<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 September 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 November
14, 1996 was 27,813,259.
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<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 September 30, 1996............ I-1
Condensed Consolidated Statements of Operations - Three months ended September 30, 1995
and 1996 and nine months ended September 30, 1995 and 1996........................... I-2
Condensed Consolidated Statements of Stockholders' Equity.................................. I-3
Condensed Consolidated Statements of Cash Flows - Nine months ended
September 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...................................... 11-1
ITEM 5. Other Information........................................................................ II-1
ITEM 6. Exhibits and Reports on Form 8-K......................................................... II-1
SIGNATURES.......................................................................................... II-2
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
PALMER WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ --------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 3,436 $ 2,780
Trade accounts receivable, net of
allowance for doubtful accounts 17,347 18,258
Receivable from other cellular carriers 3,936 648
Deferred income taxes 821 980
Prepaid expenses and deposits 1,111 7,259
Inventory 2,434 3,064
---------- -----------
Total current assets 29,085 32,989
Net property, plant and equipment 100,936 124,375
Licenses, net of amortization 321,053 377,379
Other intangible assets, net of amortization 11,797 10,603
---------- -----------
$ 462,871 $ 545,346
========== ===========
Liabilities and Equity
----------------------
Current liabilities:
Notes payable $ - $ 2,964
Current installments of long-term debt 7,441 4,397
Accounts payable 10,795 7,319
Accrued expenses 8,833 8,961
Other liabilities 3,451 3,175
---------- -----------
Total current liabilities 30,520 26,816
Long-term debt, excluding current installments 343,000 328,000
Deferred income taxes 9,636 10,603
Minority interests 5,162 6,053
---------- -----------
Total liabilities 388,318 371,472
---------- -----------
Stockholders' equity 74,553 173,874
---------- -----------
$ 462,871 $ 545,346
========== ===========
</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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Service $ 24,206 $ 37,459 $ 68,416 $ 107,664
Equipment sales and installation 1,849 2,110 5,944 6,349
---------- ---------- ---------- ----------
Total revenue 26,055 39,569 74,360 114,013
---------- ---------- ---------- ----------
Operating expenses:
Engineering, technical and other
direct 4,293 5,558 12,822 17,961
Cost of equipment 2,949 3,874 9,617 12,271
Selling, general and administrative 7,027 11,865 21,784 33,842
Depreciation and amortization 3,634 6,295 10,220 18,167
---------- ---------- ---------- ----------
Total operating expenses 17,903 27,592 54,443 82,241
---------- ---------- ---------- ----------
Operating income 8,152 11,977 19,917 31,772
---------- ---------- ---------- ----------
Other income (expense):
Interest expense, net (4,820) (7,649) (15,532) (23,654)
Other expense, net (222) (183) (570) (242)
---------- ---------- ---------- ----------
Total other expense (5,042) (7,832) (16,102) (23,896)
---------- ---------- ---------- ----------
Income before minority interest
share of income and income taxes 3,110 4,145 3,815 7,876
Minority interest share of income (309) (539) (701) (1,562)
---------- ---------- ---------- ----------
Income before income taxes 2,801 3,606 3,114 6,314
Income taxes - (630) (2,650) (1,578)
---------- ---------- ---------- ----------
Net income $ 2,801 $ 2,976 $ 464 $ 4,736
========== ========== ========== ==========
Net income per share of common stock $ 0.12 $ 0.10 $ 0.02 $ 0.19
========== ========== ========== ==========
Average shares outstanding 23,536,531 28,580,278 21,896,502 25,492,054
========== ========== ========== ==========
</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
Employee and non-employee director
stock purchase plans 17,243 - - - 290 - 290
Net income - - - - - 4,736 4,736
----------- -------- ------------ ------- ----------- ----------- -------------
Balances at September 30, 1996 11,119,681 $ 111 17,293,578 $ 173 $ 167,001 $ 6,589 $ 173,874
=========== ======== ============ ======= =========== =========== =============
</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 NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
1995 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 464 $ 4,736
---------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,220 18,167
Minority interest share of income 701 1,562
Deferred income taxes 2,650 809
Loss on disposal of property 564 59
Interest deferred and added to long-term debt 431 355
Payment of deferred interest - (1,080)
Increase in trade accounts receivable (1,852) (337)
Decrease (increase) in inventory 4,436 (553)
Decrease in accounts payable and accrued expenses (3,835) (3,789)
Change in other accounts 1,803 1,991
---------- ---------
Total adjustments $ 15,118 $ 17,184
---------- ---------
Net cash provided by operating activities $ 15,582 $ 21,920
---------- ---------
Cash flows from investing activities:
Capital expenditures (22,093) (30,174)
Proceeds from sales of property and equipment 31 4
Purchase of cellular systems - (67,580)
Collection of purchase price adjustment - 2,452
Purchases of minority interests (783) (1,854)
Deposits for PCS auction - (5,132)
Increase in other intangible assets (1,851) (522)
---------- ---------
Net cash used in investing activities $ (24,696) $(102,806)
---------- ---------
Cash flows from financing activities:
Advances to Palmer Communications Incorporated, net (1,643) -
Increase in notes payable - 2,964
Repayment of long-term debt (65,075) (108,319)
Proceeds from long-term debt 8,000 91,000
Public offering proceeds, net 71,144 94,200
Employee and non-employee director stock purchase plans - 290
Exercise of stock options - 95
---------- ---------
Net cash provided by financing activities $ 12,426 $ 80,230
---------- ---------
Net increase (decrease) in cash and cash
equivalents $ 3,312 $ (656)
Cash and cash equivalents at the beginning of period 2,998 3,436
---------- ---------
Cash and cash equivalents at the end of period $ 6,310 $ 2,780
========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 13,936 $ 21,312
Taxes - 1,498
</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 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.
On August 22, 1996, the Company signed a definitive agreement to
purchase the assets of and license to operate the non-wireline cellular
telephone system serving the Georgia Rural Service Area Market No. 383,
Georgia-13 RSA for a total purchase price of $36,500, 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 September 30, 1996, the Company provided
cellular telephone service to 261,625 subscribers in Alabama, Florida, Georgia,
and South Carolina in a total of 17 licensed service areas, composed of nine
Metropolitan Service Areas ("MSAs") and eight Rural Service Areas ("RSAs") with
an aggregate estimated population of 3.8 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 September 30, 1996.
<TABLE>
<CAPTION>
December 31, September 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 84.9
Macon, Georgia.................................................. 98.4 99.1
Savannah, Georgia............................................... 97.9 98.5
Dothan, Alabama................................................. 92.1 92.3
Montgomery, Alabama............................................. 91.9 91.9
Georgia 1 - RSA................................................. N/A 100.0
Georgia 6 - RSA................................................. N/A 94.8
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 $35.0 million, subject to certain
adjustments.
On August 22, 1996, the Company signed a definitive agreement to
purchase the assets of and the license to operate the non-wireline cellular
telephone system serving Georgia Rural Service Area Market No. 383, Georgia-13
RSA for a total purchase price of $36.5 million, subject to certain
adjustments.
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 Nine Months Ended
September 30, September 30,
------------------- ---------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Service.................................... 92.9% 94.7% 92.0% 94.4%
Equipment sales and installation........... 7.1 5.3 8.0 5.6
---- ---- ---- ----
TOTAL REVENUE...................... 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Engineering, technical and other direct:
Engineering and technical (1)...... 7.4 7.9 7.7 8.3
Other direct costs of services (2). 9.1 6.1 9.5 7.5
Cost of equipment (3)...................... 11.3 9.8 12.9 10.8
Selling, general and administrative:
Sales and marketing (4)............ 7.6 7.8 8.6 8.2
Customer service (5)............... 5.8 6.3 6.0 5.9
General and administrative (6)..... 13.6 15.9 14.8 15.5
Depreciation and amortization.............. 13.9 15.9 13.7 15.9
---- ---- ---- ----
TOTAL OPERATING EXPENSES........... 68.7 69.7 73.2 72.1
Operating income........................... 31.3% 30.3% 26.8% 27.9%
Operating income before depreciation
and amortization (7).................. 45.2% 46.2% 40.5% 43.8%
</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.
I-7
<PAGE> 10
(7) Operating income before depreciation and amortization should not be
considered in isolation or as an alternative to net income, 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 performance in the cellular telephone industry.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
REVENUE. Service revenues totaled $37.5 million for the third quarter
of 1996, an increase of 54.8% over $24.2 million for the third quarter of 1995.
This increase was primarily due to a 71.0% increase in the number of
subscribers to 261,625 as of September 30, 1996 versus 152,957 as of September
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
recent acquisitions. The GTE Acquisition accounted for 38,628 subscribers at
September 30, 1996. Service revenue attributable to the cellular systems
acquired in the GTE Acquisition totaled $5.9 million for the three months ended
September 30, 1996.
Average monthly revenue per subscriber decreased 10.3% to $49.70 for
the third quarter of 1996 from $55.39 for the third 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 revised roaming agreements
with certain 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 $2.1 million for the
third quarter of 1996 and $1.9 million for the third quarter of 1995. While
equipment sales and installation revenue remained flat for the third quarter of
1996 and 1995, it decreased as a percentage of total revenue to 5.3% for 1996
from 7.1% 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 $0.3 million for the three months ended September
30, 1996.
OPERATING EXPENSES. Engineering and technical expenses increased by
62.4% to $3.1 million for the third quarter of 1996 from $1.9 million in the
third quarter of 1995, due primarily to the increase in subscribers and the
recent acquisitions. As a percentage of revenue, engineering and technical
expenses increased to 7.9% from 7.4% for the third quarter of 1996 and 1995,
respectively, due to recurring costs associated with the Company's system
development and expansion. Such development is done for the purpose of
increasing capacity and improving coverage. Engineering and technical expenses
attributable to the cellular telephone systems acquired in the GTE Acquisition
totaled $0.6 million for the three months ended September 30, 1996.
Other direct costs of services remained flat at $2.4 million for the
third quarter of 1996 and 1995. As a percentage of revenue, however, these
costs of service declined to 6.1% from 9.1%, 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 September 30, 1996.
The cost of equipment increased 31.4% to $3.9 million for the third
quarter of 1996 from $2.9 million for the third quarter of 1995, due primarily
to the increase in gross subscriber activations for the same period. The
equipment sales margin decreased to (83.6%) for the third quarter of 1996 from
(59.5%) for the third quarter of 1995. In an effort to address market
competition and improve market
I-8
<PAGE> 11
share, the Company sold more telephones below cost in the third 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 September 30, 1996.
Sales and marketing costs increased 56.9% to $3.1 million for the third
quarter of 1996 from $2.0 million for the same period in 1995. This increase
is primarily due to the 43.9% increase in gross subscriber activations and the
resulting increase in commissions. As a percentage of total revenue, sales and
marketing costs remained relatively flat at 7.8% and 7.6% for the third quarter
of 1996 and 1995, respectively. The Company's cost to add a net subscriber,
including loss on telephone sales, increased to $416 for the third quarter of
1996 from $309 for the third 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 third 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 $0.6 million for the three months ended
September 30, 1996.
Customer service costs increased 66.6% to $2.5 million for the third
quarter of 1996 from $1.5 million for the third quarter of 1995. As a
percentage of revenue, customer service costs increased to 6.3% from 5.8% for
the third quarter of 1996 and 1995, respectively. The increase was due to the
telemarketing program instituted for customer retention and to market
additional cellular features, and to higher billing production costs. The
customer service costs attributable to the cellular telephone systems acquired
in the GTE Acquisition totaled $0.5 million for the three months ended
September 30, 1996.
General and administrative expenditures increased 76.4% to $6.3 million
for the third quarter of 1996 from $3.6 million for the third quarter of 1995,
due primarily to the increase in the costs associated with supporting the
increased subscriber base and the recent acquisitions. General and
administrative expenses increased as a percentage of revenue to 15.9% in the
third quarter of 1996 from 13.6% in the third quarter of 1995. The increase
was due primarily to overhead associated with recent acquisitions. 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 $1.0 million for the
three months ended September 30, 1996.
Depreciation and amortization increased 73.2% to $6.3 million for the
third quarter of 1996 from $3.6 million for the third quarter of 1995. This
increase was primarily due to the depreciation and amortization associated with
the recent acquisitions and additional capital expenditures. Depreciation and
amortization attributable to the cellular telephone systems acquired in the GTE
Acquisition totaled $1.5 million for the three months ended September 30, 1996.
Operating income increased 46.9% to $12.0 million in the third quarter
of 1996, from $8.2 million for the third 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 $0.9 million
for the three months ended September 30, 1996.
NET INTEREST EXPENSE, INCOME TAXES AND NET INCOME. Net interest
expense increased 58.7% to $7.6 million for the third quarter of 1996 versus
$4.8 million for the third quarter of 1995. This increase is due primarily to
debt incurred for the recent acquisitions and the amortization of deferred
financing fees related to the Credit Facility (as defined in "Liquidity and
Capital Resources").
Income tax expense was $0.6 million in the third quarter of 1996 and
none in the third quarter of 1995.
I-9
<PAGE> 12
Net income for the third quarter of 1996 was $3.0 million, or $0.10 per
share, compared to net income of $2.8 million, or $0.12 per share, for the
third quarter of 1995. The decrease in net income per share is primarily
attributable to the increase in the number of shares outstanding as a result of
the Company's issuance of an additional 5,000,000 shares of Class A Common
Stock in June of 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
REVENUE. Service revenues totaled $107.7 million for the nine months
ended September 30, 1996, an increase of 57.4% over $68.4 million for the same
period in 1995. This increase was primarily due to the 71.0% increase in the
number of subscribers to 261,625 as of September 30, 1996 versus 152,957 as of
September 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 recent acquisitions. The GTE Acquisition accounted for
38,628 subscribers at September 30, 1996. Service revenue attributable to the
cellular systems acquired in the GTE Acquisition totaled $18.5 million for the
nine months ended September 30, 1996.
Average monthly revenue per subscriber decreased 10.4% to $51.28 for
the nine months ended September 30, 1996 from $57.24 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 revised roaming
agreements with certain 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 6.8% to $6.3 million in 1996
from $5.9 million in 1995 due primarily to the increase in gross subscriber
activations. Equipment sales and installation revenue decreased as a
percentage of total revenue to 5.6% for 1996 from 8.0% 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 $0.7
million for the nine months ended September 30, 1996.
OPERATING EXPENSES. Engineering and technical expenses increased by
64.0% to $9.5 million for the nine months ended September 30, 1996 from $5.8
million for the same period in 1995 due primarily to the 71.0% increase in the
number of subscribers. As a percentage of revenue, engineering and technical
expenses increased to 8.3% from 7.7% due to additional costs incurred for the
recent acquisitions and recurring costs associated with the Company's system
development and expansion. Such development is done for the purpose of
increasing capacity and improving coverage. Engineering and technical expenses
attributable to the cellular telephone systems acquired in the GTE Acquisition
totaled $2.1 million for the nine months ended September 30, 1996.
Other direct costs of services increased 20.5% to $8.5 million for the
nine months ended September 30, 1996 from $7.0 million for the same period in
1995. As a percentage of revenue, however, these costs of service declined to
7.5% from 9.5%, 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 $1.0 million for the
nine months ended September 30, 1996.
The cost of equipment increased 27.6% to $12.3 million for the nine
months ended September 30, 1996 from $9.6 million for the same period in 1995,
due primarily to the increase in gross subscriber
I-10
<PAGE> 13
activations for the same period. The equipment sales margin decreased to
(93.3%) for the nine months ended September 30, 1996 from (61.8%) for the same
period in 1995. In an effort to address market competition and maintain market
share, the Company sold more telephones below cost in the nine months ended
September 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 $2.2 million for the nine months ended September 30, 1996.
Sales and marketing costs increased 47.6% to $9.4 million for the nine
months ended September 30, 1996 from $6.4 million for the same period in 1995
due primarily to the 41.8% increase in gross subscriber activations and the
resulting increase in commissions. As a percentage of total revenue, sales and
marketing costs decreased to 8.2% for the nine months ended September 30, 1996
from 8.6% 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 $387 for the nine months ended
September 30, 1996 from $310 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 $2.0 million
for the nine months ended September 30, 1996.
Customer service costs increased 53.1% to $6.8 million for the nine
months ended September 30, 1996 from $4.4 million for the same period in 1995.
As a percentage of revenue, customer service costs remained relatively flat at
5.9% and 6.0% for the nine months ended September 30, 1996 and 1995
respectively. The customer service costs attributable to the cellular
telephone systems acquired in the GTE Acquisition totaled $1.4 million for the
nine months ended September 30, 1996.
General and administrative expenditures increased 60.8% to $17.6
million for the nine months ended September 30, 1996 from $11.0 million for the
same period in 1995, due primarily to the increase in the costs associated with
supporting the increased subscriber base and the recent acquisitions. As a
percentage of revenue, general and administrative expenses increased to 15.5%
for the nine months ended September 30, 1996 from 14.8% for the same period in
1995. The increase was due primarily to overhead associated with recent
acquisitions. 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 $2.8 million for the nine months ended September 30, 1996.
Depreciation and amortization increased 77.8% to $18.1 million for the
nine months ended September 30, 1996 from $10.2 million for the same period in
1995. This increase was primarily due to the depreciation and amortization
associated with the recent acquisitions and additional capital expenditures.
Depreciation and amortization attributable to the cellular telephone systems
acquired in the GTE Acquisition totaled $4.5 million for the nine months ended
September 30, 1996.
Operating income increased 59.5% to $31.8 million in the nine months
ended September 30, 1996 from $19.9 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 $3.2 million for the nine months ended September 30, 1996.
NET INTEREST EXPENSE, OTHER EXPENSE, INCOME TAXES AND NET INCOME Net
interest expense increased 52.3% to $23.7 million for the nine months ended
September 30, 1996 versus $15.5 million for the same period in 1995. This
increase is due primarily to debt incurred for the recent acquisitions and the
amortization of deferred financing fees related to the Credit Facility (as
defined in "Liquidity and Capital Resources").
I-11
<PAGE> 14
Other expense of $0.2 million and $0.6 million for the nine months
ended September 30, 1996 and 1995, respectively, consists primarily of the
disposal of certain assets by the Company and other non-operating expenses.
Income tax expense was $1.6 million in the nine months ended September
30, 1996 and $2.7 million in the nine months ended September 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 nine months ended September 30, 1996 was $4.7
million, or $0.19 per share, compared to net income of $0.5 million, or $0.02
per share, for the nine months ended September 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 eight interest rate swap agreements and four interest
rate cap agreements for a total notional amount of $245.0 million. Under these
agreements, the maximum interest rate may range from 7.76% to 11.25%. As of
September 30, 1996, the effective interest rate under these agreements ranged
from 7.14% to 9.98%.
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 September 30, 1996, $328.0 million was outstanding under the
Credit Facility and $172.0 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.
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.
I-12
<PAGE> 15
On October 10, 1996, the Company's Board of Directors authorized a
stock repurchase plan for up to 600,000 shares of the Company's Class A Common
Stock over the next twelve months.
INFLATION
The Company believes that inflation affects its business no more than
it generally affects other similar businesses.
I-13
<PAGE> 16
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
None.
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 September 4, 1996, the Company filed a Form 8-K Current Report which
reported that, on August 22, 1996, the Company announced that its wholly-owned
subsidiary, Palmer Wireless Holdings, Inc. ("Holdings"), had signed a
definitive agreement with Mobile Communications Systems, L.P. pursuant to which
Holdings agreed to purchase the cellular system serving the Georgia Rural
Service Area Market No. 383, Georgia-13 RSA for a total purchase price of $36.5
million, subject to certain downward adjustments of up to $1.0 million.
II-1
<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: November 14, 1996 By: /s/ William J. Ryan
-----------------------------
William J. Ryan
President and
Chief Executive Officer
Date: November 14, 1996 By: /s/ M. Wayne Wisehart
-----------------------------
M. Wayne Wisehart
Vice President, Treasurer
and Chief Financial Officer
II-2
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,780
<SECURITIES> 0
<RECEIVABLES> 18,258
<ALLOWANCES> 0
<INVENTORY> 3,064
<CURRENT-ASSETS> 32,989
<PP&E> 124,375
<DEPRECIATION> 0
<TOTAL-ASSETS> 545,346
<CURRENT-LIABILITIES> 26,816
<BONDS> 328,000
0
0
<COMMON> 284
<OTHER-SE> 173,590
<TOTAL-LIABILITY-AND-EQUITY> 545,346
<SALES> 6,349
<TOTAL-REVENUES> 114,013
<CGS> 12,271
<TOTAL-COSTS> 30,232
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,654
<INCOME-PRETAX> 6,314
<INCOME-TAX> 1,578
<INCOME-CONTINUING> 4,736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,736
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
