<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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<S> <C>
For the year ended December 31, 1996 Commission file number 0-25588
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PALMER WIRELESS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 65-0456627
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12800 UNIVERSITY DRIVE 33907
FORT MYERS, FLORIDA (Zip Code)
(Address of principal executive offices)
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(941) 433-4350
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK THE NASDAQ STOCK MARKET
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
(Not applicable)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Based upon the closing price of the registrant's common stock as of March 27,
1997 the aggregate market value of the common stock held by non-affiliates of
the registrant is $74,790,506 million.*
The number of shares of Class A Common Stock outstanding as of March 27, 1997
was 10,519,681. The number of shares of Class B Common Stock outstanding as of
March 27, 1997 was 17,293,578.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1996 are incorporated by reference into Part II hereof. Portions
of the registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders
are incorporated by reference into Part III hereof.
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* Solely for purposes of this calculation, all executive officers and
directors of the registrant and all shareholders reporting beneficial
ownership of more than 5% of the registrant's common stock are considered to
be affiliates.
<PAGE> 2
PART I
ITEM 1. BUSINESS GENERAL
Palmer Wireless, Inc. (the "Company") is engaged in the construction,
development, management and operation of cellular telephone systems in the
southeastern United States. (References to the Company also include its
subsidiaries and its predecessor, the Partnership (defined below) and its
subsidiaries, or any of them.) At December 31, 1996, the Company provided
cellular telephone service to 279,816 subscribers in Florida, Georgia, Alabama
and South Carolina in a total of 17 licensed service areas composed of nine
Metropolitan Statistical 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 a full line of cellular products and
accessories principally through its network of retail stores. The Company
markets all of its products and services under the nationally-recognized
service mark CELLULAR ONE.
The Company has developed its business through the acquisition and
integration of cellular telephone systems, clustering multiple systems in three
market areas in order to provide broad areas of uninterrupted service and
achieve certain economies of scale, including centralized marketing and
administrative functions as well as multi-system capital expenditures. The
Company devotes considerable attention to engineering, maintenance and
improvement of its cellular telephone systems in an effort to deliver
high-quality service to its subscribers and to implement new technologies as
soon as economically practicable. Through its participation in the North
American Cellular Network ("NACN"), the Company is able to offer seven-digit
dialing access to its subscribers when they travel outside the Company's
service areas, providing them with convenient roaming access throughout large
areas of the United States, Canada, Mexico and Puerto Rico served by other NACN
participants. By marketing its products and services under the CELLULAR ONE
name, the Company also enjoys the benefits of association with a nationally
recognized service mark.
BACKGROUND
The Company's business was started by the Palmer family, which has
been in the broadcast business in Iowa since 1922. Palmer Communications
Incorporated ("PCI"), the Company's parent, owned NBC affiliate television
stations in Des Moines, Iowa and Oklahoma City, Oklahoma, together with radio
stations located in Des Moines, Iowa, Cedar Rapids, Iowa and Naples, Florida.
In 1996 and 1997, PCI sold these broadcast operations. PCI currently conducts
certain specialized mobile radio ("SMR") operations in Florida and Alabama.
PCI was also active in the cable television industry for over 25 years,
substantially exiting the industry in 1992.
PCI entered the cellular telephone business in 1987, when it
constructed a cellular telephone system for the Fort Myers, Florida MSA. PCI
acquired control of this system in March 1988 and rapidly expanded its cellular
telephone holdings, acquiring control of the non-wireline cellular licenses for
the Columbus and Albany, Georgia and Dothan and Montgomery, Alabama MSAs in
1988. These acquisitions created the nucleus for the development of a regional
cellular telephone company serving central and southern Georgia and Alabama.
During 1989, PCI transferred its cellular properties to Palmer Cellular
Partnership (the "Partnership"), a newly organized general partnership that was
formed to manage and operate all of PCI's cellular telephone operations. PCI
was the managing partner of the Partnership. The Partnership continued the
growth strategy of PCI and enhanced the Company's regional cellular cluster in
1989 by acquiring control of the cellular license for the Macon, Georgia MSA.
In 1991, the Company acquired control of the non-wireline cellular
license for the Panama City, Florida MSA. In 1992 and 1993, the Company
acquired two non-wireline cellular licenses for RSAs contiguous to the
Company's MSAs in Georgia and Alabama: the Georgia-9 RSA in June 1992
<PAGE> 3
and the Alabama-8 RSA in April 1993. The Georgia-9 RSA acquisition added the
geographic territory between the Columbus, Macon and Albany, Georgia MSAs to
the Company's service area coverage. The Alabama-8 RSA expanded the Company's
service areas around three MSAs served by the Company, covering a substantial
portion of the geographic territory between the Montgomery, Alabama, Columbus,
Georgia and Dothan, Alabama MSAs and the Georgia-9 RSA. In 1993, the Company
also increased its majority position in its MSAs in Albany, Georgia and in
Dothan and Montgomery, Alabama, through the purchase of certain minority
interests for an aggregate purchase price of $2.9 million.
During 1994, the Company continued to acquire minority interests in
six of its MSAs for an aggregate purchase price of $3.1 million. Also, on
October 31, 1994, the Company acquired the cellular telephone systems of
Southeast Georgia Cellular Limited Partnership ("SGC") and Georgia 12 Cellular
Limited Partnership ("Georgia 12" and together with SGC, the "Georgia
Partnerships") for an aggregate purchase price of $91.7 million (the "Georgia
Acquisition"). The assets acquired by the Company from SGC included the
non-wireline cellular telephone systems located in Georgia RSA Market Nos. 377,
378 and 380, otherwise known as Georgia-7 RSA, Georgia-8 RSA and Georgia-10
RSA. The assets acquired by the Company from Georgia 12 included the
non-wireline cellular telephone system located in Georgia RSA Market No. 382,
otherwise known as Georgia-12 RSA. The cellular telephone systems in the
acquired RSAs serve a geographic territory in southeast Georgia that is
adjacent to the Company's Georgia-9 RSA and Macon, Georgia MSA.
In December 1995, the Company acquired interests in cellular telephone
systems by purchasing Georgia Metronet, Inc. ("GMI") and Augusta Metronet, Inc.
("AMI" and together with GMI, the "GTE Companies") for an aggregate purchase
price of $158.4 million (the "GTE Acquisition"). The assets acquired by the
Company in the GTE Acquisition included the non-wireline cellular telephone
system located in Georgia MSA Market Nos. 155 and 108, otherwise known as
Savannah MSA and Augusta MSA, respectively. 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 RSA and Georgia-12 RSA. In addition, the Company also acquired
the 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 the Georgia-8 RSA as well
as the Savannah, Georgia MSA and the Augusta, Georgia MSA. In addition, during
1995, the Company acquired additional minority interests in six of its MSAs for
an aggregate purchase price of $2.0 million.
On June 20, 1996, the Company acquired the cellular telephone system
of USCOC of Georgia RSA #1, Inc. ("USCOC") for an aggregate purchase price of
$31.6 million. The assets acquired by the Company from USCOC included the
cellular telephone system in the Georgia-1 RSA Market No. 371, otherwise known
as Georgia-1 RSA. The cellular telephone system in the acquired RSA serves a
geographic territory of northwest Georgia between Chattanooga and Atlanta.
On July 5, 1996, two of the Company's majority-owned subsidiaries
acquired the cellular telephone system of Horizon Cellular Telephone Company of
Spalding, L.P. ("Horizon") for an aggregate purchase price of $36.0 million.
The assets acquired by the Company from Horizon include the cellular telephone
system in the Georgia-6 RSA Market No. 376, otherwise known as Georgia-6 RSA.
The cellular telephone system in the acquired RSA serves a geographic territory
of west central Georgia adjacent to the Company's Macon and Columbus, Georgia
MSAs.
Prior to March 1995, the Company's operations were conducted by the
Partnership. Contemporaneously with the Company's initial public offering
("IPO") in March 1995, the Partnership's operations, assets and liabilities and
certain other assets were transferred to the Company. Prior to that transfer,
the Company had no operations and had no material assets or liabilities other
than $1.6 million in connection with deferred expenses incurred before the IPO.
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RECENT DEVELOPMENTS
On February 1, 1997, a majority-owned subsidiary of the Company
acquired the cellular telephone system serving the Georgia-13 RSA Market No.
383 ("Georgia-13 RSA") from Mobile Communications Systems L.P. for a total
purchase price of $30.0 million, subject to certain adjustments. The cellular
telephone system in the acquired RSA serves a geographic territory of southwest
Georgia adjacent to the Company's Albany, Georgia and Dothan, Alabama MSAs.
MARKETS AND SYSTEMS
The Company's cellular telephone systems serve three distinct markets.
The largest of these markets includes 15 contiguous licensed service areas in
Georgia, Alabama and South Carolina. The Company also has cellular service
areas in Fort Myers, Florida and Panama City, Florida. The following table
sets forth as of December 31, 1996, with respect to each service area in which
the Company owns a cellular telephone system, the estimated population, the
Company's beneficial ownership percentage, the Net Pops (as defined below) and
the date of initial operation of such system by the Company or a predecessor
operator. Any reference to "Net Pops" is to the estimated population with
respect to a given cellular service area multiplied by the percentage interest
that the Company owns in the entity licensed in such cellular service area.
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ESTIMATED OWNERSHIP DATE SYSTEM
SERVICE AREA(1) POPULATION(2) PERCENTAGE NET POPS OPERATIONAL
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<S> <C> <C> <C> <C>
Georgia/Alabama
Albany, GA . . . . . . . . . . . 118,156 82.7% 97,726 4/88
Augusta, GA . . . . . . . . . . . 438,857 100.0 438,857 4/87
Columbus, GA . . . . . . . . . . . 251,568 84.9 213,480 11/88
Macon, GA . . . . . . . . . . . 313,240 99.1 310,277 12/88
Savannah, GA . . . . . . . . . . . 283,465 98.5 279,172 3/88
Georgia-1 RSA . . . . . . . . . . . 223,935 100.0 223,935 10/92
Georgia-6 RSA . . . . . . . . . . . 199,675 94.8 189,369 4/93
Georgia-7 RSA . . . . . . . . . . . 134,325 100.0 134,325 10/91
Georgia-8 RSA . . . . . . . . . . . 157,272 100.0 157,272 10/91
Georgia-9 RSA . . . . . . . . . . . 119,253 100.0 119,253 9/92
Georgia-10 RSA . . . . . . . . . . 149,712 100.0 149,712 10/91
Georgia-12 RSA . . . . . . . . . . 209,668 100.0 209,668 10/91
Dothan, AL . . . . . . . . . . . 134,771 92.3 124,434 2/89
Montgomery, AL . . . . . . . . . . 319,305 91.9 293,421 8/88
Alabama-8 RSA . . . . . . . . . . . 173,167 100.0 173,167 7/93
--------- ---------
Subtotal . . . . . . . . . 3,226,369 3,114,068
Fort Myers, FL . . . . . . . . . . . 382,962 99.0 379,132 8/87
Panama City, FL . . . . . . . . . . . 145,711 77.9 113,525 9/88
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Total . . . . . . . . 3,755,042 3,606,725
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(1) Does not include South Carolina-7 RSA and South Carolina-8 RSA where the
Company has interim operating authority as a result of the GTE
Acquisition. The Company has no subscribers in South Carolina-7 RSA and
South Carolina-8 RSA, but instead provides roaming access to its own
subscribers and others when they travel in these two service areas,
utilizing its existing cell sites. Does not include Alabama-5 RSA where
the Company has interim operating authority.
(2) Based on population estimates for 1996 from The Sourcebook of County
Demographics, Ninth Edition, 1996, published by CACI Marketing Services
(the "CACI Sourcebook"), which estimates are calculated based on the 1990
Census and U.S. Bureau of Census Current Population Reports.
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<PAGE> 5
GEORGIA/ALABAMA
In 1988, the Company acquired controlling interests in the licenses to
operate cellular telephone systems in the four MSAs (Montgomery and Dothan,
Alabama and Columbus and Albany, Georgia) that make up the core of its
Georgia/Alabama cluster. The Company continued to increase its presence in
this market by acquiring additional cellular service areas in 1989 (Macon,
Georgia MSA), 1992 (Georgia-9 RSA), 1993 (Alabama-8 RSA), 1994 (Georgia-7 RSA,
Georgia-8 RSA, Georgia-10 RSA and Georgia-12 RSA), 1995 (Savannah, Georgia MSA
and Augusta, Georgia MSA) and 1996 (Georgia-1 RSA and Georgia-6 RSA). The
Augusta, Georgia MSA includes Aiken County in South Carolina. In 1994, the
Company also received interim operating authority from the FCC to provide
service in two counties within the southern portion of the Alabama-5 RSA. In
1995, as a result of the GTE Acquisition, the Company received interim
operating authority from the FCC to provide service to South Carolina-7 RSA and
South Carolina-8 RSA. In the aggregate, this market (excluding the Alabama-5
RSA, South Carolina-7 RSA and South Carolina-8 RSA where the Company has only
interim operating authority) now covers a contiguous service area of
approximately 38,000 square miles that includes Montgomery, the state capital
of Alabama, prominent resort destinations in Jekyll Island, St. Simons Island
and Sea Island, Georgia, and over 710 miles of interstate highway, including
most of I-95 from Savannah, Georgia to Jacksonville, Florida. The Company
collects substantial roaming revenue from cellular telephone subscribers from
other systems traveling in this market from nearby population centers such as
Atlanta and Birmingham, as well as from vacation and business traffic in the
southeastern United States. Due in part to the favorable labor environment,
moderate weather and relatively low cost of land, during the last several years
there has been an influx of new manufacturing plants in this market. As of
December 31, 1996, the Company utilized 181 cell sites in this cluster
(including three cell sites in Alabama-5 RSA), 23 of which were constructed by
the Company in 1995 and 43 of which were placed in service in 1996. The
Company plans to further improve signal coverage and increase system capacity
in this cluster by adding 63 more cell sites in 1997 in addition to the 8 cell
sites acquired with Georgia-13 RSA..
FORT MYERS
The Company acquired control of the non-wireline cellular telephone
system for the Fort Myers, Florida market in 1988. The Fort Myers market is a
significant resort center, attracting both vacation and business travelers on a
year-round basis. This market also benefits from the growth and popularity of
other cities in southwest Florida, such as Naples and Sarasota. In addition,
the Fort Myers airport is a designated international port of entry. The
Company collects substantial roaming revenue in this market from subscribers
from other systems who visit Fort Myers. As of December 31, 1996, the Company
utilized 23 cell sites in this market, three of which were added in 1995, and
five of which were added in 1996. The Company plans to further improve signal
coverage and increase capacity in this market by adding five more cell sites in
1997.
PANAMA CITY
The Company acquired control of the non-wireline cellular license for
the Panama City, Florida market in 1991. The Company collects substantial
roaming revenue in this market from subscribers from other systems who visit
Panama City, a popular spring and summer vacation destination. As of December
31, 1996, the Company utilized 11 cell sites in this market. In 1997, the
Company plans to add two additional cell sites in this market.
OPERATIONS
GENERAL
The Company has concentrated its efforts on creating an integrated
network of cellular telephone systems in the southeastern United States,
principally to date in Florida, Georgia, Alabama and South Carolina. At
December 31, 1996, the Company provided cellular telephone service
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<PAGE> 6
to 279,816 subscribers in a total of 17 licensed service areas composed of nine
MSAs and eight RSAs. The Company also participates in the NACN, a nationwide
consortium of non-wireline cellular telephone companies, with the goal of
providing seamless regional and national cellular telephone service to its
subscribers. Participation in the NACN allows seven-digit dialing access to
the Company's subscribers when they travel outside the Company's service areas,
providing them with convenient call delivery throughout large areas of the
United States, Canada, Mexico and Puerto Rico served by other NACN
participants.
The following table sets forth information, at the dates indicated,
regarding the Company's subscribers, penetration rate, cost to add a net
subscriber, average monthly churn rate and average monthly service revenue per
subscriber.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
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<S> <C> <C> <C> <C> <C>
Subscribers(1) . . . . . . . . . . . . . . . . . 37,209 65,761 117,224 211,985 279,816
Penetration(2) . . . . . . . . . . . . . . . . . 2.20% 3.48% 4.58% 6.41% 7.45%
Cost to add a net subscriber(3) . . . . . . . . . $ 283 $ 203 $ 247 $ 276 $ 407
Average monthly churn RATE(4) . . . . . . . . . . 1.69% 1.37% 1.55% 1.55% 1.84%
Average monthly service
revenue per subscriber(5) . . . . . . . . . . $ 68.30 $ 62.69 $ 60.02 $ 56.68 $ 52.20
</TABLE>
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(1) Each billable telephone number in service represents one subscriber, not
including test, demonstration or other telephone numbers for which payment
is not expected. Amounts at December 31, 1992 and 1993 include the
subscribers in the Alabama-7 RSA where the Company had interim operating
authority from June 1991 through July 1994. The number of subscribers
served in the Alabama-7 RSA was 955 and 2,576 at December 31, 1992 and
1993, respectively. In 1994, the Company entered into an agreement to
sell the accounts of its subscribers in the Alabama-7 RSA to the third
party licensee of this RSA.
(2) Determined by dividing the aggregate number of subscribers by the
estimated population.
(3) Determined for the 12-month periods ended December 31, 1992, 1993, 1994,
1995 and 1996 by dividing (i) the amount of all costs of sales and
marketing, including salaries, commissions and employee benefits paid to
all sales and marketing personnel, travel and accommodations, meals and
entertainment expenses incurred by sales and marketing personnel, training
and education of such personnel, all advertising and promotional expenses
(including cash or trade), agent commissions, credit reference expenses,
losses on cellular telephone sales, rental expenses allocated to retail
operations, net installation expenses and other miscellaneous sales and
marketing charges for such period including fees paid for use of the
CELLULAR ONE service mark, by (ii) the net subscribers added during such
period. Cost to add a net subscriber does not include engineering and
technical expenses, interconnect charges or general and administrative
expenses.
(4) Determined for the 12-month periods ended December 31, 1992, 1993, 1994,
1995 and 1996 by dividing total subscribers discontinuing service during
such period by the average subscribers for such period (beginning
subscribers plus ending subscribers, divided by two), and dividing that
result by 12.
(5) Determined for the 12-month periods ended December 31, 1992, 1993, 1994,
1995 and 1996 by dividing the sum of the access, airtime, roaming, long
distance, features, connection, disconnection and other revenues for such
period by average subscribers for such period (the sum of the number of
subscribers at the beginning of each month in such period divided by the
number of months in such period), and dividing that result by 12.
SUBSCRIBERS AND SYSTEM USAGE
The Company's subscribers have increased from 22,536 at January 1,
1992 to 279,816 at December 31, 1996. Reductions in the cost of cellular
telephone services and equipment at the retail
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<PAGE> 7
level have led to an increase in cellular telephone usage by general consumers
for non-business purposes. As a result, the Company believes that there is an
opportunity for significant growth in each of its existing service areas. The
Company will continue to broaden its subscriber base for basic cellular
telephone services as well as to increase its offering of customized services.
The sale of custom calling features typically results in increased usage of
cellular telephones by subscribers, thereby further enhancing revenues. In
1996, cellular telephone service revenues represented 94.6% of the Company's
total revenues, with equipment sales and installation representing the balance.
MARKETING
The Company's marketing strategy is designed to generate continued net
subscriber growth by focusing on subscribers who are likely to generate lower
than average deactivations and delinquent accounts, while simultaneously
maintaining a low cost of adding net subscribers. Management has implemented
its marketing strategy by training and compensating its sales force in a manner
designed to stress the importance of high penetration levels and minimum costs
per net subscriber addition. The Company's sales staff has a two-tier
structure. A retail sales force handles walk-in traffic, and a targeted sales
staff solicits certain industries and government subscribers. The Company's
management believes that its internal sales force is more likely to select and
screen new subscribers and select pricing plans that realistically match
subscriber means and needs than are independent agents. In addition, the
Company motivates its direct sales force to sell appropriate rate plans to
subscribers, thereby reducing churn, by linking payment of commissions to
subscriber retention. The Company believes its use of an internal sales force
keeps marketing costs low, both because commissions are lower and because
subscriber retention is higher than if it used independent agents. For the
year ended December 31, 1996, the Company's cost to add a net subscriber was
$407. The Company believes its cost to add a net subscriber continues to be
among the lowest in the cellular telephone industry, principally because of its
in-house direct sales and marketing staff.
The Company also maintains its low churn rate through an after-sale
telemarketing program implemented through its sales force and a telemarketing
service specializing in cellular customer services. This program not only
enhances customer loyalty, which reduces churn, but also increases add-on sales
and customer referrals. The telemarketing program allows the sales staff to
check customer satisfaction as well as to offer additional calling features,
such as voicemail, call waiting and call forwarding.
The Company's sales force works principally out of retail stores in
which the Company offers its cellular products and services. As of December
31, 1996, the Company maintained 33 retail stores and 4 offices, 32 serving the
Georgia/Alabama service areas, four in Fort Myers, Florida and one in Panama
City, Florida. Retail stores, which range in size up to 11,000 square feet are
fully equipped to handle customer service and the sale of cellular services,
telephones and accessories. Ten of the newer and larger stores are promoted by
the Company as "Superstores", eight of which are located in the Company's
Georgia/Alabama service areas, one of which is located in the Fort Myers,
Florida service area, and one in the Panama City, Florida service area. Each
Superstore has an authorized warranty repair center and provides cellular
telephone installation and maintenance services. Most of the Company's larger
markets currently have at least one Superstore. In addition, to enhance
convenience for its customers, the Company has begun to open smaller stores in
locations such as shopping malls. In 1997, the Company plans to open six more
stores in its Georgia/Alabama service areas and one store in its Fort Myers
service area. The Company's stores provide subscriber-friendly retail
environments -- extended hours, a large selection of phones and accessories, an
expert sales staff, and convenient locations -- which make the sales process
quick and easy for the subscriber.
The Company markets all of its products and services under the name
CELLULAR ONE. See "-- Service Marks". As of April 1996, CELLULAR ONE, the
first national brand name in the cellular telephone industry, is utilized by
cellular operators in over 533 service areas with a combined estimated
population of 192 million. The national advertising campaign conducted by
Cellular One Group enhances the Company's advertising exposure at a fraction of
what could be
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<PAGE> 8
achieved by the Company alone. The Company also obtains substantial
marketing benefits from the name recognition associated with this widely used
service mark, both with existing subscribers traveling outside the Company's
service areas and with potential new subscribers moving into the Company's
service areas. In addition, travelers who subscribe to CELLULAR ONE service in
other markets may be more likely to use the Company's service when they travel
in the Company's service areas. Cellular telephones of non-wireline
subscribers are either programmed to select the non-wireline carrier (such as
the Company) when roaming, unless the non-wireline carrier in the roaming area
is not yet operational, or the subscriber dials a special code or has a
cellular telephone equipped with an "A/B" (wireline/non-wireline) switch and
selects the wireline carrier.
Through its membership in NACN and other special networking
arrangements, the Company provides extended regional and national service to
its subscribers, thereby allowing them to make and receive calls while in other
cellular service areas without dialing special access codes. This service
distinguishes the Company's call delivery features from those of many of its
competitors.
PRODUCTS AND SERVICES
In addition to providing high-quality cellular telephone service in
each of its markets, the Company also offers various custom-calling features
such as voicemail, call forwarding, call waiting, three-way conference calling
and no answer and busy transfer. Several rate plans are presented to
prospective subscribers so that they may choose the plan that will best fit
their expected calling needs. Generally, these rate plans include a high user
plan, a medium user plan, a basic plan and an economy plan. Most rate plans
combine a fixed monthly access fee, per minute usage charges and additional
charges for custom-calling features in a package that offers value to the
subscriber while enhancing airtime use and revenues for the Company. In
general, rate plans which include a higher monthly access fee typically include
a lower usage rate per minute. An ongoing review of equipment and service
pricing is maintained to ensure the Company's competitiveness. As appropriate,
revisions to pricing of service plans and equipment are made to meet the
demands of the local marketplace.
The following table sets forth a breakdown of the Company's revenues
from the sale of its services and equipment for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(in thousands)
--------------
<S> <C> <C> <C> <C> <C>
Service revenue:
Access and usage(1) $ 16,305 $ 25,929 $ 45,175 $ 72,816 $ 120,220
Roaming(2) 4,561 6,165 9,928 16,551 20,118
Long distance(3) 1,361 1,770 2,927 4,418 7,858
Other(4) 790 1,309 2,991 2,901 2,923
---------- ---------- ----------- --------- --------------
Total service revenue $ 23,017 $ 35,173 $ 61,021 $ 96,686 $ 151,119
Equipment sales and
installation(5) 4,284 6,285 7,958 8,220 8,624
---------- ---------- ----------- --------- --------------
Total $ 27,301 $ 41,458 $ 68,979 $ 104,906 $ 159,743
========== ========== =========== ========== ==============
</TABLE>
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(1) Access and usage revenues include monthly access fees for providing
service and usage fees based on per minute usage rates.
(2) Roaming revenues are fees charged for providing services to subscribers of
other systems when such subscribers or "roamers" place or receive a
telephone call within one of the Company's service areas.
(3) Long distance revenue is derived from long distance telephone calls placed
by the Company's subscribers.
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<PAGE> 9
(4) Other revenue includes, among other things, connect fees charged to
subscribers for initial activation on the cellular telephone system and
fees for feature services such as voicemail, call forwarding and call
waiting.
(5) Equipment sales and installation revenue includes revenue derived from the
sale of cellular telephones and fees for the installation of such
telephones.
Reciprocal agreements between each of the Company's cellular telephone
systems and the cellular telephone systems of other operators allow their
respective subscribers to place calls in most cellular service areas throughout
the country. Roamers are charged usage fees which are generally higher than a
given cellular telephone system's regular usage fees, thereby resulting in a
higher profit margin on roaming revenue. Roaming revenue is a substantial
source of incremental revenue for the Company. For 1996, roaming revenues
accounted for 13.3% of the Company's service revenues and 12.6% of the
Company's total revenue. This level of roaming revenue is due in part to the
fact that both of the Company's markets in Florida are regional shopping and
vacation destinations and a number of the Company's cellular telephone systems
in the Georgia and Alabama market are located along major interstate travel
corridors.
In order to develop the market for cellular telephone service, the
Company provides retail distribution of cellular telephones and maintains
inventories of cellular telephones. The Company negotiates volume discounts
for the purchase of cellular telephones and, in many cases, passes such
discounts on to its customers. The Company believes that earning an operating
profit on the sale of cellular telephones is of secondary importance to
offering cellular telephones at competitive prices to potential subscribers.
To respond to competition and to enhance subscriber growth, the Company has
historically sold cellular telephones below cost.
The Company is currently developing several new services which it
believes will provide additional revenue sources. Packet-switching technology
will allow data to be transmitted much more quickly and efficiently than the
current circuit-switching technology. Packet-switching uses the intervals
between voice traffic on cellular channels to send packets of data instead of
tying up dedicated cellular channels. The packets of information, which may be
transmitted using several different channels, are subsequently reassembled and
directed to the correct party at the receiving end. It is expected that the
development of this technology will make it possible for cellular carriers to
offer a broad range of cost-effective wireless data services, including
facsimile and electronic mail transmissions, point-of-sale credit
authorizations, package tracking, remote meter reading, alarm monitoring and
communications between laptop computer units and local area computer networks
or other computer databases. During 1996, the Company began offering data
transmission services using packet-switching technology in its Fort Myers,
Florida MSA. In addition, the Company began to implement the use of microcells
during 1996. Microcells are low powered transmitters, typically constructed on
a pole or the roof of a building, which provide reduced radius service within a
specific area, such as large office buildings, underground facilities or areas
shielded by topographical obstructions. Microcell service could be used, for
instance, to provide wireless service within an office environment that was
also integrated with wireless service to the home.
CUSTOMER SERVICE
The Company is committed to attracting new subscribers and retaining
existing subscribers by providing consistently high-quality customer service.
In each of its cellular service areas, the Company maintains a local staff,
including a store manager, customer service representatives, technical and
engineering staff, sales representatives and installation and repair
facilities. Each cellular service area handles its own customer-related
functions such as customer activations, account adjustments and rate plan
changes. Local offices and installation and repair facilities enable the
Company to better service customers, schedule installations and repairs and
monitor the technical quality of the cellular service areas.
- 8 -
<PAGE> 10
In addition, subscribers are able to report cellular telephone service
or account problems to the Company 24 hours a day. Through the use of
sophisticated monitoring equipment, technicians at the Company's headquarters
are able to monitor the technical performance of its service areas.
To ensure high-quality customer service, the Cellular One Group
authorizes a third-party marketing research firm to perform customer
satisfaction surveys of each of its licensees. Licensees must achieve a
minimum customer satisfaction level in order to be permitted to continue using
the CELLULAR ONE service mark. In 1996, the Company was awarded the #1 MSA and
#2 RSA rankings in CELLULAR ONE's National Customer Satisfaction Survey. The
Company has held number one rankings in four out of the last five years. The
Company believes it has achieved this first place ranking through effective
implementation of its direct sales and customer service support strategy.
The Company has implemented a new software package to combat cellular
telephone service fraud. This new software system can detect counterfeit
cellular telephones while they are being operated and enables the Company to
terminate service to the fraudulent user of the counterfeit cellular telephone.
The Company also helps protect itself from fraud with pre-call customer
validation and subscriber profiles specifically designed to combat the
fraudulent use of subscriber accounts.
NETWORKS
The Company strives to provide its subscribers with virtually seamless
coverage throughout its three market areas, thereby permitting subscribers to
travel freely within this region and have their calls and custom calling
features, such as voicemail, call waiting and call forwarding, follow them
automatically without having to notify callers of their location or to rely on
special access codes. The Company has been able to offer virtually seamless
coverage by implementing a switch interconnection plan to mobile telephone
switching offices ("MTSO") located in adjoining markets. The Company's
equipment is built by NORTEL, formerly Northern Telecom, Inc. ("NTI"), and
interconnection between MTSOs has been achieved using NTI's internal software
and hardware.
Through its participation in NACN since 1992 and other special
networking arrangements, the Company has pursued its goal of offering seamless
regional and national cellular service to its subscribers. NACN is the largest
wireless telephone network system in the world -- linking non-wireline cellular
operators throughout the United States and Canada. Membership in NACN has
aided the Company in integrating its cellular telephone systems within its
region and has permitted the Company to offer cellular telephone service to its
subscribers throughout a large portion of the United States, Canada, Mexico and
Puerto Rico. NACN has provided the Company with a number of distinct
advantages: (i) lower costs for roaming verification, (ii) increased roaming
revenue, (iii) more efficient roaming service and (iv) integration of the
Company's markets with over 4,600 cities in more than 40 states in the United
States, Canada, Mexico and Puerto Rico.
SYSTEM DEVELOPMENT AND EXPANSION
The Company develops its service areas by adding channels to existing
cell sites and by building new cell sites. Such development is done for the
purpose of increasing capacity and improving coverage in direct response to
projected subscriber demand. Projected subscriber demand is calculated for
each cellular service area on a cell by cell basis. These projections involve
a traffic analysis of usage by existing subscribers and an estimation of the
number of additional subscribers in each such area. In calculating projected
subscriber demand, the Company builds into its design assumptions a maximum
call "blockage" rate of 2.0% (percentage of calls that are not connected on
first attempt at peak usage time during the day).
- 9 -
<PAGE> 11
The following table sets forth, by market, at the dates indicated, the
number of the Company's operational cell sites.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Georgia/Alabama . . . . . . . . . . . . . 28(1) 39(1) 70(2) 121(3) 181(4)
Fort Myers, FL . . . . . . . . . . . . . 9 13 15 18 23
Panama City, FL . . . . . . . . . . . . . 4 7 7 9 11
---- ---- ---- ---- ----
Total . . . . . . . . . . . . . . . . . 41(1) 59(1) 92(2) 148(3) 215(4)
- --------------- ==== ==== ==== ==== ====
</TABLE>
(1) Includes two cell sites in the Alabama-7 RSA where the Company had interim
operating authority from June 1991 through June 1994.
(2) Includes one cell site in the Alabama-5 RSA where the Company has interim
operating authority for two counties of such RSA and 17 existing cellsites
that were purchased in the Georgia Acquisition.
(3) Includes two existing cell sites in the Alabama-5 RSA where the Company
has interim operating authority for two counties of such RSA and 28
existing cell sites that were purchased in the GTE Acquisition.
(4) Includes three existing cell sites in the Alabama-5 RSA where the Company
has interim operating authority for two counties of such RSA and 17
existing cell sites that were purchased in the Horizon and USCOC
acquisitions.
The Company estimates that in 1996 the capacity of its existing
cellular telephone systems increased 42.0%. During 1996, the Company spent
approximately $35 million and, based on projected growth in subscriber demand,
expects to spend approximately $42 million in 1997 in order to build out its
cellular service areas, install an additional microwave network and implement
certain digital radio technology. The Company plans to construct 70 additional
cell sites with respect to its existing cellular systems during 1997 to meet
projected subscriber demand and improve the quality of service. Cell site
expansion is expected to enable the Company to continue to add subscribers,
enhance use of its cellular telephone systems by existing subscribers, increase
services used by subscribers of other cellular telephone systems due to the
larger geographic area covered by the cellular telephone network and further
enhance the overall efficiency of the network. The Company believes that the
increased cellular telephone coverage will have a positive effect on market
penetration and subscriber usage.
Microwave networks enable the Company to connect switching equipment
and cell sites without making use of local landline telephone carriers, thereby
reducing or eliminating fees paid to landline carriers. During 1996, the
Company spent $1.0 million to build additional microwave connections. In
addition, in 1996 the Company spent $2.6 million to build a fiber optic network
between Dothan, Alabama and Panama City, Florida. The installation of this
network resulted in savings to the Company from a reduction in fees paid to
telephone companies for landline charges, as well as giving the Company the
ability to lease out a significant portion of capacity.
DIGITAL CELLULAR TECHNOLOGY
Over the next decade, it is expected that cellular telephones will
gradually convert from analog to digital technology. This conversion is due in
part to capacity constraints in many of the largest cellular markets, such as
Los Angeles, New York and Chicago. As carriers reach limited capacity levels,
certain calls may be unable to be completed, especially during peak hours.
Digital technology increases system capacity and offers other advantages over
analog technology, including improved overall average signal quality, improved
call security, potentially lower incremental costs for additional subscribers
and the ability to provide data transmission services. The conversion from
analog to digital technology is expected to be an industry-wide process that
will take a number of years. The exact timing and overall costs of such
conversion are not yet known.
- 10 -
<PAGE> 12
The Company began offering TDMA (Time Division Multiple Access)
standard digital service in its Fort Myers, Florida MSA during December 1996.
This digital network allows the Company to offer advanced cellular features and
services such as caller-ID, short message paging and extended battery life.
This digital network is performing well and the Company plans to roll out TDMA
digital cellular services in the rest of its major markets during the first and
second quarter of 1997. Where cell sites are not yet at their maximum capacity
of radio channels, the Company is adding digital channels to the network
incrementally based on the relative demand for digital and analog channels.
Where cell sites are at full capacity, analog channels are being removed and
redeployed to expand capacity elsewhere within the network and replaced in such
cell sites by digital channels. The implementation of digital cellular
technology over a period of several years will involve modest incremental
expenditures for switch software and possible significant cost reductions as a
result of reduced purchases of radio channels and a reduced requirement to
split existing cells. However, as indicated above, the extent of any
implementation of digital radio channels and the amount of any cost savings
ultimately to be derived therefrom will depend primarily on subscriber demand.
In the ordinary course of business, equipment upgrades at the cell sites have
involved purchasing dual mode radios capable of using both analog and digital
technology.
The benefits of digital radio channels can only be achieved if
subscribers purchase cellular telephones that are capable of transmitting and
receiving digital signals. Currently, such telephones are more costly than
analog telephones. The widespread use of digital cellular telephones is likely
to occur only over a substantial period of time and there can be no assurance
that this technology will replace analog cellular telephones. In addition,
since most of the Company's existing subscribers currently have cellular
telephones that exclusively utilize analog technology, it will be necessary to
continue to support, and if necessary increase, the number of analog radio
channels within the network for many years.
ACQUISITIONS
The Company also continues to evaluate expansion through acquisitions
of both (i) other cellular properties located in Florida, Georgia, Alabama and
South Carolina that will further enhance its network and (ii) minority
interests in its existing cellular properties. On October 31, 1994, the
Company acquired the cellular telephone systems of the Georgia Partnerships for
an aggregate purchase price of $91.7 million. On December 1, 1995, the Company
acquired the GTE Companies for an aggregate purchase price of $158.4 million.
On June 20, 1996, the Company acquired the cellular telephone system of USCOC
(Georgia-1 RSA) for an aggregate purchase price of $31.6 million. On July 5,
1996, the Company acquired the cellular telephone system of Horizon (Georgia-6
RSA) for an aggregate purchase price of $36.0 million On February 1, 1997, a
majority-owned subsidiary of the Company acquired the cellular telephone system
serving Georgia-13 RSA from Mobile Communications Systems L.P. for an aggregate
purchase price of $30.0 million, subject to certain adjustments. In 1994
through 1996, the Company acquired minority interests in six, six and five
MSAs, respectively. See "-- Background" and "-- Recent Developments." In
evaluating acquisition targets, the Company considers, among other things,
demographic factors, including population size and density, geographic
proximity to existing service areas, traffic patterns, cell site coverage and
required capital expenditures.
- 11 -
<PAGE> 13
COMPETITION
The cellular telephone service industry in the United States is highly
competitive. Cellular telephone systems compete principally on the basis of
services and enhancements offered, the technical quality of the cellular
system, customer service, coverage capacity and price. Currently, the
Company's primary competition in each of its service areas is the other
cellular licensee -- the wireline carrier. The table below lists the wireline
competitor in each of the Company's existing service areas:
<TABLE>
<CAPTION>
Wireline
Market Competitor
- ------ ----------
<S> <C>
Georgia/Alabama
Albany, GA . . . . . . . . . . . . . . . . . . . . . ALLTEL
Augusta, GA . . . . . . . . . . . . . . . . . . . . ALLTEL
Columbus, GA . . . . . . . . . . . . . . . . . . . . Public Service Cellular
Macon, GA . . . . . . . . . . . . . . . . . . . . . BellSouth
Savannah, GA . . . . . . . . . . . . . . . . . . . . ALLTEL
Georgia-1 RSA . . . . . . . . . . . . . . . . . . . BellSouth
Georgia-6 RSA . . . . . . . . . . . . . . . . . . . BellSouth and Intercel(1)
Georgia-7 RSA . . . . . . . . . . . . . . . . . . . Cellular Plus and BellSouth(1)
Georgia-8 RSA . . . . . . . . . . . . . . . . . . . ALLTEL
Georgia-9 RSA . . . . . . . . . . . . . . . . . . . ALLTEL and Public Service Cellular(1)
Georgia-10 RSA . . . . . . . . . . . . . . . . . . . Cellular Plus and ALLTEL (1)
Georgia-12 RSA . . . . . . . . . . . . . . . . . . . ALLTEL
Georgia-13 RSA . . . . . . . . . . . . . . . . . . . ALLTEL
Dothan, AL . . . . . . . . . . . . . . . . . . . . . BellSouth
Montgomery, AL . . . . . . . . . . . . . . . . . . . ALLTEL
Alabama-8 RSA . . . . . . . . . . . . . . . . . . . . ALLTEL and Intercel (1)
Fort Myers, FL . . . . . . . . . . . . . . . . . . . . GTE Mobilnet
Panama City, FL . . . . . . . . . . . . . . . . . . . . 360 degree Communications Company (formerly
Sprint Cellular)
- -----------
</TABLE>
(1) The wireline service area has been subdivided into two service areas by
the purchasers of the authorization for the RSA.
The Company also faces competition from broadband personal
communications services ("PCS"). PCS is a digital, wireless communications
system supported by high-density call transmitters. Broadband PCS involves a
network of small, low-powered transceivers placed throughout a neighborhood,
business complex, community or metropolitan area to provide customers with
mobile and portable voice and data communications. PCS subscribers communicate
using digital radio handsets.
The Federal Communications Commission ("FCC") allocated 120 MHz of
spectrum for licensed broadband PCS. The allocations for licensed PCS services
are split into six blocks of frequencies - blocks "A" and "B" being two 30 MHz
allocations for each of the 51 Major Trading Areas ("MTAs") throughout the
United States; block "C" being one 30 MHz allocation in each of 493 Basic
Trading Areas ("BTAs") in the United States; and blocks "D", "E" and "F" being
three 10 MHz allocations in each of the BTAs. The FCC has concluded the
auction of all broadband PCS frequency blocks. The table below lists the PCS
winning bidders in each of the Company's existing service areas:
- 12 -
<PAGE> 14
Overview of PCS Competition
<TABLE>
<CAPTION>
Market A Block B Block C Block D Block E Block F Block
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Albany, GA AT&T Powertel Enterprise Communications Sprint Spectrum Bell South Omnipoint
Augusta, GA AT&T Powertel Savannah Independent BellSouth Sprint Spectrum Omnipoint
Columbus, AT&T Powertel R&S Communications BellSouth Sprint Public
GA Spectrum Services
Macon, GA AT&T Powertel Georgia Independent Sprint Spectrum ALLTEL Omnipoint
Savannah, AT&T Powertel Southern Wireless Sprint Spectrum BellSouth Omnipoint
GA
Dothan, AL Sprint Powertel Enterprise Communications Sprint Spectrum ALLTEL Troup EMC
Spectrum
Montgomery, Sprint Powertel Central Alabama ALLTEL BellSouth Mercury
AL Spectrum
Georgia-1 AT&T Powertel Southeast Wireless/GWI Sprint ALLTEL Troup, BTA
RSA
Georgia-6 AT&T Powertel GWI/R&S Comm/Georgia Sprint, ALLTEL, Nextwave,
RSA Independent BellSouth Sprint Public Service,
Omnipoint
Georgia-7 AT&T Powertel Georgia Independent Sprint ALLTEL Omnipoint
RSA
Georgia-8 AT&T Powertel GA-Independent/Southern BellSouth, Sprint ALLTEL, Sprint Omnipoint
RSA Wireless/Savannah Independent BellSouth
Georgia-9 AT&T Powertel GA-Independent/R&S BellSouth, BellSouth, Public Service,
RSA Comm/Enterprise Comm Sprint Sprint, ALLTEL Omnipoint
Georgia-10 AT&T/ Powertel/ Enterprise Comm/Savannah Sprint ALLTEL, Omnipoint,
RSA Powertel PrimeCo Independent/Southern BellSouth Mercury
Wireless/GA-Independent
Georgia-12 AT&T/ Powertel Nextwave/Kmtel/ Sprint, BellSouth, Omnipoint,
RSA Powertel PrimeCo Southern Wireless BellSouth ALLTEL, Southern,
Sprint Mercury
Georgia-13 AT&T/ Powertel Southeast Wireless/ Sprint BellSouth Mercury,
RSA Powertel PrimeCo Enterprise Communications Omnipoint
Alabama-8 Sprint Powertel Central Alabama/R&S Sprint, ALLTEL, Mercury,
RSA Spectrum Comm/Enterprise Comm ALLTEL BellSouth, Public Service
BellSouth Sprint Troup
Fort Myers, Sprint PrimeCo. GWI BellSouth BellSouth Wireless One
FL Spectrum
Panama City, Powertel PrimeCo. Southeast Wireless BellSouth Sprint Spectrum Mercury
FL
</TABLE>
- 13 -
<PAGE> 15
The Company also faces competition from other existing communications
technologies such as conventional mobile telephone service, SMR and enhanced
specialized mobile radio ("ESMR") systems and paging services. ESMR is a
"cellular-like" communications service supplied by converting analog SMR
services into an integrated, digital transmission system providing for call
hand-off, frequency reuse and wide call delivery networks.
In addition, the FCC has licensed operators to provide mobile
satellite service in which transmissions from mobile units to satellites would
augment or replace transmissions to land-based stations. Although such a
system is designed primarily to serve remote areas and is subject to
transmission delays inherent in satellite communications, a mobile satellite
system could augment or replace communications with segments of land-based
cellular systems. Based on current technologies, however, satellite
transmission services are not expected to be competitively priced with cellular
telephone services.
SERVICE MARKS
CELLULAR ONE is a registered service mark with the U.S. Patent and
Trademark Office. The service mark is owned by Cellular One Group, a Delaware
general partnership of Cellular One Marketing, Inc., a subsidiary of
Southwestern Bell Mobile Systems, Inc., together with Cellular One Development,
Inc., a subsidiary of AT&T and Vanguard Cellular Systems, Inc. The Company
uses the CELLULAR ONE service mark to identify and promote its cellular
telephone service pursuant to licensing agreements with Cellular One Group (the
"Licensor"). In 1996, the Company paid $246,000 in licensing and advertising
fees under these agreements. Licensing and advertising fees are determined
based upon the population of the licensed areas. The licensing agreements
require the Company to provide cellular telephone service to its customers, and
to maintain a certain minimum overall customer satisfaction rating in surveys
commissioned by the Licensor. The Company's customer satisfaction ratings have
consistently far exceeded this required minimum. The licensing agreements
which the Company has entered into are for original five-year terms expiring on
various dates up to July 1998. These agreements may be renewed at the
Company's option for three additional five-year terms.
REGULATION
As a provider of cellular telephone services, the Company is subject
to extensive regulation by the federal government.
The licensing, construction, operation, acquisition and transfer of
cellular telephone systems in the United States are regulated by the FCC
pursuant to the Communications Act of 1934, as amended (the "Communications
Act"). The FCC has promulgated rules governing the construction and operation
of cellular telephone systems and licensing and technical standards for the
provision of cellular telephone service ("FCC Rules"). For cellular licensing
purposes, the United States is divided into MSAs and RSAs. In each market, the
frequencies allocated for cellular telephone use are divided into two equal
blocks designated as Block A and Block B. Block A licenses were initially
reserved for non-wireline companies, such as the Company, while Block B
licenses were initially reserved for entities affiliated with a local wireline
telephone company. Under current FCC Rules, a Block A or Block B license may
be transferred with FCC approval without restriction as to wireline
affiliation, but generally, no entity may own any substantial interest in both
systems in any one MSA or RSA. The FCC may prohibit or impose conditions on
sales or transfers of licenses.
Initial operating licenses are generally granted for terms of up to 10
years, renewable upon application to the FCC. Licenses may be revoked and
license renewal applications denied for cause after appropriate notice and
hearing. The Company's cellular licenses expire in the following years with
respect to the following number of service areas: 1997 (four); 1998 (three);
2001 (five); 2002 (three) and 2006 (two). The Georgia-13 RSA license expires
in the year 2000. The FCC has issued a decision confirming that current
licensees will be granted a renewal expectancy if they have
- 14 -
<PAGE> 16
complied with their obligations under the Communications Act during their
license terms and provided substantial public service. A potential challenger
will bear a heavy burden to demonstrate that a license should not be renewed if
the licensee's performance merits a renewal expectancy. The Company believes
that the licenses controlled by the Company will be renewed in a timely manner
upon application.
Under FCC rules, each cellular licensee was given the exclusive right
to construct one of two cellular telephone systems within the licensee's MSA or
RSA during the initial five-year period of its authorization. At the end of
such five-year period, other persons are permitted to apply to serve areas
within the licensed market that are not served by the licensee. Current FCC
Rules provide that competing "unserved area" applications are to be resolved
through the auction process. The Company has no unserved areas in any of its
cellular telephone systems that have been licensed for more than five years;
however, the Company does have unserved areas in several of its cellular
service areas that have been licensed for less than five years. Although the
Company intends to satisfy the five year service requirement for each of these
unserved cellular service areas, there can be no assurance that it will be
successful in doing so.
The Company also regularly applies for FCC authority to use additional
frequencies, to modify the technical parameters of existing licenses, to expand
its service territory and to provide new services. The Communications Act
requires prior FCC approval for acquisitions by the Company of other cellular
telephone systems licensed by the FCC and transfers by the Company of a
controlling interest in any of its licenses or construction permits, or any
rights thereunder. Although there can be no assurance that any future requests
for approval or applications filed by the Company will be approved or acted
upon in a timely manner by the FCC, based upon its experience to date, the
Company has no reason to believe such requests or applications would not be
approved or granted in due course.
The Communications Act prohibits the holding of a common carrier
license (such as the Company's cellular licenses) by a corporation of which
more than 20% of the capital stock is owned directly or beneficially by aliens.
Where a corporation such as the Company controls another entity that holds an
FCC license, such corporation may not have more than 25% of its capital stock
owned directly or beneficially by aliens, in each case, if the FCC finds that
the public interest would be served by such prohibitions. Failure to comply
with these requirements may result in the FCC issuing an order to the Company
requiring divestiture of alien ownership to bring the Company into compliance
with the Communications Act. In addition, fines or a denial of renewal, or
revocation of the license are possible. The Company's Restated Certificate of
Incorporation permits the redemption of the Company's common stock from
stockholders where necessary to protect the Company's regulatory licenses.
From time to time, legislation which could potentially affect the
Company, either beneficially or adversely, may be proposed by federal and state
legislators. On February 8, 1996, the Telecommunications Act of 1996 (the
"Telecom Act") was signed into law, revising the Communications Act to
eliminate unnecessary regulation and to increase competition among providers of
communications services. The Company cannot predict the future impact of this
or other legislation on its operations.
The major provisions of the Telecom Act potentially affecting the
Company are as follows:
Interconnection. The Telecom Act requires state public utilities
commissions and/or the FCC to implement policies that mandate cost-based
reciprocal compensation between cellular carriers and local exchange carriers
("LEC") for interconnection services.
On August 8, 1996, the FCC released its First Report and Order in the
matter of Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996 ("FCC Order") establishing the rules for the
costing and provisioning of interconnection services and the offering of
unbundled network elements by incumbent local exchange carriers. The FCC
Order
- 15 -
<PAGE> 17
established procedures for the Company's renegotiation of interconnection
agreements with the incumbent local exchange carrier in each of the Company's
markets. The Company is currently negotiating with the incumbent local exchange
carriers and believes that these negotiations will result in a substantial
decrease in interconnection expenses incurred by the Company.
Facilities siting for personal wireless services. The siting and
construction of cellular transmitter towers, antennas and equipment shelters
are often subject to state or local zoning, land use and other regulation. Such
regulation may require zoning, environmental and building permit approvals or
other state or local certification. The Telecom Act provides that state and
local authority over the placement, construction and modification of personal
wireless services (including cellular and other commercial mobile radio
services and unlicensed wireless services) shall not prohibit or have the
effect of prohibiting personal wireless services or unreasonably discriminate
among providers of functionally equivalent services. In addition, local
authorities must act on requests made for siting in a reasonable period of
time and any decision to deny must be in writing and supported by substantial
evidence. Appeals of zoning decisions that fail to comply with the provisions
of the Telecom Act can be made on an expedited basis to a court of competent
jurisdiction, which can be either federal district or state court. The Company
anticipates that, as a result the Telecom Act, it will more readily receive
local zoning approval for proposed cellular base stations. In addition, the
Telecom Act codified the Presidential memorandum on the use of federal lands
for siting wireless facilities by requiring the President or his designee to
establish procedures whereby federal agencies will make available their
properties, rights of ways and other easements at a fair and reasonable price
for service dependent upon federal spectrum.
Environmental effect of radio frequency emissions. The Telecom Act
provides that state and local authorities cannot regulate personal wireless
facilities based on the environmental effects of radio frequency emissions if
those facilities comply with the federal standard.
EMPLOYEES
At December 31, 1996 the Company had 627 full-time employees, none of
whom is represented by a labor organization. Management considers its
relations with employees to be good.
EXECUTIVE OFFICERS
The following is a biographical summary of the experience of the
executive officers of the Company.
WILLIAM J. RYAN, Director, President and Chief Executive Officer. Mr.
Ryan served as Chief Executive Officer and President of PCI, the managing
general partner of the Partnership, from 1984 until July 1995. Mr. Ryan was
Chief Operating Officer and President of PCI from 1982 to 1984. Mr. Ryan
continues to serve as a director of PCI. Mr. Ryan has over 40 years of
communications and telecommunications experience. He joined PCI in 1970
following that company's acquisition of certain radio and cable properties
which Mr. Ryan had partially owned and operated since 1955. In his capacity as
Chief Executive Officer, Mr. Ryan has successfully led the Company through 18
acquisitions of cellular telephone systems. Mr. Ryan is a director of the
Cellular Telecommunications Industry Association, the founding chairman of
Cable Television Advertising Bureau, Inc. and a former president of the Florida
Cable Association, the Florida Broadcasters Association and the Southern Cable
Association.
ROBERT G. ENGELHARDT, Director, Executive Vice President and
Secretary. Mr. Engelhardt served as Executive Vice President and Secretary of
PCI, the managing general partner of the Partnership, from 1982 until July
1995. Mr. Engelhardt continues to serve as a director of PCI.
- 16 -
<PAGE> 18
Mr. Engelhardt has over 40 years of communications and telecommunications
experience. After joining PCI in 1972 as Chief Engineer of WHO Broadcasting
Company in Des Moines, Iowa, Mr. Engelhardt was made Technical Director of PCI
in 1976 and was promoted to Vice President-Technical Director in 1979. Mr.
Engelhardt initiated PCI's entry into the cellular business in 1987. Mr.
Engelhardt's broadcasting career began in 1954 with the construction and
operation of KWWL-TV in Waterloo, Iowa. From 1955 to 1967, he served in a
variety of engineering roles for KVTV Channel 9 in Sioux City, Iowa. From 1967
to 1972, Mr. Engelhardt served as Technical Director/Assistant Manager of
KMEG-TV in Sioux City.
M. WAYNE WISEHART, Vice President, Treasurer and Chief Financial
Officer. Mr. Wisehart served as Chief Financial Officer of PCI, the managing
general partner of the Partnership, from 1982 until July 1995. He was promoted
to Treasurer of PCI in 1983 and to Vice President in 1987. Mr. Wisehart
continues to serve as a director of PCI. Mr. Wisehart has over 15 years of
communications and telecommunications experience. In his capacity as Chief
Financial Officer of PCI, he was instrumental in the financial management and
direction of the Company. Prior to joining PCI, Mr. Wisehart served as
Treasurer of the Des Moines Register & Tribune Company of Des Moines, Iowa, for
approximately five years. He began his career in 1972 with Peat, Marwick,
Mitchell & Co. in St. Louis, Missouri, where he became a Certified Public
Accountant. Mr. Wisehart then served as a tax specialist for three years with
General Dynamics Corporation in St. Louis, Missouri.
LEON J. HENSEN, Senior Vice President-General Manager. Mr. Hensen
served as General Manager of PCI, the managing general partner of the
Partnership, from 1987 until July 1995. Mr. Hensen has over 25 years of
communications and telecommunications experience. In 1984, he joined American
Cellular Telephone Company ("ACTC") in Fort Myers, Florida as Vice President of
Engineering and Operations. After the sale of ACTC to BellSouth in 1986, Mr.
Hensen provided consulting services to BellSouth and McCaw Cellular
Communications. From 1973 to 1984, Mr. Hensen served as Vice President of
Engineering and Operations of Rogers Radio Communications Services Inc., in
Chicago, Illinois. From 1970 to 1973, he was employed by Motorola, Inc. in the
Area Systems Engineering Group.
K. PATRICK MEEHAN, Vice President-General Counsel and Assistant
Secretary. Mr. Meehan served as General Counsel and Assistant Secretary of
PCI, the managing general partner of the Partnership, from 1991 until July
1995. As an attorney with the law firm of Leibowitz & Spencer in Miami,
Florida, from 1985 to May 1991, Mr. Meehan represented clients before the FCC
and handled corporate transactions involving broadcast, paging and cellular
telephone companies. He is a 1985 graduate of the Columbus School of Law and
The Institute for Communications Law Studies at The Catholic University of
America in Washington, D.C. Mr. Meehan is a member of the Florida Bar, the
District of Columbia Bar and the American Bar Association.
ITEM 2. PROPERTIES
For each market served by the Company's operations, the Company
maintains at least one sales or administrative office and operates a number of
cell transmitter and antenna sites. As of December 31, 1996, the Company had
32 leases for retail stores used in conjunction with its operations and 3
leases for administrative offices. The Company also had 135 leases to
accommodate cell transmitters and antennas as of December 31, 1996.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any pending legal proceedings
likely to have a material adverse impact on the Company.
- 17 -
<PAGE> 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ Stock Market. The
following table sets forth information regarding the Company's high and low
sales prices for each calendar quarter in 1995 and 1996.
<TABLE>
<CAPTION>
1995 1996
----------------------------- ------------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter(1) $15.88 $14.25 $22.50 $16.25
Second Quarter 18.88 14.25 22.81 18.75
Third Quarter 24.50 16.50 20.38 16.00
Fourth Quarter 24.25 19.75 18.00 10.25
</TABLE>
- ---------------
(1) The Company began trading on the NASDAQ Stock Market on March 15, 1995.
The Company's long term revolving Credit Facility limits the payments
of cash dividends on common stock. The Company has not paid any cash dividends
on its common stock since its inception. As of March 27, 1997, there were
approximately 92 record holders of Class A Common Stock and one record holder
of Class B Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1996,
included in the section titled "Five-Year Condensed Financial Data" on page 12
of the 1996 Annual Report to Shareholders, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the section so titled on pages 13 through 27
of the 1996 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, including
Consolidated Balance Sheets as of December 31, 1995 and 1996, Consolidated
Statements of Operations for the years ended December 31, 1994, 1995 and 1996,
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1994, 1995 and 1996, and Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1995 and 1996, and Notes to Consolidated
Financial Statements, together with the report thereon of KPMG Peat Marwick LLP
dated January 30, 1997, except for
- 18 -
<PAGE> 20
Note 10 which is as of February 1, 1997, are incorporated herein by reference
from pages 29 through 49 of the 1996 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information set forth under the caption
"Election of Directors" appearing in the Company's Proxy Statement dated March
19, 1997 for the Annual Meeting of Shareholders to be held on April 22, 1997
(the "1997 Proxy Statement"), which information is incorporated herein by
reference. Information required by this item with respect to executive
officers is provided in Item 1 of this report. See "Executive Officers."
Item 11. Executive Compensation
Reference is made to the information set forth under the caption
"Election of Directors -- Executive Compensation" appearing in the 1997 Proxy
Statement, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information set forth under the caption
"Beneficial Ownership of Common Stock" appearing in the 1997 Proxy Statement,
which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the information set forth under the caption
"Election of Directors --Certain Relationships and Related Transactions"
appearing in the 1997 Proxy Statement, which information is incorporated herein
by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1)The following consolidated financial statements of registrant
and its subsidiaries and report of independent auditors are included in Item 8
hereof.
Report of Independent Auditors.
Consolidated Balance Sheets as of December 31, 1995 and 1996.
Consolidated Statements of Operations - Years Ended December 31,
1994, 1995, and 1996.
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1994, 1995 and 1996.
- 19 -
<PAGE> 21
Consolidated Statements of Cash Flows - Years Ended December 31,
1994, 1995 and 1996.
Notes to Consolidated Financial Statements.
(a)(2) All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission either have
been included in the Consolidated Financial Statements or are not required
under the related instructions, or are inapplicable and therefore have been
omitted.
(a)(3) The following exhibits are either provided with this Report or
are incorporated herein by reference:
3.1 -- Restated Certificate of Incorporation of the Company*
3.2 -- Bylaws of the Company*
4.1 -- A copy of the specimen certificate for shares of the
Company's Class A Common Stock*
4.2 -- Registration Rights Agreement, dated March 21, 1995*
10.1 -- Tower Lease Agreement between FMT, Ltd., a subsidiary of
the Company and PCI*
10.2 -- Computer Services Agreement dated March 21, 1995 between
the Company and PCI**
10.3 -- Tax Consulting Agreement dated January 1, 1995 between the
Company and PCI*
10.4 -- Transitional Management and Administrative Services
Agreement dated March 21, 1995 between the Company and
PCI**
10.5 -- PCI Non-Competition Agreement dated March 21, 1995 between
the Company and PCI**
10.6 -- Employment Agreement dated March 21, 1995 between the
Company and Mr. Ryan**
10.7 -- Employment Agreement dated March 21, 1995 between the
Company and Mr. Engelhardt**
10.8 -- Employment Agreement dated March 21, 1995 between the
Company and Mr. Wisehart**
10.9 -- Employment Agreement dated March 21, 1995 between the
Company and Mr. Hensen**
10.10 -- Employment Agreement dated March 21, 1995 between the
Company and Mr. Meehan**
10.11 -- Palmer Wireless, Inc. 1995 Stock Option Plan dated
February 10, 1995**
10.12 -- Palmer Wireless, Inc. 1995 Directors Stock Option Plan
dated February 10, 1995**
10.13 -- Palmer Wireless, Inc. Employee Stock Purchase Plan dated
October 27, 1995***
10.14 -- Palmer Wireless, Inc. Director Stock Purchase Plan dated
October 27, 1995***
- 20 -
<PAGE> 22
10.15 -- Service Mark Licensing Agreements between the Company and
Cellular One Group*
10.16 -- Services Agreement between the Company and the North
American Cellular Network*
10.17 -- Purchase Agreement between the Company and Northern
Telecom, Inc.*
10.18 -- Agreement between the Company and Motorola, Inc.*
10.19 -- Management Agreement between the Company and PCI*
10.20 -- Services Agreement between the Company and MCI
Telecommunications Corporation*
10.21 -- Acquisition Agreement dated as of May 26, 1994 by and
among Southeast Georgia Cellular Limited Partnership,
Georgia 12 Cellular Limited Partnership, Georgia 12
Cellular Limited Partnership, Palmer Cellular Partnership
and BJV, L.P.*
10.22 -- Paying Agent Agreement dated as of October 28, 1994 by and
among NationsBank of North Carolina, N.A., SC Georgia
Holdings Limited Partnership, FGI Cellular Management,
Inc., Sterling Cellular Holdings Limited Partnership,
Palmer Cellular Partnership and BJV, L.P.*
10.23 -- Termination Agreement dated November 15, 1994 by Palmer
Cellular Partnership*
10.24 -- Cellular Supply Agreement dated October 21, 1994 by and
between Palmer Cellular Partnership and Northern Telecom
Inc.*
10.25 -- Software License and Maintenance Agreement dated May 27,
1994 by and between Coral Systems, Inc. and Palmer
Cellular Partnership*
10.26 -- Stock Purchase Agreement dated August 24, 1995 by and
between Palmer Wireless Holdings, Inc. and GTE Mobile
Communications Incorporated****
10.27 -- Third Amended and Restated Loan Agreement dated as of
December 1, 1995 by and among Palmer Wireless, Inc., PNC
Bank, N.A., The Toronto-Dominion Bank, NationsBank of
Texas, N.A., Corestates Bank, N.A., First National Bank of
Maryland, NatWest Bank, N.A., The First National Bank of
Boston, CIBC Inc., First Union National Bank of North
Carolina, Royal Bank of Canada, Shawmut Bank Connecticut,
N.A., Union Bank, Bank of Hawaii, Banque Nationale de
Paris, and Toronto Dominion (Texas), Inc., Merita Bank
Ltd., Bank of Montreal (Chicago Branch), Compagnie
Financiere DE CIC Et DE L'Union Europeene, First Hawaiian
Bank, Pearl Street L.P., Societe Generale, The Bank of
California, N.A.*****
10.28 -- Asset Acquisition Agreement by and among Horizon Cellular
Telephone Company of Spalding, L.P., Columbus Cellular
Telephone Company, and Macon Cellular Telephone Systems
Limited Partnership, dated March 22, 1996 ******
- 21 -
<PAGE> 23
10.29 -- Sale and Purchase Agreement by and among United States
Cellular Corporation, USCOC of Georgia RSA #1, Inc., and
Palmer Wireless Holdings, Inc., dated April 23, 1996
*******
10.30 -- Sale and Purchase Agreement by and between Mobile
Communications Systems, L.P. and Palmer Wireless Holdings,
Inc., dated August 22, 1996 ********
10.31 -- First Amendment to Third Amended and Restated Loan
Agreement dated as of May 31, 1996 by and among Palmer
Wireless, Inc., PNC Bank, National Association, The
Toronto-Dominion Bank, NationsBank of Texas, N.A.,
Corestates Bank, N.A., Fleet Bank, N.A. (formerly known as
NatWest Bank N.A.), First National Bank of Maryland, The
First National Bank of Boston, CIBC Inc., First Union
National Bank of North Carolina, Royal Bank of Canada,
Fleet National Bank (formerly known as Shawmut Bank
Connecticut, N.A.), Banque Nationale De Paris, Union Bank,
Bank of Hawaii, Merita Bank Ltd, Bank of Montreal, Chicago
Branch, Compagnie Financiere DE CIC Et DE L'Union
Europeenne, First Hawaiian Bank, Societe Generale, The
Bank of California, N.A., Society National Bank and Credit
Lyonnais Cayman Island Branch.
10.32 -- Second Amendment to Third Amended and Restated Loan
Agreement dated as of August 12, 1996 by and among Palmer
Wireless, Inc., PNC Bank, National Association, The
Toronto-Dominion Bank, NationsBank of Texas, N.A.,
Corestates Bank, N.A., Fleet Bank, N.A., First National
Bank of Maryland, The First National Bank of Boston, CIBC
Inc., First Union National Bank of North Carolina, Royal
Bank of Canada, Fleet National Bank, Banque Nationale de
Paris, Union Bank of California, N.A. (formerly known as
Union Bank and The Bank of California, N.A.), Bank of
Hawaii, Merita Bank Ltd, Bank of Montreal, Chicago Branch,
Compagnie Financiere DE CIC Et DE L'Union Europeenne,
First Hawaiian Bank, Societe Generale, KeyBank National
Association (formerly known as Society National Bank) and
Credit Lyonnais Cayman Island Branch.
11 -- Computation of Earnings per Share.
13 -- 1996 Annual Report to Shareholders of Palmer Wireless,
Inc. Such report is furnished for the information of the
Commission only and, except for those portions thereof
which are expressly incorporated by reference in the
Annual Report on Form 10-K, is not deemed to be filed as
part of this Report.
21 -- Subsidiaries of the Company*********
23 -- Consent of KPMG Peat Marwick LLP
27 -- Financial Data Schedule
- ------------
* Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-1 (Registration No.
33-75218).
- 22 -
<PAGE> 24
** Incorporated by reference to the Exhibits to the Company's
quarterly report on Form 10-Q for the quarter ended March
31, 1995 (File No. 0-255-88) which was filed with the
Commission on May 12, 1995.
*** Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-8 (File No. 33-99170) which
was filed with the Commission on November 9, 1995.
**** Incorporated by reference to Exhibit No. 2 to the Company's
Current Report on Form 8-K which was filed with the
Commission on August 30, 1995.
***** Incorporated by reference to the Exhibits to the Company's
Current Report on Form 8-K which was filed with the
Commission on December 14, 1995.
****** Incorporated by reference to the Exhibits to the Company's
Current Report on Form 8-K which was filed with the
Commission on April 9, 1996.
******* Incorporated by reference to the Exhibits to the Company's
Current Report on Form 8-K which was filed with the
Commission on May 1, 1996.
******** Incorporated by reference to the Exhibits to the Company's
Current Report on Form 8-K which was filed with the
Commission on September 3, 1996.
********* Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-1 (Registration No.
333-00122).
- ---------------
(b) (1) The Registrant filed a Current Report on Form 8-K on
February 12, 1996 which included financial statements for
Georgia Metronet, Inc. and Augusta Metronet, Inc., which were
acquired on December 1, 1995 by Palmer Wireless Holdings, Inc.
("Holdings"), a wholly-owned subsidiary of the Registrant.
(2) The Registrant filed a Current Report on Form 8-K on
April 9, 1996 to report that two of its subsidiaries, Columbus
Cellular Telephone Company and Macon Cellular Telephone
Systems Limited Partnership, 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.
(3) The Registrant filed a Current Report on Form 8-K on May
1, 1996 to report that Holdings had signed a definitive
agreement with United States Cellular Corporation and USCOC of
Georgia RSA#1, Inc., pursuant to which Holdings agreed to
purchase the cellular telephone system serving the Georgia-1
Rural Service Area (Market No. 371(A)) for a total cash
purchase price of $31.5 million, subject to certain
adjustments.
(4) The Registrant filed a Current Report on Form 8-K on
September 3, 1996 to report that Holdings had signed a
definitive agreement with Mobile Communications Systems, L.P.,
pursuant to which Holdings agreed to purchase the cellular
telephone system serving the Georgia-13 Rural Service Area
(Market No. 383) for a total cash purchase price of $36.5
million, subject to certain downward adjustments of up to $1
million.
(c) Exhibits to this Form 10-K are attached or incorporated by
reference as stated above.
(d) None.
- 23 -
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized as of the 31st day
of March, 1997.
PALMER WIRELESS, INC.
/s/ WILLIAM J. RYAN
William J. Ryan
Director, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ William J. Ryan
- -------------------------------------
William J. Ryan Director, President and March 31, 1997
Chief Executive Officer
(Principal Executive Officer)
/s/ M. Wayne Wisehart
- -------------------------------------
M. Wayne Wisehart Vice President, Treasurer March 31, 1997
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Robert G. Engelhardt
- -------------------------------------
Robert G. Engelhardt Director, Executive Vice March 31, 1997
President and Secretary
/s/ Thomas D. McCloskey, Jr.
- -------------------------------------
Thomas D. McCloskey, Jr. Director March 31, 1997
/s/ Kermit S. Sutton
- -------------------------------------
Kermit S. Sutton Director March 31, 1997
</TABLE>
<PAGE> 26
<TABLE>
<S> <C> <C>
/s/ Vickie A. Palmer
- -----------------------------------
Vickie A. Palmer Director March 31, 1997
/s/ James S. Cownie
- -----------------------------------
James S. Cownie Director March 31, 1997
/s/ Clark R. Mandigo
- -----------------------------------
Clark R. Mandigo Director March 31, 1997
</TABLE>
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- --------------
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Company*
3.2 -- Bylaws of the Company*
4.1 -- A copy of the specimen certificate for shares of the Company's
Class A Common Stock*
4.2 -- Registration Rights Agreement, dated March 21, 1995*
10.1 -- Tower Lease Agreement between FMT, Ltd., a subsidiary of the
Company and PCI*
10.2 -- Computer Services Agreement dated March 21, 1995 between the
Company and PCI**
10.3 -- Tax Consulting Agreement dated January 1, 1995 between the
Company and PCI*
10.4 -- Transitional Management and Administrative Services Agreement
dated March 21, 1995 between the Company and PCI**
10.5 -- PCI Non-Competition Agreement dated March 21, 1995 between the
Company and PCI**
10.6 -- Employment Agreement dated March 21, 1995 between the Company
and Mr. Ryan**
10.7 -- Employment Agreement dated March 21, 1995 between the Company
and Mr. Engelhardt**
10.8 -- Employment Agreement dated March 21, 1995 between the Company
and Mr. Wisehart**
10.9 -- Employment Agreement dated March 21, 1995 between the Company
and Mr. Hensen**
10.10 -- Employment Agreement dated March 21, 1995 between the Company
and Mr. Meehan**
10.11 -- Palmer Wireless, Inc. 1995 Stock Option Plan dated February
10, 1995**
10.12 -- Palmer Wireless, Inc. 1995 Directors Stock Option Plan dated
February 10, 1995**
10.13 -- Palmer Wireless, Inc. Employee Stock Purchase Plan dated
October 27, 1995***
10.14 -- Palmer Wireless, Inc. Director Stock Purchase Plan dated
October 27, 1995***
10.15 -- Service Mark Licensing Agreements between the Company and
Cellular One Group*
10.16 -- Services Agreement between the Company and the North American
Cellular Network*
10.17 -- Purchase Agreement between the Company and Northern Telecom,
Inc.*
10.18 -- Agreement between the Company and Motorola, Inc.*
</TABLE>
<PAGE> 28
10.19 -- Management Agreement between the Company and PCI*
10.20 -- Services Agreement between the Company and MCI
Telecommunications Corporation*
10.21 -- Acquisition Agreement dated as of May 26, 1994 by and among
Southeast Georgia Cellular Limited Partnership, Georgia 12
Cellular Limited Partnership, Georgia 12 Cellular Limited
Partnership, Palmer Cellular Partnership and BJV, L.P.*
10.22 -- Paying Agent Agreement dated as of October 28, 1994 by and
among NationsBank of North Carolina, N.A., SC Georgia Holdings
Limited Partnership, FGI Cellular Management, Inc., Sterling
Cellular Holdings Limited Partnership, Palmer Cellular
Partnership and BJV, L.P.*
10.23 -- Termination Agreement dated November 15, 1994 by Palmer
Cellular Partnership*
10.24 -- Cellular Supply Agreement dated October 21, 1994 by and
between Palmer Cellular Partnership and Northern Telecom Inc.*
10.25 -- Software License and Maintenance Agreement dated May 27, 1994
by and between Coral Systems, Inc. and Palmer Cellular
Partnership*
10.26 -- Stock Purchase Agreement dated August 24, 1995 by and between
Palmer Wireless Holdings, Inc. and GTE Mobile Communications
Incorporated****
10.27 -- Third Amended and Restated Loan Agreement dated as of December
1, 1995 by and among Palmer Wireless, Inc., PNC Bank, N.A.,
The Toronto-Dominion Bank, NationsBank of Texas, N.A.,
Corestates Bank, N.A., First National Bank of Maryland,
NatWest Bank, N.A., The First National Bank of Boston, CIBC
Inc., First Union National Bank of North Carolina, Royal Bank
of Canada, Shawmut Bank Connecticut, N.A., Union Bank, Bank of
Hawaii, Banque Nationale de Paris, and Toronto Dominion
(Texas), Inc., Merita Bank Ltd., Bank of Montreal (Chicago
Branch), Compagnie Financiere DE CIC Et DE L'Union Europeene,
First Hawaiian Bank, Pearl Street L.P., Societe Generale, The
Bank of California, N.A.*****
10.28 Asset Acquisition Agreement by and among Horizon Cellular
Telephone Company of Spalding, L.P., Columbus Cellular
Telephone Company, and Macon Cellular Telephone Systems
Limited Partnership, dated March 22, 1996 ******
10.29 Sale and Purchase Agreement by and among United States
Cellular Corporation, USCOC of Georgia RSA #1, Inc., and
Palmer Wireless Holdings, Inc., dated April 23, 1996 *******
10.30 Sale and Purchase Agreement by and between Mobile
Communications Systems, L.P. and Palmer Wireless Holdings,
Inc., dated August 22, 1996 ********
10.31 -- First Amendment to Third Amended and Restated Loan Agreement
dated as of May 31, 1996 by and among Palmer Wireless, Inc.,
PNC Bank, National Association, The Toronto-Dominion Bank,
NationsBank of Texas, N.A., Corestates Bank, N.A., Fleet Bank,
N.A. (formerly known as NatWest Bank N.A.), First National
Bank of Maryland, The First National Bank of Boston, CIBC
Inc., First Union National Bank of North Carolina, Royal Bank
of Canada,
<PAGE> 29
Fleet National Bank (formerly known as Shawmut Bank
Connecticut, N.A.), Banque Nationale De Paris, Union Bank,
Bank of Hawaii, Merita Bank Ltd, Bank of Montreal, Chicago
Branch, Compagnie Financiere DE CIC Et DE L'Union Europeenne,
First Hawaiian Bank, Societe Generale, The Bank of California,
N.A., Society National Bank and Credit Lyonnais Cayman Island
Branch.
10.32 -- Second Amendment to Third Amended and Restated Loan Agreement
dated as of August 12, 1996 by and among Palmer Wireless,
Inc., PNC Bank, National Association, The Toronto-Dominion
Bank, NationsBank of Texas, N.A., Corestates Bank, N.A., Fleet
Bank, N.A., First National Bank of Maryland, The First
National Bank of Boston, CIBC Inc., First Union National Bank
of North Carolina, Royal Bank of Canada, Fleet National Bank,
Banque Nationale de Paris, Union Bank of California, N.A.
(formerly known as Union Bank and The Bank of California,
N.A.), Bank of Hawaii, Merita Bank Ltd, Bank of Montreal,
Chicago Branch, Compagnie Financiere DE CIC Et DE L'Union
Europeenne, First Hawaiian Bank, Societe Generale, KeyBank
National Association (formerly known as Society National Bank)
and Credit Lyonnais Cayman Island Branch.
11 -- Computation of Earnings per Share
13 1996 Annual Report to Shareholders of Palmer Wireless, Inc.
Such report is furnished for the information of the Commission
only and, except for those portions thereof which are
expressly incorporated by reference in the Annual Report on
Form 10-K, is not deemed to be filed as part of this Report.
21 -- Subsidiaries of the Company*********
23 -- Consent of KPMG Peat Marwick LLP
27 -- Financial Data Schedule
- ---------------
* Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-1 (Registration No. 33-75218).
** Incorporated by reference to the Exhibits to the Company's
quarterly report on Form 10-Q for the quarter ended March 31, 1995
(File No. 0-255-88) which was filed with the Commission on May 12,
1995.
*** Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-8 (File No. 33-99170) which was
filed with the Commission on November 9, 1995.
**** Incorporated by reference to Exhibit No. 2 to the Company's Current
Report on Form 8-K which was filed with the Commission on August
30, 1995.
***** Incorporated by reference to the Exhibits to the Company's Current
Report on Form 8-K which was filed with the Commission on December
14, 1995.
****** Incorporated by reference to the Exhibits to the Company's Current
Report on Form 8-K which was filed with the Commission on April 9,
1996.
******* Incorporated by reference to the Exhibits to the Company's Current
Report on Form 8-K which was filed with the Commission on May 1,
1996.
******** Incorporated by reference to the Exhibits to the Company's Current
Report on Form 8-K which was filed with the Commission on September
3, 1996.
********* Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-1 (Registration No. 333-00122).
<PAGE> 1
FIRST AMENDMENT TO
THIRD AMENDED AND RESTATED LOAN AGREEMENT
THIS FIRST AMENDMENT TO THIRD AMENDED AND RESTATED LOAN AGREEMENT
dated as of May 31, 1996 (the "Amendment") by and among PALMER WIRELESS, INC.,
a Delaware corporation (the "Borrower"); PNC BANK, NATIONAL ASSOCIATION, THE
TORONTO-DOMINION BANK, NATIONSBANK OF TEXAS, N.A., CORESTATES BANK, N.A., FLEET
BANK, N.A. (FORMERLY KNOWN AS NATWEST BANK N.A.), FIRST NATIONAL BANK OF
MARYLAND, THE FIRST NATIONAL BANK OF BOSTON, CIBC INC., FIRST UNION NATIONAL
BANK OF NORTH CAROLINA, ROYAL BANK OF CANADA, FLEET NATIONAL BANK (FORMERLY
KNOWN AS SHAWMUT BANK CONNECTICUT, N.A.), BANQUE NATIONALE DE PARIS, UNION
BANK, BANK OF HAWAII, MERITA BANK LTD, BANK OF MONTREAL, CHICAGO BRANCH,
COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE, FIRST HAWAIIAN BANK,
SOCIETE GENERALE, THE BANK OF CALIFORNIA, N.A., SOCIETY NATIONAL BANK and
CREDIT LYONNAIS CAYMAN ISLAND BRANCH (collectively, and together with any
financial institution which subsequently becomes a 'Bank' under the Loan
Agreement, as such term is defined therein, the "Banks"); CORESTATES BANK,
N.A., NATIONSBANK OF TEXAS, N.A. AND FLEET BANK, N.A. (FORMERLY KNOWN AS
NATWEST BANK N.A.), as co-agents (collectively, in such capacity, the
"Co-Agents"); THE TORONTO-DOMINION BANK, as documentation agent (in such
capacity, the "Documentation Agent"); PNC BANK, NATIONAL ASSOCIATION, as
administrative agent (in such capacity, the Administrative Agent); and TORONTO
DOMINION (TEXAS), INC., as collateral agent for the Administrative Agent, the
Documentation Agent, the Co-Agents and the Banks (the "Collateral Agent," and
together with the Administrative Agent, the Documentation Agent and the
Co-Agents, the "Agents"),
W I T N E S S E T H:
WHEREAS, the Borrower, the Banks and the Agents are parties to that
certain Third Amended and Restated Loan Agreement dated as of December 1, 1995
(as hereafter amended, modified and supplemented from time to time, the "Loan
Agreement"); and
WHEREAS, the Borrower wishes to make certain loans to Palmer Wireless
Holdings, Inc., a Delaware corporation ("Holdings") and a Subsidiary (as that
term is defined in the Loan Agreement) of the Borrower; and
WHEREAS, due to changes in anticipated assumed revenues resulting from
recent acquisitions, the Borrower has requested that the Banks amend certain
provisions of the Loan Agreement; and
<PAGE> 2
WHEREAS, the Banks are willing to consent to the loans to Holdings and
to amend Sections 7.8 and 7.13 of the Loan Agreement all as more particularly
set forth herein;
NOW, THEREFORE, in consideration of the premises set forth above, the
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree that all capitalized terms used herein shall have the
meanings ascribed thereto in the Loan Agreement and further agree as follows:
1. Amendment to Article 5. Section 5.10 of the Agreement, Use of
Proceeds, is hereby amended by deleting Subsections 5(b) and (c) thereof in
their entireties and by substituting in lieu thereof the following:
"(b) to pay the Panama City Obligations, in an aggregate
amount not to exceed the principal amount of such obligations on the
Agreement Date together with accrued interest thereon through the date
of such payments; provided, however, that the sum of (i) the aggregate
amount of proceeds used for the purpose herein, plus (ii) the amount
used for the purpose set forth in Section 5.10(c) hereof shall not
exceed $10,000,000;"
"(c) to pay Additional Consideration (as defined in the
Panama City Purchase Agreement) to Brien L. O'Neill pursuant to
Section 2.2.3 of the Panama City Purchase Agreement; provided,
however, that no such payment shall be made prior to July 25, 1996
unless the Appraised Fair Market Per Pop Value (as defined in the
Panama City Purchase Agreement) does not exceed $175 and, provided
further, however that the sum of (i) the aggregate amount of proceeds
used for the purpose contained herein, plus (ii) the amount used for
the purpose set forth in Section 5.10(b) hereof shall not exceed
$10,000,000;"
-2-
<PAGE> 3
2. Amendments to Article 7.
(a) Section 7.8 of the Loan Agreement, Minimum Annualized
Operating Cash Flow, is hereby amended by deleting the table contained therein
in its entirety and by substituting the following table in lieu thereof:
<TABLE>
<CAPTION>
"Quarter Ending Amount
-------------- ------
<S> <C>
March 31, 1996 $52,000,000
June 30, 1996 $58,000,000
September 30, 1996 $64,000,000
December 31, 1996 $69,000,000
March 31, 1997 $74,000,000
June 30, 1997 $79,000,000
September 30, 1997 $84,500,000
December 31, 1997 $86,000,000"
</TABLE>
(b) Section 7.13, of the Loan Agreement, Limitation on
Capital Expenditures, is hereby amended by deleting the existing table therein
in its entirety and by substituting the following table in lieu thereof:
<TABLE>
<CAPTION>
"Period Dollar Amount
------ -------------
<S> <C>
From January 1, 1996 $41,000,000
through December 31, 1996
From January 1, 1997 $35,000,000
through December 31, 1997
From January 1, 1998 $30,000,000
through December 31, 1998
From January 1, 1999 $25,000,000"
through December 31, 1999
and each calendar year period
thereafter
</TABLE>
3. Consents.
(a) Notwithstanding anything to the contrary in the Loan
Agreement, the Majority Banks hereby consent to the Borrower's making loans to
Holdings, provided that (i) such loans shall at all times be evidenced by a
promissory note in form and substance satisfactory to the Collateral Agent (the
"Holdings Note"); (ii) the Borrower shall promptly deliver the Holdings Note to
the Collateral Agent, duly endorsed to the Collateral Agent (in form
satisfactory to the Collateral Agent) as Collateral for the Obligations
pursuant to the Borrower Security Agreement; and (iii) the Borrower shall not
use the outstanding principal amount
-3-
<PAGE> 4
of the Holdings Note nor the interest accrued thereon when calculating the
Borrower's compliance with Sections 7.8, 7.9, 7.10, 7.11 and 7.12 of the Loan
Agreement.
(b) Notwithstanding anything to the contrary in the Loan Agreement
(but otherwise subject to the terms and conditions of the Consent of the Banks
dated February 22, 1996), the Majority Banks hereby consent to the Acquisition
of Georgia RSA #6 by Macon Cellular Telephone Systems Limited Partnership
("Macon") and Columbus Cellular Telephone Company ("Columbus"), two
non-wholly-owned Subsidiaries of the Borrower, with the proceeds of
intercompany loans by Holdings to each of Macon and Columbus; provided,
however, that (i) such loans are secured by the Georgia RSA #6 assets acquired
by such entities (which Lien is expressly consented to by the Majority Banks);
(ii) such loans shall at all times be evidenced by promissory notes of Macon
and Columbus payable to Holdings; (iii) the Borrower shall promptly deliver the
foregoing to the Collateral Agent, duly endorsed to the Collateral Agent,
together with appropriate assignments of the underlying collateral for such
notes (all in form satisfactory to the Collateral Agent) as Collateral for the
Obligations pursuant to the Borrower Security Agreement; and (iv) the Borrower
shall not use the outstanding principal amount of such notes nor the interest
accrued thereon when calculating the Borrower's compliance with Sections 7.8,
7.9, 7.10, 7.11 and 7.12 of the Loan Agreement.
4. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
separate counterparts shall together constitute but one and the same
instrument.
5. Governing Law. This Amendment shall be construed in
accordance with and governed by the laws of the State of New York.
6. Severability. Any provision of this Amendment which is
prohibited or unenforceable in any jurisdiction shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof in that jurisdiction or affecting the validity or
enforceability of such provision in any other jurisdiction.
7. No Other Amendment or Waiver. Except for the amendments set
forth above, the text of the Loan Agreement and all other Loan Documents shall
remain unchanged and in full force and effect. No waiver by the Collateral
Agent, the other Agents or the Banks under the Loan Agreement or any other Loan
Document is granted or intended except as expressly set forth herein, and the
Collateral Agent, the other Agents and the Banks expressly reserve the right to
require strict compliance in all other
-4-
<PAGE> 5
respects (whether or not in connection with any Requests for Advance). Except
as set forth herein, the amendments agreed to herein shall not constitute a
modification of the Loan Agreement or any of the other Loan Documents, or a
course of dealing with the Collateral Agent, the other Agents and the Banks, or
any of them, at variance with the Loan Agreement or any of the other Loan
Documents, such as to require further notice by the Collateral Agent, the other
Agents, the Banks, the Majority Banks, or any of them, to require strict
compliance with the terms of the Loan Agreement and the other Loan Documents in
the future.
8. Representations and Warranties. The Borrower hereby
represents and warrants in favor of the Agents and the Banks as follows:
(a) The Borrower has the corporate power and authority (i) to
enter into this Amendment and (ii) to do all other acts and things as are
required or contemplated hereunder to be done, observed and performed by it;
(b) This Amendment has been duly authorized, validly executed and
delivered by one or more Authorized Signatories of the Borrower and constitutes
the legal, valid and binding obligation of the Borrower, enforceable against
the Borrower in accordance with its terms, subject, as to enforcement of
remedies, to the following qualifications: (i) an order of specific performance
and an injunction are discretionary remedies and, in particular, may not be
available where damages are considered an adequate remedy at law, and (ii)
enforcement may be limited by bankruptcy, insolvency, liquidation,
reorganization, reconstruction and other similar laws affecting enforcement of
creditors' rights generally (insofar as any such law relates to the bankruptcy,
insolvency or similar event of the Borrower);
(c) Each of the representations and warranties set forth in
Section 4.1 of the Loan Agreement are true and correct as of the date hereof;
and
(d) There does not exist on the date hereof any Default or Event
of Default.
9. Loan Documents. This document shall be deemed to be a Loan
Document for all purposes.
10. Effectiveness. Upon receipt by the Administrative Agent of
executed signature pages of this Amendment from the Borrower and the Majority
Banks, this Amendment shall automatically be effective.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Amendment or
caused it to be executed by their duly authorized officers, all as of the day
and year first above written.
<TABLE>
<S> <C>
BORROWER: PALMER WIRELESS, INC., a Delaware corporation
By: /s/ M. WAYNE WISEHART
---------------------------------------------------------------------
Its: Vice-President
-----------------------------------------------------------
ADMINISTRATIVE AGENT: PNC BANK, NATIONAL ASSOCIATION
By: /s/ THOMAS P. CARDEN
---------------------------------------------------------------------
Its: Vice-President
-----------------------------------------------------------
DOCUMENTATION AGENT: THE TORONTO-DOMINION BANK
By: /s/ DIANE BAILEY
---------------------------------------------------------------------
Its: MGR. SYNDICATIONS & CREDIT ADMIN
-----------------------------------------------------------
COLLATERAL AGENT: TORONTO DOMINION (TEXAS), INC.
By: /s/ DIANE BAILEY
---------------------------------------------------------------------
Its: MGR. SYNDICATIONS & CREDIT ADMIN
-----------------------------------------------------------
BANKS: PNC BANK, NATIONAL ASSOCIATION
By: /s/ THOMAS P. CARDEN
---------------------------------------------------------------------
Its: Vice-President
-----------------------------------------------------------
</TABLE>
FIRST AMENDMENT TO LOAN AGREEMENT
PALMER WIRELESS, INC.
Signature Page 1
<PAGE> 7
<TABLE>
<S> <C>
THE TORONTO-DOMINION BANK
By: /s/ DIANE BAILEY
---------------------------------------------------------------------
Its: MGR. SYNDICATIONS & CREDIT ADMIN
-----------------------------------------------------------
NATIONSBANK OF TEXAS, N.A.
By: /s/ JENNIFER ZYDNEY
--------------------------------------------------------------------
Its: Vice-President
--------------------------------------------------------
CORESTATES BANK, N.A.
By: [SIG]
--------------------------------------------------------------------
Its: VP
--------------------------------------------------------
FLEET BANK, N.A. (formerly known as NatWest Bank N.A.)
By: [SIG]
--------------------------------------------------------------------
Its: Senior Vice-President
--------------------------------------------------------
FLEET NATIONAL BANK (formerly known as Shawmut Bank Connecticut, N.A.)
By: [SIG]
--------------------------------------------------------------------
Its: Officer
--------------------------------------------------------
FIRST NATIONAL BANK OF MARYLAND
By: [SIG]
--------------------------------------------------------------------
Its: Senior Vice-President
--------------------------------------------------------
</TABLE>
FIRST AMENDMENT TO LOAN AGREEMENT
PALMER WIRELESS, INC.
Signature Page 2
<PAGE> 8
<TABLE>
<S> <C>
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ M.E. MEDUSKI
---------------------------------------------------------------------
Its: Director
---------------------------------------------------------
CIBC INC.
By: /s/ MARSHA HARNEY
---------------------------------------------------------------------
Its: Authorized Signatory
---------------------------------------------------------
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By: /s/ JOHN BUTLER
---------------------------------------------------------------------
Its: Senior Vice-President
---------------------------------------------------------
ROYAL BANK OF CANADA
By: /s/ THOMAS BYRNE
---------------------------------------------------------------------
Its: Manager
---------------------------------------------------------
BANQUE NATIONALE DE PARIS
By: /s/ SERGE DESRYAUD /s/ PAMELA LUCASH
---------------------------------------------------------------------
Its: V.P. / Team Leader Assistant Treasurer
---------------------------------------------------------
UNION BANK
By: /s/ J. KEVIN SAMPSON
---------------------------------------------------------------------
Its: ASST. VICE-PRESIDENT
---------------------------------------------------------
</TABLE>
FIRST AMENDMENT TO LOAN AGREEMENT
PALMER WIRELESS, INC.
Signature Page 3
<PAGE> 9
<TABLE>
<S> <C>
BANK OF HAWAII
By: /s/ ELIZABETH MACLEAN
---------------------------------------------------------------------
Its: VICE PRESIDENT
---------------------------------------------------------
MERITA BANK LTD
By: /s/ CHARLES J. LANSDOWNE [SIG]
---------------------------------------------------------------------
Its: Vice President Vice President
---------------------------------------------------------
BANK OF MONTREAL, CHICAGO BRANCH
By: /s/ ALLEGRA GRIFFTHS
---------------------------------------------------------------------
Its: DIRECTOR
---------------------------------------------------------
COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE
By: /s/ MARCUS EDWARD /s/ BRIAN O'LEARY
---------------------------------------------------------------------
Its: Vice Presidents
---------------------------------------------------------
FIRST HAWAIIAN BANK
By: /s/ DONALD C. YOUNG
---------------------------------------------------------------------
Its: Assistant Vice President
---------------------------------------------------------
SOCIETE GENERALE
By: /s/ MARK VIGIL
---------------------------------------------------------------------
Its: VICE PRESIDET
---------------------------------------------------------
</TABLE>
FIRST AMENDMENT TO LOAN AGREEMENT
PALMER WIRELESS, INC.
Signature Page 4
<PAGE> 10
<TABLE>
<S> <C>
UNION BANK OF CALIFORNIA, N.A., formerly known as
THE BANK OF CALIFORNIA, N.A.
By: /s/ STEVEN D. OLSON
---------------------------------------------------------------------
Its: VICE PRESIDENT
---------------------------------------------------------
SOCIETY NATIONAL BANK
By: [SIG]
---------------------------------------------------------------------
Its: Assitant Vice President
---------------------------------------------------------
CREDIT LYONNAIS CAYMAN ISLAND BRANCH
By: /s/ MARK THORSHEIM
---------------------------------------------------------------------
Its: Authorized Signature
---------------------------------------------------------
</TABLE>
FIRST AMENDMENT TO LOAN AGREEMENT
PALMER WIRELESS, INC.
Signature Page 5
<PAGE> 1
SECOND AMENDMENT TO
THIRD AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDMENT TO THIRD AMENDED AND RESTATED LOAN AGREEMENT
dated as of August 12, 1996 (the "Amendment") by and among PALMER WIRELESS,
INC., a Delaware corporation (the "Borrower"); PNC BANK, NATIONAL ASSOCIATION,
THE TORONTO-DOMINION BANK, NATIONSBANK OF TEXAS, N.A., CORESTATES BANK, N.A.,
FLEET BANK, N.A., FIRST NATIONAL BANK OF MARYLAND, THE FIRST NATIONAL BANK OF
BOSTON, CIBC INC., FIRST UNION NATIONAL BANK OF NORTH CAROLINA, ROYAL BANK OF
CANADA, FLEET NATIONAL BANK, BANQUE NATIONALE DE PARIS, UNION BANK OF
CALIFORNIA, N.A. (FORMERLY KNOWN AS UNION BANK AND THE BANK OF CALIFORNIA,
N.A.), BANK OF HAWAII, MERITA BANK LTD, BANK OF MONTREAL, CHICAGO BRANCH,
COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE, FIRST HAWAIIAN BANK,
SOCIETE GENERALE, KEYBANK NATIONAL ASSOCIATION (FORMERLY KNOWN AS SOCIETY
NATIONAL BANK) and CREDIT LYONNAIS CAYMAN ISLAND BRANCH (collectively, and
together with any financial institution which subsequently becomes a 'Bank'
under the Loan Agreement, as such term is defined therein, the "Banks");
CORESTATES BANK, N.A., NATIONSBANK OF TEXAS, N.A. AND FLEET BANK, N.A., as
co-agents (collectively, in such capacity, the "Co-Agents"); THE
TORONTO-DOMINION BANK, as documentation agent (in such capacity, the
"Documentation Agent"); PNC BANK, NATIONAL ASSOCIATION, as administrative agent
(in such capacity, the Administrative Agent); and TORONTO DOMINION (TEXAS),
INC., as collateral agent for the Administrative Agent, the Documentation
Agent, the Co-Agents and the Banks (the "Collateral Agent," and together with
the Administrative Agent, the Documentation Agent and the Co-Agents, the
"Agents"),
W I T N E S S E T H:
WHEREAS, the Borrower, the Banks and the Agents are parties to that
certain Third Amended and Restated Loan Agreement dated as of December 1, 1995,
as amended by that certain First Amendment to Third Amended and Restated Loan
Agreement dated as of May 31, 1996 (as hereafter amended, modified and
supplemented from time to time, the "Loan Agreement"); and
WHEREAS, the Borrower wishes to amend covenants in the Loan Agreement
dealing with the Borrower's acquisition of PCS Systems (as defined herein);
NOW, THEREFORE, in consideration of the premises set forth above, the
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree that all capitalized terms used herein shall have
<PAGE> 2
the meanings ascribed thereto in the Loan Agreement and further agree as
follows:
1. Amendments to Article 1. Article 1 of the Loan Agreement,
"Definitions" is hereby amended by deleting the definitions of "Auction
License," "Capital Expenditures," "Cellular System," "PCS 10MHz System," and
"PCS Subsidiary" in their entireties and by substituting the following in lieu
thereof:
"'Auction License' shall mean any License to operate a PCS
System initially sold through an auction conducted by the FCC, whether
acquired through such auction or otherwise."
"'Capital Expenditures' shall mean, in respect of any Person,
expenditures for the purchase of assets of long-term use which would
be required to be capitalized on the balance sheet of such Person in
accordance with GAAP; provided, however, that "Capital Expenditures"
shall not include expenditures by any PCS Subsidiary with respect to
any PCS System."
"'Cellular System' means a cellular mobile radio telephone
system constructed and operated in an MSA or an RSA, or a PCS System
constructed and operated in a BTA."
"'PCS System' shall mean any broad band personal
communications services telecommunications system operating on up to
20MHz of radio spectrum in a BTA, or a License or Licenses to operate
such a system."
"'PCS Subsidiary' shall mean any Subsidiary of Palmer PCS Co.
or any of its Subsidiaries holding or formed to hold, as its only
assets, Auction Licenses, PCS Systems and other assets directly
related to such Auction Licenses or PCS Systems, including, without
limitation, equity interests in, or loans to, PCS Investments and PCS
Subsidiaries."
2. Further Amendment to Article 1. Article 1, Definitions, is
hereby further amended by adding the following definitions appropriately
alphabetized:
"'Palmer PCS Co.' shall mean Palmer PCS Co., a Delaware
corporation and a wholly-owned Subsidiary of the Borrower, which has
(or will have) as its only assets Auction Licenses, PCS Subsidiaries
and PCS Investments (and other assets directly relating thereto)."
"'PCS Investment' shall mean a Person in which less than fifty
and one one-hundredth of a percent (50.01%) of
-2-
<PAGE> 3
the ownership interests of such Person are owned by a PCS Subsidiary
and which holds, or is formed to hold, an Auction License or operates,
or is formed to operate, PCS Systems."
3. Amendments to Section 5.10.
(a) Section 5.10, Use of Proceeds, is hereby amended by
deleting references to "PCS 10MHz System" in subsections 5.10(a) and 5.10(f)
and substituting therefor the term "PCS System".
(b) Subsection 5.10(j) is hereby amended by deleting the
existing subsection (j) in its entirety and by substituting the following in
lieu thereof:
"(j) so long as any Auction License acquired is for a PCS
System which is (x) located entirely in one or more of Florida,
Georgia or Alabama or (y) primarily within the same geographic area as
or contiguous to a Cellular System then owned by the Borrower or any
of its Subsidiaries, to (i) fund the downpayment in connection with
the acquisition by any PCS Subsidiary of one or more Auction Licenses
acquired directly through an auction conducted by the FCC, (ii) make
interest payments in respect of FCC Indebtedness, (iii) fund
construction and buildout of PCS Systems owned by PCS Subsidiaries and
PCS Investments, and (iv) acquire PCS Investments (and loans to PCS
Investments); provided that the aggregate amount of the proceeds
available under this subsection (j) shall not exceed $50,000,000; and"
4. Amendment to Section 5.14. Section 5.14 to the Loan
Agreement, Covenants Regarding Formation of Subsidiaries and Acquisitions;
Partnership, Subsidiaries, is hereby amended by deleting the existing Section
5.14 in its entirety and by substituting the following in lieu thereof:
"Section 5.14 Covenants Regarding Formation of Subsidiaries
and Acquisitions; Partnership, Subsidiaries. At the time of (i) any
Acquisition permitted hereunder, (ii) the purchase by the Borrower or
any of its Subsidiaries of all minority interests in any Subsidiary of
the Borrower, or (iii) the formation of any new Subsidiary of the
Borrower or any of its Subsidiaries which is permitted under this
Agreement, the Borrower will, and will cause its Subsidiaries, as
appropriate, to (a) provide to the Collateral Agent an executed
Subsidiary Security Agreement for such new Subsidiary, in
substantially the form of Exhibit F attached hereto, together with
appropriate UCC-1 financing statements, as well as an executed
Subsidiary Guaranty for such new Subsidiary, in substantially the form
of Exhibit D attached hereto, which shall constitute both
-3-
<PAGE> 4
Security Documents and Loan Documents for purposes of this Agreement,
as well as a loan certificate for such new Subsidiary, substantially
in the form of Exhibit P attached hereto, together with appropriate
attachments; (b) pledge to the Collateral Agent all of the stock or
partnership interests (or other instruments or securities evidencing
ownership) of such Subsidiary or Person which is acquired or formed,
beneficially owned by the Borrower or any of the Borrower's
Subsidiaries, as the case may be, as additional Collateral for the
Obligations to be held by the Collateral Agent in accordance with the
terms of the Borrower's Pledge Agreement, an existing Subsidiary
Pledge Agreement, or a new Subsidiary Pledge Agreement in
substantially the form of Exhibit E attached hereto, and execute and
deliver to the Collateral Agent all such documentation for such pledge
as, in the reasonable opinion of the Managing Agents, is appropriate;
and (c) provide revised financial projections for the remainder of the
fiscal year and for each subsequent year until the Maturity Date which
reflect such Acquisition or formation, certified by the Chief
Financial Officer of the Borrower, together with a statement by such
Person that no Default exists or would be caused by such Acquisition
or formation, and all other documentation, including one or more
opinions of counsel, reasonably satisfactory to the Managing Agents
which in their reasonable opinion is appropriate with respect to such
Acquisition or the formation of such Subsidiary. Notwithstanding the
foregoing provisions of this Section 5.14, PCS Investments and PCS
Subsidiaries (which, in each case, are less than wholly-owned by the
Borrower) are excluded from the requirements of Section 5.14(iii)(a)
hereof until such time as such PCS Investment becomes a wholly-owned
Subsidiary of the Borrower. Any document, agreement or instrument
executed or issued pursuant to this Section 5.14 shall be a 'Loan
Document' for purposes of this Agreement."
5. Amendments to Section 7.6. Section 7.6 of the Loan Agreement,
Investments and Acquisitions, is hereby amended as follows:
(a) Subsection 7.6(c) is hereby amended by deleting the
existing subsection (c) in its entirety and by substituting the following in
lieu thereof:
"(c) The Borrower may use the cash proceeds of any
issuance of equity interest in the Borrower (to the extent permitted
hereunder), or the issuance of Indebtedness permitted pursuant to
Section 7.1(i) hereof solely as follows:
-4-
<PAGE> 5
(i) for the acquisition (including
reasonable and customary costs and expenses related to such
Acquisition) of not less than fifty and one one-hundredth
percent (50.01%) of the ownership interest (after giving
effect to any ownership interest acquired on or prior to the
date of such Acquisition pursuant to Section 7.6(e) hereof or
otherwise) in Cellular Systems, or the right to construct a
Cellular System (including without limitation, associated
construction costs), in an RSA or an MSA or a BTA (in the case
of a PCS System) which is (x) located entirely in one or more
of South Carolina, Florida, Georgia or Alabama or (y)
primarily within the same geographic area as or contiguous to
a Cellular System then owned by the Borrower or any of its
Subsidiaries, in each case, without the consent of the Banks
(and if an Acquisition referred to in this Section 7.6(c) is
an Acquisition by any PCS Subsidiary of an Auction License,
the provisions of Section 11.20 hereof shall apply in addition
to the provisions of this Section 7.6(c)), provided, that,
except as set forth in Section 11.20 hereof, (A) the Borrower
shall not enter into any binding agreement with respect to
such Acquisition unless (1) the Borrower shall have received
sufficient funds to make such Acquisition or (2) such
agreement shall contain a commercially reasonable liquidated
damages provision, (B) prior to entering into any binding
agreement with respect to such Acquisition, the Borrower shall
deliver to the Managing Agents and the Banks a certificate
reflecting pro forma projections and compliance with the terms
and conditions of this Agreement from the date of such
Acquisition through the Maturity Date after giving effect to
such Acquisition and using reasonable assumptions in the
opinion of the Majority Banks, (C) contemporaneously with the
completion of the Acquisition, the Borrower shall grant to the
Collateral Agent a first priority Lien upon any assets
(including without limitation, capital stock and partnership
interests) acquired in connection with such Acquisition to the
same extent as required hereunder for existing Subsidiaries of
the Borrower, and (D) if a binding agreement for such
Acquisition is not executed within twelve (12) months from the
date of receipt of the proceeds of the issuance of such equity
interest in the Borrower or such Indebtedness, as the case may
be, or such Acquisition is not concluded within eighteen (18)
months from the date of receipt of the proceeds of the
issuance of equity or Indebtedness, as the case may be, the
consent of the Majority Banks shall be required for such
Acquisition. The Borrower agrees to grant to the Collateral
Agent (on behalf of the Managing Agents
-5-
<PAGE> 6
and the Banks) a security interest in the proceeds of the
issuance of such equity interest in the Borrower or such
Indebtedness, as the case may be, until such time as such
proceeds are used in connection with an Acquisition or applied
to the Obligations pursuant to Section 7.6(h) hereof; and
(ii) for PCS Investments and loans to PCS
Investments; provided that the PCS Subsidiary provides the
ownership interests evidencing such investment and evidences
of Indebtedness with respect to such loans to the Collateral
Agent to be held as additional collateral for the
Obligations;"
(b) Subsection 7.6(e) is hereby amended by deleting the
existing subsection (e) in its entirety and by substituting the following in
lieu thereof:
"(e) Subject to compliance with Section 5.14
hereof, the Borrower may use Advances as permitted by Section 5.10
hereof in whole or in part as follows:
(i) for the acquisition (including
reasonable and customary costs and expenses related to such
Acquisition) of not less than fifty and one one-hundredth
percent (50.01%) of the ownership interest (after giving
effect to any ownership interest acquired on or prior to the
date of such Acquisition as permitted hereunder) in Cellular
Systems, or the right to construct a Cellular System
(including, without limitation, associated construction
costs), in an RSA or an MSA or a BTA (in the case of a PCS
System) which is (A) located entirely in one or more of South
Carolina, Florida, Georgia, or Alabama or (B) primarily within
the same geographic area as or contiguous to a Cellular System
then owned by the Borrower or any of its Subsidiaries, in each
case, without the consent of the Banks (and if an Acquisition
referred to in this Section 7.6(e) is an Acquisition by any
PCS Subsidiary of an Auction License, the provisions of
Section 11.20 hereof shall apply in addition to the provisions
of this Section 7.6(e)); and
(ii) for PCS Investment and loans to PCS
Investments; provided that the PCS Subsidiary provides the
ownership interests evidencing such investment and evidences
of Indebtedness with respect to such loans to the Collateral
Agent to be held as additional collateral for the
Obligations;"
-6-
<PAGE> 7
(c) Subsection 7.6(f) is hereby amended by deleting the
existing subsection (f) in its entirety and by substituting the following in
lieu thereof:
"(f) Subject to compliance with Section 5.14
hereof, the Borrower may use Advances as permitted by Section 5.10
hereof in whole or in part for the acquisition by any PCS Subsidiary
or a PCS Investment (including reasonable and customary costs and
expenses related to such Acquisition) of Auction Licenses (or an
interest in Auction Licenses) for any PCS System in a BTA which is (x)
located entirely in one or more of South Carolina, Florida, Georgia,
or Alabama or (y) primarily within the same geographic area as or
contiguous to a Cellular System then owned by the Borrower or any of
its Subsidiaries, in each case, without the consent of the Banks. The
provisions of Section 11.20 hereof shall apply in addition to the
provisions of this Section 7.6(f); and"
(d) Subsection 7.6(g) is hereby amended by deleting the
existing subsection (g) in its entirety and by substituting the following in
lieu thereof:
"(g) So long as no Auction License has been
terminated or revoked, the Borrower or any of its Subsidiaries may
make additional investments in any PCS Subsidiary and any PCS
Investment; provided, however, that such investments shall be made
from (i) Excess Cash Flow in an amount not to exceed (A) for each
fiscal year prior to 1998, fifty percent (50%) of Excess Cash Flow for
the immediately preceding fiscal year, and (B) for 1998 and each
fiscal year thereafter, forty percent (40%) of Excess Cash Flow for
the immediately preceding fiscal year, (ii) Advances as permitted by
Section 5.10 hereof, or (iii) proceeds from any issuance of equity
interest in the Borrower (to the extent permitted hereunder)."
6. Amendment to Section 7.7. Section 7.7 of the Loan Agreement,
Restricted Payments and Purchases, is hereby amended by deleting existing
subsection 7.7(c) in its entirety and by substituting the following in lieu
thereof:
"(c) any PCS Subsidiary and any PCS Investment may make
payments on FCC Indebtedness; provided, however, that such payments
shall be paid from (i) Advances in accordance with Section 5.10(f)
hereof, (ii) investments permitted under Section 7.6(g) hereof or
(iii) the revenues of such Person."
7. Consents. Notwithstanding anything to the contrary in the
Loan Agreement, but subject to Sections 5.10, 7.6 and 7.7 of the Loan
Agreement, the Majority Banks hereby consent to the
-7-
<PAGE> 8
Borrower's making loans to Palmer PCS Co., provided that (i) such loans shall
at all times be evidenced by a promissory note in form and substance
satisfactory to the Collateral Agent (the "Palmer PCS Note"); (ii) the Borrower
shall promptly deliver the Palmer PCS Note to the Collateral Agent, duly
endorsed to the Collateral Agent (in form satisfactory to the Collateral Agent)
as Collateral for the Obligations pursuant to the Borrower Security Agreement;
and (iii) the Borrower shall not use the outstanding principal amount of the
Palmer PCS Note nor the interest accrued thereon when calculating the
Borrower's compliance with Sections 7.8, 7.9, 7.10, 7.11 and 7.12 of the Loan
Agreement.
8. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
separate counterparts shall together constitute but one and the same
instrument.
9. Governing Law. This Amendment shall be construed in
accordance with and governed by the laws of the State of New York.
10. Severability. Any provision of this Amendment which is
prohibited or unenforceable in any jurisdiction shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof in that jurisdiction or affecting the validity or
enforceability of such provision in any other jurisdiction.
11. No Other Amendment or Waiver. Except for the amendments set
forth above, the text of the Loan Agreement and all other Loan Documents shall
remain unchanged and in full force and effect. No waiver by the Collateral
Agent, the other Agents or the Banks under the Loan Agreement or any other Loan
Document is granted or intended except as expressly set forth herein, and the
Collateral Agent, the other Agents and the Banks expressly reserve the right to
require strict compliance in all other respects (whether or not in connection
with any Requests for Advance). Except as set forth herein, the amendments
agreed to herein shall not constitute a modification of the Loan Agreement or
any of the other Loan Documents, or a course of dealing with the Collateral
Agent, the other Agents and the Banks, or any of them, at variance with the
Loan Agreement or any of the other Loan Documents, such as to require further
notice by the Collateral Agent, the other Agents, the Banks, the Majority
Banks, or any of them, to require strict compliance with the terms of the Loan
Agreement and the other Loan Documents in the future.
-8-
<PAGE> 9
12. Representations and Warranties. The Borrower hereby
represents and warrants in favor of the Agents and the Banks as follows:
(a) The Borrower has the corporate power and authority (i) to
enter into this Amendment and (ii) to do all other acts and things as are
required or contemplated hereunder to be done, observed and performed by it;
(b) This Amendment has been duly authorized, validly executed and
delivered by one or more Authorized Signatories of the Borrower and constitutes
the legal, valid and binding obligation of the Borrower, enforceable against
the Borrower in accordance with its terms, subject, as to enforcement of
remedies, to the following qualifications: (i) an order of specific performance
and an injunction are discretionary remedies and, in particular, may not be
available where damages are considered an adequate remedy at law, and (ii)
enforcement may be limited by bankruptcy, insolvency, liquidation,
reorganization, reconstruction and other similar laws affecting enforcement of
creditors' rights generally (insofar as any such law relates to the bankruptcy,
insolvency or similar event of the Borrower);
(c) Each of the representations and warranties set forth in
Section 4.1 of the Loan Agreement are true and correct as of the date hereof;
and
(d) There does not exist on the date hereof any Default or Event
of Default.
13. Loan Documents. This document shall be deemed to be a Loan
Document for all purposes.
14. Effectiveness. Upon receipt by the Administrative Agent of
executed signature pages of this Amendment from the Borrower and the Majority
Banks, this Amendment shall automatically be effective.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-9-
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Amendment or
caused it to be executed by their duly authorized officers, all as of the day
and year first above written.
<TABLE>
<S> <C>
BORROWER: PALMER WIRELESS, INC., a Delaware corporation
By: /s/ M. WAYNE WISEHART
---------------------------------------------------------------------
Its: Vice-President
-------------------------------------------------------------
ADMINISTRATIVE AGENT: PNC BANK, NATIONAL ASSOCIATION
By: /s/ THOMAS P. CARDEN
---------------------------------------------------------------------
Its: VICE PRESIDENT
-------------------------------------------------------------
DOCUMENTATION AGENT: THE TORONTO-DOMINION BANK
By: /s/ DIANE BAILEY
---------------------------------------------------------------------
Its:
-------------------------------------------------------------
COLLATERAL AGENT: TORONTO DOMINION (TEXAS), INC.
By: /s/ DIANE BAILEY
---------------------------------------------------------------------
Its: Vice President
-------------------------------------------------------------
BANKS: PNC BANK, NATIONAL ASSOCIATION
By: /s/ THOMAS P. CARDEN
---------------------------------------------------------------------
Its: VICE PRESIDENT
-------------------------------------------------------------
</TABLE>
SECOND AMENDMENT TO LOAN AGREEMENT
PALMER WIRELESS, INC.
Signature Page 1
<PAGE> 11
<TABLE>
<S> <C>
THE TORONTO-DOMINION BANK
By: /s/ DIANE BAILEY
--------------------------------------------------------------------
Its:
------------------------------------------------------------
NATIONSBANK OF TEXAS, N.A.
By: [SIG]
--------------------------------------------------------------------
Its: Vice President
------------------------------------------------------------
CORESTATES BANK, N.A.
By: [SIG]
--------------------------------------------------------------------
Its: Vice President
------------------------------------------------------------
FLEET BANK, N.A.
By: /s/ TANYA M. CROSSLEY
--------------------------------------------------------------------
Its: VICE PRESIDENT
------------------------------------------------------------
FLEET NATIONAL BANK
By: /s/ TANYA M. CROSSLEY
--------------------------------------------------------------------
Its: VICE PRESIDENT
------------------------------------------------------------
FIRST NATIONAL BANK OF MARYLAND
By: [SIG]
--------------------------------------------------------------------
Its: VICE PRESIDENT
------------------------------------------------------------
</TABLE>
SECOND AMENDMENT TO LOAN AGREEMENT
PALMER WIRELESS, INC.
Signature Page 2
<PAGE> 12
<TABLE>
<S> <C>
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ MARY E. MEDUSKI
--------------------------------------------------------------------
Its: Director
------------------------------------------------------------
CIBC INC.
By: /s/ MARSHA HARNEY
--------------------------------------------------------------------
Its: Director, CIBC Wood Gundy Securities Corp acting as Agent
------------------------------------------------------------
for CIBC, Inc.
------------------------------------------------------------
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By: /s/ JOHN BUTLER
--------------------------------------------------------------------
Its: Senior Vice President
------------------------------------------------------------
ROYAL BANK OF CANADA
By: /s/ THOMAS BYRNE
--------------------------------------------------------------------
Its: Senior Manager
------------------------------------------------------------
BANQUE NATIONALE DE PARIS
By: /s/ SERGE DESRAYAUD /s/ PAMELA LUCASH
--------------------------------------------------------------------
Its: V.P. Team Leader Assistant Treasurer
------------------------------------------------------------
UNION BANK OF CALIFORNIA, N.A. (formerly known as Union Bank and The
Bank of California, N.A.)
By: /s/ J. KEVIN SAMPSON
---------------------------------------------------------------------
Its: Vice President
-------------------------------------------------------------
</TABLE>
SECOND AMENDMENT TO LOAN AGREEMENT
PALMER WIRELESS, INC.
Signature Page 3
<PAGE> 13
<TABLE>
<S> <C>
BANK OF HAWAII
By: /s/ BRUCE HELBERG
---------------------------------------------------------------------
Its: Coorporate Banking Officer
-------------------------------------------------------------
MERITA BANK LTD
By: /s/ CHARLES J. LANSDOWNE [SIG]
---------------------------------------------------------------------
Its: Vice President Vice President
-------------------------------------------------------------
BANK OF MONTREAL, CHICAGO BRANCH
By: /s/ YVONNE BOS
---------------------------------------------------------------------
Its: SENIOR VICE PRESIDENT
-------------------------------------------------------------
COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE
By: /s/ MARCUS EDWARD /s/ SEAN MOUNIER
---------------------------------------------------------------------
Its: Vice President First Vice Presidnet
-------------------------------------------------------------
FIRST HAWAIIAN BANK
By: /s/ DONALD C. YOUNG
---------------------------------------------------------------------
Its: Assistant Vice President
-------------------------------------------------------------
SOCIETE GENERALE
By: /s/ BRYAN G. PETERMANN
---------------------------------------------------------------------
Its: Vice President
-------------------------------------------------------------
</TABLE>
SECOND AMENDMENT TO LOAN AGREEMENT
PALMER WIRELESS, INC.
Signature Page 4
<PAGE> 14
<TABLE>
<S> <C>
KEYBANK NATIONAL ASSOCIATION (formerly known as Society National Bank)
By: /s/ KATHLEEN MAYHER
---------------------------------------------------------------------
Its: Senior Vice President
-------------------------------------------------------------
CREDIT LYONNAIS CAYMAN ISLAND BRANCH
By: /s/ MARK THORSHEIM
---------------------------------------------------------------------
Its: Vice President
-------------------------------------------------------------
</TABLE>
SECOND AMENDMENT TO LOAN AGREEMENT
PALMER WIRELESS, INC.
Signature Page 5
<PAGE> 1
Exhibit 11
PALMER WIRELESS, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of shares of common stock
outstanding at beginning of the
period 17,993 17,993 17,993 18,000 23,389
Weighted average number of shares of
common stock issued during the
period ---- ---- 7 4,179 2,701
Weighted average number of shares of
common stock from stock options
using the treasury stock method ---- ---- ---- 148 149
Weighted average number of shares of
common stock purchased for the
treasury during the period ---- ---- ---- ---- (107)
--------- -------- ------- ------- -------
Weighted average number of shares of
common stock outstanding during
the period 17,993 17,993 18,000 22,327 26,132
========= ======== ======= ======= =======
Net income (loss) $ (12,228) $ (7,352) $ 1,662 $ 954 $ 4,682
========= ======== ======= ======= =======
Earnings (loss) per common share $ (.68) $ (.41) $ .09 $ .04 $ .18
========= ======== ======= ======= =======
</TABLE>
<PAGE> 1
[PHOTO]
[PHOTO]
[PHOTO]
[PHOTO]
[PALMER WIRELESS, INC. LOGO]
PALMER WIRELESS, INC.
Annual Report 1996
<PAGE> 2
FINANCIAL HIGHLIGHTS
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Revenues $ 27,301 $ 41,458 $ 68,979 $ 104,906 $ 159,743
Operating Cash Flow* $ 7,377 $ 12,850 $ 24,900 $ 41,586 $ 66,190
Operating Cash Flow Margin 27.0% 31.0% 36.1% 39.6% 41.4%
=============================================================================================================================
Net Income (Loss) $(12,228) $ (7,352) $ 1,662 $ 954 $ 4,682
Net Income (Loss) Per Share $ ( .68) $ ( .41) $ .09 $ .04 $ .18
=============================================================================================================================
Total Assets $ 127,867 $ 150,054 $ 273,020 $ 462,871 $ 549,942
Capital Expenditures $ 3,835 $ 13,304 $ 22,541 $ 36,564 $ 41,445
=============================================================================================================================
# of Majority Owned Markets 8 9 13 15 17
Subscribers 37,209 65,761 117,224 211,985 279,816
=============================================================================================================================
Employees 158 240 395 521 627
</TABLE>
* Defined as operating income before depreciation and amortization.
CORPORATE PROFILE
Palmer Wireless, Inc. is a wireless communications company headquartered in
Fort Myers, Florida. Operating 17 non-wireline cellular systems in a four-state
region, including Georgia, Alabama, Florida and South Carolina, Palmer's
licensed service areas cover over 40,000 square miles, 1,800 miles of highway
and a total estimated population of 3.8 million people.
All of Palmer's systems are part of the North American Cellular Network and
are marketed under the CELLULAR ONE(R) brand name. With over 280,000
subscribers, Palmer is one of the largest independent operators of cellular
telephone systems in the United States.
CELLULAR ONE (R)
TABLE OF CONTENTS
- - President's Message
to Shareholders
Page 2
- - Company Operations
Page 4
- - Board of Directors
Page 8
- - Corporate Officers
Page 9
- - Map of Service Areas
Page 10
- - Five-Year Condensed
Financial Data
Page 12
- - Management's
Discussion and Analysis
Page 13
- - Consolidated Financial
Statements
Page 29
- - Corporate Information
Page 52
<PAGE> 3
[PHOTO]
TO OUR SHAREHOLDERS
The Company enjoyed another record year in 1996, highlighted by a 32% increase
in our subscribers. Palmer's 279,816 customers at December 31, 1996 represent a
penetration rate of 7.5%, one of the highest rates of any independent cellular
telephone operator. Industry wide there are now more than 44 million wireless
subscribers in the U.S., up from 7.5 million just five years ago.
Strong growth in subscribers also led to record financial performance for
the Company in 1996. Palmer's service revenues increased to $151.1 million
during the year, 56% higher than in 1995. Meanwhile, the Company's operating
cash flow rose 59% to a record $66.2 million. Palmer's 1996 cash flow margin
of 44% of service revenues continues to be one of the highest in the industry
and is a testament to the efficiency of our operations. The Company also
reported solid growth in net income, earning $4.7 million in 1996 or $.18 per
share.
One of the keys to Palmer's success is our strategy of using primarily a
direct in-house sales staff, coupled with strong customer service and
follow-up. We believe that by controlling the sales process, we are better
able to ensure that customers are comfortable using their cellular phones and
are matched to a rate plan that best suits their needs. This improves
customer retention and profitability.
For the year, Palmer's cost to add a gross subscriber was $216, while our
customer churn rate was 1.8% per month. We believe that both statistics
continue to be among the best in the industry. I am once again pleased to
report that Palmer received the #1 ranking in Cellular One's 1996 National
Customer Satisfaction Survey. This makes four of the last five years that
Palmer has held the number one ranking, and is another reflection of our strong
customer service effort.
Palmer continues to focus on improving our coverage and service offerings.
During 1996, our engineering group successfully built 50 new cell sites,
bringing the Company's total to 215 at year end. During 1997, we plan to
invest nearly $40 million to build 70 additional cell sites, and when completed
this will extend portable coverage to almost all of the population centers and
major highways in our service areas.
I would also note that we successfully launched our first TDMA digital
system in Fort Myers during December. This digital network allows us to offer
advanced cellular features and services such as caller-ID, short message paging
and extended battery life. This system is performing well and we plan to roll
out the rest of our major markets during the first and second quarter of this
year.
I am pleased to announce that in October, Palmer entered into a PCS roaming
agreement with AT&T Wireless. AT&T and Palmer's
2
<PAGE> 4
digital networks have been designed to provide seamless roaming to subscribers
traveling between each other's systems. Beginning in 1997, we look forward to
offering this expanded coverage area to our digital customers. This roaming
agreement, coupled with the introduction of digital services and our expanded
portable coverage area, positions us to offer our customers one of the most
complete and comprehensive network systems in the country.
Palmer also continues to expand through acquisitions. In 1996, Palmer
acquired the Georgia-1 and Georgia-6 RSAs, and last month closed on the
acquisition of the Georgia-13 RSA. Altogether these purchases added
approximately 21,000 subscribers and increased our total population served by
over 570,000. More importantly, these acquisitions were adjacent to Palmer's
existing footprint, allowing us to reap significant economies of scale in areas
such as network costs, billing and advertising. This "clustering" approach
allows us to offer our customers an even larger home service area, while at the
same time significantly reducing our operating costs per subscriber. I am
proud to say that at $29 per month, Palmer's cash operating cost per subscriber
is the lowest in the industry.
Once again, I want to thank the Palmer Wireless family of employees. Our
accomplishments this year would have not been possible without the efforts of
each and every member of our organization. In fact, much of Palmer's success is
attributable to the professionalism and "what can we do for our customers"
attitude of our employees. As the Company continues to expand and as
competition increases, it is imperative that we maintain this advantage.
Looking forward through 1997 and beyond, industry analysts expect the
number of wireless subscribers to surpass 100 million by the year 2000. New
technologies such as PCS, ESMR and digital will help fuel that growth, but
will also bring about a more competitive environment. The winners in this new
landscape will be those companies that can offer customers more and better
value for less money. Customers will expect it, competition will demand it,
and Palmer must provide it.
We will be up to this challenge.
/s/ WILLIAM J. RYAN
WILLIAM J. RYAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MARCH 10, 1997
3
<PAGE> 5
[PHOTO]
OFFERING CUSTOMERS MORE VALUE FOR LESS
The ability to deliver on your customers' expectations is probably the most
critical measure of any communications company. The success or failure in this
area will impact a company's ability to retain customers, the perceived level
of customer satisfaction and ultimately, the ability to attract new
subscribers. This is most important in the smaller markets in which Palmer
operates, where "word of mouth" plays a much more important role in the success
or failure of marketing to customers.
Palmer continues to focus its efforts on providing our subscribers with the
best value at the lowest possible price. This "best value" approach includes
superior network coverage, 24-hour customer service, and easy to understand
rate plans that are priced to encourage customers to use their phones and make
them part of their everyday lives. By focusing on this fundamental principle,
Palmer has enjoyed and will continue to enjoy strong customer growth, low
subscriber churn, and superior operating profits.
GROWTH IN SUBSCRIBERS
<TABLE>
<S> <C>
1996 279,816
1995 211,985
1994 117,224
1993 65,761
1992 37,209
</TABLE>
COMPREHENSIVE NETWORK COVERAGE
From a customer's viewpoint, nothing is more important than system coverage.
The ability to make and receive calls anytime, anywhere is a primary motivation
of cellular customers. Failure to live up to customer expectations in this
area is a major reason for customer churn.
Finding ways to improve and enhance Palmer's network is a continuing
assignment that Palmer takes very seriously.
4
<PAGE> 6
<TABLE>
<CAPTION>
CELL SITES IN USE
<S> <C>
1996 215
1995 148
1994 92
1993 59
1992 41
</TABLE>
EXPANDED SYSTEM
Palmer spent approximately $41 million to improve our cellular network during
1996. These expenditures included the construction of 50 additional cell sites
bringing the Company's total to 215 at year end. During 1997, Palmer will add
70 new cell sites. When completed, Palmer's nearly 300 cell sites will provide
consistent portable coverage to nearly all of the population centers and major
highways in our service areas.
In addition to constructing new cell sites, Palmer continues to expand the
use of fiber optic and microwave connections within our cluster. Microwave and
fiber optic networks allow the Company to bypass local landline telephone
companies when carrying call traffic within our service areas, and thus reduce
or eliminate fees paid to these carriers. During 1996, the Company spent
approximately $3.6 million on microwave and fiber optic connections and plans
to spend approximately $6.0 million during 1997.
STATE-OF-THE-ART DIGITAL TECHNOLOGY
In addition to improved coverage, subscribers also expect state-of-the-art
technology. The implementation of digital technology is being driven both by
subscriber demand for secure communications and enhanced features, as well as
the increased system capacity and reduced incremental capital costs afforded to
system operators. While Palmer's current network coverage provides sufficient
capacity, the features and benefits of digital technology are an essential part
of the Company's future growth plans.
In December, Palmer launched our first TDMA (Time Division Multiple Access)
standard digital system in Fort Myers, Florida. The Company's digital system,
using Northern Telecom technology, offers our subscribers new and enhanced
features such as secure communications, caller ID, short message paging, and
extended battery life.
In addition, this technology will nearly triple the effective capacity of
Palmer's network without reducing our existing analog capability. Digital
service will be launched in the rest of Palmer's markets during 1997.
[PHOTO]
5
<PAGE> 7
[PHOTO]
IMPROVED ROAMING RELATIONSHIPS
Anytime, anywhere communications also means offering customers cellular service
outside the Company's existing license areas. Through our membership in the
North American Cellular Network (NACN) and other special networking
arrangements, Palmer's subscribers enjoy seamless roaming and automatic call
delivery to over 5,000 cities in North America, allowing them to place and
receive calls without dialing special access codes.
Historically, one of the problems that has been associated with roaming is
the patchwork of rates and access charges customers have paid while roaming in
other markets. Customers have been reluctant to use their phone outside their
markets because of the cost uncertainty. Palmer, in keeping with our strategy
of offering customers greater value, introduced a new roaming program whereby
Palmer customers traveling outside their home markets are charged a low flat
rate per minute. Typically this flat rate is $.49 per minute in neighboring
states and slightly higher for the rest of the country. This program has been
well received and has increased usage among our subscribers. As more carriers
adopt this approach, Palmer expects roaming to increase as more subscribers
become comfortable with using their phones while outside their local markets.
In October, Palmer became one of the first companies in the wireless
industry to enter into a roaming agreement with a PCS provider. Palmer's
agreement with AT&T Wireless will allow AT&T's digital customers to connect
seamlessly while traveling in Palmer's markets. At the same time, Palmer's
digital subscribers will enjoy the use of enhanced features over AT&T's
national footprint.
The introduction of digital services and expanded home rate coverage,
coupled with our comprehensive roaming arrangement, position Palmer to offer
one of the most complete and extensive network systems in the country.
<TABLE>
<CAPTION>
MARKET PENETRATION
<S> <C>
1996 7.5%
1995 6.4%
1994 4.6%
1993 3.5%
1992 2.2%
</TABLE>
6
<PAGE> 8
[PHOTO]
FIRST CLASS CUSTOMER SERVICE
Another essential part of providing customer satisfaction is a strong customer
service program. Strong customer service manifests itself in lower customer
turnover or "churn" and is a very cost effective way to maintain and improve
subscriber loyalty.
In each of our cellular service markets, Palmer maintains a staff of
technical and marketing representatives to handle all customer related
functions such as credit, activations, billing adjustments and service calls.
These local offices enable Palmer to better service customers, and ensure the
technical quality of the local cellular network. Palmer also maintains a
24-hour regional call center. This allows subscribers to report service or
account problems at any time of day or night. In addition, Palmer's
sophisticated monitoring equipment and on-call technical staff constantly
maintain the technical performance of the cellular network.
To ensure high-quality customer service, the Cellular One Group authorizes
an independent marketing research firm to perform annual customer satisfaction
surveys of each of its licensees. Palmer was awarded the #1 ranking among all
Cellular One licensees in the 1996 Survey. Palmer has earned this distinction
four out of the last five years.
[PHOTO]
7
<PAGE> 9
[PHOTO]
BOARD OF DIRECTORS
(Seated, left to right)
WILLIAM J. RYAN President and Chief Executive Officer,
Palmer Wireless, Inc.
JAMES S. COWNIE Private Investor
VICKIE A. PALMER Chairman,
Palmer Chiropractic University System
(Standing, left to right)
ROBERT G. ENGELHARDT Executive Vice President and Secretary,
Palmer Wireless, Inc.
THOMAS D. MCCLOSKEY, JR. Chairman,
McCloskey Enterprises, Inc.
KERMIT S. SUTTON President,
Sutton Companies
CLARK R. MANDIGO Investor,
Business Consultant
8
<PAGE> 10
[PHOTO]
CORPORATE OFFICERS
(Back row, left to right)
WILLIAM J. RYAN President and
Chief Executive Officer
ROBERT G. ENGELHARDT Executive Vice President
and Secretary
M. WAYNE WISEHART Vice President,
Treasurer and
Chief Financial Officer
LEON J. HENSEN Senior Vice President
K. PATRICK MEEHAN Vice President,
General Counsel
(Front row, left to right)
STEVEN M. CARLSON Vice President,
Western Region
KATHRYN M. JOHNSON Vice President,
Eastern Region
MARGARET K. OSBORNE Vice President,
Marketing
DONNA F. GAPEN Vice President,
Human Resources
JAMES E. FREDRICKSON Vice President,
Engineering
9
<PAGE> 11
PALMER WIRELESS' CELLULAR LICENSE INTERESTS
<TABLE>
<CAPTION>
NET
1996 COMPANY OWNERSHIP DATE SYSTEM
MARKETS POPULATION* POPS PERCENTAGE OPERATIONAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUGUSTA, GEORGIA 438,857 438,857 100% 4/87
- -----------------------------------------------------------------------------------------------------------------
Augusta - Aiken
- -----------------------------------------------------------------------------------------------------------------
FORT MYERS, FLORIDA 382,962 379,132 99% 8/87
- -----------------------------------------------------------------------------------------------------------------
Fort Myers - Cape Coral
- -----------------------------------------------------------------------------------------------------------------
MACON, GEORGIA 313,240 310,277 99.1% 12/88
- -----------------------------------------------------------------------------------------------------------------
Macon - Warner Robins
- -----------------------------------------------------------------------------------------------------------------
MONTGOMERY, ALABAMA 319,305 293,421 91.9% 8/88
- -----------------------------------------------------------------------------------------------------------------
Montgomery
- -----------------------------------------------------------------------------------------------------------------
SAVANNAH, GEORGIA 283,465 279,172 98.5% 3/88
- -----------------------------------------------------------------------------------------------------------------
Savannah
- -----------------------------------------------------------------------------------------------------------------
COLUMBUS, GEORGIA 251,568 213,480 84.9% 11/88
- -----------------------------------------------------------------------------------------------------------------
Columbus
- -----------------------------------------------------------------------------------------------------------------
GEORGIA -1 RSA 223,935 223,935 100% 10/92
- -----------------------------------------------------------------------------------------------------------------
Dalton
- -----------------------------------------------------------------------------------------------------------------
GEORGIA-12 RSA 209,668 209,668 100% 10/91
- -----------------------------------------------------------------------------------------------------------------
Brunswick - St. Marys - Hinesville
- -----------------------------------------------------------------------------------------------------------------
GEORGIA-6 RSA 199,675 189,369 94.8% 4/93
- -----------------------------------------------------------------------------------------------------------------
Griffin
- -----------------------------------------------------------------------------------------------------------------
ALABAMA-8 RSA 173,167 173,167 100% 7/93
- -----------------------------------------------------------------------------------------------------------------
Auburn - Eufaula
- -----------------------------------------------------------------------------------------------------------------
GEORGIA-8 RSA 157,272 157,272 100% 10/91
- -----------------------------------------------------------------------------------------------------------------
Statesboro - Swainsboro
- -----------------------------------------------------------------------------------------------------------------
GEORGIA-10 RSA 149,712 149,712 100% 10/91
- -----------------------------------------------------------------------------------------------------------------
Douglas - Hazlehurst - Eastman
- -----------------------------------------------------------------------------------------------------------------
PANAMA CITY, FLORIDA 145,711 113,525 77.9% 9/88
- -----------------------------------------------------------------------------------------------------------------
Panama City
- -----------------------------------------------------------------------------------------------------------------
DOTHAN, ALABAMA 134,771 124,434 92.3% 2/89
- -----------------------------------------------------------------------------------------------------------------
Dothan
- -----------------------------------------------------------------------------------------------------------------
GEORGIA-7 RSA 134,325 134,325 100% 10/91
- -----------------------------------------------------------------------------------------------------------------
Dublin - Milledgeville
- -----------------------------------------------------------------------------------------------------------------
GEORGIA-9 RSA 119,253 119,253 100% 9/92
- -----------------------------------------------------------------------------------------------------------------
Americus - Cordele - Dawson
- -----------------------------------------------------------------------------------------------------------------
ALBANY, GEORGIA 118,156 97,726 82.7% 4/88
- -----------------------------------------------------------------------------------------------------------------
Albany
</TABLE>
*Source: Ninth Edition CACI
10
<PAGE> 12
[MAP]
CELLULAR ONE(R)
(As of January 1, 1997)
11
<PAGE> 13
FIVE-YEAR CONDENSED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenues $ 27,301 $ 41,458 $ 68,979 $104,906 $159,743
Engineering, technical and other
direct expenses 5,395 7,343 12,776 18,184 28,717
Cost of equipment 5,071 7,379 11,546 14,146 17,944
Selling, general and administrative
expenses 9,458 13,886 19,757 30,990 46,892
Depreciation and amortization 11,687 10,689 9,817 15,004 25,013
---------- ---------- ---------- --------- ---------
Operating income (loss) $ (4,310) $ 2,161 $ 15,083 $ 26,582 $ 41,177
Interest expense, net (8,290) (9,006) (12,715) (21,213) (31,462)
Other, net (5) (590) (70) (687) (429)
Minority interest share of
(income) losses 377 83 (636) (1,078) (1,880)
Income taxes - - - (2,650) (2,724)
---------- ---------- ---------- --------- ---------
Net income (loss) $ (12,228) $ (7,352) $ 1,662 $ 954 $ 4,682
========== ========== ========== ========= =========
Net income (loss) per share $ (.68) $ (.41) $ .09 $ .04 $ .18
========== ========== ========== ========= =========
OTHER DATA:
Operating income before
depreciation and amortization (1) $ 7,377 $ 12,850 $ 24,900 $ 41,586 $ 66,190
Capital expenditures $ 3,835 $ 13,304 $ 22,541 $ 36,564 $ 41,445
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash $ 443 $ 1,670 $ 2,998 $ 3,436 $ 1,698
Working capital (deficit) (740) 799 2,490 (1,435) 296
Property, plant, and equipment, net 17,371 23,918 51,884 100,936 132,438
Licenses and other intangibles, net 103,901 114,955 199,265 332,850 387,067
Total assets 127,867 150,054 273,020 462,871 549,942
Total debt (2) 106,811 131,361 245,609 350,441 343,662
Equity 10,659 3,244 4,915 74,553 164,930
</TABLE>
(1) Operating income before depreciation and amortization should not be
considered in isolation or as an alternative to net income (loss), operating
income (loss) or any other measure of performance under generally accepted
accounting principles ("GAAP"). The Company believes that operating income
before depreciation and amortization is viewed as a relevant supplemental
measure of performance in the cellular telephone industry.
(2) Includes current installments of long-term debt, notes payable and
amounts due PCI.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to facilitate an understanding and
assessment of significant changes and trends related to the financial condition
and results of operations of the Company. This discussion should be read in
conjunction with the Company's Consolidated Financial Statements and related
notes thereto. References to the Company also include its predecessor, Palmer
Cellular Partnership.
OVERVIEW
Palmer Communications Incorporated ("PCI"), the Company's parent, entered the
cellular telephone business in 1987 when it executed a management agreement
with the owner of the non-wireline cellular permit to construct and operate a
cellular telephone system for the Fort Myers, Florida, Metropolitan Statistical
Area ("MSA"). The Fort Myers system became operational in August 1987, and PCI
purchased the system in March 1988. In 1989, PCI transferred all of its
cellular telephone interests to the Company. As a result of acquisitions of
additional cellular telephone systems, as well as internal subscriber growth,
the Company's operations have grown to serve 279,816 subscribers as of December
31, 1996, in Florida, Georgia, Alabama, and South Carolina in a total of 17
licensed service areas composed of nine MSAs and eight Rural Service Areas
("RSAs").
The Company's revenues consist of service revenue and equipment sales and
installation. Service revenue includes access charges (generally a monthly
charge), usage charges (based upon per minute usage rates), roaming charges
(fees charged for providing services to subscribers of other cellular telephone
systems when such subscribers or "roamers" place or receive a phone call within
one of the Company's service areas), long distance charges derived from long
distance calls placed by the Company's subscribers and other charges,
including, among other things, connection charges for initial activation on the
cellular telephone system, and feature services such as voice mail, call
forwarding and call waiting.
<TABLE>
<CAPTION>
GROWTH IN TOTAL REVENUES (In Thousands)
<S> <C>
1996 $159,743
1995 $104,906
1994 $68,979
1993 $41,458
1992 $27,301
</TABLE>
The Company's revenues have grown primarily by increasing the number of
its subscribers, both by improving its penetration rate (determined by dividing
the aggregate number of subscribers by estimated population) in cellular
telephone systems owned by the Company and by acquiring or constructing new
cellular telephone systems. The Company's subscribers increased from 22,536 at
the beginning of 1992 to 279,816 as of December 31, 1996. During the same
period, the Company's penetration rate in its cellular telephone systems
increased from 1.45% at the beginning of 1992 to 7.45% as of December 31, 1996.
The Company also made several acquisitions between 1992 and 1996, as later
described.
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
On average, new subscribers use less airtime and generate less revenue per
subscriber than existing subscribers. Therefore, airtime usage and service
revenue generally do not increase proportionately with increases in numbers of
subscribers. As a result, although the Company's total revenue has increased
each year, its average minutes of usage per subscriber and its average monthly
revenue per subscriber have decreased over time as new subscribers have been
added. The Company expects these trends to continue in its existing cellular
telephone systems as its penetration rate increases.
<TABLE>
<CAPTION>
GROWTH IN POPULATION SERVED (in thousands)
<S> <C>
1996 3,755
1995 3,307
1994 2,561
1993 1,890
1992 1,692
</TABLE>
The Company believes that its cost to add a net subscriber continues to be
among the lowest in the cellular telephone industry, primarily because of
its in-house direct sales and marketing staff. Although much of the cellular
telephone industry markets through third-party agents, since 1992, the Company
has sold its products and services almost exclusively through an internal sales
force that works principally out of retail stores in which the Company offers a
full line of cellular telephone products and services. The Company's shift to
nearly exclusive use of an internal sales force resulted in significant
decreases in its cost to add a net subscriber during 1992-1993. Starting in
1994, increased losses from the Company's sales of cellular telephones caused
this downward trend in cost to add a net subscriber to slowly reverse itself.
The Company anticipates that its cost to add a net subscriber will continue to
increase at a modest rate as savings associated with its nearly exclusive use
of an internal sales force are fully realized, while other components of its
calculation of cost to add a net subscriber continue to increase. In addition
to sales and marketing expenses, the Company's computation of its cost to add a
net subscriber includes losses on cellular telephone sales, installation
services, credit reference services and an allocation of rental expenses
related to the Company's retail stores.
The Company currently has a microwave network in Alabama which connects the
Montgomery, Alabama MSA and the Alabama-8 RSA with the mobile telephone
switching office ("MTSO") in Dothan, Alabama. This microwave network connects
cellular switching equipment to cell sites without utilizing local landline
telephone carriers, thereby reducing or eliminating fees paid to landline
carriers. During 1995, the Company spent $1.5 million to build additional
microwave connections between Dothan and Montgomery, Alabama, and between
Brunswick and Savannah, Georgia, as well as to complete a network in Fort
Myers, Florida. During 1996, the Company spent $2.6 million to build a fiber
optic network between Dothan, Alabama and Panama City, Florida. The
installation of this fiber optic network resulted in significant savings to the
Company by the substantial reduction or elimination of fees paid to landline
carriers. In addition, this network provides the Company with excess capacity
to lease to third parties or trade for alternate fiber optic routes.
14
<PAGE> 16
Prior to 1994, the Company's customer billing was performed by a
third-party vendor. In January 1994, the Company began performing billing
functions in-house, which significantly reduced customer service costs. The
conversion to the in-house customer billing system reduced annual billing costs
per subscriber from approximately $39 in 1993 to approximately $22 in 1994, $19
in 1995, and $19 in 1996. Since 1993, the Company spent approximately $2.0
million in capital expenditures for its in-house billing system. The software
utilized for in-house billing is leased from its previous third-party vendor.
Therefore, no change has occurred in billing function, or operation.
The Company made significant acquisitions between 1992 and 1996. In
June 1992, the Company invested $6.0 million for a 100% interest in the license
to construct and operate the non-wireline cellular telephone system serving the
Georgia-9 RSA. In April 1993, the Company invested $10.9 million for a 100%
interest in the license to construct and operate the non-wireline cellular
telephone system serving the Alabama-8 RSA. In October 1994, the Company
invested $91.7 million for a 100% interest in the non-wireline cellular
telephone systems serving Georgia-7 RSA, Georgia-8 RSA, Georgia-10 RSA and
Georgia-12 RSA ("the Georgia Acquisition").
In December 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
these MSAs serve a geographic territory in eastern Georgia and a portion of
South Carolina that is adjacent to the Company's other markets - Georgia-8 RSA
and Georgia-12 RSA. In the GTE acquisition, the Company also acquired the
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 Company's other markets - Georgia-8 RSA as well as the Augusta
and Savannah, Georgia MSAs. The Company has no subscribers 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.
On June 20, 1996, the Company acquired the cellular telephone
systems serving the Georgia RSA Market No. 371, Georgia-1 RSA for a total
purchase price of $31.6 million. The Georgia-1 RSA cellular telephone system
serves a geographic territory of northwest Georgia between Chattanooga and
Atlanta, and includes the cities of Dalton, Chatsworth and Calhoun, Georgia.
On July 5, 1996, two of the Company's majority-owned subsidiaries
acquired the cellular telephone system serving Georgia RSA Market No. 376,
Georgia-6 RSA for a total purchase price of $36.0 million. The Georgia-6 RSA
cellular telephone system serves a geographic territory of west central Georgia
between the Company's Macon and Columbus markets and Atlanta, including the
cities of Griffin and Thomaston.
<TABLE>
<CAPTION>
PALMER OWNED SYSTEMS
<S> <C>
1996 17
1995 15
1994 13
1993 9
1992 8
</TABLE>
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
On February 1, 1997, one of the Company's majority-owned subsidiaries
acquired the cellular telephone system serving Georgia RSA Market No. 383,
Georgia-13 RSA for a total purchase price of $30.0 million, subject to certain
adjustments. The Georgia-13 RSA cellular telephone system serves a geographic
territory of southwest Georgia, including the cities of Bainbridge and
Thomasville, and is adjacent to the Company's Albany and Dothan markets. The
recent acquisitions are consistent with the Company's acquisition paradigm of
building a strong regional footprint in the southeast.
During 1992-1996, the Company made various purchases of minority
interests in its existing cellular telephone systems aggregating $10.5 million.
These acquisitions have had no effect on combined total revenues or expenses,
other than amortization and interest, but have decreased the minority
interests' participation in the Company's results for succeeding periods. The
Company expects to acquire additional minority interests in the future.
These acquisitions and related capital expenditures are reflected in
the Company's increased total revenue, total expenses and operating income
before depreciation and amortization. Because the Company's acquisitions
included some licenses with construction permits rather than operating systems,
and some partially built operating systems, substantial capital expenditures
were required to construct cell sites in the acquired cellular telephone
systems. Currently, small portions of the RSAs acquired in the Georgia
Acquisition do not have cellular telephone service. In 1996, the Company spent
$5.2 million on capital expenditures for the cellular telephone systems
acquired in the Georgia Acquisition and $4.0 million on capital expenditures
for cellular telephone systems acquired in the GTE Acquisition to provide
service to the unserved areas of these systems.
Acquisitions and related capital expenditures have required the
Company to incur considerable additional debt, which has increased the
Company's interest expense for periods subsequent to its incurrence. The
Company and its lenders amended and restated the Credit Facility (as defined in
"Liquidity and Capital Resources - Credit Facility") effective in December 1995
to increase the lenders' commitment from $275.0 million to $500.0 million and
to make certain other changes, including providing for: (i) an extension of the
loan maturity date to June 30, 2004; (ii) a consent permitting the transactions
contemplated by the GTE Acquisition; (iii) the incurrence by the Company of up
to $200.0 million in structurally subordinated debt, on terms and conditions
reasonably satisfactory to the Majority Banks (as defined in the Credit
Facility); and (iv) the application of the net proceeds of an equity offering
to reduce amounts outstanding under the Credit Facility without reducing the
lenders' commitments thereunder. See "Liquidity and Capital Resources - Credit
Facility".
<TABLE>
<CAPTION>
PALMER EMPLOYEES
<S> <C>
1996 627
1995 521
1994 395
1993 240
1992 158
</TABLE>
16
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth the percentage which certain amounts bear to the
Company's total revenue.
<TABLE>
<CAPTION>
Years Ended December 31,
================================================================
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Service . . . . . . . . . . . . . . . . . . . . . . . 84.3% 84.8% 88.5% 92.2% 94.6%
Equipment Sales and Installation . . . . . . . . . . 15.7 15 .2 11.5 7.8 5.4
------- -------- ------- ------- -------
Total Revenue . . . . . . . . . . . . . . . . . . . 100.0 100 .0 100.0 100.0 100.0
------- -------- ------- ------- -------
Operating Expenses:
Engineering, Technical and Other Direct:
Engineering and Technical (1) . . . . . . . . . . . 10.3 8 .8 8.1 7.6 7.9
Other Direct Costs of Services (2) . . . . . . . . 9.4 8 .9 10.5 9.7 10.1
Cost of Equipment (3) . . . . . . . . . . . . . . . . 18.6 17.8 16.7 13.5 11.2
Selling, General and Administrative:
Sales and Marketing (4) . . . . . . . . . . . . . . 10.3 9 .4 8.8 8.7 8.6
Customer Service (5) . . . . . . . . . . . . . . . 7.0 7 .2 5.6 6.0 5.9
General and Administrative (6) . . . . . . . . . . 17.4 16.9 14.2 14.9 14.9
Depreciation and Amortization . . . . . . . . . . . . 42.8 25.8 14.2 14.3 15.7
------- -------- ------- ------- -------
Total Operating Expenses . . . . . . . . . . . . . 115.8 94.8 78.1 74.7 74.3
------- -------- ------- ------- -------
Operating Income (Loss) . . . . . . . . . . . . . . . . . (15.8)% 5 .2% 21.9% 25.3% 25.7%
======= ======== ======= ======= =======
Operating Income before Depreciation and
Amortization (7) . . . . . . . . . . . . . . . . . 27.0% 31.0% 36.1% 39.6% 41.4%
======= ======== ======= ======= =======
</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 for customer service
personnel, costs of printing and mailing billings generated in-house in
1994, 1995, and 1996, and fees paid to a third-party vendor of customer
service billing prior to 1994.
(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 (loss) 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.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1996 COMPARED TO
YEAR ENDED DECEMBER 31, 1995
[PHOTO]
REVENUE. Service revenue totaled $151.1 million for 1996, an increase of $54.4
million or 56.3% over $96.7 million for 1995. This increase was due primarily
to a 69.7% increase in the average number of subscribers to 241,255 in 1996
from 142,147 in 1995. The increase in subscribers is the result of internal
growth, which the Company attributes primarily to its sales and marketing
efforts, and recent acquisitions. The GTE Acquisition accounted for 41,163
subscribers at December 31, 1996. Service revenue attributable to the cellular
telephone systems acquired in the GTE Acquisition totaled $24.6 million for
1996 as compared to $2.0 million for the one month ended December 31, 1995.
Average monthly service revenue per subscriber decreased to $52.20 for
1996 from $56.68 for 1995. This decrease occurred because, on average, new
subscribers use less airtime and generate less revenue per subscriber than
existing subscribers as is customary in the cellular telephone industry.
Therefore, airtime usage and service revenue did not increase in proportion to
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 to $8.6 million for 1996 from
$8.2 million for 1995, a 4.9% increase, due primarily to the increase in gross
subscriber activations offset by lower cellular phone prices. While equipment
sales and installation revenue increased slightly for 1996 from 1995, it
decreased as a percentage of total cellular revenue to 5.4% for 1996 from 7.8%
for 1995, reflecting the increased recurring annual 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 $ 1.0 million for 1996 as compared to $0.1 million
for the one month ended December 31, 1995.
OPERATING EXPENSES. Engineering and technical expenses increased by 57.5% to
$12.6 million for 1996 from $8.0 million for 1995, due primarily to the 32.0%
increase in the number of subscribers. As a percentage of revenue, engineering
and technical expenses increased to 7.9% for 1996 from 7.6% for 1995 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 $2.8 million for 1996
as compared to $0.2 million for the one month ended December 31, 1995.
Other direct costs of services increased 58.3% to $16.1 million for
1996 from $10.2 million for 1995. As a percentage of revenue, other direct
costs of services increased to 10.1% for 1996 from 9.7% for 1995. This
18
<PAGE> 20
increase in other direct costs of services as a percentage of revenue was due
primarily to the Company subsidizing more roaming costs for competitive
reasons. Other direct costs of service attributable to the cellular telephone
systems acquired in the GTE Acquisition totaled $1.6 million for 1996 as
compared to $0.2 million for the one month ended December 31, 1995.
Cost of equipment increased 26.8% to $17.9 million for 1996 from $14.1
million for 1995, due primarily to the increase in gross subscriber activations
for the same period. The equipment sales margin decreased to (108.1%) for 1996
from (72.1%) for 1995. In an effort to address market competition and improve
market share, the Company sold more telephones below cost in 1996 than in 1995.
The cost of equipment attributable to the cellular telephone systems acquired
in the GTE Acquisition totaled $3.1 million for 1996 as compared to $0.2
million for the one month ended December 31, 1995.
Sales and marketing costs increased 50.2% to $13.7 million for 1996
from $9.1 million for 1995. This increase is primarily due to the 28.1%
increase in gross subscriber activations and the resulting increase in salaries
and commissions. Sales and marketing costs as a percentage of total revenue
remained relatively flat at 8.6% for 1996 and 8.7% for 1995. The Company's cost
to add a net subscriber, including losses on cellular telephone sales,
increased to $407 for 1996 from $276 for 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. Sales and marketing costs attributable to the cellular telephone
systems acquired in the GTE Acquisition totaled $2.8 million in 1996 as
compared to $0.2 million for the one month ended December 31, 1995.
<TABLE>
<CAPTION>
MONTHLY CASH OPERATING COSTS PER SUBSCRIBER
<S> <C>
1996 $29
1995 $32
1994 $36
1993 $40
1992 $48
</TABLE>
Customer service costs increased 49.9% to $9.4 million for 1996 from
$6.3 million for 1995. As a percentage of revenue, customer service costs
remained relatively flat at 5.9% and 6.0% for 1996 and 1995, respectively.
Customer service costs attributable to the cellular telephone systems acquired
in the GTE Acquisition totaled $1.9 million in 1996 as compared to $0.2 million
for the one month ended December 31, 1995.
General and administrative expenses increased 52.5% to $23.8 million
for 1996 from $15.6 million for 1995 and remained flat as a percentage of
revenue at 14.9% for 1996 and 1995. As the Company continues to add more
subscribers and generate 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 $3.4 million for 1996 as compared to $0.4 million
for the one month ended December 31, 1995.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Depreciation and amortization increased 66.7% to $25.0 million for
1996 from $15.0 million for 1995. This increase is 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 $6.2
million for 1996 as compared to $0.5 million for the one month ended December
31, 1995.
Operating income for 1996 increased 54.9% to $41.2 million, an
increase of $14.6 million over operating income for 1995. This improvement in
operating results is attributed 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 $3.8 million
for 1996 as compared to $0.2 million for the one month ended December 31, 1995.
<TABLE>
<CAPTION>
OPERATING CASH FLOW (In Thousands)
<S> <C>
1996 $66,190
1995 $41,586
1994 $24,900
1993 $12,850
1992 $7,377
</TABLE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE. Service revenue totaled $96.7 million for 1995, an increase of $35.7
million or 58.4% over $61.0 million for 1994. This increase was due primarily
to a 67.8% increase in the average number of subscribers to 142,147 in 1995
from 84,718 in 1994. The increase in subscribers was the result of internal
growth, which the Company attributes primarily to its sales and marketing
efforts, and the GTE Acquisition. During 1995, the Company added 13,098 net
subscribers in the Georgia Acquisition, bringing the total subscribers served
by those systems to 25,238 at December 31, 1995. Service revenue attributable
to the cellular telephone systems acquired in the Georgia Acquisition totaled
$12.3 million for 1995 as compared to $1.6 million for the two months ended
December 31, 1994. The GTE Acquisition increased the Company's subscribers by
34,904 at December 31, 1995. Service revenue attributable to the cellular
telephone systems acquired in the GTE Acquisition totaled $2.0 million for the
one month ended December 31, 1995, and is included in the Company's 1995
results of operations.
Average monthly service revenue per subscriber decreased to $56.68 for
1995 from $60.02 for 1994. This decrease occurred because, on average, new
subscribers use less airtime and generate less revenue per subscriber than
existing subscribers as is customary in the cellular telephone industry.
Therefore, airtime usage and service revenue did not increase in proportion to
the increase in subscribers.
20
<PAGE> 22
Equipment sales and installation revenue, which consists primarily of
cellular subscriber equipment sales, increased to $8.2 million for 1995 from
$8.0 million for 1994, a 3.3% increase, due primarily to the increase in
subscriber activations offset by lower cellular phone prices. While equipment
sales and installation revenue increased slightly for 1995 from 1994, it
decreased as a percentage of total cellular revenue to 7.8% for 1995 from 11.5%
for 1994, reflecting the increased recurring annual 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 Georgia Acquisition totaled $1.1 million for 1995 as compared to $0.2
million for the two months ended December 31, 1994. Equipment sales and
installation revenue attributable to the cellular telephone systems acquired in
the GTE Acquisition totaled $0.1 million for the one month ended December 31,
1995 and is included in the Company's results of operations for 1995.
OPERATING EXPENSES. Engineering and technical expenses increased by 43.2% to
$8.0 million for 1995 from $5.6 million for 1994, due primarily to the increase
in subscribers. As a percentage of revenue, engineering and technical expenses
decreased to 7.6% for 1995 from 8.1% for 1994. Engineering and technical
expenses attributable to the cellular telephone systems acquired in the Georgia
Acquisition totaled $2.4 million for 1995 as compared to $0.3 million for the
two months ended December 31, 1994. Engineering and technical expenses
attributable to the cellular telephone systems acquired in the GTE Acquisition
totaled $0.2 million for the one month ended December 31, 1995 and are included
in the Company's results of operations for 1995.
Other direct costs of services increased 41.7% to $10.2 million for
1995 from $7.2 million for 1994. As a percentage of revenue, other direct costs
of services decreased to 9.7% for 1995 from 10.5% for 1994. This decrease in
other direct costs of services as a percentage of revenue was due primarily to
the Company improving its roaming agreements with neighboring cellular service
providers, spreading its fixed charges over a larger revenue base, and bringing
its intramarket roaming settlements in-house. Other direct costs of service
attributable to the cellular telephone systems acquired in the Georgia
Acquisition totaled $1.1 million for 1995 as compared to $0.2 million for the
two months ended December 31, 1994. Other direct costs of service attributable
to the cellular telephone systems acquired in the GTE Acquisition totaled $0.2
million for the one month ended December 31, 1995 and are included in the
Company's results of operations for 1995.
Cost of equipment increased 22.5% to $14.1 million for 1995 from $11.5
million for 1994, due primarily to the increase in gross subscriber activations
for the same
[PHOTO]
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
period. The equipment sales margin decreased to (72.1%) for 1995 from (45.1%)
for 1994. In an effort to address market competition and improve market share,
the Company sold more telephones below cost in 1995 than in 1994. The cost of
equipment attributable to the cellular telephone systems acquired in the
Georgia Acquisition totaled $2.4 million for 1995 as compared to $0.3 million
for the two months ended December 31, 1994. The cost of equipment attributable
to the cellular telephone systems acquired in the GTE Acquisition totaled $0.2
million for the one month ended December 31, 1995 and is included in the
Company's results of operations for 1995.
Sales and marketing costs increased 51.5% to $9.1 million for 1995
from $6.0 million for 1994. This increase is primarily due to the 49.1%
increase in gross subscriber activations and the resulting increase in salaries
and commissions. Sales and marketing costs as a percentage of total revenue
remained relatively flat at 8.7% for 1995 and 8.8% for 1994. The Company's cost
to add a net subscriber, including losses on cellular telephone sales,
increased to $276 for 1995 from $247 for 1994. This increase in cost to add a
net subscriber was caused primarily by increased losses from the Company's
sales of cellular telephones. Sales and marketing costs attributable to the
cellular telephone systems acquired in the Georgia Acquisition totaled $1.7
million for 1995 as compared to $0.3 million for the two months ended December
31, 1994. Sales and marketing costs attributable to the cellular telephone
systems acquired in the GTE Acquisition totaled $0.2 million for the one month
ended December 31, 1995 and are included in the Company's results of operations
for 1995.
Customer service costs increased 62.0% to $6.3 million for 1995 from
$3.9 million for 1994 and increased as a percentage of total revenue to 6.0%
for 1995 from 5.6% for 1994. This increase is primarily due to an increase in
subscribers, to operating costs associated with the newly established regional
customer service call centers in Montgomery, Alabama and Savannah, Georgia and
to non-recurring expenditures incurred in connection with the implementation of
new area codes in the Company's Alabama and Fort Myers, Florida service areas.
Customer service costs attributable to the cellular telephone systems acquired
in the Georgia Acquisition totaled $0.9 million for 1995 as compared to $0.2
million for the two months ended December 31, 1994. Customer service costs
attributable to the cellular telephone systems acquired in the GTE Acquisition
totaled $0.2 million for the one month ended December 31, 1995 and are included
in the Company's results of operations for 1995.
General and administrative expenses increased 58.2% to $15.6 million
for 1995 from $9.8 million for 1994 and increased as a percentage of total
revenue to 14.9% for 1995 from 14.2% for 1994 due primarily to the increase in
the number of subscribers, as well as the Georgia and GTE Acquisitions. Fixed
general and administrative costs attributable to the acquisitions are incurred
prior to the development of the subscriber base and the generation of
associated revenue. As the Company continues to add more subscribers and
generate 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 Georgia
Acquisition totaled $3.2 million for 1995 as compared to $0.4 million for the
two months ended December 31, 1994. The general and administrative costs
attributable to the cellular telephone systems acquired in the GTE Acquisition
totaled $0.4 million for the one month ended December 31, 1995 and are included
in the Company's results of operations for 1995.
Depreciation and amortization increased 52.8% to $15.0 million for
1995 from $9.8 million for 1994. This increase is primarily due to the
depreciation and amortization associated with the acquisitions and additional
capital expenditures. Depreciation and amortization attributable to the
cellular telephone systems acquired in the Georgia Acquisition totaled $3.6
million for 1995 as compared to the $0.7 million for the two months ended
December 31, 1994. Depreciation and amortization attributable to the cellular
telephone systems acquired in the GTE Acquisition totaled $0.5 million for the
one month ended December 31, 1995 and are included in the Company's results of
operations for 1995.
22
<PAGE> 24
Operating income for 1995 increased 76.2% to $26.6 million, an
increase of $11.5 million over operating income for 1994. This improvement in
operating results is attributed primarily to increases in revenue which
exceeded increases in operating expenses. Operating income (loss) attributable
to the cellular telephone systems acquired in the Georgia Acquisition totaled
$(2.0) million for 1995 as compared to $(0.6) million for the two months ended
December 31, 1994. Operating income attributable to the cellular telephone
systems acquired in the GTE Acquisition totaled $0.2 million for the one month
ended December 31, 1995 and is included in the Company's results of operations
for 1995.
NET INTEREST EXPENSE, OTHER EXPENSE, INCOME TAX EXPENSE, AND NET INCOME
Net interest expense increased 48.3% to $31.5 million for 1996 from $21.2
million for 1995 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"). For 1995, net interest expense
increased 66.8% to $21.2 million from $12.7 million for 1994 due primarily to
debt incurred for the Georgia and GTE Acquisitions, the amortization of
deferred financing fees related to the Credit Facility, and increased interest
rates.
Other expense was $0.4 million in 1996, $0.7 million in 1995 and $0.1
million in 1994. Other expense consists primarily of the disposal of certain
assets by the Company and other non-operating expenses.
Income tax expense was $2.7 million for both 1996 and 1995 compared to
none in 1994. The $2.7 million income tax expense in 1995 was 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 ("the Partnership"), predecessor of the Company. In
connection with the Company's initial public offering of securities in March,
1995, all of the assets and liabilities of the Partnership were exchanged for
stock in the Company. Due to the exchange, a deferred tax liability was
recorded to reflect the difference between the financial statement and income
tax return basis in these assets and liabilities. See notes 2 and 5 to the
Company's consolidated financial statements.
Net income for 1996 was $4.7 million, or $.18 per share of common
stock, compared to net income of $1.0 million, or $.04 per share of common
stock for 1995. The increase in net income is primarily attributable to
increases in revenue which exceeded increases in operating expenses. Net income
for 1994 was $1.7 million, or $.09 of common stock. The decrease in net income
per share between 1995 and 1994 is primarily attributable to interest expense
on debt incurred for the Georgia Acquisition and the GTE Acquisition, and
income tax expense.
LIQUIDITY AND CAPITAL RESOURCES - GENERAL
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, through operating cash flow. The
Company does not anticipate that it will have access to loans or other
financial support from PCI or any of its subsidiaries (other than subsidiaries
of the Company).
In 1996, the Company spent approximately $41.4 million for capital
expenditures. The Company expects to spend $50 million and $40 million for
capital expenditures for the years ended December 31, 1997 and 1998,
respectively. The Company expects to use net cash provided by operating
activities to fund such capital expenditures.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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 part of any
such acquisitions, it expects to raise such cash from borrowings under the
Credit Facility or, if feasible and attractive, issuance of securities. The
Credit Facility, however, places certain conditions and other restrictions on
the Company's ability to make such acquisitions. See "Credit Facility" below.
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 which were
used to reduce the amount outstanding under the Credit Facility.
In the fourth quarter of 1996, the Company repurchased 600,000 shares
of Class A Common Stock.
The Company believes that operating cash flow and borrowings available
under the Credit Facility (including amounts repaid with the net proceeds of
any permitted equity offering) 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 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 that the terms thereof will be attractive to the Company.
<TABLE>
<CAPTION>
TOTAL DEBT OUTSTANDING (In Thousands)
<S> <C>
1996 $343,662
1995 $350,441
1994 $245,609
1993 $131,361
1992 $106,811
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES - CREDIT FACILITY
The Company currently has a $500.0 million revolving credit facility with a
syndicate of 21 banks (the "Credit Facility").
On December 1, 1995, the Company and its lenders amended and restated
the Credit Facility to increase the lenders' commitments from $275.0 million to
$500.0 million and to make certain other changes, including providing for (i)
an extension of the loan maturity date to June 30, 2004; (ii) a consent
permitting the transactions contemplated by the GTE Acquisition; (iii) the
incurrence by the Company of up to $200.0 million in structurally subordinated
debt, on terms and conditions reasonably satisfactory to the Majority Banks (as
defined in the Credit Facility); and (iv) the application of the net proceeds
of an equity offering to reduce amounts outstanding under the Credit Facility
without reducing the lenders' commitments.
The Credit Facility also permits, subject to certain conditions and
restrictive covenants, the Company to invest in personal communication service
("PCS") licenses. At December 31, 1996, $337.0 million was outstanding under
the Credit Facility.
24
<PAGE> 26
[PHOTO]
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 0.25% 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 ten interest rate
swap agreements and four interest rate cap agreements for a total notional
amount of $295.0 million. Under these agreements, the maximum interest rate may
range from 7.76% to 11.25%. At December 31, 1996, the effective interest rate
under these agreements ranged from 7.14% to 9.98%.
The Company incurs a 1/2% per annum commitment fee on the unused
portion of the Credit Facility.
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.
The Credit Facility requires that the Company satisfy certain
financial tests, including the maintenance of certain maximum leverage, debt
service and other financial ratios, and that the Company meet, on a quarterly
basis, certain minimum operating cash flow requirements. The Credit Facility
also contains certain restrictive covenants which impose restrictions and/or
limitations on the operations and activities of the Company including, among
other things: the incurrence of indebtedness and the terms thereof, the
creation or incurrence of liens, investments and acquisitions, sales of assets,
declaration or payment of dividends or other payments or distributions to
stockholders, and capital expenditures. The Credit Facility provides for
various events of default, including (i) PCI and PCI's existing stockholders
and any trust, the beneficiaries of which are any of the stockholders or any of
their immediate family members, cease together to own (x) at least 51.0% of all
voting rights with respect to the capital stock of the Company, (y) at least
33.0% of all the outstanding shares of capital stock of the Company, or (z) the
single largest percentage of the outstanding shares of capital stock of the
Company; (ii) PCI's existing stockholders and any trust the beneficiaries of
which are any of the stockholders or any of their immediate family members,
cease together to own (x) at least 51.0% of each class of the capital stock of
PCI having the right to vote in an election of PCI's directors, or (y) at least
51.0% of all the outstanding shares of capital stock of PCI; or (iii) the
Company (x) sells, leases, abandons or otherwise disposes of any of its assets,
other than in the ordinary course of business, without the prior written
consent of its lenders, or (y) merges with another corporation.
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
[PHOTO]
The Company will be permitted to borrow amounts under the Credit Facility
for: (a) capital expenditures, to the extent that the aggregate amount of such
capital expenditures does not exceed amounts specified in the Credit Facility;
(b) the acquisition of (i) minority interests in subsidiaries in which the
Company owns a majority interest as of the date of the acquisition; (ii)
interests in additional cellular telephone systems specified in the Credit
Facility; (iii) 50.01% or more ownership interests in cellular telephone
systems located in South Carolina, Florida, Georgia and Alabama, or within the
same geographic area or contiguous to any cellular system owned by the Company
or any of its subsidiaries; (c) funding down payments for and interest payments
on the acquisition of any licenses for broadband 10 MHz PCS frequency blocks
spectrum for service areas located in Florida, Georgia and Alabama, or within
the same geographic area or contiguous to any cellular system owned by the
Company or any of its subsidiaries, in an amount of up to $10.0 million; and
(iv) working capital needs and other corporate purposes of the Company. The
Credit Facility also permits the Company to issue equity in consideration for
ownership interests in additional cellular telephone systems or in broadband
PCS systems located anywhere in the United States to the extent that such
acquisition represents greater than 50.0% of the ownership interests in any
such system (or less than 50.0% if such interests are not subject to mandatory
capital contribution requirements). The Company also will be permitted to use
the cash proceeds of a subsequent issuance of equity in the Company to fund
acquisitions pursuant to which the Company acquires at least 50.01% of the
ownership interests in additional cellular telephone systems or in broadband
PCS systems located within South Carolina, Florida, Georgia and Alabama,
provided that the acquisition does not cause the Company to violate the
financial ratios and other provisions of the Credit Facility, as evidenced in
pro forma projections acceptable to the Company's lenders.
26
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES - PURCHASE OBLIGATIONS
In connection with the purchase of controlling interests in the non-wireline
cellular license for the Panama City, Florida MSA, the Company incurred certain
purchase obligations which aggregated approximately $5.3 million as of
December 31, 1996. These purchase obligations were paid in January, 1997.
ACCOUNTING POLICIES
For financial reporting purposes, the Company reports 100% of revenues and
expenses for the markets for which it provides cellular telephone service.
However, in several of its markets, the Company holds less than 100% of the
equity ownership. The minority stockholders' and partners' shares of income or
losses in those markets are reflected in the consolidated financial statements
as "minority interest share of (income) losses", except for losses in excess of
their capital accounts and cash call provisions which are not eliminated in
consolidation. For financial reporting purposes, the Company consolidates each
subsidiary and partnership in which it has a controlling interest (greater than
50.0%). From 1992 through 1996, the Company had controlling interests in each
of its subsidiaries and partnerships.
INFLATION
The Company believes that inflation affects its business no more than it
generally affects other similar businesses.
[PHOTO]
27
<PAGE> 29
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28
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Palmer Wireless, Inc.:
We have audited the accompanying consolidated balance sheets of Palmer
Wireless, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Palmer
Wireless, Inc. and subsidiaries at December 31, 1995 and 1996, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Des Moines, Iowa
January 30, 1997,
except for Note 10
which is as of
February 1, 1997
29
<PAGE> 31
CONSOLIDATED BALANCE SHEETS
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31,
==================================
ASSETS (NOTE 4)
1995 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,436 $ 1,698
Trade accounts receivable, net of allowance for doubtful
accounts of $1,880 in 1995 and $1,791 in 1996 17,347 18,784
Receivable from other cellular carriers 3,936 1,706
Prepaid expenses and deposits 1,111 2,313
Inventory 2,434 5,106
Deferred income taxes (note 5) 821 830
--------- ---------
Total current assets $ 29,085 $ 30,437
--------- ---------
Property, plant and equipment:
Land and improvements 3,796 5,238
Buildings and improvements 5,120 7,685
Equipment, communication systems, and furnishings 127,140 166,735
--------- ---------
$ 136,056 $ 179,658
Less accumulated depreciation and amortization 35,120 47,220
--------- ---------
Net property, plant and equipment $ 100,936 $ 132,438
--------- ---------
Licenses and goodwill, at cost less accumulated amortization of
$20,828 in 1995 and $30,188 in 1996 (note 3) 321,053 375,808
Other intangible assets and other assets, at cost less accumulated
amortization of $4,471 in 1995 and $7,311 in 1996 11,797 11,259
--------- ---------
Total assets $ 462,871 $ 549,942
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 32
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except for per share amounts)
<TABLE>
<CAPTION>
December 31,
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1996
---- ----
<S> <C> <C>
Current liabilities:
Current installments of long-term debt (note 4) $ 7,441 $ 5,296
Notes payable (note 4) - 1,366
Accounts payable 10,795 10,394
Accrued interest payable 2,508 2,341
Accrued salaries and employee benefits 2,267 2,432
Other accrued liabilities 4,058 3,626
Deferred revenue 2,860 3,929
Customer deposits 591 757
--------- ---------
Total current liabilities $ 30,520 $ 30,141
Long-term debt, excluding current installments (note 4) 343,000 337,000
Deferred income taxes (note 5) 9,636 11,500
Minority interests 5,162 6,371
--------- ---------
Total liabilities $ 388,318 $ 385,012
--------- ---------
Stockholders' equity (note 7):
Preferred stock par value $.01 per share;
10,000,000 shares authorized; none issued - -
Class A Common Stock par value $.01 per share; 73,000,000
shares authorized; 6,095,772 shares issued in 1995 and
11,119,681 shares issued in 1996 including shares in treasury
and Class B Common Stock par value $.01 per share;
18,000,000 shares authorized; 17,293,578 shares issued in
1995 and 1996 234 284
Additional paid-in capital 72,466 166,975
Retained earnings 1,853 6,535
--------- ---------
$ 74,553 $ 173,794
Less Class A Common Stock in treasury at cost -
600,000 shares in 1996 - 8,864
--------- ---------
Total stockholders' equity $ 74,553 $ 164,930
Commitments and contingencies (note 8).
--------- ---------
Total liabilities and stockholders' equity $ 462,871 $ 549,942
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 33
CONSOLIDATED STATEMENTS OF OPERATIONS
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
==========================================================
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenue:
Service $ 61,021 $ 96,686 $ 151,119
Equipment sales and installation 7,958 8,220 8,624
------------ ----------- -------------
Total revenue $ 68,979 $ 104,906 $ 159,743
------------ ----------- -------------
Operating expenses:
Engineering, technical, and other direct 12,776 18,184 28,717
Cost of equipment 11,546 14,146 17,944
Selling, general, and administrative:
Related party, net (note 6) (442) (408) (414)
Other 20,199 31,398 47,306
Depreciation and amortization 9,817 15,004 25,013
------------ ----------- -------------
Total operating expenses $ 53,896 $ 78,324 $ 118,566
------------ ----------- -------------
Operating income $ 15,083 $ 26,582 $ 41,177
------------ ----------- -------------
Other income (expense):
Interest income:
Investment 93 211 62
Related party (note 6) 78 - -
Interest expense:
Long-term debt (11,158) (21,424) (31,524)
Related party (note 6) (1,728) - -
------------ ----------- -------------
Interest expense, net $ (12,715) $ (21,213) $ (31,462)
Other expense, net (70) (687) (429)
------------ ----------- -------------
Total other expense $ (12,785) $ (21,900) $ (31,891)
------------ ----------- -------------
Income before minority interest share of
income and income tax expense $ 2,298 $ 4,682 $ 9,286
Minority interest share of income 636 1,078 1,880
------------ ----------- -------------
Income before income tax expense $ 1,662 $ 3,604 $ 7,406
Income tax expense (note 5) - 2,650 2,724
------------ ----------- -------------
Net income $ 1,662 $ 954 $ 4,682
============ =========== =============
Net income per share of common stock $ .09 $ .04 $ .18
============ =========== =============
Average shares outstanding 18,000,000 22,326,613 26,132,455
============ =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK (ACCUMULATED
CLASS A CLASS B ADDITIONAL DEFICIT) TREASURY STOCK TOTAL
---------------- ------------------- PAID-IN RETAINED ------------------ STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
---------------- ------------------- ---------- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 706,422 $ 7 17,293,578 $173 $ 3,064 $ - - $ - $ 3,244
Partnership earnings before
business combination - - - - 1,829 - - - 1,829
Net loss - - - - - (167) - - (167)
Capital contribution, net
before business combination - - - - 9 - - - 9
--------- ---- ---------- ---- -------- ------ ------- ----- ---------
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 $5,826 5,000,000 50 - - 94,124 - - - 94,174
Exercise of stock options 6,666 - - - 95 - - - 95
Employee and non-employee
director stock purchase plans 17,243 - - - 290 - - - 290
Treasury shares purchased - - - - - - 600,000 (8,864) (8,864)
Net income - - - - - 4,682 - - 4,682
---------- ---- ---------- ---- -------- ------ ------- ------- --------
Balances at December 31, 1996 11,119,681 $111 17,293,578 $173 $166,975 $6,535 600,000 $(8,864) $164,930
========== ==== ========== ==== ======== ====== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
========================================
1994 1995 1996
---- ---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,662 $ 954 $ 4,682
--------- --------- ---------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 9,817 15,004 25,013
Minority interest share of income 636 1,078 1,880
Deferred income taxes - 2,650 1,855
Increase in trade accounts receivable (4,195) (2,741) (1,561)
(Increase) decrease in inventory (3,672) 4,076 (2,595)
Increase (decrease) in accounts payable 2,508 2,623 (841)
Increase (decrease) in accrued interest payable 1,184 (14) (167)
Interest deferred and added to related party borrowings 1,611 - -
Deferred interest paid to related party (6,475) - -
Interest deferred and added to other debt 537 607 355
Payment of deferred interest - - (1,080)
Increase in accrued salaries and employee benefits 466 241 165
Increase (decrease) in other accrued liabilities 895 583 (507)
Increase in deferred revenue 1,163 658 912
Increase (decrease) in customer deposits 191 (53) 134
Change in other accounts 910 1,994 1,885
--------- --------- ---------
Total adjustments $ 5,576 $ 26,706 $ 25,448
--------- --------- ---------
Net cash provided by operating activities $ 7,238 $ 27,660 $ 30,130
--------- --------- ---------
Cash flows from investing activities:
Cash payment for purchases of non-wireline cellular
telephone systems and licenses (note 3) (91,720) (158,397) (67,588)
Purchases of minority interests (3,097) (1,543) (1,854)
Capital expenditures (22,541) (36,564) (41,445)
Proceeds from sales of property, plant and equipment 150 38 5
Decrease (increase) in other intangible assets and other assets 358 (310) (2,180)
Collection of purchase price adjustment - - 2,452
--------- --------- ---------
Net cash used in investing activities $(116,850) $(196,776) $(110,610)
---------- ---------- ----------
Cash flows from financing activities:
Advances from Palmer Communications Incorporated 4,176 - -
Payments on advances from Palmer
Communications Incorporated (2,359) (1,650) -
Increase in notes payable - - 1,366
Proceeds from long-term debt 137,000 171,000 100,000
Repayment of long-term debt (75) (65,125) (108,319)
Repayment of related party borrowings (20,000) - -
Payment of debt issuance costs (6,454) (4,803) -
Public offering proceeds, net - 71,144 95,000
Proceeds from stock options exercised - 285 95
Payment of deferred offering costs (1,448) (1,297) (826)
Collection of common stock subscriptions receivable 100 - -
Purchase of treasury stock - - (8,864)
Proceeds from sales under stock purchase plans - - 290
--------- --------- ---------
Net cash provided by financing activities $ 110,940 $ 169,554 $ 78,742
--------- --------- ---------
Net increase (decrease) in cash $ 1,328 $ 438 $ (1,738)
Cash and cash equivalents at beginning of year 1,670 2,998 3,436
--------- --------- ---------
Cash and cash equivalents at end of year $ 2,998 $ 3,436 $ 1,698
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 36
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During 1994, certain assets net of certain liabilities were transferred between
Palmer Wireless, Inc. and Palmer Communications Incorporated. These transfers
were treated as contributions to and distributions from equity and amounted to
a net contribution of $9 for the year ended December 31, 1994.
During 1994, Palmer Wireless, Inc. accrued $188 for unpaid deferred offering
costs.
During 1995, Palmer Wireless, Inc. committed to purchase certain minority
interests in 1996. This commitment totaling $451 was accrued in 1995 and paid
in 1996.
During 1996, the Company increased the purchase obligations related to the
final purchase price adjustment for the controlling interest in a non-wireline
cellular telephone system purchased in 1991. This increase amounted to $899 and
resulted in an increase in licenses.
Acquisitions of non-wireline cellular telephone systems in 1994, 1995 and 1996
(note 3):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash payment $91,720 $158,397 $67,588
======= ======== =======
Allocated to:
Fixed assets $11,332 22,846 5,678
Licenses 79,383 136,940 61,433
Deferred income taxes - (6,165) -
Current assets and liabilities, net 1,005 4,776 477
------- -------- -------
$91,720 $158,397 $67,588
======= ======== =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended December 31,
===========================================
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash paid for interest $15,199 $18,435 $29,733
Cash paid for income taxes $ - $ - $ 1,591
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except for per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Palmer
Wireless, Inc. and its subsidiaries (the "Company"), all of which the
Company has an ownership interest in greater than 50 percent.
Palmer Wireless, Inc. ("Wireless") is a Delaware corporation and was
incorporated on December 15, 1993 to effect an initial public offering of
its Class A Common Stock. At December 31, 1996, Palmer Communications
Incorporated ("PCI") owned 61 percent of Wireless' outstanding common stock
and had 75 percent of Wireless' voting rights and therefore Wireless is a
subsidiary of PCI.
In March of 1995, Wireless issued common stock for 100 percent of the
partnership interests of Palmer Cellular Partnership (the "Partnership")
(see note 2). Since this exchange was between related parties it has been
accounted for in a manner similar to a pooling of interests. Therefore, the
statements of operations, stockholders' equity and cash flows for the year
ended December 31, 1994 have been restated to include the accounts of the
Partnership.
Losses in subsidiaries, attributable to minority stockholders and partners,
in excess of their capital accounts and cash capital call provisions are
not eliminated in consolidation.
Significant intercompany accounts and transactions have been eliminated in
the consolidation.
OPERATIONS
The Company has majority ownership in corporations and partnerships which
operate the non-wireline cellular telephone systems in nine Metropolitan
Statistical Areas ("MSA") in three states: Florida (two), Georgia (five)
and Alabama (two). The Company's ownership percentages in these entities
range from approximately 78 percent to 100 percent. The Company owns
directly and operates eight non-wireline cellular telephone systems in
Rural Service Areas ("RSA") in Georgia (seven) and Alabama (one).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows the Company considers
repurchase agreements with a maturity of three months or less to be cash
equivalents.
36
<PAGE> 38
TRADE ACCOUNTS RECEIVABLE
The Company grants credit to its customers. Substantially all of the
customers are residents of the local areas served by the Company.
Generally, the Company discontinues service to customers whose accounts are
60 days past due. The activity in the Company's allowance for doubtful
accounts for the years ended December 31, 1994, 1995, and 1996 consisted of
the following:
<TABLE>
<CAPTION>
Additions-
Balance at Additions allowance at
beginning charged to dates of Deductions net Balance at
of year expenses acquisitions of recoveries end of year
---------- ----------- ------------ --------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994 $ 681 $ 1,453 $ 211 $ 778 $ 1,567
====== ======== ======== ======== ========
Year ended December 31, 1995 $ 1,567 $ 2,078 $ 432 $ 2,197 $ 1,880
======= ======== ======== ======== ========
Year ended December 31, 1996 $ 1,880 $ 3,946 $ 1,270 $ 5,305 $ 1,791
======= ======== ======== ======== ========
</TABLE>
INVENTORY
Inventory consisting primarily of cellular telephones and telephone parts
is stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is provided
principally by the straight-line method over the estimated useful lives,
ranging from 5 to 20 years for buildings and improvements and 5 to 10 years
for equipment, communications systems and furnishings.
ACQUISITIONS AND LICENSES
The cost of acquired companies is allocated first to the identifiable
assets, including licenses, based on the fair market value of such assets
at the date of acquisition (as determined by independent appraisers or
management of the Company). The excess of the total consideration over the
amounts assigned to identifiable assets is recorded as goodwill.
Also included in licenses are expenditures related directly to acquiring
licenses which were not developed or operating at the time of purchase.
Licenses and goodwill are being amortized from the date of commencement of
service to customers (with applicable interest capitalized from acquisition
date to this date) on a straight-line basis over a 40-year period.
Subsequent to the acquisition of the licenses, the Company continually
evaluates whether later events and circumstances have occurred that
indicate the remaining estimated useful life of licenses may warrant
revision or that the remaining balance of the license rights may not be
recoverable. The Company has undergone an annual independent appraisal of
its licenses' value. The Company utilizes projected undiscounted cash flows
over the remaining life of the licenses and sales of comparable businesses
to evaluate the recorded value of licenses. The assessment of the
recoverability of the remaining balance of the license rights will be
impacted if projected cash flows are not achieved.
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except for per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER INTANGIBLE ASSETS AND OTHER ASSETS
Other intangibles and other assets consist primarily of deferred financing
costs, covenants not to compete, subscriber base, and other items. These
costs are being amortized by the interest or straight-line method over
their respective useful lives, which range from 5 to 10 years.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method
of accounting for deferred income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The 1994 consolidated financial statements made no provision for income
taxes, due to the fact that the losses of the Partnership were included in
the income tax returns of the individual partners. Also, the consolidated
financial statements made no provision for income taxes of subsidiary
corporations of the Company since those corporations had approximately
$16,182 of net operating loss carryforwards at December 31, 1994 for
federal income tax purposes. In addition, the 1994 consolidated financial
statements made no provision for income taxes on the loss of Wireless due
to the non-utilization of Wireless' net operating loss for the year.
INTEREST RATE SWAP AND CAP AGREEMENTS
The differential to be paid or received in connection with interest rate
swap agreements is accrued as interest rates change and is recognized over
the life of the agreements.
Premiums paid for purchased interest rate cap agreements are amortized to
interest expense over the term of the caps. Unamortized premiums are
included in other assets in the consolidated balance sheet. Amounts
receivable under cap agreements are accrued as a reduction of interest
expense.
REVENUE RECOGNITION
Service revenue includes local subscriber revenue and roamer revenue.
The Company earns local subscriber revenue by providing access to the
cellular network (access revenue) or, as applicable, for usage of the
cellular network (airtime revenue). Access revenue is billed one month in
advance and is recognized when earned. Airtime revenue is recognized when
the service is rendered.
Roamer revenue represents revenue earned by the Company for usage of its
cellular network by subscribers of other cellular carriers. Roamer revenue
is recognized when the services are rendered.
38
<PAGE> 40
Equipment sales and installation revenue is recognized upon delivery or
installation of the equipment to the customer.
OPERATING EXPENSES - ENGINEERING, TECHNICAL AND OTHER DIRECT
Engineering, technical and other direct operating expenses represent
certain costs of providing cellular telephone service to customers. These
costs include cost of incollect roaming service. Incollect roaming is the
result of the Company's subscribers using cellular networks of other
cellular carriers. Incollect roaming revenue is netted against the cost of
incollect roaming service to determine net incollect roaming expense.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No.123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
No.25 and provide the pro forma disclosure provisions of SFAS No. 123.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions used to estimate the fair
value of the Company's financial instruments are set forth below:
For cash and cash equivalents, trade accounts receivable, receivable from
other cellular carriers, notes payable, accounts payable and accrued
expenses, the carrying amount approximates the estimated fair value due to
the short-term nature of those instruments.
Rates currently available to the Company for long-term debt with similar
terms and remaining maturities are used to discount the future cash flows
to estimate the fair value for long-term debt. Note 4 presents the fair
value for long-term debt and the related interest rate cap and swap
agreements.
Fair value estimates are made as of a specific point in time, based upon
the relevant market information about the financial instruments. Because no
market exists for a majority of the Company's financial instruments, fair
value estimates are based on judgements regarding current economic
conditions and other factors. These estimates are subjective in nature and
involve uncertainties and matters of judgement and, therefore, cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except for per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTATION OF NET INCOME PER SHARE
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. Average shares of common stock outstanding has been computed
assuming that the 704,755 shares of Class A Common Stock and 17,288,578
shares of Class B Common Stock issued in the Exchange (as defined in note
2) have been outstanding since January 1, 1994 and the 1,667 shares of
Class A Common Stock and the 5,000 shares of Class B Common Stock issued in
the initial capitalization of Wireless have been outstanding since January
1, 1994.
(2) OFFERING AND EXCHANGE
On March 21, 1995 and April 18, 1995, Wireless issued 5,000,000 and 369,350
shares, respectively, of Class A Common Stock in an initial public offering
(the "Offering") for net proceeds of $68,399. In connection with the
Offering, on March 21, 1995, Wireless issued 704,755 shares of Class A
Common Stock and 17,288,578 shares of Class B Common Stock in exchange for
100 percent of the Partnership interests of the Partnership (the
"Exchange"). The assets and liabilities received in the Exchange were
recorded at their historical cost to the Partnership and not revalued at
fair value on the date of transfer. Since the Exchange was between related
parties it has been accounted for in a manner similar to a pooling of
interests (see note 1).
(3) ACQUISITIONS AND PURCHASE OF LICENSES
On October 31, 1994, the Company acquired the assets of and the licenses to
operate the non-wireline cellular telephone systems serving the Georgia
Rural Service Area Market Nos. 377, 378, 380 and 382, otherwise known as
Georgia-7 RSA, Georgia-8 RSA, Georgia-10 RSA and Georgia-12 RSA,
respectively, for an aggregate purchase price of $91,720. The acquisition
was accounted for by the purchase method of accounting. In connection with
this acquisition, $79,383 of the purchase price was allocated to licenses.
From the date of acquisition to December 31, 1994, revenue, depreciation
and amortization, operating loss and net loss before interest expense
related to the purchase price of the non-wireline cellular telephone
systems purchased were $1,803, $744, $(645) and $(644), respectively.
On December 1, 1995, the Company purchased all of the outstanding stock of
Augusta Metronet, Inc. and Georgia Metronet, Inc., which owned either
directly (or in the case of Georgia Metronet, Inc., through its 97.9
percent interest in the Savannah Cellular Limited Partnership) the licenses
to operate the non-wireline cellular telephone systems in the Savannah and
Augusta, Georgia MSAs, respectively, for an aggregate purchase price of
$158,397. The acquisition was accounted for by the purchase method of
accounting. In connection with this acquisition, $136,940 of the purchase
was allocated to licenses. From the date of acquisition to December 31,
1995, revenue, depreciation and amortization, operating income and net
income before interest expense related to the purchase price of the
non-wireline cellular telephone systems were $2,126, $508, $208 and $202,
respectively.
On June 20, 1996, the Company acquired the assets of and the license to
operate the non-wireline cellular telephone system serving the Georgia
Rural Service Area Market No. 371, otherwise known as Georgia-1 RSA for an
aggregate
40
<PAGE> 42
purchase price of $31,616. The acquisition was accounted for by the
purchase method of accounting. In connection with the acquisition, $27,942
of the purchase price was allocated to licenses. From the date of
acquisition to December 31, 1996, revenue, depreciation and amortization,
operating loss and net loss before interest expense related to the purchase
of the non-wireline cellular telephone system were $1,239, $556, $(278),
and $(278), respectively.
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 the Georgia Rural Service Area Market No. 376,
otherwise known as Georgia-6 RSA for an aggregate purchase price of
$35,972. The acquisition was accounted for by the purchase method of
accounting. In connection with the acquisition, $33,491 of the purchase
price was allocated to licenses. From the date of acquisition to December
31, 1996, revenue, depreciation and amortization, operating income, and net
income before interest expense related to the purchase of the non-wireline
cellular telephone system were $2,682, $578, $743, and $743, respectively.
Assuming the 1995 and 1996 acquisitions had occurred on January 1, 1995,
unaudited pro forma revenue, net (loss) income and net (loss) income per
share for the year ended December 31, 1995 would have been $132,958,
$(12,437), and $(.56), respectively, and for the year ended December 31,
1996, would have been $163,393, $3,840, and $.15, respectively. These pro
forma amounts assume that the financing requirements were met by the
incurrence of bank debt and are not necessarily indicative of what the
actual consolidated results of operation might have been if the acquisition
had been effective on January 1, 1995.
(4) NOTES PAYABLE AND LONG-TERM DEBT
On December 1, 1995, the Company entered into a loan agreement with a bank
which provides for a revolving line of credit of up to $5,000 to facilitate
day-to-day cash management needs. The loan agreement provides for interest
at the bank's prime rate and matures November 30, 1997.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Credit agreement (a) $ 343,000 $ 337,000
Purchase obligations (b) 7,441 5,296
----------- ---------
$ 350,441 $ 342,296
Less current installments 7,441 5,296
----------- ---------
Long-term debt, excluding current installments $ 343,000 $ 337,000
=========== =========
</TABLE>
(a) On December 1, 1995, the Company entered into an amended and restated
credit agreement with 21 banks which provides for a revolving line of
credit of up to $500,000, subject to certain limitations through June 30,
2004. This credit agreement increased the Company's previously existing
$275,000 revolving line of credit. The credit agreement provides for
quarterly commitment reductions commencing September 30, 1998 and
commitment reductions of 25 to 50 percent of Excess Cash Flow (as defined
in the credit agreement), if any, are required on April 15, 1998 and
annually thereafter. Interest is payable at variable rates and under
various interest rate options. The interest rate at December 31, 1996
ranged from 7.42 to 8.88 percent before the effect of the interest rate
swap and cap agreements outlined below. The credit agreement also provides
for a commitment fee of .5 percent per year on any unused amounts of the
credit agreement. Amounts outstanding are secured by the assets of the
Company.
41
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except for per share amounts)
(4) NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The credit agreement provides for various compliance covenants and
restrictions, including items related to mergers or acquisition
transactions, the declaration or payment of dividends or other payments to
stockholders, capital expenditures and maintenance of certain financial
ratios.
The Company has entered into interest rate swap and cap agreements to
reduce the impact of changes in interest rates on its floating debt and
thus were entered into for purposes other than trading. At December 31,
1996, the Company had outstanding ten interest rate swap agreements and
four interest rate cap agreements having a total notional value of
$295,000. These interest rate swap and cap agreements effectively change
the Company's interest rate exposure on a quarterly basis on $295,000 of
credit. The cap and swap agreements are summarized as follows:
<TABLE>
<CAPTION>
MAXIMUM NOTIONAL
TYPE OF AGREEMENT MATURITY LIBOR(1) VALUE
----------------- -------- -------- -----
<S> <C> <C> <C>
Cap Nov. 17, 1997 8.00 $ 10,000
Swap Nov. 17, 1997 8.10 10,000
Swap Nov. 17, 1997 7.48 20,000
Participating Cap (2) Nov. 23, 1997 8.75 15,000
Participating Swap (3) Nov. 24, 1997 8.29 15,000
Trigger Cap (4) Nov. 28, 1997 7.50/8.50 15,000
Pay Later Cap (5) Jan. 12, 1998 8.50 20,000
Swap Aug. 3, 1998 5.26 25,000
Participating Swap (6) Aug. 10, 1998 5.98 15,000
Swap Aug. 6,1999 6.36 25,000
Swap Aug. 7, 2000 6.04 50,000
Swap Aug. 20, 2000 6.03 25,000
Swap Oct. 11, 2000 5.99 25,000
--------
$295,000
========
</TABLE>
(1) The maximum interest rate is 2.5 percent over the LIBOR stated in the table
below. The 2.5 percent interest rate over such LIBOR decreases if certain
leverage ratios are met by the Company.
(2) On 36 percent ($5,400) the interest rate is set at 8.75 percent, the
balance is set at the three-month LIBOR up to a maximum 8.75 percent.
(3) When the three-month LIBOR is less than 8.29 percent the Company
participates in 50 percent of the difference.
(4) When LIBOR is below 8.5 percent the rate is 7.5 percent, when LIBOR is 8.5
percent or above the rate is 8.5 percent.
(5) When the three-month LIBOR rate is 8.5 percent or higher the Company
receives a quarterly payment of $98.
(6) When the six-month LIBOR is less than 5.98 percent the Company participates
in 45 percent of the difference.
42
<PAGE> 44
Fees in the amount of $240 were incurred in connection with certain of the
cap agreements and are being amortized over the lives of the respective cap
agreements.
The market value of the swap and cap agreements above, which has not been
reflected in the consolidated financial statements as of December 31, 1996,
is a loss of $1,545.
The Company is exposed to interest rate risk in the event of nonperformance
by the other party to the interest rate swap and cap agreements. However,
the Company does not anticipate nonperformance by any of the banks.
(b) In connection with the purchase of controlling interest in a
non-wireline cellular telephone system in 1991, the Company incurred
certain purchase obligations. The obligations, were retired in July 1996
and January 1997.
Based upon current borrowing rates the fair value approximates the carrying
value of the long-term debt outstanding under the credit agreement described
in (a) above and the purchase obligations described in (b) above.
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
------------ ------
<S> <C>
1997 $ 5,296
1998 -
1999 -
2000 -
2001 72,000
Thereafter 265,000
--------
$342,296
========
</TABLE>
(5) INCOME TAXES
Components of income tax expense consist of the following:
<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
Year ended December 31, 1995:
Current $ - $ - $ -
Deferred 2,550 100 2,650
------ ------ ------
$2,550 $ 100 $2,650
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
Year ended December 31, 1996:
Current $ - $ 869 $ 869
Deferred 1,795 60 1,855
------ ------ ------
$1,795 $ 929 $2,724
====== ====== ======
</TABLE>
43
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except for per share amounts)
(5) INCOME TAXES (CONTINUED)
The consolidated effective tax rate differs from the statutory United States
federal tax rate for the following reasons and by the following percentages:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Statutory United States federal tax rate 34.0% 34.0%
Partnership loss prior to corporate status 10.1 -
License amortization not deductible for tax 7.7 32.5
Net operating loss carryforwards (59.0) (42.8)
State taxes - 8.3
Recognition of deferred income taxes related to the
difference between financial statement and income
tax bases of certain assets and liabilities in
connection with the Exchange 73.5 -
Other 7.2 4.8
------ ------
Consolidated effective tax rate 73.5% 36.8%
====== ======
</TABLE>
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 658 $ 609
Nondeductible accruals 163 221
Net operating loss carryforwards 4,314 4,100
-------- --------
Total deferred tax assets $ 5,135 $ 4,930
Valuation allowance (3,898) -
--------- --------
$ 1,237 $ 4,930
-------- --------
Deferred tax liabilities:
Property, plant and equipment (7,323) (7,415)
Licenses (2,729) (8,185)
--------- ---------
Total deferred tax liabilities $(10,052) $(15,600)
--------- ---------
Deferred tax liability, net $ (8,815) $(10,670)
========= =========
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1996 was a decrease of $3,898. A valuation allowance had been recorded
primarily to offset the gross deferred tax assets created by net operating
loss carryforwards until such time as earnings of the Company or
alternative tax planning strategies warranted full recognition. Management
believes that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize that portion
of the deferred tax asset related to the net operating loss carryforwards.
The net operating loss carryforwards totaled approximately $11,700 at
December 31, 1996 and expire in amounts ranging from approximately $400 to
$4,100 through 2011. For carryforwards of approximately $10,900, generated
in periods prior to the Exchange, utilization is limited to the subsidiary
that generated the carryforwards, unless the Company utilizes alternative
tax planning strategies.
44
<PAGE> 46
(6) RELATED PARTY TRANSACTIONS
During 1994, the Company had a subordinated demand note of $20,000 with
Palmer Broadcasting Limited Partnership, a majority-owned subsidiary of
PCI. Interest expense under the note was $1,611 for the year ended
December 31, 1994. The note was paid off in 1994.
PCI had previously extended the Company a line of credit in the amount of
$3,000 that was used for the initial operations of the Company, to pay
organization expenses and to pay expenses of the Offering. The line of
credit bore interest at 2 percent above the prime rate. Interest expense
on the line of credit amounted to $117 for the year ended December 31,
1994. The borrowings totalling $1,615 were repaid with the proceeds of the
Offering.
During 1994, the Company earned $78 of interest income from advances to
PCI.
During 1994, the Company performed certain management functions for PCI.
These functions included general management, human resources
administration, accounting, and computer services. PCI was charged a fee
based on the Company's estimate of its time spent managing PCI and usage of
its computer. Concurrently with the Offering and the Exchange, the Company
and PCI entered into both a transitional management and administrative
services agreement and a computer services agreement that extend each
December 31 for additional one-year periods unless and until either party
notifies the other. The fees from these arrangements amounted to a total
of $509, $492, and $534 for the years ended December 31, 1994, 1995, and
1996, respectively, and are included as a reduction of selling, general and
administrative expenses.
During 1994, PCI provided certain tax consulting services to the Company.
Concurrently with the Offering and the Exchange, the Company and PCI
entered into a tax consulting agreement that extends each December 31 for
additional one-year periods unless and until either party notifies the
other. The fees for tax consulting services amounted to a total of $67,
$84, and $120 for the years ended December 31, 1994, 1995, and 1996,
respectively, and are included in selling, general and administrative
expenses.
PCI has a 401(k) plan with a noncontributory retirement feature and a
matching provision for employees who meet length of service and other
requirements. The Company participates in this plan and was allocated
401(k) retirement and matching expense of $305, $493, and $696 for the
years ended December 31, 1994, 1995, and 1996, respectively.
(7) COMMON STOCK AND STOCK PLANS
During 1994, the Company amended its certificate of incorporation to
increase the number of authorized shares of common stock from 60,000,000 to
91,000,000 and to provide for Class A Common Stock and Class B Common
Stock. The Class A Common Stock has one vote per share. The Class B
Common Stock, which may be owned only by PCI or certain successors of PCI
and of which no shares may be issued subsequent to the Offering, has five
votes per share, provided, however, that, so long as any Class A Common
Stock is issued and outstanding, at no time will the total outstanding
Class B Common Stock have the right to cast votes having more than 75
percent of the total voting power of the common stock in the aggregate.
Shares of Class B Common Stock shall be converted into Class A Common Stock
on a share-for-share basis: (i) at any time at the option of the holder;
(ii) immediately upon the transfer of shares of
45
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except for per share amounts)
(7) COMMON STOCK AND STOCK PLANS (CONTINUED)
Class B Common Stock to any holder other than a successor of PCI; (iii)
immediately if the shares of Class B Common Stock held by PCI or its
successors constitute 33 percent or less of the outstanding shares of the
Company; (iv) at the end of 20 years from original issuance of those shares
of Class B Common Stock; or (v) if more than 50 percent of the equity
interests in PCI become beneficially owned by persons other than: (i)
beneficial owners of PCI as of December 29, 1994 ("Current PCI Beneficial
Owners"); (ii) affiliates of Current PCI Beneficial Owners; (iii) heirs or
devisees of any individual Current PCI Beneficial Owner, successors of any
corporation or partnership which is a Current PCI Beneficial Owner and
beneficiaries of any trust which is a Current PCI Beneficial Owner; and
(iv) any relative, spouse or relative of a spouse of any Current PCI
Beneficial Owner.
The Company adopted a Stock Option Plan in connection with the Offering,
under which options for an aggregate of 1,600,000 shares of Class A Common
Stock are available for grants to key employees. The Company also adopted
a Director's Stock Option Plan in connection with the Offering, under which
options for an aggregate of 300,000 shares of Class A Common Stock are
available for grants to directors who are not officers or employees of the
Company. Stock options under both plans are granted with an exercise price
equal to the stock's fair value at the date of grant. The stock options
granted under the Stock Option Plan have 10-year terms and vest and become
exercisable ratably over three years from the date of grant. The stock
options granted under the Director's Stock Option Plan are vested and
become fully exercisable upon the date of the grant. At December 31,
1996, there were options with respect to 693,334 and 45,000 shares of Class
A Common Stock outstanding under the Stock Option Plan and the Director's
Stock Option Plan, respectively. At December 31, 1996, there were 880,000
and 255,000 additional shares available for grant under the Stock Option
Plan and the Director's Stock Option Plan, respectively.
The Company applies APB Opinion No. 25 in accounting for its Stock Option
Plan and Director's Stock Option Plan ("the Plans") and accordingly, no
compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
SFAS No.123, the Company's net income (loss) and net income (loss) per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net income-as reported $ 954 $ 4,682
Net (loss) income-pro forma $(777) $ 2,850
Net income per share-as reported $ .04 $ .18
Net (loss) income per share-pro forma $(.03) $ .11
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the weighted-average
assumptions as follows: dividend yield of 0.0%; expected volatility of
101%; risk-free interest rate of 5.5%; and expected lives of five years.
The fair value of the option grants in 1995 and 1996 were $11.04 and $13.36
per share, respectively.
46
<PAGE> 48
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Number Weighted Average
Of Shares Exercise Price
--------- ----------------
<S> <C> <C>
Balance December 31, 1994 - -
Granted 692,500 $14.25
Exercised (20,000) 14.25
--------
Balance December 31, 1995 672,500 14.25
Granted 72,500 17.25
Exercised (6,666) 14.25
--------
Balance December 31, 1996 738,334 14.54
========
</TABLE>
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $14.25 - $17.25 and
8.3 years, respectively.
At December 31, 1995 and 1996, the number of options exercisable was 37,500
and 250,000, respectively, and the weighted average exercise price of those
options was $14.25 and $14.34, respectively.
The Company adopted a stock purchase plan for employees (the "Employee
Stock Purchase Plan") and a stock purchase plan for non-employee directors
(the "Non-Employee Director Stock Purchase Plan"). Under the Employee
Stock Purchase Plan, 160,000 shares of Class A Common Stock are available
for purchase by eligible employees of the Company or any of its
subsidiaries. Under the Non-Employee Director Stock Purchase Plan, 25,000
shares of Class A Common Stock are available for purchase by non-employee
directors of the Company. The purchase price of each share of Class A
Common Stock purchased under the Employee Stock Purchase Plan or the
Non-Employee Director Stock Purchase Plan will be the lesser of 90 percent
of the fair market value of the Class A Common Stock on the first trading
day of the plan year or on the last day of such plan year; provided,
however, that in no event shall the purchase price be less than the par
value of the stock. Both plans will terminate in 2005, unless terminated
at an earlier date by the board of directors. During the year ended
December 31, 1996, 15,541 shares were issued under the Employee Stock
Purchase Plan and 1,702 shares were issued under the Non-Employee Director
Stock Purchase Plan at a purchase price of $16.85. Compensation cost
computed under the provisions of SFAS No. 123 related to the shares issued
under the Employee Stock Purchase Plan and the Non-Employee Director Stock
Purchase Plan is immaterial to the consolidated financial statements.
47
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PALMER WIRELESS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except for per share amounts)
(8) COMMITMENTS AND CONTINGENCIES
LEASES
The Company occupies certain buildings and uses certain tower sites, cell
sites and equipment under noncancelable operating leases which expire
through 2014. The operating leases for a building and certain tower sites
and cell sites are with related parties.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Related parties Others
--------------- ------
<S> <C> <C>
1997 $ 285 $ 3,429
1998 285 2,899
1999 52 2,507
2000 14 2,011
2001 - 1,348
Later years through 2014 - 4,522
----- -------
Total minimum lease payments $ 636 $16,716
===== =======
</TABLE>
Rental expense was $1,609, $2,487, and $3,551 for the years ended December
31, 1994, 1995 and 1996, respectively, of which $253, $269, and $278 was
paid to related parties for 1994, 1995 and 1996, respectively.
CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial statements.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with six officers of the Company.
The agreements have terms of two or three years and provide for aggregate
annual salaries of $1,181 in 1997. Each employment agreement provides that
if the officer is terminated by the Company without cause (as defined
therein) or terminates the agreement for good reason (as defined therein),
the Company will pay the officer the full base salary and benefits which
would have been paid to such officer during the remaining term of the
agreement.
48
<PAGE> 50
(9) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1995 QUARTER (a) QUARTER QUARTER QUARTER TOTAL
----------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Total Revenue $22,374 $25,931 $26,055 $30,546 $104,906
======= ======= ======= ======= ========
Operating Income $ 4,872 $ 6,892 $ 8,152 $ 6,666 $ 26,582
======= ======= ======= ======= ========
Net (Loss) Income $(3,958) $ 1,620 $ 2,801 $ 491 $ 954
======= ======= ======= ======= ========
Net (Loss) Income Per Share* $ (.21) $ .07 $ .12 $ .02 $ .04
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1996 QUARTER (b) QUARTER(b) QUARTER(b) QUARTER TOTAL
----------- ----------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
Total Revenue $36,950 $ 40,031 $41,171 $41,591 $159,743
======= ======== ======= ======= ========
Operating Income $ 8,514 $ 11,281 $11,977 $ 9,405 $ 41,177
======= ======== ======= ======= ========
Net Income (Loss) $ 76 $ 1,684 $ 2,976 $ (54) $ 4,682
======= ======== ======= ======= ========
Net Income (Loss) Per Share* $ .00 $ .07 $ .10 $ (.00) $ .18
======= ======== ======= ======= ========
</TABLE>
(a) First quarter loss was increased by $2,650 due to the recognition of
deferred income taxes relating to the difference between financial
statement and income tax return basis of certain assets and liabilities in
connection with the Exchange.
(b) Certain reclassifications have been made to conform to the fourth
quarter presentation.
* Weighted average shares outstanding for the quarters are calculated
independent of the weighted average shares outstanding for the year;
therefore, quarterly net income (loss) per share may not total to annual
net income per share.
(10) SUBSEQUENT EVENT
On February 1, 1997, one 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. 383,
otherwise known as Georgia-13 RSA for a total purchase price of $30,000,
subject to certain adjustments.
49
<PAGE> 51
NOTES
50
<PAGE> 52
NOTES
51
<PAGE> 53
CORPORATE INFORMATION
<TABLE>
<S> <C>
CORPORATE HEADQUARTERS INDEPENDENT AUDITORS
Palmer Wireless, Inc. KPMG Peat Marwick L.L.P.
12800 University Drive Des Moines, Iowa
Suite 500
Fort Myers, Florida 33907-5337 CORPORATE COUNSEL
Telephone Number: (941) 433-4350 Hogan & Hartson L.L.P.
Fax Number: (941) 433-8213 Washington, D.C.
INVESTOR INQUIRIES TRANSFER AGENT AND REGISTRAR
Our annual report, Form 10-K, quarterly reports, First Union National Bank Of North Carolina
prospectuses, and news releases about Palmer Wireless 230 South Tryon Street
are available by contacting: 10th Floor
Jeffrey L. Green Charlotte, North Carolina 28288-1154
Director of Corporate Planning and Analysis
Palmer Wireless, Inc. ANNUAL MEETING
12800 University Drive The 1997 annual meeting of shareholders
Suite 500 will be held at the University Park Building,
Fort Myers, Florida 33907-5337 12800 University Drive, Fort Myers, Florida
(941) 433-8226 on Tuesday, April 22, 1997, at 8:30 A.M.
(Eastern Standard Time)
</TABLE>
NASDAQ SYMBOL: PWIR
Price Range Of Common Stock
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
FIRST QUARTER $ 22.50 $16.25
SECOND QUARTER $ 22.81 $18.75
THIRD QUARTER $ 20.38 $16.00
FOURTH QUARTER $ 18.00 $10.25
</TABLE>
Palmer's long-term revolving credit facility limits the payment of cash
dividends on common stock. The Company has not paid any cash dividends on its
common stock since its inception.
52
<PAGE> 54
Palmer Wireless, Inc.
12800 University Drive, Suite 500
Fort Myers, Florida 33907
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Palmer Wireless, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-99170 and 33-99172) on Form S-8 of Palmer Wireless, Inc. of our report dated
January 30, 1997, except for note 10 which is as of February 1, 1997, relating
to the consolidated balance sheets of Palmer Wireless, Inc. and subsidiaries as
of December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996, which report appears in the December
31, 1996 Form 10-K of Palmer Wireless, Inc.
KPMG Peat Marwick LLP
Des Moines, Iowa
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,698
<SECURITIES> 0
<RECEIVABLES> 18,784
<ALLOWANCES> 0
<INVENTORY> 5,106
<CURRENT-ASSETS> 30,437
<PP&E> 179,658
<DEPRECIATION> 47,220
<TOTAL-ASSETS> 549,942
<CURRENT-LIABILITIES> 30,141
<BONDS> 337,000
0
0
<COMMON> 284
<OTHER-SE> 164,646
<TOTAL-LIABILITY-AND-EQUITY> 549,942
<SALES> 8,624
<TOTAL-REVENUES> 159,743
<CGS> 17,944
<TOTAL-COSTS> 46,661
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,462
<INCOME-PRETAX> 7,406
<INCOME-TAX> 2,724
<INCOME-CONTINUING> 4,682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,682
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
