the accompanying financial statements.
CAPITAL EXPENDITURES. As of September 30, 1995, the Company had approximately
$264 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 $95 million during the first nine months of 1995. Capital
expenditures for the remainder of 1995 are estimated to be approximately $35
million and are expected to be funded primarily with proceeds from the 1994
Credit Facility.
CASH FLOW GOALS. Operating Cash Flow improved $21.9 million to $50.1 million
during the nine months ended September 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.
I-18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits to this Form 10-Q are listed in the
accompanying Index to Exhibits.
(b) There have been no reports filed on Form 8-K during the
period.
II-1
<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, 1995 By: /s/ Haynes G. Griffin
----------------------
Haynes G. Griffin
President
and
Chief Executive Officer
Date: November 14, 1995 By: /s/ Stephen L. Holcombe
-----------------------
Stephen L. Holcombe
Senior Vice President
and
Chief Financial Officer
(principal accounting and
principal financial officer)
II-2
<PAGE>
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.
10 Letter Agreement dated October 19, 1995, between registrant and
Inter|X|Act Systems, Incorporated.
11 Calculation of fully diluted net loss per share for the three months and
nine months ended September 30, 1995 and 1994.
27 Financial Data Schedule.
* Incorporated by reference to the statement or report indicated.
<PAGE>
Inter(Bullet)Act Systems, Incorporated
October 19, 1995
Page 1
October 19, 1995
Inter(Bullet)Act Systems, Incorporated
14 Westport Avenue
Norwalk, Connecticut 06851
Gentlemen:
Inter(Bullet)Act Systems, Incorporated (the "Company") has approached
Vanguard Cellular Systems, Inc. ("Vanguard") regarding an additional equity
investment in the Company. We are pleased to advise you that Vanguard, or a
subsidiary of Vanguard, is willing to make an additional investment in the
Company on the following terms and conditions:
1. Vanguard will purchase up to $8,000,000.00 of the Company's common
stock at $5.50 per share as a part of a concurrent $7,000,000.00 equity
offering to other accredited investors at the same price (the
"Offering"). The terms of the Offering shall be as set forth on the
confidential term sheet attached to and made a part of this letter
agreement.
2. At the time of each Vanguard investment, the Company will issue to
Vanguard a warrant to purchase additional common shares equal to 10% of
the number of common shares then purchased, on the terms and conditions
set forth in the form of warrant agreement attached to and made a part
of this agreement.
3. The Registration Rights Agreement dated as of May 8, 1995 between
Vanguard and the Company (which agreement was subsequently assigned by
Vanguard to its wholly owned subsidiary, Vanguard Cellular Operating
Corp.) will be amended to provide that, from and after six months
following the effective date of the Company's initial public offering,
Vanguard Cellular Operating Corp. (or Vanguard or any other subsidiary
that Vanguard shall designate to hold shares of the Company) will have
one demand registration per year with respect to the shares now or
subsequently owned by Vanguard or its designees until such time as such
shares may be sold in the public market, or otherwise, pursuant to Rule
144(k) of the Securities and Exchange Commission or any subsequent
statute, rule or regulation that similarly permits unlimited sales of
the Company's stock by Vanguard or its designee.
4. Vanguard's obligations hereunder are subject to the following:
(a) Approval by the Company's shareholders of an amendment to
the bylaws of the Company to permit a maximum of 12 directors;
<PAGE>
Inter(Bullet)Act Systems, Incorporated
October 19, 1995
Page 2
(b) Other action by the Company's shareholders satisfactory to
Vanguard that will assure that Vanguard shall, at all times
until the Company shall have completed its initial public
offering, have six representatives on the Board of Directors of
the Company (which shall initially include Messrs. Haynes G.
Griffin, Stephen R. Leeolou and L. Richardson Preyer, Jr., who
are already directors of the Company in their own right) and
elect as Chairman of the Board of the Company one of those
directors.
5. Both Vanguard and the Company agree to keep discussions of this
transaction strictly confidential unless the parties agree otherwise,
except that officers and directors of the Company may discuss the
arrangement with potential investors in the Offering. Vanguard may make
such disclosure as it determines to be necessary or appropriate by
reason of its status as a publicly held corporation to its shareholders,
the Securities and Exchange Commission and others.
All funds received pursuant to the Offering except funds received from
Vanguard will be placed in an escrow account for which Doris R. Bray and Dan T.
Barker, Jr. will serve as escrow agents pursuant to an Escrow Agreement in the
form attached to this letter agreement.
If the foregoing reflects our agreement, please sign the enclosed copy
of this letter agreement and return it to the undersigned.
Vanguard Cellular Systems, Inc.
By: /s/ Stephen L. Holcombe
Senior Vice President
Approved and agreed to this 24th day of October, 1995.
INTER(Bullet)ACT SYSTEMS, INCORPORATED
By: /s/ Shephen B. Hadelman
<PAGE>
Proposed Investment by Vanguard Cellular Systems, Inc.
in
Inter(Bullet)Act Systems, Inc.
Confidential Tem Sheet - for Discussion Purposes Only
Issuer: InteroAct Systems, Inc.
("Inter(Bullet)Act")
Purchaser: Vanguard Cellular Systems, Inc., or a
subsidiary. ("Vanguard")
Common Stock Investment: Vanguard, subject to terms and
conditions including but not limited to those
described herein, shall purchase up to
$8,000,000 ("The Vanguard Tranche") of
Inter(Bullet)Act's common shares as part of a
concurrent $15,000,000 equity offering to
accredited investors ("The Offering").
Price: $5.50 per share
Common Stock Warrant: Inter(Bullet)Act shall issue
Vanguard a warrant to purchase additional common
shares equal to 10% of the number of Common
shares Vanguard purchases in The Offering.
The term of the warrant shall be five years with
a per share exercise price to be established by
the first equity sale of $2,000,000 or more to a
bona fide investor(s) following closure of The
Offering.
Staged Investment: Vanguard shall stage its potential $8,000,000
equity investment as follows:
1) $1,000,000 immediately upon approval of a
definitive term sheet and documentation by both
InteroAct's and Vanguard's respective Board of
Directors.
2) $2,000,000,.in a single payment, upon
receiving all of the first $2,000,000 pursuant
to The Offering that is not part of the Vanguard
Tranche.
<PAGE>
3) $2,000,000, in a single payment, upon
receiving all of the next $2,000,000 pursuant to
The Offering that is not part of the Vanguard
Tranche.
4) Up to $3,000,000, on a dollar-for-dollar
basis, paid in monthly installments, upon
receiving up to the final $3,000,000 pursuant to
The Offering that is not part of the Vanguard
Tranche.
Board of Directors: In consideration of Vanguard's
conditional $8,000,000 commitment, and its
efforts to manage the outside equity investment
effort, Vanguard shall be granted seats on
InteroAct's Board of Directors (including the
position of Chairman, Treasurer) that
the Company's board seats (excluding Mssrs.
Griffin, Preyer & Leeolou) at closing of The
Offering.
Conditions of Final Agreement: Final agreement to this proposed investment by
Vanguard is subject to, among other things; the
following:
1) In-depth financial and operational
due diligence.
2) Mutual agreement on a definitive term
sheet, and any related documentation.
3) Approval, if necessary, by Vanguard's
senior lenders.
4) Approval by Vanguard's Board of Directors.
Confidentiality & Timing: Both Vanguard and InteroAct agree to
keep discussions of this proposed
transaction strictly confidential unless
both parties agree otherwise
Based on Inter(Bullet)Act's current financial
status, and the impending year-end holiday
season, both parties agree to use best efforts
to close The Offering before the end of
November, 1995.
<PAGE>
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER ANY FEDERAL OR STATE SECURITIES LAWS. THIS
WARRANT HAS BEEN ISSUED UNDER EXEMPTIONS THAT DEPEND, IN PART, ON THE INTENT OF
THE HOLDER HEREOF NOT TO SELL OR TRANSFER THIS WARRANT OR SUCH SHARES IN ANY
MANNER NOT PERMITTED BY SUCH LAWS. THIS WARRANT AND SUCH SHARES THEREFORE MAY
NOT BE SOLD OR TRANSFERRED EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH
HEREIN.
INTER(Bullet)ACT SYSTEMS, INCORPORATED
COMMON STOCK PURCHASE WARRANT
No. Shares
FOR VALUE RECEIVED, InteroAct Systems, Incorporated, a North Carolina
corporation (the "Company"), hereby grants , or his or its registered assigns,
the right to purchase ( ) shares at a price per share equal to the Exercise
Price, as defined in Section 2 below, (such number of shares and Exercise Price
being subject to adjustment as provided hereinafter) of the validity authorized
and issued, fully paid and nonassessable shares of common stock of the Company,
no par value per share (the "Common Stock"), upon compliance with and subject to
the following terms and conditions:
1. Exercise of Warrant. This warrant may be exercised in whole at any
time, or in part from time to time, on or before the expiration date set forth
in Section 3 below by surrendering this Warrant, or the applicable portion
hereof, with a subscription form substantially in the form attached hereto duly
executed, at the offices of the Company in Norwalk, Connecticut, and by paying
in full the Exercise Price, in immediately available funds or as otherwise
hereinafter provided, for the number of shares of Common Stock as to which this
Warrant or applicable portion hereof is exercised. No fractional shares shall be
issued upon the exercise of this Warrant and, instead, any fractional shares
created by exercise hereunder shall be purchased by the Company at the rate of
the Exercise Price per share then in effect.
2. Exercise Price. This Warrant is being issued in connection with the
offering and sale of up to $15,000,000 of common stock approved by the Board of
Directors of the Company on October 13, 1995 (the "Offering"). The exercise
price per share of this Warrant (the "Exercise Price") shall be equal to the
average price per share of Common Stock received by the Company from the next
$2,000,000 of Common Stock issued and sold by the Company after the close of the
Offering to investors (which may include existing shareholders) excluding shares
issued or sold pursuant to the exercise of options or warrants or pursuant to
the conversion of indebtedness or other convertible securities outstanding as of
October 13, 1995 and excluding shares issued or sold to the registered holder.
The Company shall give written notice of the Exercise Price to the registered
holder promptly after the Exercise Price has been determined.
<PAGE>
3. Expiration of Warrant. This Warrant shall expire and
all rights hereunder shall cease on December 31, 2000.
4. Adjustment of Number of Shares. The number of shares of
Common Stock for which this Warrant may be exercised and the
Exercise Price per share shall be adjusted in amount and number in accordance
with the following:
(a) If the Company shall declare and pay on shares of Common
Stock a dividend payable in shares of Common Stock or shall split the
then outstanding shares of Common Stock into a greater number of shares,
the number of share of Common Stock for which this Warrant may be
exercised, as in effect at the time of taking of a record for such
dividend or at the time of such stock split, shall be proportionately
increased and the Exercise Price per share shall be proportionately
decreased. Conversely, if at any time the Company shall contract or
reduce the number of outstanding shares of Common Stock by combining
such shares into a smaller number of shares, the number of shares of
Commons Stock for which this Warrant may be exercised at the time of
such action shall be proportionately decreased and the Exercise Price
per share shall be proportionately increased.
(b) In the case of (i) any reclassification or changes of the
Common Stock other than as provided above, or (ii) a consolidation,
merger, share exchange or combination involving the Company or a sale or
conveyance to another corporation of the property and assets of the
Company as an entirety or substantially as an entirety, in each case as
a result of which holders of Common Stock shall be entitled to receive
stock, securities or other property assets (including cash) with respect
to or in exchange for such Common Stock, the registered holder of this
Warrant will be entitled thereafter to receive, upon exercise thereof,
the kind and amount of shares of stock, other securities or other
property or assets which such registered holder would have owned or been
entitled to receive upon such reclassification, change, consolidation,
merger, share exchange, combination, sale or conveyance had this Warrant
been exercised immediately prior thereto.
5. Notice of Adjustments. Within five (5) days after any adjustment
pursuant to Section 4 above, the Company shall give written notice thereof to
the registered holder. Such notice shall state the Exercise Price as adjusted
and the increased or decreased number of shares purchasable upon the exercise of
this Warrant, setting forth in detail the method of calculation.
6. Partial Exercise of Warrant. In the event of any partial exercise of
this Warrant, the Company shall return to the registered holder this Warrant,
which shall have noted thereon the date of partial exercise and the number of
shares of Common Stock issued upon the partial exercise thereof.
7. Reservation of Shares. The Company shall at all times
reserve and keep available a number of its authorized but unissued
shares of its Common Stock sufficient to
<PAGE>
permit the exercise in full of this Warrant.
8. Sale of Warrant or Shares. Neither this Warrant nor the shares of
Common stock issuable upon exercise hereof have been registered under the
Securities Act of 1933, as amended, or under the securities laws of any state.
Neither this Warrant nor such shares, when issued, may be sold, transferred,
pledged or hypothecated in the absence of an effective registration statement
for this Warrant, or the shares of Common Stock, as the case may be, under the
Securities Act of 1933, as amended, and such registration or qualification as
may be necessary under the securities laws of any state, or an opinion of
counsel satisfactory to the Company that such registration or qualification is
not required.
9. Shareholders' Agreement. The holder understands and agrees that the
shares of Common stock issuable upon exercise of this Warrant shall also be
subject to the restrictions on transfer and other provisions of that certain
Shareholders' Agreement dated as of April 16, 1993 among the Company and all its
shareholders, as amended by Amendment No. 1 to Shareholders' Agreement dated as
of June 17, 1994 (as amended and as may be further amended with the consent of
the registered holder, the "Shareholders' Agreement") if in effect at the time
of exercise. As a condition to the exercise of this Warrant, the holder agrees
that the holder will become a party to the Shareholders' Agreement by executing
a Joinder Agreement or other appropriate document.
10. Legends. The certificate or certificates evidencing all
or any of the shares of Common Stock issued upon exercise of this
Warrant shall bear the following legend:
"The Shares evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended, or
under the securities laws of any state. The shares may not be
sold, transferred, pledged or hypothecated in the absence of an
effective registration statement under the Securities Act of
1933, as amended, and such registration or qualification as may
be necessary under the securities laws of any state, or any
opinion of counsel satisfactory to the Company that such
registration or qualification is not required."
Such certificate or certificates shall also bear any legend required by
the Shareholders' Agreement.
11. Successor and Assigns. The terms of this Warrant shall
be binding upon and shall enure to the benefit of any successors or
assigns of the company and of the holder or holders hereof and of the
Common Stock issued or issuable upon the exercise hereof.
12. Transfer of Warrant. This Warrant shall be registered
on the books of the Company, which shall be kept by it at its principal
office for that purpose and shall be transferable only on said books by
the registered holder hereof in person or by such
3
<PAGE>
holder's duly authorized attorney upon surrender of this Warrant properly
endorsed, and only in compliance with the foregoing provisions of this Warrant.
Except as otherwise provided herein, and subject to applicable securities laws,
this Warrant and all rights hereunder are transferable in whole or in part by
the registered holder hereof in person or by the registered holder's duly
authorized attorney on the books of the company upon surrender of this Warrant,
or the applicable portion hereof, with a transfer form substantially in the form
attached hereto duly executed, at the offices of the Company in Norwalk,
Connecticut. The Company may deem and treat the registered holder of this
Warrant at any time as the absolute owner hereof for all purposes and shall not
be affected by any notices to the contrary.
13. Notices. Notices under this Warrant shall be in writing and shall be
deemed to have been duly given (i) when personally delivered, (ii) when
forwarded by Federal Express, Airborne, or another private carrier which
maintains records showing delivery information, (iii) when sent via facsimile
but only if a written or facsimile acknowledgement of receipt is received by the
sending party, or (iv) when place in the United States Mail and forwarded by
registered or certified mail, return receipt requested, postage prepaid,
addressed to the party to whom such notice is being given and, with respect to
the Company, addressed to the Company's principal office, and with respect to
the registered holder of the Warrant, addressed to the address of such holder as
maintained on the records of the Company, or to such other address as may by
furnished in writing to the parties.
14. Governing Law. This Warrant shall be governed in
accordance with the laws of the State of North Carolina without taking
into account conflict of law provisions.
IN WITNESS WHEREOF, the Company has caused this Warrant to be issued and
executed in its corporate name by its President and its corporate seal to be
affixed hereto and attested by its Secretary or Assistant Secretary.
DATED: Inter(Bullet)Act Systems, Inc.
By:
Vice President
ATTEST:
Assistant Secretary
(Corporate Seal)
4
<PAGE>
Exercise Form for
Common Stock Purchase Warrant
INTERoACT SYSTEMS, INCORPORATED
The undersigned hereby irrevocably subscribes for the shares of Common
Stock of Inter(Bullet)Act Systems, Incorporated indicated below, upon the terms
and subject to the terms and conditions of the
attached Warrant.
No. of Shares:
Exercise Price per share:
$
Subscriber's Name and Address:
(Please print)
Subscriber's Telephone Number:( )
Subscriber's Signature:
(if individual)
Subscriber's Signature:
(if entity) (Name of Entity)
By:
(Signature of Authorized Person)
(Title of Authorized Person)
5
<PAGE>
Transfer Form for
Common Stock Purchase Warrant
INTERoACT SYSTEMS, INCORPORATED
The undersigned registered holder of the attached Warrant hereby
irrevocable transfers the following portion of the Warrant to purchase, which
transfer is subject to shares of Common Stock of Inter(Bullet)Act Systems,
Incorporated the terms and conditions described in the Warrant.
Date of Transfer: .
Number of Shares Exercisable under
Warrant as of Date of Transfer
Portion of Warrant Transferred:
Expressed as fraction or percentage
Expressed as number of shares
Transferee's Name and Address:
(Please Print)
Transferee's Telephone Number: ( )
Transferor's Signature:
(if individual)
Transferor's Signature:
(if entity) (Name of Entity)
By:
(Signature of Authorized Person)
(Title of Authorized Person)
6
<PAGE>
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CALCULATION OF FULLY DILUTED NET LOSS PER SHARE
<TABLE>
<CAPTION>
(Dollar amounts in thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net Income (Loss)..............................$ 3,291 $ (263) $ (5,193) $ (4,561)
Weighted average number of common
shares outstanding........................... 41,207,035 38,581,748 41,029,439 38,477,457
Adjustments necessary to reflect weighted
average number of common shares
outstanding on a fully diluted basis......... 1,095,748 1,703,911 1,201,740 1,685,065
42,302,783 40,285,659 42,231,179 40,162,522
Fully diluted net income (loss) per share......$ 0.08 $ (0.01) $ (0.12) $ (0.11)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from financial
statements in the Registrant's Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 8,706,000
<SECURITIES> 0
<RECEIVABLES> 34,627,000
<ALLOWANCES> 4,547,000
<INVENTORY> 6,054,000
<CURRENT-ASSETS> 46,092,000
<PP&E> 314,200,000
<DEPRECIATION> 94,436,000
<TOTAL-ASSETS> 592,541,000
<CURRENT-LIABILITIES> 56,238,000
<BONDS> 0
<COMMON> 413,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 592,541,000
<SALES> 156,670,000
<TOTAL-REVENUES> 171,275,000
<CGS> 17,652,000
<TOTAL-COSTS> 38,868,000
<OTHER-EXPENSES> 108,711,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,835,000
<INCOME-PRETAX> (5,193,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,193,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,193,000)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.12)
</TABLE>
