<PAGE> 1
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
-------------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------
Commission file number 0-25588
-------------------
PALMER WIRELESS, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 65-0456627
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
12800 University Drive, Ste. 500, 33907
Fort Myers, Florida (Zip Code)
(Address of principal executive offices)
Registrant's telephone number (941) 433-4350
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
-------- -----
The number of shares outstanding of the issuer's common stock as of August 13,
1996 was 28,396,016.
- ------------------------------------------------------------------------------
<PAGE> 2
PALMER WIRELESS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - December 31, 1995 and June 30, 1996................ I-1
Condensed Consolidated Statements of Operations - Three months ended June 30, 1995
and 1996 and six months ended June 30, 1995 and 1996....................................... I-2
Condensed Consolidated Statements of Stockholders' Equity.................................. I-3
Condensed Consolidated Statements of Cash Flows - Six Months ended June 30, 1995
and 1996................................................................................... I-4
Notes to Condensed Consolidated Financial Statements....................................... I-5
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... I-6
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................................................ II-1
ITEM 2. Changes in Securities.................................................................... II-1
ITEM 3. Defaults Upon Senior Securities.......................................................... II-1
ITEM 4. Submission of Matters to a Vote of Security Holders...................................... II-1
ITEM 5. Other Information........................................................................ II-2
ITEM 6. Exhibits and Reports on Form 8-K......................................................... II-2
SIGNATURES.......................................................................................... II-3
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
PALMER WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
============ ===========
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,436 $ 1,372
Trade accounts receivable, net of
allowance for doubtful accounts 17,347 18,156
Receivable from other cellular carriers 3,936 223
Deferred income taxes 821 768
Prepaid expenses and deposits 1,111 2,039
Inventory 2,434 2,076
----------- -----------
Total current assets 29,085 24,634
Net property, plant and equipment 100,936 118,746
Licenses, net of amortization 321,053 345,095
Other intangible assets, net of amortization 11,797 12,715
----------- -----------
$ 462,871 $ 501,190
=========== ===========
Liabilities and Equity
Current liabilities:
Notes payable $ - $ 2,535
Current installments of long-term debt 7,441 7,717
Accounts payable 10,795 9,334
Accrued expenses 8,833 9,355
Other liabilities 3,451 3,710
----------- -----------
Total current liabilities 30,520 32,651
Long-term debt, excluding current installments 343,000 282,000
Deferred income taxes 9,636 10,081
Minority interests 5,162 5,850
----------- -----------
Total liabilities 388,318 330,582
----------- -----------
Stockholders' equity 74,553 170,608
----------- -----------
$ 462,871 $ 501,190
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
I - 1
<PAGE> 4
PALMER WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
============================== ===============================
1995 1996 1995 1996
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue:
Service $ 23,802 $ 36,349 $ 44,211 $ 70,205
Equipment sales and installation 2,129 2,204 4,095 4,239
------------ ------------- ------------ -------------
Total revenue 25,931 38,553 48,306 74,444
------------ ------------- ------------ -------------
Operating expenses:
Engineering, technical and other direct 4,669 5,779 8,529 12,403
Cost of equipment 3,525 4,466 6,669 8,397
Selling, general and administrative 7,625 11,053 14,756 21,977
Depreciation and amortization 3,220 5,974 6,587 11,872
------------ ------------- ------------ -------------
Total operating expenses 19,039 27,272 36,541 54,649
------------ ------------- ------------ -------------
Operating income 6,892 11,281 11,765 19,795
------------ ------------- ------------ -------------
Other income (expense):
Interest expense, net (4,983) (8,060) (10,712) (16,005)
Other expense, net (20) (59) (348) (59)
------------ ------------- ------------ -------------
Total other expense (5,003) (8,119) (11,060) (16,064)
------------ ------------- ------------ -------------
Income before minority interest
share of income and income taxes 1,889 3,162 705 3,731
Minority interest share of income (269) (571) (392) (1,023)
------------ ------------- ------------ -------------
Income before income taxes 1,620 2,591 313 2,708
Income taxes - (907) (2,650) (948)
------------ ------------- ------------ -------------
Net income (loss) $ 1,620 $ 1,684 $ (2,337) $ 1,760
============ ============= ============ =============
Net income (loss) per share of common stock $ 0.07 $ 0.07 $ (0.11) $ 0.07
============ ============= ============ =============
Average shares outstanding 23,300,351 24,299,453 20,968,685 23,940,039
============ ============= ============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I - 2
<PAGE> 5
PALMER WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK (ACCUMULATED
CLASS A CLASS B ADDITIONAL DEFICIT) TOTAL
======================= ======================= PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ----------- ---------- ----------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 706,422 $ 7 17,293,578 $ 173 $ 4,902 $ (167) $ 4,915
Partnership loss before
business combination - - - - (1,066) - (1,066)
Public offering, net of issuance
costs of $8,114 5,369,350 54 - - 68,345 - 68,399
Exercise of stock options 20,000 - - - 285 - 285
Net income - - - - - 2,020 2,020
---------- ----------- ---------- ----------- ----------- -------------- ---------------
Balances at December 31, 1995 6,095,772 $ 61 17,293,578 $ 173 $ 72,466 $ 1,853 $ 74,553
Public offering, net of issuance
costs of $5,800 (Note 3) 5,000,000 50 - - 94,150 - 94,200
Exercise of stock options 6,666 - - - 95 - 95
Net income - - - - - 1,760 1,760
---------- ----------- ---------- ----------- ----------- -------------- ---------------
Balances at June 30, 1996 11,102,438 $ 111 17,293,578 $ 173 $ 166,711 $ 3,613 $ 170,608
========== =========== ========== =========== =========== ============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I - 3
<PAGE> 6
PALMER WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
==============================
1995 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (2,337) $ 1,760
------------- -------------
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 6,587 11,872
Minority interest share of income 392 1,023
Deferred income taxes 2,650 498
Loss on disposal of property 342 59
Interest deferred and added to long-term debt 301 326
Increase in trade accounts receivable (1,383) (809)
Decrease in inventory 4,108 358
Decrease in accounts payable and accrued expenses (5,701) (1,629)
Change in other accounts 1,423 2,345
------------- -------------
Total adjustments $ 8,719 $ 14,043
------------- -------------
Net cash provided by operating activities $ 6,382 $ 15,803
------------- -------------
Cash flows from investing activities:
Capital expenditures (16,314) (21,639)
Proceeds from sales of property and equipment 30 4
Purchase of cellular system - (31,500)
Collection of purchase price adjustment - 2,452
Purchases of minority interests (735) (1,254)
Increase in other intangible assets (1,466) (1,710)
------------- -------------
Net cash used in investing activities $ (18,485) $ (53,647)
------------- -------------
Cash flows from financing activities:
Advances to Palmer Communications Incorporated, net (1,601) -
Increase in notes payable - 2,535
Repayment of long-term debt (65,050) (100,050)
Proceeds from long-term debt 8,000 39,000
Public offering proceeds, net 71,144 94,200
Exercise of stock options - 95
------------- -------------
Net cash provided by financing activities $ 12,493 $ 35,780
------------- -------------
Net increase (decrease) in cash and cash equivalents $ 390 $ (2,064)
Cash and cash equivalents at the beginning of period 2,998 3,436
------------- -------------
Cash and cash equivalents at the end of period $ 3,388 $ 1,372
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 9,935 $ 14,460
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I - 4
<PAGE> 7
PALMER WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Palmer
Wireless, 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. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financials. In the opinion of management, all adjustments (none of which were
other than normal recurring items) considered necessary for a fair
presentation have been included. The results of operations for the interim
periods reported are not necessarily indicative of results to be expected for
the year.
The computation of net income (loss) per share is based on the weighted
average number of common and dilutive common equivalent shares (common stock
options using the treasury stock method) outstanding during the periods
presented.
(2) ACQUISITIONS AND PURCHASE OF LICENSES
On June 20, 1996, the Company acquired the assets of and license to
operate the non-wireline cellular telephone system serving the Georgia Rural
Service Area Market No. 371, Georgia-1 RSA for a total purchase price of
$31,500, subject to certain adjustments.
On July 5, 1996, two of the Company's majority-owned subsidiaries
acquired the assets of and license to operate the non-wireline cellular
telephone system serving the Georgia Rural Service Area Market No. 376,
Georgia-6 RSA for a total purchase price of $35,000, subject to certain
adjustments.
(3) OFFERING
On June 18, 1996, the Company issued 5,000,000 shares of Class A Common
Stock in a public offering for net proceeds of $94,200.
I - 5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Palmer Wireless, Inc. ("Company") is engaged in the construction,
development, management and operation of cellular telephone systems in the
southeastern United States. As of June 30, 1996, the Company provided
cellular telephone service to 243,887 subscribers in Alabama, Florida,
Georgia, and South Carolina in a total of 16 licensed service areas, composed
of nine Metropolitan Service Areas ("MSAs") and seven Rural Service Areas
("RSAs") with an aggregate estimated population of 3.6 million. The Company
sells its cellular telephone service as well as cellular telephones and
accessories principally through its network of retail stores offering a full
line of cellular products and services. The Company markets all of its
products and services under the nationally-recognized service mark CELLULAR
ONE.
MARKET OWNERSHIP
The following is a summary of the Company's ownership interest in the
cellular telephone system in each licensed service area to which the Company
provided service at December 31, 1995 and June 30, 1996.
<TABLE>
<CAPTION>
December 31, June 30,
Cellular Service Area 1995 1996
- --------------------- ------------ --------
<S> <C> <C>
Albany,Georgia.................................. 82.1% 82.7%
Augusta, Georgia................................ 100.0 100.0
Columbus, Georgia............................... 83.2 84.2
Macon, Georgia.................................. 98.4 98.7
Savannah, Georgia............................... 97.9 98.2
Dothan, Alabama................................. 92.1 92.3
Montgomery, Alabama............................. 91.9 91.9
Georgia 1 - RSA................................. N/A 100.0
Georgia 7 - RSA................................. 100.0 100.0
Georgia 8 - RSA................................. 100.0 100.0
Georgia 9 - RSA................................. 100.0 100.0
Georgia 10 - RSA................................ 100.0 100.0
Georgia 12 - RSA................................ 100.0 100.0
Alabama 8 - RSA................................. 100.0 100.0
Fort Myers, Florida............................. 99.0 99.0
Panama City, Florida............................ 77.9 77.9
</TABLE>
On December 1, 1995, the Company acquired the cellular telephone systems
serving the Augusta and Savannah MSAs for an aggregate purchase price of
$158.4 million ("the GTE Acquisition"). The cellular telephone systems in the
newly-acquired MSAs serve a geographic territory in eastern Georgia and a
portion of South Carolina that is adjacent to the Company's existing markets
in the Georgia-8 and Georgia-12 RSAs. In the GTE Acquisition, the Company
also acquired interim authority to provide cellular service to the southern
portions of South Carolina RSA Market Nos. 631 and 632, otherwise known as
South Carolina-7 RSA and South Carolina-8 RSA, respectively, which serve a
geographic territory that is adjacent to the Company's existing markets in
Georgia-8 RSA as well as the Augusta and Savannah, Georgia MSAs. The Company
has no subscribers and has not constructed any cell sites in South Carolina-7
RSA and South Carolina-8 RSA, however it provides roaming access to its own
subscribers and others when they travel in these two service areas by
utilizing its existing cell sites in adjacent service areas.
I - 6
<PAGE> 9
On June 20, 1996, the Company acquired the assets of and the license to
operate the non-wireline cellular telephone system serving Georgia Rural
Service Area Market No. 371, Georgia-1 RSA for a total purchase price of
$31.5 million, subject to certain adjustments.
On July 5, 1996, two of the Company's majority-owned subsidiaries
acquired the assets of and the license to operate the non-wireline cellular
telephone system serving Georgia Rural Service Area Market No. 376, Georgia-6
RSA for a total purchase price of $35 million, subject to certain adjustments.
On June 18, 1996, the Company issued 5,000,000 shares of Class A Common
Stock in a public offering for net proceeds of $94.2 million.
RESULTS OF OPERATIONS
The following table sets forth for the Company, for the periods
indicated, the percentage which certain amounts bear to total revenue.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1995 1996 1995 1996
------ ------ ----- ------
<S> <C> <C> <C> <C>
REVENUE:
Service................................................ 91.8% 94.3% 91.5% 94.3%
Equipment sales and installation....................... 8.2 5.7 8.5 5.7
----- ----- ----- -----
TOTAL REVENUE.................................. 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Engineering, technical and other direct:
Engineering and technical (1).................. 7.9 7.8 8.0 8.5
Other direct costs of services (2)............. 10.1 7.2 9.7 8.2
Cost of equipment (3).................................. 13.6 11.6 13.8 11.3
Selling, general and administrative:
Sales and marketing (4)........................ 9.0 8.1 9.1 8.5
Customer service (5)........................... 5.5 5.5 6.0 5.7
General and administrative (6)................. 14.9 15.0 15.4 15.3
Depreciation and amortization.......................... 12.4 15.5 13.6 15.9
---- ---- ---- ----
TOTAL OPERATING EXPENSE........................ 73.4 70.7 75.6 73.4
Operating income....................................... 26.6% 29.3% 24.4% 26.6%
Operating income before depreciation
and amortization (7).............................. 39.0% 44.8% 38.0% 42.5%
</TABLE>
_________________
(1) Consists of costs of cellular telephone network, including inter-trunk
costs, span-line costs, cell site repairs and maintenance, cell site
utilities, cell site rent, engineers' salaries and benefits and other
operational costs.
(2) Consists of net costs of roaming, costs of long distance, costs of
interconnection with wireline telephone companies and other costs of
services.
(3) Consists primarily of the costs of the cellular telephones and
accessories sold.
(4) Consists primarily of salaries and benefits of sales and marketing
personnel, employee and agent commissions and advertising and promotional
expenses.
(5) Consists primarily of salaries and benefits of customer service personnel
and costs of printing and mailing billings generated in-house.
(6) Includes salaries and benefits of general and administrative personnel and
other overhead expenses.
(7) Operating income before depreciation and amortization should not be
considered in isolation or as an alternative to net income (loss),
operating income or any other measure of performance under generally
accepted accounting principles. The Company believes that operating
income before depreciation and amortization is viewed as a relevant
supplemental measure of perfomrance in the cellular telephone industry.
I - 7
<PAGE> 10
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
REVENUE. Service revenues totaled $36.4 million for the second quarter
of 1996, an increase of 52.7% over $23.8 million for the second quarter of
1995. This increase was primarily due to a 71.8% increase in the number of
subscribers to 243,887 as of June 30, 1996 versus 141,944 as of June 30,
1995. The increase in subscribers is the result of internal growth, which the
Company attributes primarily to its strong sales and marketing efforts, and
the GTE Acquisition. The GTE Acquisition accounted for 36,693 subscribers at
June 30, 1996. Service revenue attributable to the cellular systems acquired
in the GTE Acquisition totaled $6.4 million for the three months ended June
30, 1996.
Average monthly revenue per subscriber decreased 12.7% to $52.23 for the
second quarter of 1996 from $59.82 for the second quarter of 1995. This is
due to a common trend in the cellular telephone industry, where, on average,
new customers use less airtime than existing subscribers. Therefore, service
revenues generally do not increase proportionately with the increase in
subscribers. In addition, the Company entered into several revised roaming
agreements with some of its neighboring carriers. These agreements provide
for reciprocal lower roaming rates per minute of use. This resulted in lower
roaming revenue for the Company, but also resulted in offsetting lower direct
costs of services when the Company's subscribers were roaming on these
neighboring systems.
Equipment sales and installation revenue, which consists primarily of
cellular subscriber equipment sales, remained flat at $2.2 million for the
second quarter of 1996 and $2.1 million for the second quarter of 1995. While
equipment sales and installation revenue remained flat for the second quarter
of 1996 and 1995, it decreased as a percentage of total cellular revenue to
5.7% for 1996 from 8.2% for 1995, reflecting the increased recurring revenue
base as well as lower cellular equipment prices charged to customers.
Equipment sales and installation revenue attributable to the cellular
telephone systems acquired in the GTE Acquisition totaled $0.2 million for the
three months ended June 30, 1996.
OPERATING EXPENSES. Engineering and technical expenses increased by
46.9% to $3.0 million for the second quarter of 1996 from $2.1 million in the
second quarter of 1995, due primarily to the increase in subscribers and the
GTE Acquisition. As a percentage of revenue, engineering and technical
expenses remained relatively flat at 7.8% and 7.9% for the second quarter of
1996 and 1995 respectively. The Company expects engineering and technical
expenses to decrease as a percentage of revenue due to its large component of
fixed costs. Engineering and technical expenses attributable to the cellular
telephone systems acquired in the GTE Acquisition totaled $0.7 million for the
three months ended June 30, 1996.
Other direct costs of services increased 5.7% to $2.8 million for the
second quarter of 1996 from $2.6 million in the second quarter of 1995. As a
percentage of revenue, however, these costs of service declined to 7.2% from
10.1%, reflecting improved roaming agreements with neighboring cellular
service providers, as well as efficiencies gained from the growing subscriber
base. Other direct costs of services attributable to the cellular telephone
systems acquired in the GTE Acquisition totaled $0.2 million for the three
months ended June 30, 1996.
The cost of equipment increased 26.7% to $4.5 million for the second
quarter of 1996 from $3.5 million for the second quarter of 1995, due
primarily to the increase in gross subscriber activations for the same period.
The equipment sales margin decreased to (102.6%) for the second quarter of
1996 from
I - 8
<PAGE> 11
(65.6%) for the second quarter of 1995. In an effort to address market
competition and improve market share, the Company sold more telephones below
cost in the second quarter of 1996 than in the same period of 1995. The cost
of equipment attributable to the cellular telephone systems acquired in the
GTE Acquisition totaled $0.9 million for the three months ended June 30, 1996.
Sales and marketing costs increased 34.4% to $3.1 million for the second
quarter of 1996 from $2.3 million for the same period in 1995. This increase
is primarily due to the 33.8% increase in gross subscriber activations and the
resulting increase in commissions. As a percentage of total revenue, sales
and marketing costs decreased to 8.1% from 9.0% for the second quarter of 1996
and 1995 respectively. The decrease was due to a significant portion of sales
and marketing costs being fixed. The Company's cost to add a net subscriber,
including loss on telephone sales, increased to $395 for the second quarter of
1996 from $308 for the second quarter of 1995. This increase in cost to add a
net subscriber was caused primarily by additional advertising and fixed
marketing overhead associated with the systems acquired in the GTE
Acquisition, which are not yet generating the offsetting gains in net
subscribers. In addition, there were increased losses from the Company's
sales of cellular telephones in the second quarter of 1996 compared to the
same period in 1995. The sales and marketing costs attributable to the
cellular telephone systems acquired in the GTE Acquisition totaled $0.7
million for the three months ended June 30, 1996.
Customer service costs increased 51.3% to $2.1 million for the second
quarter of 1996 from $1.4 million for the second quarter of 1995, but remained
relatively flat as a percentage of revenue at 5.5% in the second quarter of
1996 and 1995. The customer service costs attributable to the cellular
telephone systems acquired in the GTE Acquisition totaled $0.4 million for the
three months ended June 30, 1996.
General and administrative expenditures increased 49.0% to $5.8 million
for the second quarter of 1996 from $3.9 million for the second quarter of
1995, due primarily to the increase in the number of subscribers and the GTE
Acquisition. General and administrative expenses remained relatively flat as
a percentage of total revenue at 15.0% in the second quarter of 1996 and 14.9%
for the second quarter of 1995. As the Company continues to add more
subscribers, and generates associated revenue, general and administrative
expenses should decrease as a percentage of total revenues. The general and
administrative costs attributable to the cellular telephone systems acquired
in the GTE Acquisition totaled $0.8 million for the three months ended June
30, 1996.
Depreciation and amortization increased 85.5% to $6.0 million for the
second quarter of 1996 from $3.2 million for the second quarter of 1995. This
increase was primarily due to the depreciation and amortization associated
with the GTE Acquisition and additional capital expenditures. Depreciation
and amortization attributable to the cellular telephone systems acquired in
the GTE Acquisition totaled $1.6 million for the three months ended June 30,
1996.
Operating income increased 63.7% to $11.3 million in the second quarter
of 1996, from $6.9 million for the second quarter of 1995. This improvement
in operating results is attributable primarily to increases in revenue which
exceeded increases in operating expenses. Operating income attributable to
the cellular telephone systems acquired in the GTE Acquisition totaled $1.3
million for the three months ended June 30, 1996.
NET INTEREST EXPENSE, INCOME TAXES AND NET INCOME. Net interest expense
increased 61.7% to $8.1 million for the second quarter of 1996 versus $5.0
million for the second quarter of 1995. This increase is due primarily to
debt incurred for the GTE Acquisition and the amortization of deferred
financing fees related to the Credit Facility (as defined in "Liquidity and
Capital Resources").
Income tax expense was $0.9 million in the second quarter of 1996 and
none in the second quarter of 1995.
I - 9
<PAGE> 12
Net income for the second quarter of 1996 was $1.7 million, or $0.07 per
share, compared to net income of $1.6 million, or $0.07 per share, for the
second quarter of 1995.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
REVENUE. Service revenues totaled $70.2 million for the six months ended
June 30, 1996, an increase of 58.8% over $44.2 million for the same period in
1995. This increase was primarily due to the 71.8% increase in the number of
subscribers to 243,887 as of June 30, 1996 versus 141,944 as of June 30, 1995.
The increase in subscribers is the result of internal growth, which the
Company attributes primarily to its strong sales and marketing efforts, and
the GTE Acquisition. The GTE Acquisition accounted for 36,693 subscribers at
June 30, 1996. Service revenue attributable to the cellular systems acquired
in the GTE Acquisition totaled $12.6 million for the six months ended June 30,
1996.
Average monthly revenue per subscriber decreased 10.5% to $52.16 for the
six months ended June 30, 1996 from $58.31 for the same period in 1995. This
is due to a common trend in the cellular telephone industry, where, on
average, new customers use less airtime than existing subscribers. Therefore,
service revenues generally do not increase proportionately with the increase
in subscribers. In addition, the Company entered into several revised roaming
agreements with some of its neighboring carriers. These agreements provide
for reciprocal lower roaming rates per minute of use. This resulted in lower
roaming revenue for the Company, but also resulted in offsetting lower direct
costs of services when the Company's subscribers were roaming on these
neighboring systems.
Equipment sales and installation revenue, which consists primarily of
cellular subscriber equipment sales, increased insignificantly to $4.2 million
in 1996 from $4.1 million in 1995. While equipment sales and installation
revenue remained flat, it decreased as a percentage of total cellular revenue
to 5.7% for 1996 from 8.5% for 1995, reflecting the increased recurring
revenue base as well as lower cellular equipment prices charged to customers.
Equipment sales and installation revenue attributable to the cellular
telephone systems acquired in the GTE Acquisition totaled $0.4 million for the
six months ended June 30, 1996.
OPERATING EXPENSES. Engineering and technical expenses increased by
64.9% to $6.3 million for the six months ended June 30, 1996 from $3.8 million
for the same period in 1995 due primarily to the 71.8% increase in the number
of subscribers. As a percentage of revenue, engineering and technical
expenses increased to 8.5% from 8.0% due to additional costs incurred for the
GTE Acquisition. The Company expects engineering and technical expenses to
decrease as a percentage of revenue due to its large component of fixed costs
except for unusual expenses incurred in cases of acquisitions. Engineering
and technical expenses attributable to the cellular telephone systems acquired
in the GTE Acquisition totaled $1.5 million for the six months ended June 30,
1996.
Other direct costs of services increased 29.5% to $6.1 million for the
six months ended June 30, 1996 from $4.7 million for the same period in 1995.
As a percentage of revenue, however, these costs of service declined to 8.2%
from 9.7%, reflecting improved roaming agreements with neighboring cellular
service providers, as well as efficiencies gained from the growing subscriber
base. Other direct costs of services attributable to the cellular telephone
systems acquired in the GTE Acquisition totaled $0.8 million for the six
months ended June 30, 1996.
The cost of equipment increased 25.9% to $8.4 million for the six months
ended June 30, 1996 from $6.7 million for the same period in 1995, due
primarily to the increase in gross subscriber activations for the same period.
The equipment sales margin decreased to (98.1%) for the six months ended June
30, 1996 from (62.9%) for the same period in 1995. In an effort to address
market
I - 10
<PAGE> 13
competition and maintain market share, the Company sold more telephones below
cost in the six months ended June 30, 1996 than in the same period of 1995.
The cost of equipment attributable to the cellular telephone systems acquired
in the GTE Acquisition totaled $1.3 million for the six months ended June 30,
1996.
Sales and marketing costs increased 43.3% to $6.3 million for the six
months ended June 30, 1996 from $4.4 million for the same period in 1995 due
primarily to the 40.8% increase in gross subscriber activations and the
resulting increase in commissions. As a percentage of total revenue, sales
and marketing costs decreased to 8.5% for the six months ended June 30, 1996
from 9.1% for the same period in 1995 due to a significant portion of sales
and marketing costs being fixed. The Company's cost to add a net subscriber
(including loss on telephone sales) increased to $375 for the six months ended
June 30, 1996 from $311 for the same period in 1995. This increase in cost to
add a net subscriber was caused primarily by additional advertising and fixed
marketing overhead associated with the systems acquired in the GTE
Acquisition, which are not yet generating the offsetting gains in net
subscribers. In addition, there were increased losses from the Company's
sales of cellular telephones. The sales and marketing costs attributable to
the cellular telephone systems acquired in the GTE Acquisition totaled $1.4
million for the six months ended June 30, 1996.
Customer service costs increased 46.2% to $4.2 million for the six months
ended June 30, 1996 from $2.9 million for the same period in 1995, but
decreased as a percentage of revenue to 5.7% from 6.0% for the same periods.
This decrease is due to a significant portion of customer service costs being
fixed. The customer service costs attributable to the cellular telephone
systems acquired in the GTE Acquisition totaled $1.0 million for the six
months ended June 30, 1996.
General and administrative expenditures increased 53.3% to $11.4 million
for the six months ended June 30, 1996 from $7.4 million for the same period
in 1995, due primarily to the increase in the costs associated with supporting
the increased subscriber base and the GTE Acquisition. General and
administrative expenses remained relatively flat as a percentage of revenue at
15.3% and 15.4% for the six months ended June 30, 1996 and 1995, respectively.
As the Company continues to add more subscribers, and generates associated
revenue, general and administrative expenses should decrease as a percentage
of total revenues. The general and administrative costs attributable to the
cellular telephone systems acquired in the GTE Acquisition totaled $1.8
million for the six months ended June 30, 1996.
Depreciation and amortization increased 80.2% to $11.9 million for the
six months ended June 30, 1996 from $6.6 million for the same period in 1995.
This increase was primarily due to the depreciation and amortization
associated with the GTE Acquisition and additional capital expenditures.
Depreciation and amortization attributable to the cellular telephone systems
acquired in the GTE Acquisition totaled $3.0 million for the six months ended
June 30, 1996.
Operating income increased 68.3% to $19.8 million in the six months ended
June 30, 1996 from $11.8 million for the same period in 1995. This
improvement in operating results is attributable primarily to increases in
revenue which exceeded increases in operating expenses. Operating income
attributable to the cellular telephone systems acquired in the GTE Acquisition
totaled $2.2 million for the six months ended June 30, 1996.
NET INTEREST EXPENSE, OTHER EXPENSE, INCOME TAXES AND NET INCOME (LOSS)
Net Interest expense increased 49.4% to $16.0 million for the six months ended
June 30, 1996 versus $10.7 million for the same period in 1995. This increase
is due primarily to debt incurred for the GTE Acquisition and the amortization
of deferred financing fees related to the Credit Facility (as defined in
"Liquidity and Capital Resources").
Other expense of $0.1 million and $0.3 million for the six months ended
June 30, 1996 and 1995, respectively, consists primarily of the disposal of
certain assets by the Company.
I - 11
<PAGE> 14
Income tax expense was $0.9 million in the six months ended June 30, 1996
and $2.7 million in the six months ended June 30, 1995. The $2.7 million is a
non-recurring deferred income tax charge related to the difference between the
financial statement and income tax return basis of certain assets and
liabilities of Palmer Cellular Partnership and its subsidiaries. In
connection with the initial public offering in March of 1995, all of the
assets and liabilities of Palmer Cellular Partnership and its subsidiaries
were exchanged for stock in the Company. Due to the exchange, a corporate tax
liability was recorded to reflect the difference between the financial
statement and income tax return basis in these assets and liabilities.
Net income for the six months ended June 30, 1996 was $1.8 million, or
$0.07 per share, compared to a net loss of $(2.3) million, or $(0.11) per
share, for the six months ended June 30, 1995. The increase in net income is
primarily attributable to increases in revenue which exceeded increases in
operating expenses and interest expense, and decreases in income tax expense
and other expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's long-term capital requirements consist of funds for capital
expenditures, acquisitions and debt service. Historically, the Company has
met its capital requirements primarily through equity contributions, bank and
intercompany debt, and, to a lesser extent, operating cash flow.
The Company currently has a $500.0 million revolving credit facility with
a syndicate of 22 banks ("Credit Facility"). The Credit Facility is a
revolving line of credit with scheduled commitment reductions commencing
September 30, 1998. Interest rates under the Credit Facility range from .25%
over prime or 1.5% over the London Inter Bank Offered Rate ("LIBOR") to 1.25%
over prime or 2.5% over LIBOR depending upon the Company's leverage ratio.
The Company has entered into five interest rate swap agreements and six
interest rate cap agreements for a total notional amount of $185.0 million.
Under these agreements, the maximum interest rate may range from 7.76% to
11.25%. As of June 30, 1996, the effective interest rate under these
agreements ranged from 7.39% to 10.23%.
The Credit Facility is secured by substantially all of the property and
assets of the Company and its subsidiaries. The subsidiaries of the Company
also guarantee all obligations of the Company under the Credit Facility.
As of June 30, 1996, $282.0 million was outstanding under the Credit
Facility and $218.0 million was available to be borrowed. The Company
believes that operating cash flow and borrowings available under the Credit
Facility will provide sufficient financial resources to satisfy the Company's
debt service requirements and to meet the Company's currently anticipated
capital and other expenditure requirements over at least the next two to three
years. However, there can be no assurance that the Company will not require
future financing or that, if so required, such financing will be available,
or, if available, that the terms thereof will be attractive to the Company.
Any acquisitions by the Company of ownership interests in cellular
telephone systems may be for cash, securities or a combination of cash and
securities. To the extent that the Company uses cash for all or a part of any
such acquisitions, it expects to raise such cash from borrowings under the
Credit Facility or, if feasible and attractive, issuance of Class A Common
Stock.
INFLATION
The Company believes that inflation affects its business no more than it
generally affects other similar businesses.
I - 12
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders
at the 1996 Annual Meeting of Stockholders held on April 18, 1996:
1. Election of two Class II Directors and three Class III
Directors to the Board of Directors of the Company. The
following votes were cast in the election of directors:
<TABLE>
<CAPTION>
WITHHOLD
FOR AUTHORITY
--- ---------
<S> <C> <C>
Class II Directors
------------------
William J. Ryan 17,957,072 0
Kermit Sutton 17,957,072 0
Class III Directors
-------------------
James S. Cownie 17,957,072 0
Clark R. Mandigo 17,957,072 0
Robert G. Engelhardt 17,957,072 0
</TABLE>
2. Proposed Employee Stock Purchase Plan described in the proxy
statement dated March 25, 1995. There were 17,938,351 votes cast
for approval of the plan, 16,857 votes cast against approval of
the plan, 0 votes withheld and 1,864 abstentions. There were no
broker non-votes recorded.
3. Proposed Non-Employee Director Stock Purchase Plan described in
the proxy statement dated March 25, 1995. There were 17,828,066
votes cast for approval of the plan, 127,147 votes cast against
approval of the plan, 0 votes withheld and 1,864 abstentions.
There were no broker non-votes recorded.
4. Proposed ratification of the appointment of KPMG Peat Marwick
LLP as the independent auditors of the Company for the fiscal
year ending December 31, 1996. There were 17,956,637 votes cast
for ratification, 100 votes cast against ratification, 0 votes
withheld and 335 abstentions. There were no broker non-votes
recorded.
II - 1
<PAGE> 16
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
On April 9, 1996, the Company filed a Current Report on Form 8-K which
reported that two of the Company's majority-owned subsidiaries had signed a
definitive agreement with Horizon Cellular Telephone Company of Spalding, L.P.
for the purchase of the cellular telephone system serving the Georgia-6 Rural
Service Area Market No. 376(A) for a total purchase price of $35 million,
subject to certain adjustments.
II - 2
<PAGE> 17
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.
PALMER WIRELESS, INC.
Date: August 13, 1996 By: /s/ William J. Ryan
----------------------------
William J. Ryan
President and
Chief Executive Officer
Date: August 13, 1996 By: /s/ M. Wayne Wisehart
----------------------------
M. Wayne Wisehart
Vice President, Treasurer
and Chief Financial Officer
II - 3
<PAGE> 18
INDEX TO EXHIBITS
Exhibit
Number Description Numbered Page
- ------ ----------- -------------
27 Financial Data Schedule .............
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,372
<SECURITIES> 0
<RECEIVABLES> 18,156
<ALLOWANCES> 0
<INVENTORY> 2,076
<CURRENT-ASSETS> 24,634
<PP&E> 118,746
<DEPRECIATION> 0
<TOTAL-ASSETS> 501,190
<CURRENT-LIABILITIES> 32,651
<BONDS> 282,000
0
0
<COMMON> 284
<OTHER-SE> 170,324
<TOTAL-LIABILITY-AND-EQUITY> 501,190
<SALES> 4,239
<TOTAL-REVENUES> 74,444
<CGS> 8,397
<TOTAL-COSTS> 20,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,005
<INCOME-PRETAX> 2,708
<INCOME-TAX> 948
<INCOME-CONTINUING> 1,760
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,760
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
