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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-28160
WESTERN WIRELESS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1638901
- ------------------------------ ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2001 NW SAMMAMISH ROAD
ISSAQUAH, WASHINGTON 98027
- ---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
(206) 313-5200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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
--- ---
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 . [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares Outstanding as
Title of March 14, 1997
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Class A Common Stock, no par value 14,785,604
Class B Common Stock, no par value 55,222,657
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, computed by reference to the last sale of such stock as of the close
of trading on March 14, 1997, was $284,937,770.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated parts of this Form 10-K: 1997 Proxy Statement - Part III.
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WESTERN WIRELESS CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
Item 1. BUSINESS............................................................................................3
Item 2. PROPERTIES.........................................................................................19
Item 3. LEGAL PROCEEDINGS..................................................................................19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................19
EXECUTIVE OFFICERS OF THE REGISTRANT...............................................................20
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............................22
Item 6. SELECTED FINANCIAL DATA............................................................................23
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.........................................................................................25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................32
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE........................................................................................32
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................33
Item 11. EXECUTIVE COMPENSATION............................................................................33
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................33
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................33
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.................................34
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
LITIGATION REFORM ACT OF 1995. Statements contained or incorporated by reference
in this document that are not based on historical fact are "forward-looking
statements" within the meaning of the Private Securities Reform Act of 1995.
Forward-looking statements may be identified by use of forward-looking
terminology such as "believe," "intends," "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of those terms or the
negative of those terms.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Western Wireless Corporation (the "Company" or "Western Wireless")
provides wireless communications services in the western United States. The
Company owns, or has been the high bidder in recently concluded auctions of the
Federal Communication Commission ("FCC") on, an aggregate of 182 cellular and
personal communications services ("PCS") licenses for a geographic area covering
approximately 63.9 million persons. In addition, Western Wireless has a 49.9
percent interest in Cook Inlet Western Wireless PV/SS PCS, LP ("Cook Inlet PCS")
which owns, or has been the high bidder in the recently concluded FCC auctions
on, 21 PCS licenses covering approximately 12.7 million persons. Western
Wireless combined cellular and PCS licenses, together with the Cook Inlet PCS
licenses, cover approximately 59% of the land in the continental United States.
In its cellular and PCS markets, the Company served 359,700 subscribers at
December 31,1996.
The Company operates its cellular systems under the CELLULAR ONE(R)
brand name and operates its PCS markets under its proprietary VoiceStream(R)
brand name. It owns and operates cellular systems in 59 Rural Service Areas
("RSAs") and 16 Metropolitan Statistical Areas ("MSAs") with an aggregate
population of approximately 6.1 million persons. The Company holds or was the
high bidder on 7 Major Trading Area ("MTA") broadband PCS licenses and 100 Basic
Trading Area ("BTA") broadband PCS licenses covering approximately 62.8 million
persons. The Company currently offers PCS service in six MTAs - Honolulu,
Salt Lake City, EI Paso/Albuquerque, Portland, Oklahoma City, Des Moines/Quad
Cities - and expects to begin offering service in the Denver MTA during the
second quarter of 1997. During 1997, the Company expects to begin design and
construction in the Seattle and Phoenix/Tucson BTAs. Each of the Company's
operational PCS systems are utilizing Global System for Mobile Communications
("GSM") technology as the network standard. GSM is the leading digital wireless
standard worldwide, with systems operating in approximately 110 countries and
serving over 30 million subscribers, including systems operational in the United
States.
In addition, Western Wireless is engaged in activities related to its
principal wireless communications business. The Company has acquired interests
in entities which have made wireless license applications in certain foreign
countries, including entities that have an interest in joint ventures which have
obtained the GSM cellular licenses in the Republics of Latvia, Georgia and
Ghana. During 1997, the joint venture commenced operations in the Republic of
Latvia. The licenses of the Republics of Georgia and Ghana are not yet
operational. In addition, since their acquisition in February 1996, the Company
has operated paging systems in eight western states and currently serves
approximately 29,000 customers.
Western Wireless Corporation was formed in July 1994 as the result of a
business combination (the "Business Combination") among various companies,
including Markets Cellular Limited Partnership d/b/a Pacific Northwest Cellular,
a Delaware limited partnership ("MCLP"), and General Cellular Corporation, a
Delaware corporation ("GCC"). GCC commenced operations in 1989 and MCLP was
formed in 1992. As a result of the Business Combination and a series of related
transactions, Western Wireless Corporation became the owner of all of the assets
of MCLP. Accordingly, all financial data relating to the Company herein with
respect to periods after the date of the Business Combination reflect the
operations of GCC and MCLP and all such data with respect to prior periods
reflect only the operations of GCC, which, for accounting purposes, is
considered Western Wireless Corporation's predecessor.
STRATEGY
Historically, the Company has focused on the acquisition and operation
of cellular communications systems in RSAs and small MSAs in the western United
States. The Company's acquisition of PCS licenses enables it to significantly
expand both its customer base and geographic coverage and to offer enhanced
wireless communications services. The Company's initial focus with its PCS
licenses has been, and will continue to be, to commence operations in the most
densely populated
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areas within its PCS systems. The Company believes that cellular is the optimum
technology for rural, less densely populated areas because they are less
susceptible to competition and have a greater capacity for future growth than
most major markets, and that PCS is the optimum technology for more densely
populated urban areas where analog cellular systems are more expensive to deploy
and face potential capacity constraints. The Company has entered markets at a
relatively low cost, having purchased cellular licenses for an average of $45.68
per pop overall. The Company's PCS MTA licenses were purchased at an average of
$10.81 per pop and the PCS BTA licenses were purchased at an average of $3.13
per pop, including the Company's ownership percentage in Cook Inlet PCS's
licenses. "Pops" refers to the number of persons in a licensed area multiplied
by the Company's ownership interest in the license for such licensed area.
The Company's operating strategy has been to (i) achieve a critical
time-to-market advantage by rapidly constructing and commencing operations of
PCS systems in urban areas within selected PCS markets; (ii) continue to expand
its operations through increased subscriber growth and usage; (iii) utilize its
centralized management and back office functions to support the combined needs
of its cellular and PCS subscribers, thereby further improving operating
efficiencies and generating greater economies of scale; and (iv) selectively
acquire cellular and PCS properties primarily in contiguous markets. The Company
is implementing its strategy by continuing to build its PCS systems, offer a
wide range of products and services at competitive prices, continually upgrade
the quality of its network, establish strong brand recognition, create a strong
sales and marketing program tailored to local markets and provide a superior
level of customer service.
THE WIRELESS COMMUNICATIONS INDUSTRY
OVERVIEW
Wireless communications systems use a variety of radio frequencies to
transmit voice and data. Broadly defined, the wireless communications industry
includes one-way radio applications, such as paging or beeper services, and
two-way radio applications, such as cellular telephone, PCS and Enhanced
Specialized Mobilized Radio ("ESMR") networks. Historically, each application
has been licensed and operates in a distinct radio frequency block.
Since its introduction in 1983, wireless service has grown
dramatically. As of December 31, 1996 according to Cellular Telecommunications
Industry Association ("CTIA") there were over 44.0 million wireless subscribers
in the United States, representing a penetration rate of 17.0% and a growth rate
of 30.4% from December 31, 1995.
The following chart illustrates the annual growth in United States
wireless subscribers through December 31, 1996:
U.S. WIRELESS SUBSCRIBERS
1984 1985 1986 1987 1988 1989
---- ---- ---- ---- ---- ----
Millions of Subscribers 0.20 0.34 0.68 1.23 2 4
1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ----
Millions of Subscribers 5 8 11 16 24 34 44
Source: Cellular Telecommunications Industry Association
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The following table sets forth certain domestic wireless industry
statistics derived from the data survey results published semi-annually by CTIA:
Year Ended December 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
WIRELESS INDUSTRY STATISTICS
Total Service Revenues (in billions) ............ $ 7.8 $ 10.9 $ 14.2 $ 19.0 $ 23.6
Ending Wireless Subscribers (in millions) ....... 11.0 16.0 24.1 33.8 44.0
Subscriber Growth ............................... 46.0% 45.1% 50.8% 40.0% 30.4%
Average Monthly Service Revenue
per Subscriber .............................. $ 70.13 $ 67.13 $ 59.08 $ 54.90 $ 50.61
Average Monthly Subscriber Revenue
per Subscriber .............................. $ 61.40 $ 58.74 $ 51.48 $ 47.59 $ 44.66
Ending Penetration .............................. 4.4% 6.2% 9.4% 13.0% 17.0%
These statistics represent results for the industry as a whole. Average
Monthly Service Revenue per Subscriber reflects per subscriber revenue including
roaming revenue, and Average Monthly Subscriber Revenue per Subscriber reflects
per subscriber revenue excluding roaming revenue.
In the wireless communications industry, there are two principal
services licensed by the FCC for transmitting voice and data signals, "cellular
services" and "PCS." Cellular service is the predominant form of wireless voice
communications service currently available. The FCC has made available for
cellular service a portion of the radio spectrum from 830-870 MHz. Cellular
service is capable of providing high quality, high capacity service to and from
mobile, portable and stationary telephones. Cellular handsets are affordable and
easy to use and offer important benefits to both business and residential
consumers. Fully equipped, multi-cell cellular systems are capable of handling
thousands of calls at any given time and thus are capable of providing service
to hundreds of thousands of subscribers in a given market. See "--Products and
Services."
Cellular systems are primarily analog based systems, although digital
technology has been introduced in certain markets. Analog technology currently
has several limitations, including lack of privacy and limited capacity. Digital
systems convert voice or data signals into a stream of digits that is compressed
before transmission, enabling a single radio channel to carry multiple
simultaneous signal transmissions. This enhanced capacity, along with
improvements in digital signaling, allows digital-based wireless technologies to
offer new and enhanced services, such as greater call privacy, and robust data
transmission features, such as "mobile office" applications (including
facsimile, electronic mail and wireless connections to computer/data networks,
including the Internet). See "- Operation of Wireless Communications Systems."
PCS is a term commonly used in the United States to describe a portion
of radio spectrum (1850-1990 MHz). PCS spectrum was auctioned by the FCC
beginning with the A and B Blocks, which were auctioned by the FCC in late 1994
and 1995. In late 1995 and in 1996 the C Block was auctioned and the FCC has
recently concluded simultaneous auctions of the D, E and F Blocks. This portion
of radio spectrum is to be used by PCS licensees to provide wireless
communications services. PCS will initially compete directly with existing
cellular telephone, paging and specialized mobile radio services. PCS will also
include features that are not generally offered by cellular providers, such as
data transmissions to and from portable computers, advanced paging services and
facsimile services. The Company believes that PCS providers will be the first
direct wireless competitors to cellular providers. In addition, wireless
providers may offer mass market wireless local loop applications in competition
with wired local communications services. See "--Governmental Regulation" for a
discussion of the FCC auction process and allocation of wireless licenses.
The Company, and the wireless communications industry in general, have
historically experienced significant subscriber growth during the fourth
calendar quarter. The Company has historically experienced highest usage and
revenue per subscriber during the summer months. The Company expects these
trends to continue.
OPERATION OF WIRELESS COMMUNICATIONS SYSTEMS
Wireless communications system service areas, whether cellular or PCS,
are divided into multiple cells. Due to the frequencies in which they operate,
cellular cells generally have a wider transmission radius than PCS cells. In
both cellular and PCS systems, each cell contains a transmitter, a receiver and
signaling equipment (the "Cell Site").
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The Cell Site is connected by microwave or landline telephone lines to a switch
that uses computers to control the operation of the cellular communications
system for the entire service area. The system controls the transfer of calls
from cell to cell as a subscriber's handset travels, coordinates calls to and
from handsets, allocates calls among the cells within the system and connects
calls to the local landline telephone system or to a long distance telephone
carrier. Wireless communications providers establish interconnection agreements
with local exchange carriers and interexchange carriers, thereby integrating
their system with the existing landline communications system.
Because the signal strength of a transmission between a handset and a
Cell Site declines as the handset moves away from the Cell Site, the switching
office and the Cell Site monitor the signal strength of calls in progress. When
the signal strength of a call declines to a predetermined level, the switching
office may "hand off" the call to another Cell Site where the signal strength is
stronger. If a handset leaves the service area of a cellular or PCS system, the
call is disconnected unless there is a technical connection with the adjacent
system.
Analog cellular handsets are functionally compatible with cellular
systems in all markets within the United States. As a result, analog cellular
handsets may be used wherever a subscriber is located, as long as a cellular
system is operational in the area. Cellular system operators normally agree to
provide service to subscribers from other cellular systems who are temporarily
located in or traveling through their service areas. Agreements among system
operators provide that the carrier that normally provides services to the
roaming subscriber pays the serving carrier at rates prescribed by the serving
carrier.
Although PCS and cellular systems utilize similar technologies and
hardware, they operate on different frequencies and use different technical and
network standards. As a result, and as discussed further below, it currently is
not possible for users of one type of system to "roam" on a different type of
system outside of their service area, or to hand off calls from one type of
system to another. This will also be true for PCS subscribers seeking to roam in
a PCS service area served by operators using different technical standards.
PCS systems will operate under one of three principal digital signal
transmission technologies, or standards, that have been proposed by various
operators and vendors for use in PCS systems: GSM, Code Division Multiple Access
("CDMA") or Time Division Multiple Access ("TDMA"). GSM and TDMA are both "time
division-based" standards but are incompatible with each other and with CDMA.
Accordingly, a subscriber of a system that utilizes GSM technology is currently
unable to use a GSM handset when traveling in an area not served by GSM-based
PCS operators, unless the subscriber carries a dual-mode handset that permits
the subscriber to use the analog cellular system in that area. Such dual-mode
handsets are not yet commercially available and will be more expensive than
single-mode handsets.
CELLULAR OPERATIONS
The Company operates cellular systems in 59 RSAs and 16 smaller MSAs,
and generally owns 100% of each of its cellular licenses. In these rural and
small urban markets, the Company's cellular systems cover large geographic areas
with relatively few Cell Sites, incorporating cost efficient technology.
The Company's experience is that several inherent attributes of RSAs
and small MSAs make such markets attractive. Such attributes include high
subscriber growth rates, population bases of customers with substantial needs
for wireless communications, the ability to cover larger geographic areas with
fewer Cell Sites than is possible in urban areas, less intense competitive
environments and less vulnerability to PCS competition.
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CELLULAR MARKETS AND SYSTEMS
The Company owns FCC licenses to provide wireless cellular
communications services in 75 separate markets. The Company's pops by cellular
market are as follows:
CELLULAR OWNERSHIP THE COMPANY'S
MARKETS (1) POPULATION (2) PERCENTAGE POPULATION (2)
- ------------------ --------------- -------------- ----------------
California
Mono (CA-8) 30,000 100 30,000
--------------- ----------------
California Total 30,000 30,000
--------------- ----------------
Colorado
Pueblo 127,000 100 127,000
Elbert (CO-5) 28,000 100 28,000
Saguache (CO-7) 46,000 100 46,000
Kiowa (CO-8) 44,000 100 44,000
Costilla (CO-9) 27,000 100 27,000
--------------- ----------------
Colorado Total 272,000 272,000
--------------- ----------------
Idaho
Idaho (ID-2) (3) 78,000 100 78,000
--------------- ----------------
Idaho Total 78,000 78,000
--------------- ----------------
Iowa
Sioux City 119,000 100 119,000
Monona (IA-8) 54,000 100 54,000
--------------- ----------------
Iowa Total 173,000 173,000
--------------- ----------------
Kansas
Jewell (KS-3) 50,000 100 50,000
Marshall (KS-4) 145,000 100 145,000
Elisworth (KS-8) 129,000 100 129,000
Morris (KS-9) 57,000 100 57,000
Franklin (KS-10) 107,000 100 107,000
Reno (KS-14) 170,000 100 170,000
--------------- ----------------
Kansas Total 658,000 658,000
--------------- ----------------
Minnesota
Kittson (MS-1) 50,000 100 50,000
Lake of the Woods
(MN-2-A1) 25,000 100 25,000
--------------- ----------------
Minnesota Total 75,000 75,000
--------------- ----------------
Missouri
Bates (MO-9) 75,000 100 75,000
--------------- ----------------
Missouri Total 75,000 75,000
--------------- ----------------
Montana
Billings 133,000 97 129,000
Great Falls 83,000 100 83,000
Lincoln (MT-1) 151,000 100 151,000
Toole (MT-2) 39,000 100 39,000
Malta (MT-3) 15,000 49 7,000
Daniels (MT-4) 39,000 100 39,000
Mineral (MT-5) 196,000 100 196,000
Deer Lodge (MT-6) 65,000 100 65,000
Fergus (MT-7) 29,000 100 29,000
Beaverhead (MT-8) 96,000 100 96,000
Carbon (MT-9) 34,000 100 34,000
Prairie (MT-10) 20,000 100 20,000
--------------- ----------------
Montana Total 900,000 888,000
--------------- ----------------
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CELLULAR OWNERSHIP THE COMPANY'S
MARKETS (1) POPULATION (2) PERCENTAGE POPULATION (2)
- ------------------- ----------------- ------------- -----------------
Nevada
Humbolt (NV-1) 46,000 100 46,000
Lander (NV-2) 59,000 100 59,000
Mineral (NV-4) 30,000 100 30,000
White Pine (NV-5) 15,000 100 15,000
----------------- -----------------
Nevada Total 150,000 150,000
----------------- -----------------
New Mexico
Lincoln (NM-6) 240,000 100 240,000
----------------- -----------------
New Mexico
Total 240,000 240,000
----------------- -----------------
North Dakota
Bismarck 89,000 99 88,000
Fargo 167,000 100 167,000
Grand Forks 105,000 100 105,000
Divide (ND-1) 101,000 100 101,000
Bottineau (ND-2) 58,000 100 58,000
McKenzie (ND-4) 62,000 100 62,000
Kidder (ND-5) 47,000 100 47,000
----------------- -----------------
North Dakota
Total 629,000 628,000
----------------- -----------------
South Dakota
Rapid City 117,000 100 117,000
Sioux Falls 140,000 99 139,000
Harding (SD-1) 36,000 100 36,000
Corson (SD-2) 22,000 100 22,000
McPherson (SD-3) 52,000 100 52,000
Marshall (SD-4) 65,000 100 65,000
Custer (SD-5) 25,000 100 25,000
Haakon (SD-6) 38,000 100 38,000
Sully (SD-7) 66,000 100 66,000
Kingsbury (SD-8) 73,000 100 73,000
Harrison (SD-9) 93,000 100 93,000
----------------- -----------------
South Dakota
Total 727,000 726,000
----------------- -----------------
Texas
Abilene 154,000 100 154,000
Lubbock 233,000 100 233,000
Midland 124,000 96 119,000
Odessa 132,000 96 127,000
San Angelo 107,000 100 107,000
Parmer (TX-3) 150,000 100 150,000
Gaines (TX-8) 140,000 100 140,000
Hudspeth (TX-12) 26,000 100 26,000
Reeves (TX-13) 32,000 100 32,000
Loving (TX-14) 49,000 100 49,000
----------------- -----------------
Texas Total 1,147,000 1,137,000
----------------- -----------------
Nebraska
Lincoln 233,000 100 233,000
Cherry (NE-2) 30,000 100 30,000
Knox (NE-3) 113,000 100 113,000
Grant (NE-4) 35,000 100 35,000
Keith (NE-6) 109,000 100 109,000
Hall (NE-7) 90,000 100 90,000
Chase (NE-8) 56,000 100 56,000
Adams (NE-9) 79,000 100 79,000
Cass (NE-10) 84,000 100 84,000
----------------- -----------------
Nebraska Total 829,000 829,000
----------------- -----------------
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CELLULAR OWNERSHIP THE COMPANY'S
MARKETS (1) POPULATION (2) PERCENTAGE POPULATION (2)
- ------------------- --------------- -------------- ------------------
Wyoming
Casper 63,000 100 63,000
Sheridan (WY-2) 76,000 100 76,000
Douglas (WY-5) 12,000 49 6,000
--------------- -------------
Wyoming Total 151,000 145,000
--------------- -------------
Cellular Total 6,134,000 6,104,000
=============== =============
(1) Excludes three markets containing a population of 370,000 in which the
Company operates under an Interim Operating Authority ("IOA").
(2) Estimated 1997 populations are based on 1995 estimates by Equifax adjusted
by the Company by a growth factor based upon Equifax's growth factors from
1990 to 1995.
(3) The population for Idaho 2 includes 5,000 persons in Idaho 3 which the
Company has construction permits to build Cell Sites under its Idaho 2
license.
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PCS OPERATIONS
The Company owns, or has been the high bidder on, 107 PCS licenses,
covering approximately 62.8 million persons, including 100 licenses covering
approximately 43.5 million persons for which the Company was the higher bidder
in the FCC auction of PCS licenses designated as D and E Blocks, which concluded
during 1997.
The Company has completed initial construction and commenced commercial
operations of its PCS systems in the Honolulu, Salt Lake City, El
Paso/Albuquerque, Portland, Oklahoma City and Des Moines/Quad Cities MTAs, and
is constructing the initial phase of its PCS system in the Denver MTA which the
Company expects to become operational during the second quarter of 1997. In
1997, the Company intends to begin design and construction of PCS systems in the
Seattle and Phoenix/Tucson BTAs, for which it was the high bidder in the FCC D
and E Block auctions. The Company has not yet finalized its construction plans
for all of the licenses for which it was the high bidder in the D and E
auctions.
The Company believes its PCS service offerings are broader than those
generally offered by cellular systems in the Company's PCS markets. PCS service
offerings initially include all of the services typically provided by cellular
systems, as well as paging, caller identification, text messaging, smart cards,
voice mail, over-the-air activation and over-the-air subscriber profile
management.
The Company's goal is to achieve significant market penetration by
aggressively marketing competitively priced PCS services under its proprietary
VoiceStream brand name, offering enhanced services not generally provided by
cellular operators and providing superior customer service. In addition, the
Company is structured to be a low-cost provider of PCS services by taking
advantage of the existing business infrastructure and business experience
established in connection with its cellular operations, including centralized
management, marketing, billing and customer service functions, and by focusing
on efficient customer acquisition and retention. See "--Products and Services."
The Company's experience is that PCS technology is better suited to
urban areas than rural areas and has cost advantages relative to cellular
technology in urban areas. PCS Cell Sites operate at a higher frequency and
lower power than cellular Cell Sites and, therefore, typically have a smaller
coverage area. Unlike in rural areas, wireless systems in urban areas require
substantial frequency "reuse" to provide high capacity. The coverage advantage
that cellular frequencies and analog technology enjoy in rural areas is not
present in urban areas because analog cellular technology does not provide
efficient frequency reuse. As a result, the higher frequency, lower power,
digital PCS systems are likely to provide greater capacity in urban areas.
The Company has selected GSM as the digital standard for its PCS system
because the Company believes it has significant advantages over the other
competing digital standards, including the experience of years of proven
operability in Europe and Asia, enhanced features not presently available with
other standards and an open system architecture that will allow the Company to
choose from a variety of equipment options and providers. GSM is the leading
digital wireless standard in the world, with over 30 million customers in 110
countries. The GSM digital standard also has been selected by other PCS
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licensees which, together with the Company, would cover over 260 million persons
representing approximately 98% of the US population.
The Company has entered into roaming agreements or letters of intent
with all of the MTA licensees which have chosen to deploy the GSM standard in
their PCS markets in the United States which will provide for roaming by the
Company's PCS subscribers into these carriers' PCS markets, and vice versa, when
such systems are operational. The Company also has reciprocal roaming agreements
or letters of intent with 35 international carriers who have chosen to deploy
the GSM standard. The Company anticipates entering into similar agreements with
other domestic and international carriers who deploy the GSM standard and with
other cellular carriers.
PCS MARKETS AND SYSTEMS
The Company owns, or was the high bidder on 107 FCC licenses to provide
wireless PCS communications services in the markets listed below. The MTA
licenses owned by the Company are 30 MHz blocks in the A and B Blocks and the
BTA licenses are 10 MHz blocks in the D and E Blocks. See "--Governmental
Regulation--Licensing of PCS Systems.
PCS MTA MARKETS PCS BTA MARKETS POPULATION(1) PCS MTA MARKETS PCS BTA MARKETS POPULATION(1)
- --------------- --------------- ------------- --------------- --------------- -------------
Honolulu . . . . . . . . . . . . . . . . . . . . . 1,234,000 San Francisco
San Francisco . . . . . . 6,896,000
Portland . . . . . . . . . . . . . . . . . . . . . 3,527,000
Spokane
Salt Lake City . . . . . . . . . . . . . . . . . . 3,071,000 Billings . . . . . . . . 314,000
Great Falls . . . . . . . 170,000
Denver . . . . . . . . . . . . . . . . . . . . . 4,500,000 Walla Walla . . . . . . . 172,000
Kennewick-Pasco . . . . . 185,000
El Paso/Albuquerque . . . . . . . . . . . . . . . 2,433,000 Missoula . . . . . . . . 167,000
Lewiston . . . . . . . . 129,000
Oklahoma City . . . . . . . . . . . . . . . . . . 1,957,000 Butte . . . . . . . . . . 69,000
Bozeman . . . . . . . . . 80,000
Des Moines/Quad Cities(2) . . . . . . . . . . . . 3,078,000 Kalispell . . . . . . . . 72,000
Helena . . . . . . . . . 69,000
Clinton-Sterling . . . . 148,000
Burlington . . . . . . . 140,000 Wichita
Mason City . . . . . . . 115,000 Wichita . . . . . . . . . 636,000
Marshalltown . . . . . . 54,000 Salina . . . . . . . . . 140,000
Hutchinson . . . . . . . 122,000
Seattle
Seattle-Tacoma . . . . . 3,117,000 Tulsa
Olympia-Centralia . . . . 333,000 Coffeyville . . . . . . . 60,000
Phoenix Omaha
Phoenix . . . . . . . . . 2,772,000 Lincoln . . . . . . . . . 326,000
Tucson . . . . . . . . . 752,000 Grand Island . . . . . . 145,000
Yuma . . . . . . . . . . 143,000 Norfolk . . . . . . . . . 110,000
Prescott . . . . . . . . 139,000 North Platte . . . . . . 85,000
Flagstaff . . . . . . . . 119,000 Hastings . . . . . . . . 71,000
Sierra Vista-Douglas . . 114,000 McCook . . . . . . . . . 33,000
Nogales . . . . . . . . . 38,000 Kansas City
Manhattan . . . . . . . . 134,000
San Antonio
San Antonio . . . . . . . 1,749,000 Minneapolis
Corpus Christi . . . . . 544,000 Fargo . . . . . . . . . . 306,000
McAllen . . . . . . . . . 561,000 Grand Forks . . . . . . . 211,000
Brownsville-Harlin . . . 342,000 Sioux Falls . . . . . . . 226,000
Laredo . . . . . . . . . 195,000 Bismarck . . . . . . . . 125,000
Aberdeen . . . . . . . . 85,000
Mitchell . . . . . . . . 83,000
Watertown . . . . . . . . 72,000
Bemidji . . . . . . . . . 64,000
Huron . . . . . . . . . . 52,000
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PCS MTA MARKETS PCS BTA MARKETS POPULATION(1) PCS MTA MARKETS PCS BTA MARKETS POPULATION(1)
- --------------- --------------- ------------- --------------- --------------- -------------
Dallas Chicago
Austin . . . . . . . . . 1,086,000 Jacksonville . . . . . . 69,000
Amarillo . . . . . . . . 400,000 Little Rock
Abilene . . . . . . . . . 258,000 Little Rock . . . . . . . 921,000
Odessa (3) . . . . . . . 229,000 Fort Smith . . . . . . . 305,000
San Angelo . . . . . . . 167,000 Fayetteville . . . . . . 262,000
Midland (3) . . . . . . . 129,000 Jonesboro . . . . . . . . 172,000
Paris . . . . . . . . . . 93,000 Pine Bluff . . . . . . . 154,000
Clovis . . . . . . . . . 83,000 Hot Springs . . . . . . . 129,000
Brownwood . . . . . . . . 61,000 Russellville . . . . . . 91,000
Hobbs . . . . . . . . . . 59,000 Harrison . . . . . . . . 82,000
Big Spring . . . . . . . 36,000
Cincinnati
St. Louis Dayton-Springfield . . . 1,242,000
St. Louis . . . . . . . . 2,829,000
Carbondale-Marion . . . . 208,000 Richmond
Columbia . . . . . . . . 200,000 Norfolk-VA Beach . . . . 1,818,000
Cape Girardeau . . . . . 187,000 Richmond-Petersburg . . . 1,213,000
Quincy-Hannibal . . . . . 175,000 Danville . . . . . . . . 169,000
Poplar Bluff . . . . . . 154,000 Lynchburg . . . . . . . . 161,000
Jefferson City . . . . . 151,000 Staunton-Waynesburo . . . 108,000
Mount Vernon . . . . . . 116,000 Martinsville . . . . . . 93,000
Rolla . . . . . . . . . . 106,000 ==========
West Plains . . . . . . . 72,000 PCS Total 62,808,000(4)
Kirksville . . . . . . . 54,000 ==========
Milwaukee
Milwaukee . . . . . . . . 1,810,000
Cleveland
Cleveland-Akron . . . . . 2,936,000
Canton . . . . . . . . . 528,000
Youngstown-Warren . . . . 493,000
Erie . . . . . . . . . . 284,000
Mansfield . . . . . . . . 228,000
Sandusky . . . . . . . . 137,000
Sharon . . . . . . . . . 122,000
East Liverpool-Salem . . 113,000
Ashtabula . . . . . . . . 102,000
Meadville . . . . . . . . 86,000
(1) Estimated 1997 populations are based on 1995 estimates by Equifax adjusted
by the Company by a growth factor based upon Equifax's growth factors from
1990 to 1995.
(2) "Quad Cities" refers to the cities of Moline and Rock Island Illinois, and
Bettendorf and Davenport, Iowa.
(3) The Company was the high bidder on two 10 MHz licenses in these BTAs.
(4) Total PCS populations reflected here are net of the Des Moines/Quad Cities
BTA markets which overlap the Des Moines/Quad Cities MTA market.
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The Company has a 49.9 percent partnership interest in Cook Inlet PCS,
which owns PCS licenses for 14 BTAs covering approximately 3.4 million persons,
and was the high bidder for 7 PCS licenses covering approximately 9.3 million
persons in the FCC auction of PCS licenses designated as F Block, which
concluded during 1997. Cook Inlet PCS is a Delaware limited partnership
ultimately controlled by Cook Inlet Region, Inc., an Alaska Native Regional
Corporation, which qualifies Cook Inlet PCS for additional benefits available to
a small business. Cook Inlet PCS has begun to construct its PCS system in the
Tulsa BTA, which is expected to be operational in the third quarter of 1997.
Cook Inlet PCS has not yet finalized its construction plans for the other
licenses that it owns or those for which it was the high bidder in the FCC's F
Block auction.
Cook Inlet PCS owns, or was the high bidder on, FCC licenses to provide
wireless PCS communications services in 21 separate markets. The BTA licenses
owned by Cook Inlet PCS are 30 MHz blocks in the C Block except as noted below.
See "--Governmental Regulation--Licensing of PCS Systems."
PCS MTA MARKETS PCS BTA MARKETS POPULATION (1)
- ---------------- ---------------- -------------
Seattle
Seattle-Tacoma (2)...................................................... 3,117,000
Yakima ................................................................. 247,000
Bremerton .............................................................. 251,000
Wenatchee .............................................................. 198,000
Aberdeen ............................................................... 91,000
Port Angeles ........................................................... 93,000
Bellingham (2).......................................................... 155,000
Spokane
Spokane ................................................................ 715,000
Walla Walla ............................................................ 172,000
Phoenix
Phoenix (2)............................................................. 2,772,000
Tucson (2).............................................................. 752,000
Dallas
Temple (2).............................................................. 317,000
Wichita Falls .......................................................... 207,000
Sherman-Dennison ....................................................... 159,000
Tulsa
Tulsa .................................................................. 913,000
Muskogee ............................................................... 159,000
Coffeyville ............................................................ 60,000
Bartlesville ........................................................... 49,000
Kansas City
Pittsburg (2)........................................................... 40,000
Minneapolis
Worthington ............................................................ 96,000
Cincinnati
Cincinnati (2).......................................................... 2,104,000
===========
Total 12,717,000
===========
(1) Estimated 1997 populations are based on 1995 estimates by Equifax adjusted
by the Company by a growth factor based upon Equifax's growth factors from
1990 to 1995.
(2) Represents a 10 MHz license for which it was the higher bidder in the F
Block. See "--Governmental Regulation--Licensing of PCS Systems."
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PRODUCTS AND SERVICES
The Company provides a variety of wireless products and services
designed to match a range of needs for business and personal use.
CELLULAR
The Company offers its subscribers high quality cellular
communications, as well as several custom calling services, such as call
forwarding, call waiting, conference calling, voice message storage and
retrieval and no-answer transfer. In addition, all subscribers can access local
government emergency services from their cellular handsets (with no air time
charge) by dialing 911. The Company will continue to evaluate new products and
services that may be complementary to its wireless operations. The Company has
designed several pricing options to meet the varied needs of its customer base.
Most options consist of a fixed monthly charge (with varying allotments of
included minutes, in some cases), plus additional variable charges per minute of
use. In addition, in most cases the Company separately charges for its custom
calling features.
The Company provides extended regional and national service to cellular
subscribers in its markets, thereby allowing them to make and receive calls
while in other cellular service areas without dialing special access codes,
through its membership in North American Cellular Network ("NACN") and other
regional networking arrangements. NACN is the largest wireless telephone network
system in the world, linking non-wireline cellular operators throughout the
United States, Canada, Puerto Rico and the Virgin Islands. The Company also has
special roaming arrangements with certain cellular carriers in areas adjacent to
the Company's markets that provide the Company's customers attractive rates when
roaming in these surrounding areas.
PCS
The Company is currently operating PCS systems in the Honolulu, Salt
Lake City, El Paso/Albuquerque, Portland, Oklahoma City and Des Moines/Quad
Cities MTAs and will offer PCS services in the Denver MTA and selected BTAs
using the GSM standard. The Company currently offers several distinct services
and features in its PCS systems, including:
Enhanced Features--The Company's PCS systems offer caller identification, call
hold, voice mail, numeric paging, as well as custom calling features such as
call waiting, conference calling and call forwarding.
Messaging and Wireless Data Transmission--Digital networks offer voice and data
communications, including text messaging, through a single handset. The Company
believes that, as data transmission services develop, a number of uses for such
services will emerge.
Call Security and Privacy--Sophisticated encryption algorithms provide increased
call security, encouraging users to make private, business and personal calls
with significantly lower risk of eavesdropping than on analog-based systems.
Smart Card--"Smart" cards, programmed with the user's billing information and a
specified service package, allow subscribers to obtain PCS connectivity
automatically, simply by inserting their smart cards into compatible PCS
handsets.
Over-the-Air Activation and Over-the-Air Subscriber Profile Management--The
Company is able to transmit changes in the subscriber's feature package,
including mobile number assignment and personal directory numbers, directly to
the subscriber's handset.
Extended Battery Performance--Digital handsets are capable of entering into a
"sleep" mode when not in use, significantly extending the handset's battery
performance. In addition, because the Company's PCS systems utilize tightly
spaced, low power transmitters, less power is required to transmit calls,
thereby further extending battery performance.
Roaming--Subscribers will be able to roam in substantial portions of the United
States, either on other GSM-based PCS systems operated by current licensees or
by using dual-mode handsets that can be used on existing cellular systems. The
Company has entered into roaming agreements which allow its PCS customers to
roam on cellular systems. The Company has been advised by the manufacturers of
dual-mode handsets that such handsets will be commercially available in
significant quantities in 1998 and it has entered into agreements with suppliers
to acquire dual-mode handsets when available.
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MARKETING, SALES AND CUSTOMER SERVICE
The Company's sales and marketing strategy is to generate continued net
subscriber growth and increased subscriber revenues. In addition, the Company
targets a customer base which it believes is likely to generate higher monthly
service revenues, while attempting to achieve a low cost of adding new
subscribers. The Company markets its services under nationally recognized and
proprietary brand names, and sells its products and services through a
combination of direct and indirect distribution channels.
MARKETING
The Company markets its cellular products and services in all markets
principally under the name CELLULAR ONE. CELLULAR ONE, the first national brand
name in the cellular industry, is currently utilized by a national coalition of
cellular licensees in the 50 states with a combined estimated population of over
173 million. The national advertising campaign conducted by the Cellular One
Group enhances the Company's advertising exposure at a fraction of the cost of
what could be achieved by the Company alone.
The Company markets its PCS products and services under its proprietary
VoiceStream brand name. The Company's objective is to develop brand recognition
of VoiceStream through substantial advertising and direct marketing in each of
its PCS markets. In marketing its PCS services, the Company intends to emphasize
the enhanced features, privacy and competitive pricing of such services.
Initially, the Company intends to concentrate its PCS marketing efforts
primarily on businesses and individuals "on-the-go," which would benefit from
integrated mobile voice, messaging and wireless data transmission capabilities,
and subscribers with substantial needs for wireless communications, who would
benefit from enhanced features and services.
SALES
The Company sells its products and services through a combination of
direct and indirect channels. The Company operates 162 local sales offices
(which also serve as retail sales locations), including 102 under the CELLULAR
ONE brand name, 14 under the Phones-To-Go brand name and 46 under the
VoiceStream brand name, and utilizes a direct sales force of over 850 persons
based out of these offices, who are trained to educate new customers on the
features of its products. Sales commissions generally are linked both to
subscriber revenue and subscriber retention, as well as activation levels.
The Company believes that its local sales offices provide the physical
presence in local markets necessary to position the Company as a quality local
service provider, and give the Company greater control over both its costs and
the sales process. The Company also utilizes indirect sales through an extensive
network of national and local merchant and specialty retailers. The Company
intends to continue to use a combination of direct and indirect sales channels,
with the mix depending on the demographics of each particular market.
In addition, the Company acts as a retail distributor of handsets and
maintains inventories of handsets. Although subscribers generally are
responsible for purchasing or otherwise obtaining their own handsets, the
Company has historically sold handsets below cost to respond to competition and
in accordance with general industry practice.
CUSTOMER SERVICE
Customer service is a significant element of the Company's operating
philosophy. The Company is committed to attracting and retaining subscribers by
providing consistently superior customer service. At its headquarters in
Issaquah, Washington, the Company maintains a highly sophisticated monitoring
and control system, a staff of customer service personnel and a well-trained
technical staff to handle both routine and complex questions as they arise, 24
hours a day, 365 days a year.
The Company implements credit check procedures at the time of sale and
continuously monitors customer churn (the rate of subscriber attrition). The
Company believes that it helps manage its churn through an outreach program by
its sales force and customer service personnel. This program not only enhances
subscriber loyalty, but also increases add-on sales and customer referrals. The
outreach program allows the sales staff to check customer satisfaction, as well
as to offer additional calling features, such as voice mail, call waiting and
call forwarding.
In February 1997, the Company announced plans to build a customer call
center in Albuquerque, New Mexico. The facility is slated to open during the
second half of 1997. This facility, along with the Company's current customer
call center in
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Issaquah, Washington, will support the Company's current cellular and PCS
customers and will be able to support the Company's expected subscriber growth
for the foreseeable future. As these customer call centers are in different
regions of the country, they will also provide backup for one another in case of
natural disaster, which will allow the Company to maintain continuous customer
service.
SUPPLIERS AND EQUIPMENT VENDORS
The Company does not manufacture any of the handsets or Cell Site
equipment used in the Company's operations. The high degree of compatibility
among different manufacturer's models of handsets and Cell Site equipment allows
the Company to design, supply and operate its systems without being dependent
upon any single source of such equipment. The handsets and Cell Site equipment
used in the Company's operations are available for purchase from multiple
sources, and the Company anticipates that such equipment will continue to be
available in the foreseeable future. The Company currently purchases handsets
primarily from Motorola, Inc., Ericsson Inc. and Nokia Telecommunications, Inc.
The Company currently purchases Cell Site and switching equipment primarily from
Northern Telecom, Inc., Lucent Technologies, Inc. and Nokia Telecommunications,
Inc.
COMPETITION
Competition for subscribers among wireless licensees is based
principally upon the services and features offered, the technical quality of the
wireless system, customer service, system coverage, capacity and price. Such
competition may increase to the extent that licenses are transferred from
smaller, stand-alone operators to larger, better capitalized and more
experienced wireless communications operators who may be able to offer
subscribers certain network advantages similar to those offered by the Company.
The Company has one cellular competitor in each of its cellular markets
including CommNet Cellular Inc., Aliant Communications, Inc., United States
Cellular Corporation ("US Cellular"), Kansas Cellular, Southwestern Bell Mobile
Systems and AirTouch Cellular Communications, Inc. ("AirTouch"), and there will
be six PCS licenses in each of its markets. Currently, the Company's principal
competitors in its PCS business are Sprint Spectrum L.P., PCS PrimeCo L.P. and
AT&T Wireless Services Inc. ("AT&T Wireless"), as well as the two existing
cellular providers in its PCS markets. The Company also competes with paging,
dispatch and conventional mobile telephone companies, resellers and landline
telephone service providers. Potential users of cellular systems may, however,
find their communications needs satisfied by other current and developing
technologies. One or two-way paging or beeper services that feature voice
messaging and data display as well as tone only service may be adequate for
potential subscribers who do not need to speak to the caller. In the future,
cellular service may also compete more directly with traditional landline
telephone service providers.
The Company's PCS business will directly compete with existing cellular
service providers in its PCS markets, many of which have been operational for a
number of years and have significantly greater financial and technical resources
than those available to the Company and who may upgrade their systems to provide
comparable services in competition with the Company's PCS systems. These
cellular competitors include AT&T Wireless, AirTouch and US Cellular.
The FCC requires all cellular and PCS licensees to provide service to
"resellers." A reseller provides wireless service to customers but does not hold
an FCC license or own facilities. Instead, the reseller buys blocks of wireless
telephone numbers and capacity from a licensed carrier and resells service
through its own distribution network to the public. Thus, a reseller is both a
customer of a wireless licensee's services and also a competitor of that
licensee. Several small resellers currently operate in competition with the
Company's systems. With respect to PCS licensees, the resale obligations
terminate five years after the last group of initial licenses of currently
allotted PCS spectrum is awarded.
In the future, in its cellular and PCS markets the Company expects to
face increased competition from entities providing other communications
technologies and services, including digital mobile communications systems on
existing Specialized Mobile Radio ("SMR") frequencies, referred to as ESMR, and
satellite-based telecommunications systems. Although some of these technologies
and services are currently operational, others are being developed or may be
developed in the future.
Continuing technological advances in communications and FCC policies
that encourage the development of new spectrum-based technologies may result in
new technologies that compete with cellular and PCS systems. In addition, the
Omnibus Budget Reconciliation Act of 1993 requires, among other things, the
allocation to commercial use of a portion of 200 MHz of the spectrum currently
reserved for government use. It is possible that some portion of the spectrum
that is reallocated will be used to create new land-mobile services or to expand
existing land-mobile services.
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GOVERNMENTAL REGULATION
The FCC regulates the licensing, construction, operation, acquisition
and sale of cellular and PCS systems in the United States pursuant to the
Communications Act of 1934 (the "Communications Act" ), as amended from time to
time, and the rules, regulations and policies promulgated by the FCC thereunder.
LICENSING OF CELLULAR COMMUNICATIONS SYSTEMS
A cellular communications system operates under a protected geographic
service area license granted by the FCC for a particular market on one of two
frequency blocks allocated for cellular service. One license for each market was
initially awarded to a company or group that was affiliated with a local
landline telephone carrier in such market and is called the wireline or "B" band
license and the other license is called the non-wireline or "A" band license.
Following notice of completion of construction, a cellular operator obtains
initial operating authority. Cellular authorizations are issued generally for a
10-year term beginning on the date of the grant of the initial construction
permit. Under FCC rules, the authorized service area of a cellular provider in
each of its markets is referred to as the Cellular Geographic Service Area or
CGSA. A cellular licensee has the exclusive right to serve the entire area that
falls within the licensee's MSA or RSA for a period of five years after grant of
the licensee's construction permit. At the end of the five-year period, however,
the licensee's exclusive CGSA rights become limited to the area actually served
by the licensee as of that time, as determined pursuant to a formula adopted by
the FCC. After the five-year period any entity may apply to serve portions of
the MSA or RSA not being served by the licensee. The five year exclusivity
period has expired for most licensees and parties have filed unserved area
applications, including some in the Company's markets.
Near the conclusion of the 10-year license term, licensees must file
applications for renewal of licenses to obtain authority to renew their license.
The FCC has adopted specific standards to apply to cellular renewals, under
which standard the FCC will award a renewal expectancy to a cellular licensee
that (i) has provided substantial service during its past license term and (ii)
has substantially complied with applicable FCC rules and policies and the
Communications Act. Violations of the Communications Act or the FCC's rules
could result in license revocations, forfeitures or fines.
Cellular radio service providers also must satisfy a variety of FCC
requirements relating to technical and reporting matters. One such requirement
is the coordination of proposed frequency usage with adjacent cellular users,
permittees and licensees in order to avoid electrical interference between
adjacent systems. In addition, the height and power of base station transmitting
facilities and the type of signals they emit must fall within specified
parameters. The FCC has also provided guidelines respecting cellular service
resale practices and the terms under which certain ancillary services may be
provided through cellular facilities.
Cellular and PCS systems are subject to certain FAA regulations
respecting the location, lighting and construction of transmitter towers and
antennae and may be subject to regulation under the National Environmental
Policy Act and the environmental regulations of the FCC. State or local zoning
and land use regulations also apply to the Company's activities. The Company
uses common carrier point to point microwave facilities to connect Cell Sites
and to link them to the main switching office. These facilities are separately
licensed by the FCC and are subject to regulation as to technical parameters and
service.
The Communications Act preempts state and local regulation of the entry
of, or the rates charged by, any provider of commercial mobile radio service
("CMRS" ) or any private mobile radio service ("PMRS"), which CMRS includes
cellular (and PCS) service.
TRANSFERS AND ASSIGNMENTS OF CELLULAR LICENSES
The Communications Act and FCC rules require the FCC's prior approval
of the assignment or transfer of control of a construction permit or license for
a cellular system. Subject to FCC approval, a license or permit may be
transferred from a nonwireline entity to a wireline entity, or vice versa.
Non-controlling interests in an entity that holds a cellular license or cellular
system generally may be bought or sold without prior FCC approval. Any
acquisition or sale by the Company of cellular interests may also require the
prior approval of the Federal Trade Commission and the Department of Justice, if
over a certain size, as well as any state or local regulatory authorities having
competent jurisdiction.
In addition, the FCC's rules prohibit the alienation of any ownership
interest in an RSA application, or an entity holding such an application, prior
to the grant of a construction permit. For unserved cellular areas, no change of
control may take
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place until after the FCC has granted both a construction permit and a license
and the licensee has provided service to the public for at least one year. These
restrictions affect the ability of prospective purchasers, including the
Company, to enter into agreements for RSA and unserved area acquisitions prior
to the lapse of the applicable transfer restriction periods. The restriction on
sales of interests in RSA and unserved area applications and on agreements for
such sales should not have a greater effect on the Company than on any other
prospective buyer.
LICENSING OF PCS SYSTEMS
In order to increase competition in wireless communications, promote
improved quality and service and make available the widest possible range of
wireless services, federal legislation was enacted directing the FCC to allocate
radio frequency spectrum for PCS by competitive bidding. A PCS system operates
under a protected geographic service area license granted by the FCC for a
particular market on one of six frequency blocks allocated for broadband PCS
service. The FCC has divided the United States and its possessions and
territories into PCS markets made up of 493 BTAs and 51 MTAs. Each MTA consists
of at least two BTAs. As many as six licensees will compete in each PCS service
area. The FCC has allocated 120 MHz of radio spectrum in the 2 GHz band for
licensed broadband PCS services. The FCC divided the 120 MHz of spectrum into
six individual blocks, each of which is allocated to serve either MTAs or BTAs.
The spectrum allocation includes two 30 MHz blocks (A and B Blocks) licensed for
each of the 51 MTAs, one 30 MHz block (C Block) licensed for each of the 493
BTAs, and three 10 MHz blocks (D, E and F Blocks) licensed for each of the 493
BTAs. A PCS license will be awarded for each MTA or BTA in every block, for a
total of more than 2,000 licenses. During 1997, the last of these auctions was
completed. The high bidder for each of these licenses has been announced, but
the licenses for the D, E and F Block licenses have not yet been awarded.
Under the FCC's current rules specifying spectrum aggregation limits
affecting broadband PCS licensees, no entity may hold licenses for more than 45
MHz of PCS, cellular and SMR services regulated as CMRS where there is
significant overlap in any geographic area (significant overlap will occur when
at least ten percent of the population of the PCS licensed service area is
within the CGSA(s) and/or SMR service area(s)).
The Company owns cellular licenses serving markets that are wholly or
partially within the Denver MTA, resulting in the Company exceeding the FCC's
current 45 MHz CMRS crossownership restriction described above. The Company has
a period of time after acquisition of the Denver MTA in which to comply with
this ownership restriction. In the event that this restriction is not waived or
revised, the Company will be obligated to divest sufficient portions of its PCS
market or its cellular holdings to come into compliance with the rules. The
Company does not believe such restriction or any actions the Company is required
to take to comply therewith will have a material adverse effect on the Company.
All PCS licenses will be granted for a 10-year period, at the end of
which they must be renewed. The FCC has adopted specific standards to apply to
PCS renewals, under which the FCC will award a renewal expectancy to a PCS
licensee that (i) has provided substantial service during its past license term
and (ii) has substantially complied with applicable FCC rules and policies and
the Communications Act. All 30 MHz PCS licensees, including the Company, must
construct facilities that offer coverage to one-third of the population of their
service area within five years of their initial license grants and to two-thirds
of the population within ten years. Licensees that fail to meet the coverage
requirements may be subject to forfeiture of the license.
FCC rules restrict the voluntary assignments or transfers of control of
C and F Block licenses. During the first five years of the license term,
assignments or transfers affecting control are permitted only to assignees or
transferees that meet the eligibility criteria for participation in the
entrepreneur block auction at the time the application for assignment or
transfer of control is filed, or if the proposed assignee or transferee holds
other licenses for C and F Blocks and, at the time of receipt of such licenses,
met the same eligibility criteria. Any transfers or assignments during the
entire 10 year initial license term are subject to unjust enrichment penalties,
i.e., forfeiture of any bidding credits and acceleration of any installment
payment plans should the assignee or transferee not qualify for the same
benefits. In the case of the C and F Blocks, the FCC will conduct random audits
to ensure that licensees are in compliance with the FCC's eligibility rules.
Violations of the Communications Act or the FCC's rules could result in license
revocations, forfeitures or fines.
For a period of up to five years after the grant of a PCS license
(subject to extension), a PCS licensee will be required to share spectrum with
existing licensees that operate certain fixed microwave systems within its
license area. To secure a sufficient amount of unencumbered spectrum to operate
its PCS systems efficiently and with adequate population coverage, the Company
will need to relocate many of these incumbent licensees. In an effort to balance
the competing interests of existing microwave users and newly authorized PCS
licensees, the FCC has adopted (i) a transition plan to relocate such microwave
operators to other spectrum blocks and (ii) a cost sharing plan so that if the
relocation of an incumbent benefits
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more than one PCS licensee, the benefiting PCS licensees will share the cost of
the relocation. Initially, this transition plan allowed most microwave users to
operate in the PCS spectrum for a two-year voluntary negotiation period and an
additional one-year mandatory negotiation period. For public safety entities
dedicating a majority of their system communications for police, fire or
emergency medical services operations, the voluntary negotiation period is three
years, with an additional two year mandatory negotiation period. The FCC is
considering shortening the voluntary negotiation period by one year and
lengthening the mandatory negotiation period by one year for PCS licensees in
the C, D, E and F Blocks. Parties unable to reach agreement within these time
periods may refer the matter to the FCC for resolution, but the incumbent
microwave user is permitted to continue its operations until final FCC
resolution of the matter. The transition and cost sharing plans expire on April
4, 2005, at which time remaining incumbents in the PCS spectrum will be
responsible for their costs to relocate to alternate spectrum locations.
TRANSFERS AND ASSIGNMENTS OF PCS LICENSES
The Communications Act and FCC rules require the FCC's prior approval
of the assignment or transfer of control of a license for a PCS system. In
addition, the FCC has established transfer disclosure requirements that require
licensees who transfer control of or assign a PCS license within the first three
years of their license term to file associated contracts for sale, option
agreements, management agreements or other documents disclosing the total
consideration that the licensee would receive in return for the transfer or
assignment of its license. Non-controlling interests in an entity that holds a
PCS license or PCS system generally may be bought or sold without FCC approval.
Any acquisition or sale by the Company of PCS interests may also require the
prior approval of the Federal Trade Commission and the Department of Justice, if
over a certain size, as well as state or local regulatory authorities having
competent jurisdiction.
FOREIGN OWNERSHIP
Under existing law, no more than 20% of an FCC licensee's capital stock
may be owned, directly or indirectly, or voted by non-US citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation. Because the Company itself does not hold any FCC license but
instead controls other companies which themselves hold the licenses (which is
the current and intended structure), up to 25% of the Company's capital stock
may be owned or voted by non-US. citizens or their representatives, by a foreign
government or its representatives or by a foreign corporation. Alien ownership
above the 25% level may be allowed should the FCC find such higher levels not
inconsistent with the public interest. If foreign ownership of the Company were
to exceed the 25% level, the FCC could revoke the Company's FCC licenses,
although the Company could seek a declaratory ruling from the FCC allowing the
foreign ownership or take other actions to reduce the Company's foreign
ownership percentage in order to avoid the loss of its licenses. The Company has
no knowledge of any present foreign ownership in violation of these
restrictions.
TELECOMMUNICATIONS ACT OF 1996 AND OTHER RECENT INDUSTRY DEVELOPMENTS
On February 8, 1996, the Telecommunications Act of 1996 (the
"Telecommunications Act") was signed into law, substantially revising the
regulation of communications. The goal of the Telecommunications Act is to
enhance competition and remove barriers to market entry, while deregulating the
communications industry to the greatest extent possible. To this end, local and
long-distance communications providers will, for the first time, be able to
compete in the other's market, and telephone and cable companies will likewise
be able to compete. To facilitate the entry of new carriers into existing
markets, the Telecommunications Act imposes certain interconnection and equal
access requirements on incumbent carriers. Additionally, all communications
carriers providing interstate communications services must contribute to the
federal universal service support mechanisms that the FCC will establish. The
Company cannot predict the outcome of the FCC's rulemaking proceedings to
promulgate regulations to implement the new law or the effect of the new
regulations on cellular service or PCS, and there can be no assurance that such
regulations will not adversely affect the Company's business or financial
condition.
At present, cellular providers, other than the regional Bell operating
companies, have the option of using only one designated long distance carrier.
The Telecommunications Act codifies the policy that CMRS providers will not be
required to provide equal access to long distance carriers. The FCC, however,
may require CMRS carriers to offer unblocked access (i.e., implemented by the
subscriber's use of a carrier identification code or other mechanisms at the
time of placing a call) to the long distance provider of a subscriber's choice.
The FCC has terminated its inquiry into the imposition of equal access
requirements on CMRS providers.
On July 26, 1996, the FCC released a Report and Order establishing
timetables for making emergency 911 services available by cellular, PCS and
other mobile service providers, including "enhanced 911" services that provide
the caller's
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telephone number, location and other useful information. By late 1997, cellular
and PCS providers must be able to process and transmit 911 calls (without call
validation), including those from callers with speech or hearing disabilities.
Assuming a cost recovery mechanism is in place, by mid-1998 such providers must
have completed actions enabling them to relay a caller's automatic number
identification and Cell Site, and by 2001 they must be able to identify the
location of a 911 caller within 125 meters in 67% of all cases. State actions
incompatible with the FCC rules are subject to preemption.
On August 1, 1996, the FCC released a Report and Order expanding the
flexibility of cellular, PCS and other CMRS providers to provide fixed as well
as mobile services. Such fixed services include, but need not be limited to,
"wireless local loop" services, e.g., to apartment and office buildings, and
wireless backup to PBXs and local area networks, to be used in the event of
interruptions due to weather or other emergencies. The FCC has not yet decided
whether such fixed services should be subjected to universal service
obligations, or how they should be regulated, but it has proposed a presumption
that they be regulated as CMRS services.
On August 8, 1996, the FCC released its order implementing the
interconnection provisions of the Telecommunications Act of 1996. The FCC's
decision is lengthy and complex and is subject to petitions for reconsideration
and judicial review (as described below), and its precise impact is difficult to
predict with certainty. However, the FCC's order concludes that CMRS providers
are entitled to reciprocal compensation arrangements with local exchange
carriers ("LECs") and prohibits LECs from charging CMRS providers for
terminating LEC-originated traffic. The FCC's decision gives it broad authority
to regulate on the intrastate level, but states may impose additional
procompetitive rules beyond the minimum federal guidelines. Under these
guidelines, states must set arbitrated rates for interconnection and access to
unbundled elements based upon the LECs' long run incremental costs, plus a
reasonable share of forward-looking joint and common costs. In lieu of such
cost-based rates, the FCC has also established for use by states a benchmark
maximum range of 0.2-0.4 cents per minute for end office termination pending
further cost-based studies, and subject to a possible "true-up" payment later.
The FCC has also permitted states to impose "bill and keep" arrangements, under
which CMRS providers would make no payments for LEC termination of calls where
LECs and CMRS providers have symmetrical termination costs and roughly balanced
traffic flows. However, the FCC has found no evidence that these conditions
presently exist. The relationship of these charges to the payment of access
charges and universal service contributions has not yet been resolved by the
FCC. LECs and state regulators filed appeals of the interconnection order, which
have been consolidated in the US Court of Appeals for the Eighth Circuit. The
Court has temporarily stayed the effective date of the pricing rules (including
the benchmark maximum of 0.2 - 0.4 cents described above) until more permanent
relief can be fashioned.
The FCC recently adopted rules on telephone number portability which
will enable subscribers to migrate their landline and cellular telephone numbers
to a PCS carrier and from a PCS carrier to another service provider.
INTELLECTUAL PROPERTY
CELLULAR ONE is a service mark registered with the United States Patent
and Trademark Office. The service mark is owned by Cellular One Group, a
Delaware general partnership comprised of Cellular One Marketing, Inc., a
subsidiary of Southwestern Bell Mobile Systems, 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. In
1996 the Company paid approximately $110,000 and $144,000, in licensing and
advertising fees, respectively, under these agreements. The licensing agreements
require the Company to provide high-quality cellular telephone service to its
customers, and to maintain a certain minimum overall customer satisfaction
rating in surveys commissioned by Cellular One Group. The licensing agreements
that the Company has entered into are for original five-year terms expiring on
various dates. Assuming compliance by the Company with the provisions of the
agreements, each of these agreements may be renewed at the Company's option for
three additional five-year terms.
Western Wireless and VoiceStream are service marks owned by the Company
and registered with the United States Patent and Trademark Office. "Tele-Waves,"
a service mark owned by one of the Company's subsidiaries, is registered with
the United States Patent and Trademark Office and is the service mark under
which the Company provides its paging services.
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EMPLOYEES AND LABOR RELATIONS
The Company considers its labor relations to be good and, to the
Company's knowledge, none of its employees is covered by a collective bargaining
agreement. As of December 31, 1996 the Company employed a total of approximately
2,470 people in the following areas:
Category Number of Employees
- -------- -------------------
Sales and marketing ................................................ 1,300
Engineering ........................................................ 440
General and administration, including customer service ............. 730
ITEM 2. PROPERTIES
In addition to the direct and attributable interests in cellular, PCS
and paging licenses and other similar assets discussed previously, the Company
leases its principal executive offices (consisting of approximately 116,000
square feet) located primarily in Issaquah, Washington. The Company and its
subsidiaries and affiliates also lease and own locations for inventory storage,
microwave, Cell Site and switching equipment and local sales and administrative
offices. The Company is currently seeking additional space in or near Issaquah
to support the growth of its principal executive offices.
The Company leases a distribution center in Denver, which stores and
distributes handset inventory for all of the Company's cellular and PCS
operations. The facility has adequate space to support the growth of the
Company's distribution network which will grow with the expansion of the
Company's PCS markets.
In February 1997, the Company announced plans to build a customer call
center in Albuquerque, New Mexico. The approximately 65,000 square foot facility
is slated to open during the second half of 1997. This facility, along with the
Company's current customer call center in Issaquah, Washington, is expected to
support the Company's anticipated subscriber growth for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There are no material, pending legal proceedings to which the Company
or any of its subsidiaries or affiliates is a party or of which any of their
property is subject which, if adversely decided, would have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the executive officers and key
personnel of the Company are listed below along with their business experience
during the past five years. The business address of all officers of the Company
is 2001 NW Sammamish Road, Issaquah, Washington 98027. All of these individuals
are citizens of the United States. Executive officers of the Company are
appointed by the Board of Directors. No family relationships exist among any of
the executive officers of the Company, except for Mr. Stanton and Ms. Gillespie,
who are married to each other.
NAME AGE POSITION
- ---- --- --------
John W. Stanton 41 Chairman, Director and Chief Executive Officer
Donald Guthrie 41 Vice Chairman and Chief Financial Officer (1)
Robert R. Stapleton 38 President
Mikal J. Thomsen 40 Chief Operating Officer
Theresa E. Gillespie 44 Senior Vice President (1)
Alan R. Bender 42 Secretary, Senior Vice President and General Counsel
Cregg B. Baumbaugh 40 Senior Vice President - Corporate Development
Timothy R. Wong 41 Vice President - Engineering
Robert P. Dotson 36 Vice President - Marketing
Bradley J. Horwitz 41 Vice President - International
Nastashia Stoneman Press 36 Principal Accounting Officer
(1) Ms. Gillespie was the Chief Financial Officer until February 25, 1997, at
which time Mr. Guthrie was appointed the Chief Financial Officer and Ms.
Gillespie was appointed Senior Vice President.
John W. Stanton has been a director, Chairman of the Board and Chief
Executive Officer of the Company since its formation in July 1994. Mr. Stanton
has been Chief Executive Officer of GCC since March 1992, and was Chairman of
the Board of GCC from March 1992 to December 1995. Mr. Stanton has served as
Chairman of the Board and Chief Executive Officer of PN Cellular, Inc. ("PN
Cellular"), the former General Partner of MCLP since its formation in October
1992. Mr. Stanton served as a director of McCaw Cellular Communications, Inc.
("McCaw") from 1986 to 1994, and as a director of LIN Broadcasting Corporation
("LIN Broadcasting") from 1990 to 1994, during which time it was a publicly
traded company. From 1983 to 1991, Mr. Stanton served in various capacities with
McCaw, serving as Vice-Chairman of the Board of McCaw from 1988 to September
1991 and as Chief Operating Officer of McCaw from 1985 to 1988. Mr. Stanton is
also a member of the Board of Directors of Advanced Digital Information
Corporation and SmarTone (Hong Kong). In addition, Mr. Stanton is a trustee of
Whitman College, a private college. Mr. Stanton is currently Second Vice
Chairman of the Cellular Telephone Industry Association ("CTIA").
Donald Guthrie has been Vice Chairman of the Company since November
1995. Effective February 25, 1997, Mr. Guthrie was appointed Chief Financial
Officer of the Company. From 1986 to October 1995 he served as Senior Vice
President and Treasurer of McCaw and, from 1990 to October 1995 he served as
Senior Vice President--Finance of LIN Broadcasting.
Robert R. Stapleton has been President of the Company since its
formation in July 1994, and President of GCC since November 1992. From August
1989 to November 1992, he served in various positions with GCC, including Chief
Operating Officer and Vice President of Operations. From 1984 to 1989, Mr.
Stapleton was employed by mobile communications subsidiaries of Pacific Telesis,
Inc., which now are affiliated with AirTouch Communications.
Mikal J. Thomsen has been Chief Operating Officer of the Company since
its formation in July 1994. Mr. Thomsen was a director and Chief Operating
Officer of MCLP and its predecessor from its inception in 1991 until the
Company's formation in July 1994. From 1983 to 1991, Mr. Thomsen held various
positions at McCaw, serving as General Manager of its International Division
from 1990 to 1991 and as General Manager of its West Florida Region from 1987 to
1990.
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Theresa E. Gillespie was Chief Financial Officer of the Company since
its formation in July 1994 until February 25, 1997 at which time she was
appointed Senior Vice President. Ms. Gillespie was Chief Financial Officer of
MCLP and its predecessor since its inception in 1991 until the Company's
formation in July 1994. Ms. Gillespie has been Chief Financial Officer of
certain entities controlled by Mr. Stanton and Ms. Gillespie since 1988. From
1986 to 1987, Ms. Gillespie was Senior Vice President and Controller of McCaw.
From 1975 to 1986 she was employed by a national public accounting firm.
Alan R. Bender has been Secretary, Senior Vice President and General
Counsel of the Company since its formation in July 1994. Mr. Bender joined GCC
in April 1990, as Senior Counsel, and was named Secretary in June 1990, General
Counsel in August 1990 and Vice President in March 1992. From 1988 to 1990, Mr.
Bender was Vice President and Senior Counsel of a subsidiary of PacifiCorp Inc.
Cregg B. Baumbaugh has been Senior Vice President--Corporate
Development of the Company since its formation in July 1994. From November 1989
through the present, he has served in various positions with GCC, including Vice
President--Business Development. From 1986 to 1989, Mr. Baumbaugh was employed
by The First Boston Corporation.
Timothy R. Wong has been Vice President--Engineering of the Company
since January 1996. From 1990 to 1995 Mr. Wong held various positions at U S
WEST Cellular, serving as Executive Director--Engineering and Operations from
1994 to 1995, Director of Wireless Systems Engineering in 1993, Manager of
International Wireless Engineering in 1992, and Manager--Systems Design from
1990 to 1991.
Robert P. Dotson has been Vice President--Marketing of the Company
since May 1996. Previously, Mr. Dotson held various marketing positions with
PepsiCo's KFC restaurant group, serving as Senior Director of Concept
Development from 1994 to 1996, Director of International Marketing from 1993 to
1994, Divisional Marketing Director from 1991 to 1993 and Manager of New Product
Development and Base Business Marketing from 1989 through 1991.
Bradley J. Horwitz has been Vice President--International of the
Company and President of Western Wireless International Corporation, a
subsidiary of the Company, since November 1995. From 1983 to 1995 Mr. Horwitz
held various positions at McCaw, serving as Vice President--International
Operations from 1992 to 1995, Director--Business Development from 1990 to 1992
and Director of Paging Operations from 1986 to 1990. Mr. Horwitz is currently a
member of the Board of Directors of SmarTone (Hong Kong).
Nastashia Stoneman Press has been Principal Accounting Officer since
December 1995. Ms. Press was Controller of the Company from its formation in
July 1994 to December 1995 and Controller of MCLP from April 1992 to the
Company's formation in July 1994. From 1989 to 1992, Ms. Press was Controller of
Institutional Communications Company. From 1983 to 1989, she held various
accounting and finance positions at MCI Communications Corporation.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company commenced its initial public offering on May 22, 1996 at a
price to the public of $23.50 per share. Since that date, the Company's Class A
Common Stock has been traded over-the-counter on the NASDAQ National Market
System under the symbol WWCA. There currently is no established public trading
market for the Company's Class B Common Stock. The following table sets forth
the quarterly high and low bid quotations for the Class A Common Stock in the
over-the-counter market, as quoted by NASDAQ. These quotations reflect the
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
1996 High Low
---- ---- ---
Second quarter (from May 22, 1996) ....................... $25 1/2 $19 7/8
Third quarter............................................. $22 1/8 $13 3/4
Fourth quarter.............................................. $18 1/8 $13
As of March 14, 1997, there were approximately 130 and 109 shareholders
of record of the Company's Class A and Class B Common Stock, respectively. The
Company has never declared or paid dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. In addition, certain
provisions of the Senior Secured Facilities (as described in "Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Liquidity and Capital Resources") and the indentures of its public debt
offerings contain restrictions on the Company's ability to declare and pay
dividends on its Common Stock. The Company has never declared or issued
dividends.
The table below sets forth the sales of unregistered equity securities
made by the registrant in 1996:
Title and Amount of Security Date of Sale Exemption (1)
---------------------------- ------------ -------------
88,567 shares of Class B Common Stock February 1996 (2)
515,561 shares of Class B Common Stock February 1996 (3)
79,748 shares of Class B Common Stock February 1996 (4)
1,938 shares of Class B Common Stock January through August 1996 (5)
(1) Except where noted, all sales were private placements made in reliance
upon the exemptions provided by Section 4(2) of the Securities Act of
1933 as amended. No underwriting was involved.
(2) Issued to an officer in consideration for $999,950. See "Certain
Relationships and Related Transactions."
(3) Issued to the shareholders of Palouse Paging, Inc. ("Palouse") in
consideration for all of the issued and outstanding stock of Palouse. See
"Certain Relationships and Related Transactions."
(4) Issued to the shareholders of Sawtooth Paging, Inc. ("Sawtooth"), other
than the Company, in consideration for the shares of stock of Sawtooth
representing the 55% ownership interest in Sawtooth not held by the
Company. See "Certain Relationships and Related Transactions."
(5) Issued upon exercise of stock options for total proceeds of $3,120,
pursuant to Rule 701 of the Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
and operating data for the Company as of and for each of the four years in the
period ended December 31, 1996 which was derived from the Company's consolidated
financial statements and notes thereto that have been audited by Arthur Andersen
LLP, independent public accountants. The table also sets forth certain unaudited
selected consolidated financial and operating data for the Company as of and for
the nine months ended December 31, 1992. In March 1992, GCC reorganized under
Chapter 11 of the U.S. Bankruptcy Code and, as part of the reorganization, GCC
adopted fresh-start reporting in conformity with procedures specified by the
American Institute of Certified Public Accountants Statement of Position 90-70.
All financial data relating to the Company herein with respect to periods after
the date of the Business Combination reflect the combined operations of GCC and
MCLP and all such data with respect to prior periods reflect only the operations
of GCC, which, for accounting purposes, is considered Western Wireless
Corporation's predecessor. Accordingly, the financial data of the Company for
the periods subsequent to the Business Combination are not comparable to
financial data for prior periods. See Note 12 to the Company's consolidated
financial statements for pro forma information presenting the results of
operations of the Company as if the Business Combination occurred on January 1,
1994. All of the data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's consolidated financial statements and notes thereto.
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------------ DECEMBER 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(dollars in thousands, except per share data)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Subscriber revenues .......................... $ 182,441 $ 105,430 $ 38,838 $ 11,105 $ 4,861
Roamer revenues .............................. 34,065 29,660 16,746 7,285 4,468
Equipment sales and other revenue ............ 26,579 11,465 7,524 2,344 1,208
------------ ------------ ------------ ------------ ------------
Total revenues ............................ 243,085 146,555 63,108 20,734 10,537
------------ ------------ ------------ ------------ ------------
Operating Expenses:
Cost of service .............................. 53,600 27,686 13,303 4,310 2,730
Cost of equipment sales ...................... 46,305 20,705 11,446 3,533 1,818
General and administrative ................... 66,673 31,253 15,226 6,253 5,048
Sales and marketing .......................... 83,652 41,390 18,553 6,101 3,074
Depreciation and amortization ................ 79,741 49,456 25,670 5,399 3,746
Provision for restructuring costs ............ 2,478
------------ ------------ ------------ ------------ ------------
Total operating expenses .................. 329,971 170,490 86,676 25,596 16,416
------------ ------------ ------------ ------------ ------------
Operating loss ................................... (86,886) (23,935) (23,568) (4,862) (5,879)
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest and financing expense, net .......... (44,690) (25,428) (10,659) (2,242) (1,666)
Gain (loss) on dispositions, net ............. . (573) 6,202 10,102 1,876
Other, net ................................... 1,471 627 2,065 331 130
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary item .......... (130,105) (49,309) (25,960) 3,329 (5,539)
Extraordinary item ............................... (6,645)
============ ============ ============ ============ ============
Net income (loss) ............................ $ (130,105) $ (55,954) $ (25,960) $ 3,329 $ (5,539)
============ ============ ============ ============ ============
Share data (1):
Income (loss) per common share
before extraordinary item ..................... $ (2.00) $ (0.87) $ (0.59) $ 0.10 $ (0.22)
Per common share effect of extraordinary
item ........................................ (0.12)
============ ============ ============ ============ ============
Net income (loss) per common share ............... $ (2.00) $ (0.99) $ (0.59) $ 0.10 $ (0.22)
============ ============ ============ ============ ============
Weighted average common shares and common
equivalent shares outstanding ................. 65,196,000 56,470,000 43,949,000 32,253,000 25,665,000
============ ============ ============ ============ ============
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DECEMBER 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- --------------
(dollars in thousands)
CONSOLIDATED BALANCE SHEETS DATA:
Current assets ................................... $ 149,790 $ 37,508 $ 36,769 $ 14,686 $ 8,098
Property and equipment, net ...................... 538,617 193,692 120,648 48,591 27,528
Licensing and other intangible, assets net ....... 540,482 417,971 211,309 86,270 43,873
Other assets ..................................... 12,814 9,857 1,468 6,219 5,522
----------- ----------- ----------- ----------- --------------
Total assets .................................. $ 1,241,703 $ 659,028 $ 370,194 $ 155,766 $ 85,021
=========== =========== =========== =========== ==============
Current liabilities .............................. $ 144,454 $ 55,936 $ 39,214 $ 16,447 $ 5,806
Total long-term debt, net of current portion ..... 743,000 362,487 200,587 53,430 14,893
Minority interests in equity of consolidated
subsidiary .................................... 3,376
Shareholders' equity ............................. 354,249 240,605 127,017 85,889 64,322
----------- ----------- ----------- ----------- --------------
Total liabilities and shareholders' equity .... $ 1,241,703 $ 659,028 $ 370,194 $ 155,766 $ 85,021
=========== =========== =========== =========== ==============
OTHER DATA:
Cellular subscribers ............................. 324,200 209,500 112,800 30,000 13,700
PCS subscribers .................................. 35,500
EBITDA (2) ....................................... $ (7,145) $ 25,521 $ 2,102 $ 537 $ (2,133)
CASH FLOWS PROVIDED BY (USED IN):
Operating activities .......................... $ (61,333) $ (745) $ (998) $ (255) $ (1,490)
Investing activities .......................... $ (489,086) $ (293,579) $ (70,190) $ (32,535) $ (13,159)
Financing activities .......................... $ 596,732 $ 295,109 $ (70,777) $ 36,212 $ 16,552
(1) As required by the Securities and Exchange Commission (the "SEC"), common
shares issued by the Company in the year preceding the filing of an
initial public offering have been included in the calculation of shares
used in determining the net loss per share as if they had been outstanding
for all periods presented, the effect of which is anti-dilutive. The
number of shares outstanding for periods subsequent to May 22, 1996 has
been calculated based on the requirements of Accounting Principles Board
("APB") Opinion No. 15.
(2) EBITDA represents operating loss before depreciation and amortization.
EBITDA is a measure commonly used in the industry but is not prepared in
accordance with United States generally accepted accounting principals
("GAAP") and should not be considered as a measurement of net cash flows
from operating activities. In 1994, the Company recorded provisions for
restructuring costs of $2.5 million. EBITDA before such provisions for
restructuring costs would have been $4.6 million.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of the consolidated
financial condition and results of operations of the Company and should be read
in conjunction with the Company's consolidated financial statements and notes
thereto and other financial information included herein. As a result of
acquisitions, the Company's operating results for prior periods may not be
indicative of future performance.
OVERVIEW
The Company provides wireless communications services in the western
United States through the ownership and operation of cellular communications
systems in 75 Rural Service Areas and Metropolitan Statistical Areas. At
December 31, 1996 the Company had acquired broadband personal communications
services ("PCS") licenses in seven Major Trading Areas ("MTAs"). Through
December 31, 1996 the Company has commenced commercial operations in six of its
PCS MTAs. A partnership in which the Company holds a 49.9% limited partnership
interest acquired broadband PCS licenses in 14 Basic Trading Areas ("BTAs")
during 1996. These BTAs are not yet operational. During 1997, the Company was
the high bidder on 100 additional PCS licenses in the Federal Communication
Commission's ("FCC") D and E Block auctions. The partnership in which the
Company is a 49.9% limited partner was the high bidder on 7 additional PCS
licenses in the FCC F Block auction during 1997.
The Company's revenues consist primarily of subscriber revenues
(including access charges and usage charges), roamer revenues (fees charged for
providing services to subscribers of other cellular communications systems when
such subscribers, or "roamers," place or receive a phone call within one of the
Company's service areas) and equipment sales. The majority of the Company's
revenues are derived from subscriber revenues. The Company had no revenues from
its paging or PCS systems prior to February 1, 1996 and February 29, 1996,
respectively. Revenues from paging systems are included in other revenue and
account for less than 2% of the Company's total revenues in 1996. The Company
expects to continue to sell cellular and PCS handsets below cost and regards
these losses as a cost of building its subscriber base. As used herein, "service
revenues" include subscriber, roamer and other revenue.
Cost of service consists of the cost of providing wireless service to
subscribers, primarily including costs to access local exchange and long
distance carrier facilities and maintain the Company's wireless network. General
and administrative expenses include the costs associated with billing a
subscriber and the administrative cost associated with maintaining subscribers,
including customer service, accounting and other centralized functions. General
and administrative expenses also include provisions for unbillable fraudulent
roaming charges and subscriber bad debt. Sales and marketing costs include costs
associated with acquiring a subscriber, including direct and indirect sales
commissions, salaries, all costs of sales offices and retail locations,
advertising and promotional expenses. Depreciation and amortization includes
primarily depreciation expense associated with the Company's property and
equipment in service and amortization associated with its wireless licenses for
operational markets. The Company amortizes licensing costs associated with PCS
systems once they become operational.
Certain centralized general and administrative costs, including
customer service, accounting and other centralized functions, benefit all of the
Company's operations. These costs are allocated to those operations in a manner
which reflects management's judgment as to the nature of the activity causing
those costs to be incurred.
As used herein, "EBITDA" represents operating loss before depreciation
and amortization. EBITDA is a measure commonly used in the industry and should
not be construed as an alternative to operating income (loss) (as determined in
accordance with Generally Accepted Accounting Principles, "GAAP"), as an
alternative to cash flows from operating activities (as determined in accordance
with GAAP), or as a measure of liquidity. Cellular EBITDA represents EBITDA from
the Company's cellular operations.
The Company expects a decline in consolidated EBITDA as it develops,
constructs and operates its PCS systems and aggressively seeks to build its PCS
subscriber base. To the extent that the time to complete the PCS build-out is
faster or the costs are greater than expected, operating losses will increase
and consolidated EBITDA may be negative for some periods. The Company has
experienced rapid growth in its revenues and assets during the periods set forth
below, which rates of growth will not necessarily continue over the next few
years. The Company has made and expects to make substantial capital expenditures
in connection with the expansion of its wireless communications systems. The
Company's results of operations for the periods described herein will not
necessarily be indicative of future performance.
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In the comparisons that follow, the Company has separately set forth
certain information relating to cellular operations (including paging) and PCS
operations. The Company believes that this is appropriate because its cellular
systems have been operating for a number of years while its PCS systems did not
commence operations until 1996, although the Company incurred start-up costs
beginning in the third quarter of 1995 in connection with such PCS operations.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1995
The Company had 324,200 cellular subscribers at December 31, 1996,
representing an increase of 114,700 or 54.7% during 1996. At December 31, 1995
the Company had 209,500 cellular subscribers representing an increase of 96,700
or 85.7% during 1995. In 1996 and 1995 the net number of subscribers added
through system acquisitions was approximately 4,900 and 3,300, respectively. The
Company had 35,500 PCS subscribers at December 31, 1996.
REVENUES
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995
-------------------------- ----------
CELLULAR PCS CELLULAR
------------ ---------- ----------
(in thousands)
Subscriber revenues .................. $ 174,647 $ 7,794 $ 105,430
Roamer revenues ...................... 34,065 29,660
Equipment sales ...................... 12,595 9,745 11,465
Other revenue (1) .................... 4,239
------------ ---------- ----------
Total revenues .................. $ 225,546 $ 17,539 $ 146,555
============ ========== ==========
- ----------
(1) Primarily revenue from paging services
Cellular subscriber revenues increased to $174.6 million in 1996 from
$105.4 million in 1995. This $69.2 million or 65.7% increase is primarily due
to the growth in the number of subscribers and a decrease in the average monthly
cellular subscriber revenue per subscriber. Average monthly cellular subscriber
revenue per subscriber, calculated as the average of the monthly averages, was
$54.96 in 1996 as compared to $57.25 in 1995. Historically the Company has
experienced a relatively stable average monthly cellular subscriber revenue
per subscriber, but experienced a 4.0% decline in 1996 as compared to 1995. The
Company anticipates this downward trend to continue in 1997. Over the past few
years the cellular industry as a whole has also shown a decline in the average
monthly cellular subscriber revenue per subscriber.
PCS subscriber revenues in 1996 were $7.8 million. Average monthly PCS
subscriber revenue per subscriber was $62.85 in 1996. As the Company's PCS
operations only began generating revenue during 1996 these results are not
necessarily representative of future operations.
Roamer revenues were $34.1 million in 1996 compared to $29.7 million in
1995 an increase of $4.4 million or 14.9%. Growth in the Company's roamer
revenues generally reflects increases in roaming services provided due to the
general subscriber growth in the industry offset by the decline in rates charged
by carriers between each other in the industry. Roamer revenues as a percentage
of total cellular revenues declined to 15.1% in 1996 from 20.3% in 1995. While
the Company expects total roamer minutes to continue to increase, further
declines in the rates charged between carriers may limit revenue growth in 1997.
Cellular equipment sales, which consist primarily of handset sales,
increased to $12.6 million in 1996 compared to $11.5 million in 1995. This $1.1
million or 9.9% increase is primarily due to the 18.6% increase in net
subscriber additions offset by a slight decrease in the average cellular handset
sales price. PCS equipment sales were $9.7 million in 1996 as a result of the
commencement of commercial operations in six of the Company's PCS MTAs. The
Company anticipates continued growth in equipment sales as a result of increases
in cellular and PCS subscriber additions and the commencement of commercial
operations in its remaining PCS markets.
Other revenue, which consists primarily of paging revenues, were $4.2
million in 1996 following the acquisition of paging operations in February 1996.
26
29
OPERATING EXPENSES
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995
------------------------- -------------------------
CELLULAR (1) PCS CELLULAR PCS
----------- ----------- ----------- -----------
(in thousands)
Cost of service ................... $ 41,130 $ 12,470 $ 27,686
Cost of equipment sales ........... 25,516 20,789 20,705
General and administrative ........ 46,464 20,209 28,184 $ 3,069
Sales and marketing ............... 52,147 31,505 41,051 339
Depreciation and amortization ..... 65,346 14,395 49,187 269
----------- ----------- ----------- -----------
Total operating expenses ..... $ 230,603 $ 99,368 $ 166,813 $ 3,677
=========== =========== =========== ===========
- ----------
(1) Includes expenses attributable to paging services
CELLULAR OPERATING EXPENSES
Cost of service increased to $41.1 million in 1996 from $27.7 million
in 1995. This increase is primarily attributable to the increased number of
subscribers. While cost of service increased $13.4 million or 48.6%, it
decreased as a percentage of service revenues to 19.3% in 1996 from 20.5% in
1995 which is due primarily to efficiencies gained from the growing subscriber
base.
Cost of equipment sales increased to $25.5 million in 1996 from $20.7
million in 1995. This $4.8 million or 23.2% increase is due primarily to the
18.6% increase in net subscriber additions in 1996 from 1995.
General and administrative costs increased to $46.5 million in 1996
from $28.2 million in 1995 an increase of $18.3 million or 64.9%. The Company's
general and administrative costs are principally considered to be variable
costs, that is costs that will vary with the level of subscribers. The increase
is primarily attributable to the increase in costs associated with supporting
the increased subscriber base. While the Company has not incurred material fraud
or bad debt expenses to date and continues to develop and invest in measures to
minimize such expenses, there can be no assurance that such expenses will not
increase in the future.
Sales and marketing costs increased to $52.1 million in 1996 from $41.1
million in 1995 primarily due to net subscriber additions. Sales and marketing
cost per gross subscriber added declined in 1996 from 1995. Although the Company
noted a decline in the rate of churn in 1996 from 1995, the growing subscriber
base resulted in a higher number of disconnected subscribers. This increase in
the number of disconnected subscribers resulted in an increase in the cost per
net subscriber added in 1996 to $475 from $446 in 1995. Including the losses on
equipment sales, the cost per net subscriber added increased to $593 in 1996
from $546 in 1995.
Depreciation expense increased to $42.3 million in 1996 from $30.1
million in 1995. This increase of $12.2 million or 40.5%, is attributable to the
continued expansion of the Company's cellular systems. Amortization expense
increased to $23.0 million in 1996 from $19.1 million in 1995. This $3.9 million
or 20.4% increase is primarily attributable to an increase in gross cellular
licensing costs and other intangible assets to $365.9 million at December 31,
1996 from $300.5 million at December 31, 1995.
PCS OPERATING EXPENSES
Total PCS operating expenses were $99.4 million in 1996. A portion of
each individual component of PCS operating expenses were start-up costs incurred
prior to the commencement of operations in each PCS system. Exclusive of
depreciation and amortization expense which was not material, approximately $17
million of start-up costs was incurred in 1996. As these costs are not
reflective of the annual operating costs to support a growing subscriber base,
the Company expects total PCS operating expenses to increase in 1997.
Accordingly, the PCS operating expenses are not representative of future
operations. Cost of service represents the expenses incurred by the six PCS
systems since they respectively began commercial operations during 1996.
Depreciation expense of $12.6 million and amortization expense of $1.8 million
in 1996 will increase in 1997 as none of the PCS systems were operational for an
entire year.
27
30
OPERATING LOSS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
CELLULAR (1) PCS CELLULAR PCS
-------------- ------------- -------------- -------------
(in thousands)
Operating loss...................... $ (5,057) $ (81,829) $ (20,258) $ (3,677)
============== ============= ============== =============
- ----------
(1) Includes paging operations
Total operating loss increased to $86.9 million in 1996 from $23.9
million in 1995 primarily as a result of the $81.8 million operating loss
attributable to PCS operations partially offset by the improved cellular
operating loss.
OTHER INCOME (EXPENSE); EXTRAORDINARY LOSS; NET OPERATING LOSS CARRYFORWARDS
Interest and financing expense, net of capitalized interest, increased
to $44.7 million in 1996 from $25.4 million in 1995. The increase of $19.3
million or 75.8%, is primarily attributable to an increase in long-term debt,
which increased to $743.0 million at December 31, 1996 from $362.5 million at
December 31, 1995 incurred primarily to fund the Company's capital expenditures
associated with the build-out of the Company's PCS systems. Interest expense
will increase in 1997 as a result of increased borrowings the Company has
incurred, and will continue to incur, to fund its expansion. The weighted
average interest rate was 9.8% in 1996 and 9.2% in 1995.
Extraordinary loss on early extinguishment of debt of $6.6 million in
1995 represents the charge for the unamortized portion of financing costs
incurred in connection with the refinancing of the Company's then outstanding
Credit Facility.
The Company had available at December 31, 1996 net operating loss
carryforwards ("NOLs") of approximately $250 million which will expire in the
years 2002 through 2011. The Company may be limited in its ability to use these
carryforwards in any one year due to ownership changes that preceded the
Business Combination. Approximately $17 million of such NOLs are subject to such
limitations. Any amount of NOLs subject to such limitation that the Company is
not able to use in any one year may be used in subsequent years prior to the
expiration thereof. There is currently no limitation on the remaining NOLs of
$233 million. Management believes that, based on a number of factors, there is
sufficient uncertainty regarding the utilization of all of the Company's NOLs.
See Note 8 of the Company's Notes to the consolidated financial statements.
EBITDA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
CELLULAR (1) PCS CELLULAR PCS
-------------- ------------- -------------- -------------
(in thousands)
EBITDA............................. $ 60,289 $ (67,434) $ 28,929 $ (3,408)
============== ============= ============== =============
- ----------
(1) Includes paging operations
EBITDA declined to negative $7.1 million in 1996 from $25.5 million in
1995 primarily due to the negative $67.4 million EBITDA attributable to PCS
operations offset by an increase in cellular EBITDA. Cellular EBITDA increased
108% to $60.3 million in 1996 from $28.9 million in 1995 primarily as a result
of increased revenues due to the increased subscriber base and the related cost
efficiencies recognized. As a result, cellular operating margin (cellular EBITDA
as a percentage of cellular service revenues) increased to 28.3% in 1996 from
21.4% in 1995.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1994
The Company had 209,500 cellular subscribers at December 31, 1995 an
increase of 96,700 or 85.7% during 1995. At December 31, 1994, the Company had
112,800 cellular subscribers, an increase of 82,800 or 276% during 1994. In 1995
and 1994, the net number of subscribers added through system acquisitions was
approximately 3,300 and 37,500 (including 29,000 through the acquisition of
MCLP), respectively.
28
31
REVENUES
All revenues below are from cellular operations. The Company commenced
paging operations and PCS commercial operations in February 1996 and therefore
had no PCS or paging revenues in prior years.
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994
----------- -----------
(in thousands)
Subscriber revenues ............................ $ 105,430 $ 38,838
Roamer revenues ................................ 29,660 16,746
Equipment sales ................................ 11,465 7,524
=========== ===========
Total revenues ............................. $ 146,555 $ 63,108
=========== ===========
Subscriber revenues increased to $105.4 million in 1995 from $38.8
million in 1994. This $66.6 million or 172% increase is due primarily to the
85.7% growth in the number of subscribers (including as a result of the Business
Combination). Average monthly cellular subscriber revenue per subscriber was
$57.25 in 1995 compared to $54.35 in 1994. This $2.90 or 5.3% increase is a
result of the Company's efforts to expand its geographical coverage and focus
subscribers on higher-end rate plans.
Roamer revenues were $29.7 million in 1995 compared to $16.7 million in
1994, an increase of $13.0 million or 77.8%. Growth in the Company's roamer
revenues generally reflects increases in the Company's geographic coverage
(including as a result of the Business Combination) and market penetration
levels in adjacent markets and the cellular industry as a whole. Roamer revenues
as a percentage of total revenues declined to 20.3% in 1995 from 26.5% in 1994.
Equipment sales, which consist primarily of handset sales, increased to
$11.5 million in 1995 from $7.5 million in 1994. This $4.0 million or 53.3%
increase is due primarily to the increase in net subscriber additions (including
as a result of the Business Combination), offset by a slight decrease in the
average handset sales price.
OPERATING EXPENSES
As PCS operations had not yet commenced in 1995, all PCS operating
expenses reflect start-up costs that are not representative of future operating
expenses. All operating expenses discussed below are from cellular operations.
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994
------------------------ -----------
CELLULAR PCS CELLULAR
----------- ----------- -----------
(in thousands)
Cost of service ........................ $ 27,686 $ $ 13,303
Cost of equipment sales ................ 20,705 11,446
General and administrative ............. 28,184 $ 3,069 15,226
Sales and marketing .................... 41,051 339 18,553
Depreciation and amortization .......... 49,187 269 25,670
Provision for restructuring costs ...... 2,478
=========== =========== ===========
Total operating expenses .......... $ 166,813 $ 3,677 $ 86,676
=========== =========== ===========
Cost of service increased to $27.7 million in 1995 from $13.3 million
in 1994, primarily as a result of the 85.7% increase in the number of
subscribers (including as a result of the Business Combination), which resulted
in increased costs to access local exchange and long distance carrier facilities
and to maintain the Company's expanding wireless network. While this represents
a $14.4 million or 108% increase for the year, it represents a decrease as a
percentage of service revenues to 20.5% in 1995 from 23.9% in 1994, which is due
primarily to efficiencies gained from the growing subscriber base.
General and administrative costs increased to $28.2 million in 1995
from $15.2 million in 1994, an increase of $13.0 million or 85.5%, which is
attributable primarily to the increase in the costs associated with supporting
the increased subscriber base (including as a result of the Business
Combination). However, these costs continued to decline as a percentage of
service revenues to 20.9% in 1995 from 27.3% in 1994, primarily attributable to
improved efficiency.
29
32
Sales and marketing costs increased to $41.1 million in 1995 from $18.6
million in 1994, primarily due to net subscriber additions (including as a
result of the Business Combination), an increase in the Company's use of
indirect sales channels and an increase in churn. For these reasons, sales and
marketing costs per net subscriber added increased to $446 in 1995 from $411 in
1994. Including the losses on equipment sales, the costs per net subscriber
added increased to $546 in 1995 from $497 in 1994.
Depreciation expense increased to $30.1 million in 1995 from $17.0
million in 1994. This increase of $13.1 million or 77.1% is attributable to the
expansion of the Company's cellular systems (including as a result of the
Business Combination). Amortization expense increased to $19.1 million in 1995
from $8.7 million in 1994. This $10.4 million or 120% increase is attributable
to an increase in gross cellular licensing costs and other intangible assets to
$300.5 million at December 31, 1995 from $223.0 million at December 31, 1994.
Provision for restructuring costs of $2.5 million in 1994 consists of
costs relating to the Business Combination, which relate primarily to the
elimination of duplicative headquarters and other facilities.
OPERATING LOSS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994
-------------------------------- -------------
CELLULAR PCS CELLULAR
------------- -------------- -------------
(in thousands)
Operating loss....................... $ (20,258) $ (3,677) $ (23,568)
============= ============== =============
Total operating loss increased to $23.9 million in 1995 from $23.6
million in 1994 as a result of the $3.7 million operating loss attributable to
PCS operations offset by the improved cellular operating loss. Cellular
operating loss decreased to $20.3 million in 1995 from $23.6 million in 1994.
Cellular operating loss in 1994 included a one-time provision for restructuring
costs of $2.5 million.
OTHER INCOME (EXPENSE); EXTRAORDINARY LOSS
Interest and financing expense increased to $25.4 million in 1995 from
$10.7 million in 1994. The $14.7 million or 137% increase is attributable
primarily to an increase in borrowings to $362.5 million at December 31, 1995
from $211.5 million at December 31, 1994, to fund the Company's expansion and
capital expenditures. The weighted average interest rate was 9.2% in 1995 and
1994.
The $6.2 million gain on dispositions in 1994 represents nonrecurring
gains associated with the exchange or sale of certain cellular systems.
Extraordinary loss on early extinguishment of debt of $6.6 million in
1995 represents the charge for the unamortized portion of financing costs
incurred in connection with the refinancing of the Company's then outstanding
Credit Facility.
EBITDA
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994
------------------------------- -------------
CELLULAR PCS CELLULAR
------------- -------------- -------------
(in thousands)
EBITDA .......................... $ 28,929 $ (3,408) $ 2,102
============= ============== =============
EBITDA improved to $25.5 million in 1995 from $2.1 million in 1994, as
a result of increased cellular EBITDA offset by the negative $3.4 million EBITDA
attributable to PCS operations. Cellular EBITDA increased to $28.9 million in
1995 from $2.1 million in 1994, primarily as a result of the increased
subscriber base and the related cost efficiencies (including as a result of the
Business Combination). As a result, cellular operating margin increased to 21.4%
in 1995 from 3.8% in 1994. EBITDA is a measure commonly used in the industry but
is not prepared in accordance with GAAP and should not be considered as a
measurement of net cash flows from operating activities. In 1994, the Company
recorded a provision for restructuring costs of $2.5 million. EBITDA before
provision for restructuring costs would have been $4.6 million in 1994.
30
33
LIQUIDITY AND CAPITAL RESOURCES
The Company's initial public offering of common stock (the "Equity
Offering") became effective on May 22, 1996. Approximately 12.7 million shares
of common stock were sold to the public, of which approximately 10.7 million
shares were sold by the Company. The net proceeds to the Company of the Equity
Offering after the underwriting discount and other offering expenses, were
approximately $233.9 million. Simultaneously with the Equity Offering, the
Company sold $200 million of Senior Subordinated Notes Due 2006 (the "2006 Debt
Offering") on the public market. The net proceeds to the Company of the 2006
Debt Offering after the underwriting discount and other offering expenses, were
approximately $193 million. In October 1996 the Company sold $200 million of
Senior Subordinated Notes Due 2007 (the "2007 Debt Offering" and together with
the Equity Offering and the 2006 Debt Offering are collectively known as the
"Offerings") in a transaction exempt from registration under the Securities Act
of 1933. In December 1996 the Company exchanged the unregistered notes issued
under the 2007 Debt Offering for notes which have been registered under the
Securities Act of 1933. The net proceeds to the Company from the 2007 Debt
Offering after the underwriting discount and other offering expenses, were
approximately $194 million.
The Company has a credit facility (the "Credit Facility") with a
consortium of lenders providing for $750 million of revolving credit and a $200
million term loan. A subsidiary of the Company also has a credit facility (the
"NORTEL Facility" and, together with the Credit Facility, the "Senior Secured
Facilities") with Northern Telecom Inc. The NORTEL Facility was recently amended
to increase the amount of the facility from $200 million to $300 million. As of
December 31, 1996 $200.0 million and $143.0 million were outstanding under the
Credit Facility and the NORTEL Facility, respectively, and the amounts available
for borrowing under the Credit Facility and the NORTEL Facility were $166.6
million and $23.7 million, respectively. Indebtedness under the Credit Facility
and the NORTEL Facility matures on March 31, 2005, and December 31, 2003,
respectively, and bears interest at variable rates. Substantially all the assets
of the Company are pledged as security for such indebtedness.
The Company currently anticipates that it will require approximately
$225 million to complete the build-out of its PCS MTA systems and to begin
construction of the Seattle and Phoenix/Tucson BTA systems and approximately $81
million for the acquisition of the D and E Block PCS licenses for which it was
the high bidder in the recently concluded FCC auction in 1997. In addition,
further funds will be required to finance the continued growth of its cellular
and PCS operations (which may be significant), provide for working capital, and
service debt. The Company will utilize cash on hand and amounts available for
borrowing under the Credit Facility and the NORTEL Facility for such purposes.
While the Company believes such sources will be sufficient, to the extent that
the build-out of the PCS systems or other costs associated with the growth of
its business are greater than expected, the Company will need to seek additional
financing. The Company continues to consider additional sources of funding to
meet those potential needs which may include the issuance of additional
indebtedness or the sale of additional equity. There can be no assurance that
such funds will be available to the Company on acceptable or favorable terms.
The Company continues to evaluate acquisition opportunities, joint
ventures and other potential business transactions. Such transactions, if
completed, could require additional funds raised through the issuance of
additional indebtedness or the sale of additional equity. There can be no
assurance that such funds will be available to the Company on acceptable or
favorable terms.
Net cash used in operating activities in 1996 was $61.3 million.
Adjustments to the $130.1 million net loss for such period to reconcile to net
cash used in operating activities primarily included $81.7 million of
depreciation and amortization (including the amortization of deferred financing
costs). Other adjustments included changes in operating assets and liabilities,
net of effects from consolidating acquired interests, consisting primarily of an
increase of $10.3 million in accounts receivable primarily as a result of the
increased subscriber base, an increase of $20.5 million in inventory as a result
of the purchase of PCS handsets, an increase of $11.0 million in prepaid
expenses and other current assets primarily as a result of escrow deposits made
in conjunction with international ventures and an increase of $19.6 million in
accrued liabilities as a result of the growth of the business. Net cash used in
operating activities was $0.7 million and $1.0 million in 1995 and 1994,
respectively.
Net cash used in investing activities was $489.1 million in 1996.
Investing activities for such period consisted primarily of purchases of
wireless licenses and other of $86.1 million of which $66.1 million was
attributable to the purchase of the Denver PCS MTA, purchases of property and
equipment of $333.3 million of which $234.4 million was attributable to PCS
capital expenditures, acquisitions of wireless properties, net of cash acquired,
which used net cash proceeds to the company
31
34
of $40.2 million and net deposits made with the FCC of $23.5 million. Net cash
used in investing activities was $293.6 million and $70.2 million in 1995 and
1994, respectively.
Net cash provided by financing activities was $596.7 million in 1996.
Financing activities for such period consisted primarily of additions to
long-term debt, which provided cash of $361.1 million net of $512.7 million in
repayments and $19.1 million in fees, and the issuance of stock, primarily under
the Equity Offering, which provided net cash proceeds to the Company of $235.6
million. Net cash provided by financing activities was $295.1 million and $70.8
million in 1995 and 1994, respectively.
The Company holds a 49.9% limited partnership interest in Cook Inlet
PCS, an entity which acquired licenses in 14 BTAs in the FCC C Block auctions
and was the high bidder on 7 BTA licenses in the F Block auction. Cook Inlet PCS
is subject to the FCC's build-out requirements and will require significant
additional amounts to complete the build-out of its PCS systems and to meet the
government debt service requirements on the C Block license purchase prices. The
potential sources of such additional funding include vendor loans, loans or
capital contributions by the partners of Cook Inlet PCS or other third party
financing. The Company funded the operations of Cook Inlet PCS during 1996 and
has agreed to enter into a loan agreement with Cook Inlet PCS whereby the
Company would agree to provide a $20 million revolver/term loan to Cook Inlet
PCS at an interest rate equal to the higher of fifteen percent or the London
Interbank Offer Rate ("LIBOR") plus 5%. At December 31, 1996 the Company had
advanced funds totaling $1.9 million to Cook Inlet PCS. These advances are due
in August 1997.
In the ordinary course of business, the Company continuously reviews
potential acquisition opportunities and has entered into various joint
development agreements with respect to international interests. Any such
prospective acquisitions would be financed with the borrowings under the Senior
Secured Facilities or additional financing, which may not be on terms favorable
to the Company.
SEASONALITY
The Company, and the wireless communications industry in general, have
historically experienced significant subscriber growth during the fourth
calendar quarter. Accordingly, during such quarter the Company experiences
greater losses on equipment sales and increases in sales and marketing expenses.
The Company has historically experienced highest usage and revenue per
subscriber during the summer months. The Company expects these trends to
continue.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth on pages
F-1 through F-21 and the related financial statement schedule is set forth on
page S-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item is incorporated by reference to
the section entitled "Election of Directors and Management Information" in the
Company's Proxy Statement for its 1997 annual shareholders meeting to be filed
with the United States Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item is incorporated by reference to
the section entitled "Executive Compensation" in the Company's Proxy Statement
for its 1997 annual shareholders meeting to be filed with the United States
Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is incorporated by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for its 1997 annual shareholders
meeting to be filed with the United States Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for its 1997 annual shareholders meeting to be filed
with the United States Securities and Exchange Commission.
33
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) Financial Statements and Schedule
The financial statements and schedule which are filed with this Form
10-K are set forth in the Index to Consolidated Financial Statements and
Schedule at page F-1, which immediately precedes such documents.
(B) Reports on Form 8-K
The Company filed a Form 8-K on October 25, 1996 and such form was
amended on November 6, 1996 in connection with the registration of the Company's
2007 Notes.
(C) Exhibits
EXHIBIT DESCRIPTION
- ------- -----------
3.1++ Amended and Restated Articles of Incorporation of the Registrant.
3.2++ Bylaws of the Registrant.
4.1* Indenture between Western Wireless Corporation and Harris Trust Company
of California, dated May 22, 1996
4.2** Indenture between Western Wireless Corporation and Harris Trust Company
of California, dated October 24, 1996
10.1++ Loan Agreement between Western PCS II Corporation and Northern Telecom
Inc., dated June 30, 1995
10.2++ PCS 1900 Project and Supply Agreement between Western PCS
Corporation and Northern Telecom Inc., dated June 30, 1995
10.3++ Purchase Agreement between Motorola Nortel Communications Co. and
General Cellular Corporation, dated July 29, 1993
10.4++ Loan Agreement among Western Wireless Corporation and The
Toronto-Dominion Bank, Barclays Bank, PLC, and Morgan Guaranty Trust
Company of New York, as Managing Agents for the Various Lenders, dated
June 30, 1995
10.5++ First Amendment to Loan Agreement by and among Western Wireless
Corporation, The Toronto-Dominion Bank, Barclays Bank, PLC, and Morgan
Guaranty Trust Company of New York, as Managing Agents for the Various
Lenders, dated January 11, 1996
10.6++ Supply Contract by and between Western PCS Corporation and Nokia
Telecommunications Inc., dated December 14, 1995
10.7++ Purchase and Sale Agreement, Nokia Mobile Phones, Inc. and Western
Wireless Corporation, dated November 10, 1995
10.8++ Western Wireless Corporation, 1994 Management Incentive Stock
Option Plan, approved, as adopted and amended, by Shareholders
November 16, 1995 together with form of Stock Option Agreement for
offers thereunder
10.9++ Stockholders Agreement by and among Western Wireless Corporation and
certain of its shareholders, dated July 29, 1994
10.10++ First Amendment to Stockholders Agreement by and among Western
Wireless Corporation and certain of its shareholders, Adding as a
Party Western PCS Corporation, dated November 30, 1994
10.11++ Waiver Agreement by and among Western Wireless Corporation, Western
PCS Corporation and certain of Western Wireless Corporation's
shareholders, dated November 30, 1994
10.12++ Waiver Agreement by and among Western Wireless Corporation, Western
PCS Corporation and certain of Western Wireless Corporation's
shareholders, dated February 15, 1996
10.13++ Voting Agreement by and among Western Wireless Corporation and certain
of its shareholders
10.14++ Lease Agreement by and between WWC Holding Co., Inc., successor in
interest to MARKETS Cellular Limited Partnership, and WRC
Properties, Inc., dated May 1, 1994
10.15++ Lease Agreement by and between Western Wireless Corporation and
Department of Natural Resources, dated August 25, 1995
10.16++ First Amendment to Lease Agreement by and between Western Wireless
Corporation and Department of Natural Resources, dated February 28, 1996
10.17++ Form of Cellular One Group License Agreement
10.18++ Asset Purchase Agreement between Western PCS III License
Corporation as Buyer and GTE Mobilnet Incorporated as Seller, dated
January 16, 1996
34
37
EXHIBIT DESCRIPTION
- ------- -----------
10.19++ Purchase and Sale Agreement by and between Robert O. Tyler, Esq., as Trustee,
Seller, and GCC License Corporation, Purchaser, dated December 22, 1995
10.20++ Agreement for Purchase and Sale of Autoplex Cellular Equipment,
Software and Services by and among American Telephone and Telegraph
Company, WWC Holding Co., Inc., successor to MARKETS Cellular
Limited Partnership and MCII General Partnership, dated March 17,
1993
10.21++ Agreement and Plan of Reorganization by and among Palouse Paging, Inc., the
Shareholders of 100% of the Stock of Palouse Paging, Inc., Western Paging I
Corporation and Western Wireless Corporation, dated February 5, 1996
10.22++ First Amendment to Agreement and Plan of Reorganization by and among Western
Paging I Corporation, the former Shareholders of 100% of the Stock of Palouse
Paging, Inc. and Western Wireless Corporation
10.23++ Agreement and Plan of Reorganization by and among Sawtooth Paging, Inc., the
Shareholders of 52.93% of the Stock of Sawtooth Paging, Inc., Western Paging II
Corporation and Western Wireless Corporation, dated February 5, 1996
10.24++ Employment Agreement by and between John W. Stanton and Western Wireless
Corporation, dated March 12, 1996
10.25++ Employment Agreement by and between Robert R. Stapleton and Western Wireless
Corporation, dated March 12, 1996
10.26++ Employment Agreement by and between Mikal J. Thomsen and Western Wireless
Corporation, dated March 12, 1996
10.27++ Employment Agreement by and between Theresa E. Gillespie and Western Wireless
Corporation, dated March 12, 1996
10.28 Employment Agreement by and between Donald Guthrie and Western Wireless
Corporation, dated March 12, 1996
10.29++ Form of Registrant's Restrictive Covenant and Confidentiality Agreement
10.30++ Form of Director and Officer Indemnification Agreement
10.31++ Western PCS Corporation Series A Preferred Stock Purchase Agreement among Western
Wireless Corporation, Western PCS Corporation and the Purchasers
listed therein, dated April 10, 1995
10.32 Intentionally omitted
10.33++ PCS Block "C" Organization and Financing Agreement by and among
Western PCSBTA I Corporation, Western Wireless Corporation, Cook
Inlet PV/SS PCS Partners, L.P., Cook Inlet Telecommunications,
Inc., SSPCS Corporation and Providence Media Partners L.P. dated as
of November 5, 1995
10.34++ Limited Partnership Agreement by and between Cook Inlet PV/SS PCS Partners, L.P.
and Western PCS BTA I Corporation dated as of November 5, 1995
10.35++ First Amendment to Block "C" Organization and Financing Agreement
and Cook Inlet Western Wireless PV/SS PCS, L.P. Limited Partnership
Agreement by and among Western PCS BTA I Corporation, Western
Wireless Corporation, Cook Inlet PV/SS PCS Partners, L.P., Cook
Inlet Telecommunications, Inc., SSPCS Corporation and Providence
Media Partners L.P. dated as of April 8, 1996
10.36++ Amended and Restated Loan Agreement among Western Wireless Corporation and The
Toronto-Dominion Bank, Barclays Bank, PLC, and Morgan Guaranty Trust Company of
New York, as Managing Agents for the Various Lenders, dated May 6, 1996
10.37** Second Amendment to Block "C" Organization and Financing Agreement
and Cook Inlet Western Wireless PV/SS PCS, L.P. Limited Partnership
Agreement by and among Western PCS BTA I Corporation, Western
Wireless Corporation, Cook Inlet PV/SS PCS Partners, L.P., Cook
Inlet Telecommunications, Inc., SSPCS Corporation and Providence
Media Partners L.P. dated as of June 27, 1996
10.38** Third Amendment to Block "C" Organization and Financing Agreement
and Cook Inlet Western Wireless PV/SS PCS, L.P. Limited Partnership
Agreement and First Amendment to Technical Services Agreement by
and among Western PCS BTA I Corporation, Western Wireless
Corporation, Cook Inlet PV/SS PCS Partners, L.P., Cook Inlet
Telecommunications, Inc., SSPCS Corporation, Providence Media
Partners L.P. and Cook Inlet Western Wireless PV/SS PCS, L.P.,
dated July 30, 1996
10.39** General Agreement for Purchase of Cellular Systems between Lucent Technologies
Inc. and Western Wireless Corporation, dated September 16, 1996
10.40** Amendment No. 1 to PCS 1900 Supply Agreement between Western PCS Corporation and
Northern Telecom Inc., dated July 25, 1996
35
38
EXHIBIT DESCRIPTION
- ------- -----------
10.41** Amendment No. 2 to PCS 1900 Supply Agreement between Western PCS Corporation and
Northern Telecom Inc., dated July 25, 1996
10.42+ Amendment No. 3 to PCS Supply Agreement between Western PCS Corporation and
Northern Telecom Inc., dated October 14, 1996
10.43+++ Western Wireless Corporation 1996 Employee Stock Purchase Plan
21.1++ Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
- --------------------
* Incorporated herein by reference to the exhibit filed with the
Company's Registration Statement on Form S-1 (Commission File No.
333-2688).
** Incorporated herein by reference to the exhibit filed with the
Company's Registration Statement on Form S-4 (Commission File No.
333-14859).
+ Portions of this exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 406 of the Act.
++ Incorporated herein by reference to the exhibit filed with the
Company's Registration Statement on Form S-1 (Commission File No.
333-2432).
+++ Incorporated herein by reference to the exhibit filed with the
Company's Registration Statement on Form S-8 (Commission File No.
333-18137) .
36
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WESTERN WIRELESS CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants...................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995.................................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994.................... F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994.......... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994.................... F-6
Notes to Consolidated Financial Statements.................................................................... F-7
Schedule II - Valuation and Qualifying Accounts............................................................... S-1
F-1
40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Western Wireless Corporation:
We have audited the accompanying consolidated balance sheets of Western Wireless
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements and the schedule referred to below 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 financial statements referred to above present fairly, in
all material respects, the financial position of Western Wireless Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Seattle, Washington
February 18, 1997
F-2
41
WESTERN WIRELESS CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(Dollars in thousands)
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 54,885 $ 8,572
Accounts receivable, net of allowance for doubtful accounts of
$4,266 and $2,800, respectively ............................................ 28,958 18,074
Inventory ........................................................................ 26,138 5,361
Prepaid expenses and other current assets ........................................ 14,809 4,001
Deposit held by FCC .............................................................. 25,000 1,500
------------ ------------
Total current assets .......................................................... 149,790 37,508
Property and equipment, net of accumulated depreciation
of $107,685 and $53,423, respectively ............................................ 538,617 193,692
Licensing costs and other intangible assets, net of accumulated
amortization of $55,363 and $28,364, respectively ............................... 540,482 417,971
Investments in and advances to unconsolidated affiliates .............................. 12,655 8,388
Other assets .......................................................................... 159 1,469
============ ============
$ 1,241,703 $ 659,028
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 14,122 $ 7,568
Accrued liabilities .............................................................. 36,652 16,659
Construction accounts payable .................................................... 89,583 28,408
Unearned revenue and customer deposits ........................................... 4,097 3,301
------------ ------------
Total current liabilities ..................................................... 144,454 55,936
------------ ------------
Long-term debt ........................................................................ 743,000 362,487
------------ ------------
Commitments (Note 7)
Shareholders' equity:
Preferred stock, no par value, 50,000,000 shares authorized;
no shares issued and outstanding
Common stock, no par value, 300,000,000 shares authorized; Class A,
14,540,691 shares issued and outstanding at December 31, 1996; Class B,
55,239,157 and 58,047,235
shares issued and outstanding, respectively ................................... 569,278 324,729
Deferred compensation ............................................................ (800)
Deficit .......................................................................... (214,229) (84,124)
------------ ------------
Total shareholders' equity .................................................... 354,249 240,605
------------ ------------
$ 1,241,703 $ 659,028
============ ============
See accompanying notes to consolidated financial statements
F-3
42
WESTERN WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AS OF DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)
1996 1995 1994
-------------- -------------- --------------
Revenues:
Subscriber revenues ................................ $ 182,441 $ 105,430 $ 38,838
Roamer revenues .................................... 34,065 29,660 16,746
Equipment sales and other revenue .................. 26,579 11,465 7,524
-------------- -------------- --------------
Total revenues ................................ 243,085 146,555 63,108
-------------- -------------- --------------
Operating expenses:
Cost of service .................................... 53,600 27,686 13,303
Cost of equipment sales ............................ 46,305 20,705 11,446
General and administrative ......................... 66,673 31,253 15,226
Sales and marketing ................................ 83,652 41,390 18,553
Depreciation and amortization ...................... 79,741 49,456 25,670
Provision for restructuring costs .................. 2,478
-------------- -------------- --------------
Total operating expenses ...................... 329,971 170,490 86,676
-------------- -------------- --------------
Operating loss ........................................... (86,886) (23,935) (23,568)
-------------- -------------- --------------
Other income (expense):
Interest and financing expense, net ................ (44,690) (25,428) (10,659)
Gain (loss) on dispositions, net ................... (573) 6,202
Other, net ......................................... 1,471 627 2,065
-------------- -------------- --------------
Total other income (expense) ................. (43,219) (25,374) (2,392)
-------------- -------------- --------------
Loss before extraordinary item ........................... (130,105) (49,309) (25,960)
Extraordinary loss on early extinguishment of debt ....... (6,645)
-------------- -------------- --------------
Net loss ...................................... $ (130,105) $ (55,954) $ (25,960)
============== ============== ==============
Loss per common share before extraordinary item .......... $ (2.00) $ (0.87) $ (0.59)
Per common share effect of extraordinary item ............ (0.12)
============== ============== ==============
Net loss per common share ................................ $ (2.00) $ (0.99) $ (0.59)
============== ============== ==============
Weighted average common shares and common
equivalent shares outstanding ..................... 65,196,000 56,470,000 43,949,000
============== ============== ==============
See accompanying notes to consolidated financial statements
F-4
43
WESTERN WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands)
Common Stock
-------------------------------------
Par value and Total
Class A Class B paid-in Deferred shareholders'
shares shares capital compensation Deficit equity
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 1994 .................... 26,153,885 $ 88,384 $ (285) $ (2,210) $ 85,889
Business Combination:
Shares issued:
To acquire MCLP ....................... 18,160,643 70,918 70,918
To acquire interests in subsidiaries .. 39,761 160 160
GCC shares held by minority interests ... (1,370,929) (4,275) (4,275)
Deferred compensation ...................... 285 285
Net loss ................................... (25,960) (25,960)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 ................... 42,983,360 155,187 (28,170) 127,017
Shares issued:
For cash, net of costs .................. 12,665,905 143,002 143,002
In exchange for shareholder loans
plus accrued interest .............. 1,245,998 14,068 14,068
For minority interests in GCC, net ...... 896,210 9,944 9,944
In exchange for wireless assets ......... 217,000 2,450 2,450
Upon exercise of stock options .......... 38,762 78 78
Net loss ................................... (55,954) (55,954)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 ................... 58,047,235 324,729 (84,124) 240,605
Shares issued:
For cash, net of costs .................. 10,664,800 88,567 234,724 234,724
Upon exercise of stock options .......... 383,937 879 879
In exchange for wireless assets ......... 595,309 7,117 7,117
Class B shares exchanged for
Class A Shares ....................... 3,491,954 (3,491,954)
Deferred compensation ...................... 1,829 (800) 1,029
Net loss ................................... (130,105) (130,105)
=========== =========== =========== =========== =========== ===========
Balance, December 31, 1996 ................... 14,540,691 55,239,157 $ 569,278 $ (800) $ (214,229) $ 354,249
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements
F-5
44
WESTERN WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands)
1996 1995 1994
----------- ----------- -----------
Operating activities:
Net loss ..................................................... $ (130,105) $ (55,954) $ (25,960)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............................. 81,716 49,456 25,670
Extraordinary loss on early extinguishment of debt ........ 6,645
(Gain) loss on dispositions, net .......................... 573 (6,202)
Deferred compensation ..................................... 1,029 285
Other, net ................................................ 2,081 527 163
Changes in operating assets and liabilities, net
of effects from consolidating acquired interests:
Accounts receivable, net ............................. (10,309) (5,748) (2,249)
Inventory ............................................ (20,493) (239) (3,454)
Prepaid expenses and other current assets ............ (10,979) (1,284) 4,843
Accounts payable ..................................... 5,771 (272) (1,465)
Accrued liabilities .................................. 19,646 6,421 5,082
Unearned revenue and customer deposits ............... 310 (870) 2,299
----------- ----------- -----------
Net cash used in operating activities ..................... (61,333) (745) (988)
----------- ----------- -----------
Investing activities:
Purchase of property and equipment ........................... (333,315) (79,464) (47,423)
Purchase of wireless licenses and other ...................... (86,097) (137,805)
Acquisition of wireless properties, net of cash acquired ..... (40,180) (60,700) (30,566)
Proceeds from disposition of assets, net ..................... 10,163
Investments in and advances to unconsolidated affiliates ..... (5,994) (8,268) (2,364)
Purchase of subsidiary stock, including fees ................. (5,842)
Deposit held by FCC, net ..................................... (23,500) (1,500)
----------- ----------- -----------
Net cash used in investing activities ..................... (489,086) (293,579) (70,190)
----------- ----------- -----------
Financing activities:
Proceeds from issuance of common stock, net .................. 235,603 143,080
Additions to long-term debt .................................. 893,000 438,000 214,729
Payment of debt .............................................. (512,722) (277,015) (135,264)
Deferred financing costs ..................................... (19,149) (12,798) (8,688)
Loans from shareholders ...................................... 3,842
----------- ----------- -----------
Net cash provided by financing activities ................. 596,732 295,109 70,777
----------- ----------- -----------
Change in cash and cash equivalents .............................. 46,313 785 (401)
Cash and cash equivalents, beginning of year ..................... 8,572 7,787 8,188
----------- ----------- -----------
Cash and cash equivalents, end of year ........................... $ 54,885 $ 8,572 $ 7,787
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-6
45
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
Western Wireless Corporation (the "Company") provides wireless
communications services in the western United States principally through the
ownership and operation of cellular and personal communications systems ("PCS").
In addition to the cellular communications systems, the Company has acquired
seven PCS licenses covering seven Metropolitan Trading Areas ("MTAs"). Between
February and December 1996, the Company initiated service in the Honolulu, Salt
Lake City, Albuquerque, Portland, Oklahoma City and Des Moines MTAs. The Company
intends to initiate wireless services in the one remaining MTA, Denver, during
the first half of 1997.
The Company was formed in July 1994, as a result of a business
combination (the "Business Combination") among several companies, principally
MARKETS Cellular Limited Partnership ("MCLP") and General Cellular Corporation
("GCC"). The Business Combination has been accounted for as a purchase with GCC
deemed to be the acquiring company. As a result, the financial results after the
date of the Business Combination reflect the consolidated operations of GCC and
MCLP; all financial results prior to such date reflect only the consolidated
operations of GCC, which is considered the Company's predecessor for accounting
purposes.
The Company expects to incur significant operating losses and to
generate negative cash flows from operating activities during the next several
years while it develops and constructs its PCS systems and builds a PCS customer
base.
In January 1997, a wholly owned subsidiary of the Company was the high
bidder on 100 PCS Licenses in the D and E Block auctions conducted by the FCC.
The purchase price of the licenses will be approximately $80.9 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries and its affiliate investments in which
the Company has a greater than 50% interest. All affiliate investments in which
the Company has between a 20% and 50% interest are accounted for using the
equity method. All significant intercompany accounts and transactions have been
eliminated.
Cash and cash equivalents:
Cash and cash equivalents generally consist of cash, time deposits,
commercial paper and money market instruments. The Company invests its excess
cash in deposits with major banks and money market securities of investment
grade companies from a variety of industries and, therefore, bears minimal risk.
These investments have original maturity dates which do not exceed three months.
Such investments are stated at cost, which approximates fair market value.
Revenue recognition:
Service revenues based on customer usage are recognized at the time the
service is provided. Access and special feature service revenues are recognized
when earned. Sales of equipment, primarily handsets, are recognized when the
goods are delivered to the customer.
Inventory:
Inventory consists primarily of handsets and accessories. Inventory is
stated at the lower of cost or market, determined on a first-in, first-out
basis.
Property and equipment and depreciation:
Property and equipment are stated at cost. Depreciation commences once
the assets have been placed in service and is computed using the straight-line
method over the estimated useful lives of the assets which primarily range from
three to ten years.
F-7
46
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Licensing costs and other intangible assets and amortization:
Licensing costs primarily represent costs incurred to apply for or
acquire Federal Communication Commission ("FCC") wireless licenses, including
cellular licenses obtained by the Company, principally through acquisitions, and
PCS licenses which were primarily purchased from the FCC.
Amortization of cellular licenses is computed using the straight-line
method. During 1996 the Company amortized its cellular licensing costs over 15
years. Effective January 1, 1997, the Company prospectively changed its
amortization period for cellular licensing costs from 15 years to 40 years to
conform more closely with industry practices. Amortization of PCS licenses
begins with the commencement of service to customers and is computed using the
straight-line method over 40 years. As of December 31, 1996, the Company had
initiated commercial operations in six of its PCS markets. At December 31, 1995,
operations had not commenced in any of the Company's PCS markets.
The Company's PCS licenses represent qualified assets pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 34, "Capitalization of
Interest Cost." During the years ended December 31, 1996 and 1995, the Company
capitalized interest in the amount of $5.2 million and $0.4 million,
respectively, pertaining to the build out of its PCS markets.
Other intangible assets consist primarily of deferred financing costs.
Deferred financing costs are amortized using the effective interest method over
the terms of the respective loans.
Income taxes:
The Company accounts for deferred taxes using the asset and liability
method.
Net loss per common share:
Net loss per common share is calculated using the weighted average
number of shares of outstanding common stock and common stock equivalents during
the period. As required by the Securities and Exchange Commission (the "SEC"),
common shares issued by the Company in the year preceding the filing of an
initial public offering have been included in the calculation of shares used in
determining the net loss per share as if they had been outstanding for all
periods presented, the effect of which is anti-dilutive. The number of shares
outstanding for periods subsequent to May 22, 1996 has been calculated based on
the requirements of Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share." Due to the net loss incurred during the period subsequent
to May 22, 1996, through December 31, 1996, all options and warrants are
anti-dilutive, thus primary and fully diluted loss per share are equal.
Stock-based compensation plans:
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 10 for
discussion of the effect on net income and other related disclosures had the
Company accounted for these plans under the SFAS No. 123, "Accounting for
Stock-Based Compensation."
Financial instruments:
As required under the Credit Facility (as defined in Note 6), the
Company enters into interest rate swap and cap agreements to manage interest
rate exposure pertaining to long-term debt. The Company has only limited
involvement with these financial instruments, and does not use them for trading
purposes. Interest rate swaps are accounted for on an accrual basis, the income
or expense of which is included in interest expense. Premiums paid to purchase
interest rate cap agreements are classified as an asset and amortized to
interest expense over the terms of the agreements. These transactions do not
subject the Company to risk of loss because gains and losses on these contracts
are offset against losses and gains on the underlying liabilities. No collateral
is held in relation to the Company's financial instruments.
F-8
47
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The Company's carrying value of financial instruments approximates fair
value. The estimated fair value of the Company's financial instruments has been
determined using available market quotes and appropriate valuation
methodologies.
Supplemental cash flow disclosure:
Cash paid for interest (net of amounts capitalized) was $36.2 million,
$21.7 million, and $10.9 million for the years ended December 31, 1996, 1995 and
1994, respectively.
Non-cash investing and financing activities were as follows (in
thousands):
YEAR ENDED DECEMBER, 31
----------------------------------------
1996 1995 1994
------------ ------------ -----------
Conversion of FCC deposit to wireless license ............................. $ 10,000
Conversion of revolving debt to term debt ................................. $ 200,000
Issuance of common stock in exchange for wireless assets .................. 7,117 2,450
Exchange of shareholder loans and accrued interest for common stock ....... 14,068
Shareholder loans to fund FCC deposit ..................................... $ 10,000
The Business Combination described in Notes 1, 9 and 12 was also a
non-cash transaction involving the issuance of 18,160,643 shares of the
Company's common stock to acquire the assets and liabilities of MCLP and 39,761
shares of the Company's common stock for interests in subsidiaries. During 1995,
the Company issued 896,210 shares of its common stock in exchange for minority
interests in GCC.
Concentration of credit risk:
The Company's customers are dispersed throughout the western United
States. No single customer accounted for a significant amount of the Company's
sales, and there were no significant accounts receivable from a single customer.
The Company reviews the credit histories of potential customers prior to
extending credit and maintains allowances for potential credit losses. The
Company maintains cash and cash equivalents in high credit quality institutions.
The Company believes that its risk from concentration of credit is limited.
Estimates used in preparation of financial statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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 periods. Actual results could differ from those estimates.
F-9
48
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
3.PROPERTY AND EQUIPMENT:
Property and equipment consists of (in thousands):
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
Land, buildings and improvements ................. $ 8,433 $ 2,879
Wireless communications systems .................. 370,628 165,825
Furniture and equipment .......................... 49,351 16,273
----------- -----------
428,412 184,977
Less accumulated depreciation .................... (107,685) (53,423)
----------- -----------
320,727 131,554
Construction in progress ......................... 217,890 62,138
=========== ===========
$ 538,617 $ 193,692
=========== ===========
Depreciation expense was $54.9 million, $30.2 million and $17.0 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES:
At December 31, 1996, the Company's investments in and advances to
unconsolidated affiliates consisted of an interest in Cook Inlet Western
Wireless PV/SS PCS, L.P. ("Cook Inlet PCS"), and an interest in Latcom Wireless
Telephone Co. ("Latcom"). At December 31, 1995, the Company's investments in
unconsolidated affiliates consisted of a 47% interest in Sawtooth Paging, Inc.
("Sawtooth") and an interest in Cook Inlet PCS. During 1996, the Company
purchased the remaining unowned portion of Sawtooth (See Note 9).
In the first quarter of 1996, a wholly owned subsidiary of the Company
entered into a joint venture to form Latcom. Latcom is a 49% partner in BALTEL
SIA, which owns and operates a cellular license in the Republic of Latvia. The
Company has approximately a 47.9% ownership interest and a $4.7 million
investment in Latcom at December 31, 1996.
In the fourth quarter of 1995, a wholly owned subsidiary of the Company
entered into an agreement to form Cook Inlet PCS in order to participate in the
FCC's auctions of PCS licenses. A shareholder of the Company is also a limited
partner of the General Partner. The Company has a 49.9% ownership interest in
Cook Inlet PCS. During 1996, Cook Inlet PCS was successful in acquiring 14
licenses in the FCC's C Block auction. In January 1997, Cook Inlet PCS was the
high bidder in 7 PCS licenses in the F Block auction conducted by the FCC. The
purchase price of the licenses will be approximately $50.5 million. At December
31, 1996 and 1995, the Company's investment in and advances to Cook Inlet PCS
was approximately $8.1 million and $7.6 million, respectively.
The assets, liabilities and results of operations of Sawtooth, Cook
Inlet PCS, and Latcom are not material to the Company during 1996 and 1995.
F-10
49
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. ACCRUED LIABILITIES:
Accrued liabilities consist of (in thousands):
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
Accrued payroll and benefits ....................... $ 11,192 $ 5,551
Accrued interest expense ........................... 10,265 4,471
Accrued taxes, other than income ................... 5,096 3,236
Other .............................................. 10,099 3,401
----------- -----------
$ 36,652 $ 16,659
=========== ===========
6. LONG-TERM DEBT:
Long-term debt consists of (in thousands):
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
Credit Facility(a):
Revolver ..................................... $ 347,000
Term Loan .................................... $ 200,000
10-1/2% Senior Subordinated Notes Due 2006(b) ...... 200,000
10-1/2% Senior Subordinated Notes Due 2007(c) ...... 200,000
NORTEL Facility(d) ................................. 143,000 13,000
Other .............................................. 2,487
=========== ===========
$ 743,000 $ 362,487
=========== ===========
(a) Credit Facility
On June 30, 1995, the Company entered into a credit facility with a
group of banks (the "Credit Facility"). Pursuant to the Credit Facility, the
banks agreed to make loans to the Company, on a revolving-credit basis, in an
aggregate principal amount not to exceed $750 million (the "Revolving Loans").
On May 6, 1996, the Company amended the Credit Facility to increase the
Company's borrowing capacity in the form of a $200 million term loan (the "Term
Loan"). On December 31, 1999, the Revolving Loans expire, thus, loans are
restricted to the principal amount outstanding on that date. Beginning March 31,
2000, and June 30, 2000, the Company is required to make quarterly payments on
the outstanding principal of the Revolving Loans and Term Loan. These payments
increase each year, on the anniversary date of the initial payment, until paid
in full on December 31, 2004, for the Revolving Loans and March 31, 2005, for
the Term Loan. The Credit Facility also contains certain financial covenants,
the most restrictive of which impose limitations on the incurrence of
indebtedness.
Any loan shall, at the option of the Company, be made as a Base Rate
Advance, Eurodollar Advance or CD Rate Advance. Under the Credit Facility,
interest is payable at an applicable margin in excess of the prevailing base
rate. The applicable margin on the Revolving Loans is determined quarterly based
on the leverage ratio of the Company, excluding certain of its subsidiaries. The
applicable margin on the Term Loan is 2.75%. During 1996 and 1995, all loans
under the Credit Facility had been borrowed using the Eurodollar option. The
weighted average interest rate, including the appropriate applicable margin, for
the years ended December 31, 1996 and 1995, were 7.79% and 7.41%, respectively.
The Credit Facility also provides for an annual fee of 0.5% of the unused
commitment, payable quarterly. As of December 31, 1996 and 1995, the unused
portion of the commitment under the Credit Facility was $750 million and $403
million, respectively.
The Credit Facility requires the Company to enter into interest rate
swap and cap agreements to manage the interest rate exposure pertaining to
borrowings under the Credit Facility. At December 31, 1996 and 1995, the Company
had entered into interest rate caps and swaps with a total notional amount of
$205 million and $375 million, respectively. Generally these instruments had
initial terms ranging from three to 3 1/2 years and effectively converted
variable rate debt to fixed rate. The
F-11
50
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. LONG-TERM DEBT - (CONTINUED):
weighted average interest rate under these agreements was approximately 6.76% at
December 31, 1996 and 1995. The amount of unrealized loss attributable to
changing interest rates at December 31, 1996 and 1995, was immaterial.
The repayment of the Credit Facility is secured by, among other things,
the grant of a security interest in substantially all of the assets of the
Company, excluding, among other items, the capital stock and assets of the
subsidiary that is party to the NORTEL Facility.
Upon execution of the Credit Facility, the Company repaid all of its
outstanding indebtedness under its then existing revolving/term loan agreement
(the "Previous Agreement"). Pursuant to the Previous Agreement, the lenders
thereunder agreed to make loans to the Company on a revolving credit basis in an
aggregate principal amount not to exceed $325 million. The Previous Agreement
was collateralized by substantially all of the assets of the Company.
The Company incurred an extraordinary loss of approximately $6.6
million in connection with the early repayment of the outstanding indebtedness
under the Previous Agreement during 1995. The loss primarily consisted of the
write-off of the related financing costs which had been deferred and only
partially amortized.
(b) 10-1/2% Senior Subordinated Notes Due 2006
In May 1996, the Company issued $200 million principal amount of
10-1/2% Senior Subordinated Notes Due 2006 (the "2006 Notes") at par. The 2006
Notes mature on June 1, 2006. Interest is payable semi-annually commencing on
December 1, 1996. The 2006 Notes may be redeemed at any time at the option of
the Company, in whole or from time to time in part, at varying redemption
prices. The Credit Facility prohibits the repayment of all or any portion of the
principal amount of the 2006 Notes prior to the repayment of all indebtedness
under the Credit Facility.
The 2006 Notes contain certain restrictive covenants which impose
limitations on the operations and activities of the Company and certain of its
subsidiaries, including the incurrence of other indebtedness, the creation of
liens, the sale of assets, issuance of preferred stock of subsidiaries, and
certain investments and acquisitions. The 2006 Notes are subordinate in right of
payment to the Credit Facility and the NORTEL Facility (see item (d) below).
(c) 10-1/2% Senior Subordinated Notes Due 2007
In October 1996, the Company issued $200 million principal amount of
10-1/2% Senior Subordinated Notes, which will mature on February 1, 2007 (the
"2007 Notes") at par. Interest is payable semi-annually commencing February 1,
1997. The 2007 Notes were issued pari passu to the 2006 Notes. As such, the 2007
Notes may be redeemed at any time at the option of the Company, in whole or from
time to time in part, at varying redemption prices. The Credit Facility
prohibits the repayment of all or any portion of the principal amount of the
2007 Notes prior to the repayment of all indebtedness under the Credit Facility.
The 2007 Notes contain certain restrictive covenants which are
consistent with that of the 2006 Notes. The 2007 Notes are subordinate in right
of payment to the Credit Facility and the NORTEL Facility.
(d) NORTEL Facility
Effective June 30, 1995, a wholly owned subsidiary of the Company
entered into a $200 million credit facility (the "NORTEL Facility") with
Northern Telecom Inc. ("NORTEL") which expires on December 31, 2003. The NORTEL
Facility bears interest at a rate approximating the prime rate plus a margin of
1.5%, or the London Interbank Offered Rate ("LIBOR") plus a margin of 2.5%. As
of December 31, 1996, all outstanding borrowings were drawn under the LIBOR rate
option. The weighted average interest rate, including margin, for the years
ended December 31, 1996 and 1995, were 8.06% and 8.43%, respectively. At
December 31, 1996 and 1995, the unused portion of the NORTEL Facility was $57
million and $187 million, respectively. The NORTEL Facility contains certain
financial covenants, the most restrictive of which impose a minimum cash
coverage and is collateralized by substantially all of the subsidiary's assets
and the stock of such subsidiary.
F-12
51
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. LONG-TERM DEBT - (CONTINUED):
Interest only payments are required through September 30, 2000.
Commencing September 30, 2000, and at the end of each calendar quarter
thereafter, the subsidiary is required to make payments on the principal amount
outstanding under the NORTEL Facility in increasing quarterly installments.
During the first quarter of 1997, the Company entered into negotiations
to amend the terms of the NORTEL Facility and the Credit Facility. The proposed
amendments will increase the NORTEL Facility to $300 million and change certain
financial covenants of the Credit Facility and to allow for an increase in the
NORTEL Facility.
The aggregate amounts of principal maturities as of December 31, 1996,
of the Company's debt are as follows (in thousands):
Year ending December 31,
1997...................................................... $ 0
1998...................................................... 0
1999...................................................... 0
2000...................................................... 15,050
2001...................................................... 35,320
Thereafter................................................ 692,630
----------
$ 743,000
==========
7. COMMITMENTS:
The Company leases various facilities, Cell Site locations,
rights-of-way and equipment under operating lease agreements. The leases expire
at various dates through 2036. Some leases have options to renew for additional
periods up to 25 years. Certain leases require the Company to pay property
taxes, insurance and normal maintenance costs. Substantially all of the
Company's leases have fixed minimum lease payments. The Company has no
significant capital lease liabilities.
Future minimum payments required under operating leases and agreements
that have initial or remaining noncancellable terms in excess of one year as of
December 31, 1996, are summarized below (in thousands):
Year ending December 31,
1997..................................................... $ 16,550
1998..................................................... 15,242
1999..................................................... 13,876
2000..................................................... 12,752
2001..................................................... 8,531
Thereafter............................................... 11,529
--------
$ 78,480
========
Aggregate rental expense for all operating leases was approximately
$14.2 million, $4.8 million and $2.2 million for the years ended December 31,
1996, 1995 and 1994, respectively.
F-13
52
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. COMMITMENTS - (CONTINUED) :
In order to ensure adequate supply and availability of certain
inventory requirements and service needs, the Company has committed to purchase
from various suppliers wireless communications equipment, handsets, and
services. These agreements expire at various dates through December 2005. The
aggregate amount of these commitments total approximately $401.3 million. At
December 31, 1996, the Company has ordered approximately $219.7 million under
all of these agreements, of which approximately $48.5 million is outstanding.
The Company has various other purchase commitments for materials,
supplies and other items incident to the ordinary course of business which are
neither significant individually nor in the aggregate. Such commitments are not
at prices in excess of current market value.
During the first quarter of 1997, the Company entered into various new
purchase commitments for equipment, services, and handsets totaling an estimated
$45.4 million. These agreements expire between 1998 and 2001.
8. INCOME TAXES:
Significant components of deferred income tax assets and liabilities
are as follows (in thousands):
DECEMBER 31,
----------------------
1996 1995
---------- ---------
Deferred tax assets:
Net operating loss carryforwards............................. $ 100,000 $ 38,000
Other temporary differences.................................. 12,000 5,000
---------- ---------
Total deferred tax assets........................................ 112,000 43,000
Valuation allowance.............................................. (90,000) (34,000)
---------- ---------
22,000 9,000
Deferred tax liabilities:
Property and wireless licenses basis differences............ (22,000) (9,000)
---------- ---------
$ 0 $ 0
========== =========
For tax purposes, the Company had available at December 31, 1996, net
operating loss carryforwards for regular tax purposes of approximately $250
million which will expire in 2002 through 2011. The Company may be limited in
its ability to use these carryforwards in any one year due to ownership changes
that preceded the Business Combination. The change in the valuation allowance
was an increase of approximately $56 million and $16 million in 1996 and 1995,
respectively and a decrease of approximately $5 million in 1994.
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realization of
the net deferred tax assets. Such factors include recurring operating losses
resulting primarily from the development of the Company's PCS business and
expected increased competition from new entrants into the Company's existing
markets. Accordingly, a valuation allowance has been provided for the net
deferred tax assets of the Company.
The difference between the statutory tax rate of approximately 40% (35%
federal and 5% state, net of federal benefits) and the tax benefit of zero
recorded by the Company is primarily due to the Company's full valuation
allowance against its net deferred tax assets.
F-14
53
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. SHAREHOLDERS' EQUITY:
(a) Business combinations
On December 29, 1995, the shareholders of the Company, Palouse Paging
Inc. ("Palouse"), and Sawtooth approved the merger of Palouse and Sawtooth into
wholly owned subsidiaries of the Company. During 1995, certain officers, one of
whom is a director, of the Company who are also shareholders of Palouse and
Sawtooth provided Palouse and Sawtooth with short-term financing. During 1996,
shareholders of Palouse and Sawtooth exchanged their shares for 515,561 and
79,748 shares of the Company's common stock, respectively. Certain shareholders
of Palouse and Sawtooth were also officers and non-controlling shareholders of
the Company. The Company accounted for the transaction as a stock purchase and
paid approximately $3.1 million and $0.3 million of outstanding debt, including
the debt to shareholders noted above, of Palouse and Sawtooth, respectively.
On July 29, 1994, certain shareholders in GCC, holding approximately
95% of the then outstanding stock of GCC, and holders of all MCLP partnership
interests exchanged their ownership interests for common stock of the Company in
the Business Combination. The participating GCC shareholders exchanged
23,384,345 shares of GCC common stock in a one-for-one exchange for common stock
in the Company. Under the terms of the Business Combination, the MCLP
partnership interests received 18,160,643 shares of common stock in the Company,
net of 661,609 shares of GCC stock owned by MCLP. GCC directly and indirectly
owned MCLP partnership interests of approximately 9.9% which were converted into
2,059,352 shares of common stock of the Company. These shares are excluded from
those outstanding for each of the periods presented. GCC's investment in MCLP
had been recorded at a cost of $8.3 million. The fair value of common stock of
the Company issued to acquire the non-GCC partnership interests in MCLP was
$70.9 million.
The Company recorded a provision for restructuring costs in 1994 of
approximately $2.5 million, primarily related to the elimination of duplicative
headquarters and other facilities and employee relocation costs.
(b) GCC minority interest
During 1995 and 1994, subsequent to the Business Combination of GCC and
MCLP, the Company completed two cash redemptions of the remaining shares (the
"Redemptions") of GCC's common stock. In addition, as part of the 1995
Redemption, the Company issued 896,210 shares of the Company's common stock for
GCC common stock in a one-for-one exchange.
These redemptions eliminated all minority interest positions in the
equity of GCC. The cost in excess of the carrying amounts of the minority
interests acquired increased licensing costs and other intangible assets by
approximately $11 million and $1 million for the years ended December 31, 1995
and 1994, respectively.
(c)Stock issuances
During 1996, 10,664,800 shares of common stock were issued and
approximately $233.9 million in net proceeds were received by the Company under
a registration statement of the Company's Class A Common Stock filed with the
SEC. Prior to this, the Company sold 88,567 shares of its common stock to an
officer of the Company at $11.29 per share for aggregate proceeds of
approximately $1.0 million.
In November 1995, the Board of Directors approved an increase in the
number of authorized shares of the Company's common stock from 25 million to 300
million.
During 1995, a wholly owned subsidiary issued 4,300,001 shares of Series
A Preferred Stock to certain existing shareholders of the Company at $35.00 per
share for aggregate proceeds of approximately $150 million, which was comprised
of approximately $14 million of converted debt of shareholders and approximately
$136 million in cash. The preferred stock in the subsidiary was converted into
common stock of the Company on a one for 3.1 basis. Additionally, the Company
sold 581,901 shares of common stock at $11.29 per share for cash during 1995 to
existing shareholders.
F-15
54
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCK-BASED COMPENSATION PLANS:
On September 20, 1994, the Board of Directors of the Company established
the 1994 Management Incentive Stock Option Plan (the "MISOP") which was later
amended and approved, as amended, by the shareholders of the Company on November
16, 1995. The MISOP, provides for the issuance of up to 5,890,000 shares of
common stock as either Nonstatutory Stock Options or as Incentive Stock Options,
the terms and conditions of which are at the discretion of the Administrator of
the MISOP. The MISOP provided for the conversion to stock options of the Company
for the stock options issued under a plan previously created by GCC and for the
conversion of unvested rights to ownership in MCLP by its B Unit holders, as
well as new options granted by the Company in the normal course of business
subsequent to the Business Combination. As of July 29, 1994, GCC had granted
options to purchase 1,061,251 shares of GCC stock at an average of approximately
$2.98 per share; 545,629 of such options were fully vested as of that date. The
Business Combination automatically accelerated the vesting of the remaining
options under the terms of the GCC Option Plan. All such options were converted
into options to purchase common stock of the Company.
During 1996, the Board of Directors of the Company approved the 1996
Employee Stock Purchase Plan (the "ESPP") which became effective January 1, 1997
which provides for the issuance of up to 1,000,000 shares of Class A Common
Stock to eligible employees participating in the plan. The terms and conditions
of eligibility under the ESPP require that an employee must have been employed
by the Company or its subsidiaries for at least three months prior to
participation.
A participant may contribute up to 10% of her or his total annual
compensation toward the ESPP, not to exceed the IRS contribution limit each
calendar year. Shares will be offered under this ESPP at 85% of market value at
each offer date.
Participants are fully vested at all times.
At December 31, 1996, the Company has accounted for the above described
MISOP and ESPP following the guidelines of APB Opinion No. 25 and related
interpretations. Had compensation cost for the MISOP and the ESPP been
determined based upon the fair value at the grant dates for awards under these
plans consistent with the method of SFAS No. 123, the Company's net loss and
loss per share would have been increased to the pro forma amounts indicated
below (in thousands except per share data):
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
Net loss:
As reported ................................... $ (130,105) $ (55,954)
Pro forma ..................................... $ (134,255) $ (57,388)
Primary and fully diluted loss per share:
As reported ................................... $ (2.00) $ (0.99)
Pro forma ..................................... $ (2.06) $ (1.02)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model using the following
weighted-average assumptions:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
---------- ----------
Weighted average risk free interest rates .......... 6.33% 6.30%
Expected dividend yield ............................ 0% 0%
Expected volatility ................................ 50% 0%
Expected lives (in years) .......................... 7.5 7.5
The Black-Scholes option pricing model requires the input of highly
subjective assumptions and does not necessarily provide a reliable measure of
fair value.
F-16
55
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCK-BASED COMPENSATION PLANS - (CONTINUED):
Options granted, exercised and canceled under the above MISOP are
summarized as follows (in thousands, except pricing information):
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
average average average
Shares price Shares price Shares price
----------- ------------- ---------- ------------- ----------- ------------
Outstanding, beginning of period...... 3,538 $8.02 2,182 $5.15 760 $2.51
Options granted....................... 1,139 12.54 1,453 12.15 1,113 8.08
Options issued for conversion of
unvested MCLP B units............. 322 1.10
Options exercised..................... (384) 2.28 (39) 2.02
Options canceled...................... (128) 12.06 (58) 7.73 (13) 1.82
----------- ------------- ---------- ------------- ----------- ------------
Outstanding, end of the period 4,165 $9.65 3,538 $8.02 2,182 $5.15
=========== ============= ========== ============= =========== ============
Exercisable, end of period 1,877 $6.36 1,582 $3.69 1,383 $2.54
The weighted average fair value price per option outstanding at
December 31, 1996 was $9.79.
The following table summarizes information about fixed price stock
options outstanding at December 31, 1996:
Options outstanding Options exercisable
------------------------------------------------------ ------------------------
Weighted Weighted
average Weighted average
Range of Number remaining average Number exercise
exercise prices outstanding contractual life exercise price exercisable price
- ------------------------ ------------- ---------------- --------------- ----------- ------------
$ 1.10 - $ 4.03 1,094 6 years $ 2.67 1,030 $ 2.77
$ 9.68 - $ 11.29 1,393 8 years $ 10.47 654 $ 10.11
$ 12.90 - $ 12.90 684 9 years $ 12.90 193 $ 12.90
$ 13.88 - $ 16.13 994 10 years $ 13.98
- ---------- ------------- ------------- ---------------- --------------- ----------- ----------
$ 1.10 - $ 16.13 4,165 8 years $ 9.65 1,877 $ 6.36
- ---------- ------------- ------------- ---------------- --------------- ----------- ----------
During the first quarter of 1997, the Company's Board of Directors
approved a restricted stock plan for certain executives of the Company. The
Board approved the reservation of 500,000 shares for this plan which is
effective January 1, 1997. During the month of January 1997, 95,000 shares were
granted.
F-17
56
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. ACQUISITIONS AND DISPOSITIONS:
The following table summarizes the cellular market acquisitions of the
Company for each of the three years ended December 31, 1996 (in thousands):
1996 1995 1994
--------------- -------------- -------------
Market
Fargo, ND MSA ...................................................... January
North Dakota 3 RSA.................................................. January
Kansas 3 RSA........................................................ June
Kansas 14 RSA....................................................... April
South Dakota 3 RSA.................................................. May
Kansas 8 RSA........................................................ May
South Dakota 1 RSA (a).............................................. December
Nevada 5 RSA ....................................................... January
South Dakota 8 RSA.................................................. April
Nebraska 3 RSA...................................................... August
Kansas 4, 9 and 10 and Missouri 9 RSAs.............................. November
Minnesota 3 RSA..................................................... December
Purchase price including cash and liabilities assumed:
Cash paid........................................................... $ 35,600 $ 38,600 $ 40,800
=============== ============== =============
Liabilities assumed................................................. $ 0 $ 500 $ 2,500
=============== ============== =============
(a) 217,000 shares of common stock were issued at $11.29 per share as part of
the South Dakota 1 RSA acquisition.
With the exception of the South Dakota 1 RSA and the South Dakota 8 RSA
acquisitions which were stock purchases, the above transactions were asset
purchases. All of these transactions were accounted for using the purchase
method. Significantly all of the total purchase price of each acquisition has
been allocated to licensing costs. Acquisitions of additional minority interests
in owned markets are not reflected above. The results of operations of the
properties acquired are included in the Consolidated Statement of Operations
from the date of acquisition.
In June 1996, the Company purchased a Denver MTA PCS wireless license
for $66.1 million. This transaction was accounted for as an asset purchase.
Exchanges:
In July 1995, the Company exchanged its cellular assets in certain
Minnesota markets, and its ownership interests in three other markets and $3.0
million in cash for the cellular assets and license for the Lubbock, TX MSA
market. There was no gain or loss recognized on the transaction.
In November 1994, the Company exchanged the assets in Hood River Cellular
Telephone Company, a subsidiary of the Company, which included the cellular
licenses of the Oregon 2 and Washington 7 RSA markets, in return for the assets
and license in the Pueblo, CO MSA market and approximately $2.4 million in cash.
There was no gain or loss recognized on the transaction.
F-18
57
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. ACQUISITIONS AND DISPOSITIONS - (CONTINUED):
In July 1994, a subsidiary of the Company exchanged its Chico, CA MSA
market for the Texas 3 and Texas 8 RSA markets. As part of the same agreement, a
subsidiary of the Company obtained the Sioux City, IA MSA market and
approximately $4.5 million in cash. As a result of the transaction, a gain of
approximately $2.9 million was recognized.
Dispositions:
In April 1994, the assets of Lawton Cellular License Corporation, a
subsidiary of the Company, were sold including the cellular license for the
Lawton, OK MSA market for approximately $7.3 million in cash and marketable
securities. As a result of the transaction, the Company recorded a gain of
approximately $3.3 million.
The following table reflects the operating results of the above 1995
and 1994 transactions since the effective date of the transactions. Pro forma
unaudited consolidated operating results of the Company and the above
transactions (including the acquisition of MCLP which is discussed in Note 12)
for the years ended December 31, 1995 and 1994, assuming the acquisitions and
dispositions, had been made as of January 1, 1994, are summarized below (in
thousands, except per share amounts):
Year ended
December 31,
-----------------------
1995 1994
---- ----
Revenues................................................................... $149,547 $ 89,945
======== ========
Loss before extraordinary item............................................. $(49,840) $(44,043)
Extraordinary loss......................................................... (6,645)
-------- --------
Net loss........................................................... $(56,485) $(44,043)
======== ========
Loss per common share before extraordinary item............................ $ (0.88) $ (1.00)
Per common share effect of extraordinary item.............................. (0.12)
-------- --------
Net loss per common share.......................................... $ (1.00) $ (1.00)
======== ========
These pro forma results have been prepared for comparative purposes
only and include certain adjustments such as additional depreciation and
amortization expense resulting from allocating a portion of the purchase price
to fixed and wireless assets, and increased interest expense. They do not
purport to be indicative of the results of operations which actually would have
resulted had the combinations been in effect on January 1, 1994 or of future
results of operations of the consolidated entities.
12. ACQUISITION OF MARKETS CELLULAR LIMITED PARTNERSHIP:
On July 29, 1994 the Company acquired MCLP in the Business Combination
in exchange for 18,160,643 shares of common stock of the Company. The Business
Combination was accounted for using the purchase method.
The purchase price of MCLP was determined as follows (in thousands):
Fair value of shares issued to non-GCC interests ....................... $ 70,918
GCC's investments in MCLP .............................................. 8,250
MCLP's long-term debt assumed .......................................... 59,590
Transaction fees and other ............................................. 1,310
===========
$ 140,068
===========
The purchase price was allocated as follows (in thousands):
Cash acquired .......................................................... $ 11,726
Working capital and tangible assets acquired ........................... 37,346
Licenses and other intangible assets ................................... 90,996
===========
$ 140,068
===========
F-19
58
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. ACQUISITION OF MARKETS CELLULAR LIMITED PARTNERSHIP- (CONTINUED):
The following unaudited pro forma information presents the results of
operations of the Company as if the Business Combination occurred on January 1,
1994. These results include certain adjustments to conform with the Company's
accounting policies, increased amortization expense and the elimination of the
provision for nonrecurring restructuring costs related to the Business
Combination. These results are not necessarily indicative of the results that
actually would have been attained if the Business Combination had been in effect
at the beginning of 1994 or which may be attained in the future (in thousands,
except per share data):
YEAR ENDED
DECEMBER 31,
1994
-----------
(unaudited)
Revenues:
Subscriber revenues .......................... $ 47,410
Roamer revenues .............................. 19,985
Equipment sales .............................. 9,207
-----------
Total revenues .......................... 76,602
-----------
Operating expenses:
Cost of service .............................. 15,961
Cost of equipment sales ...................... 13,758
General and administrative ................... 18,600
Sales and marketing .......................... 23,099
Depreciation and amortization ................ 33,389
-----------
Total operating expenses ................ 104,807
-----------
Operating loss ................................... (28,205)
Other income (expense):
Interest and financing expense ............... (13,113)
Gain on dispositions, net .................... 6,202
Other income (expense) ....................... 657
===========
Net loss ................................ $ (34,459)
===========
Net loss per common share ........................ $ (0.66)
===========
F-20
59
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED):
Selected quarterly consolidated financial information for the years
ended December 31, 1996 and 1995 is as follows (in thousands, except per share
data):
LOSS BEFORE
LOSS BEFORE EXTRAORDINARY NET LOSS
TOTAL OPERATING EXTRAORDINARY ITEM PER PER COMMON
QUARTER ENDED REVENUES LOSS ITEM NET LOSS COMMON SHARE SHARE
- -------------------------- ----------- ------------ ------------ -------------- ----------- -----------
March 31, 1995 $ 26,084 $ (7,766) $ (12,463) $ (12,463) $ (0.24) $ (0.24)
June 30, 1995 $ 34,613 $ (4,023) $ (10,145) $ (16,790) $ (0.19) $ (0.31)
September 30, 1995 $ 42,120 $ (3,749) $ (11,135) $ (11,135) $ (0.19) $ (0.19)
December 31, 1995 $ 43,738 $ (8,397) $ (15,566) $ (15,566) $ (0.25) $ (0.25)
March 31, 1996 $ 46,035 $ (10,505) $ (18,574) $ (18,574) $ (0.31) $ (0.31)
June 30, 1996 $ 58,569 $ (13,158) $ (21,596) $ (21,596) $ (0.35) $ (0.35)
September 30, 1996 $ 67,339 $ (27,489) $ (38,605) $ (38,605) $ (0.56) $ (0.56)
December 31, 1996 $ 71,142 $ (35,734) $ (51,330) $ (51,330) $ (0.74) $ (0.74)
14. RELATED PARTY TRANSACTIONS:
In connection with the 2006 Notes and equity offerings during the second
quarter of 1996, the Company paid total underwriting fees of approximately $23.3
million. In connection with the 2007 Notes during the third quarter of 1996, the
Company paid total underwriting fees of approximately $5.5 million. Goldman,
Sachs & Co., an affiliate of a shareholder of the Company, was the lead
underwriter on each offering.
F-21
60
WESTERN WIRELESS CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS
(Dollars in thousands)
Balance at Charged to Charged to
beginning of costs and other Deductions Balance at
Description period expenses accounts (1) (2) end of period
----------- ---------------- ---------------- ---------------- ---------------- ----------------
Year ended December 31, 1996 $ 2,800 $ 9,091 $ (624) $ (7,001) $ 4,266
================ ================ ================ ================ ================
Year ended December 31, 1995 $ 1,772 $ 4,558 $ 892 $ (4,422) $ 2,800
================ ================ ================ ================ ================
Year ended December 31, 1994 $ 476 $ 1,885 $ 638 $ (1,227) $ 1,772
================ ================ ================ ================ ================
(1) Represents market acquisitions and dispositions, late fees and net fraud
credits given to customers
(2) Write-offs, net bad debt recovery.
S-1
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly causes this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 28, 1997
____________________
WESTERN WIRELESS CORPORATION
/s/ John W. Stanton
By_________________________________
John W. Stanton
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signatures Title
/s/John W. Stanton Chairman of the Board and Chief Executive Officer March 28,1997
__________________________ (Principal Executive Officer) Date: ______________
John W. Stanton
/s/Donald Guthrie March 28, 1997
__________________________ Vice Chairman and Chief Financial Officer Date: ______________
Donald Guthrie (Principal Financial Officer)
/s/Natashia Stoneman Press March 28, 1997
__________________________ Principal Accounting Officer Date: ______________
Nastashia Stoneman Press
/s/John L. Bunce, Jr. March 28, 1997
_________________________ Director Date: ______________
John L. Bunce, Jr.
/s/Mitchell R. Cohen March 28, 1997
__________________________ Director Date: ______________
Mitchell R. Cohen
/s/Terence O'Toole March 28, 1997
__________________________ Director Date: ______________
Terence O'Toole
/s/Jonathan M. Nelson March 28, 1997
__________________________ Director Date: ______________
Jonathan M. Nelson
62
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
3.1++ Amended and Restated Articles of Incorporation of the Registrant.
3.2++ Bylaws of the Registrant.
4.1* Indenture between Western Wireless Corporation and Harris Trust Company of
California, dated May 22, 1996
4.2** Indenture between Western Wireless Corporation and Harris Trust Company of
California, dated October 24, 1996
10.1++ Loan Agreement between Western PCS II Corporation and Northern
Telecom Inc., dated June 30, 1995
10.2++ PCS 1900 Project and Supply Agreement between Western PCS
Corporation and Northern Telecom Inc., dated June 30, 1995
10.3++ Purchase Agreement between Motorola Nortel Communications Co. and General
Cellular Corporation, dated July 29, 1993
10.4++ Loan Agreement among Western Wireless Corporation and The
Toronto-Dominion Bank, Barclays Bank, PLC, and Morgan Guaranty
Trust Company of New York, as Managing Agents for the Various
Lenders, dated June 30, 1995
10.5++ First Amendment to Loan Agreement by and among Western
Wireless Corporation, The Toronto-Dominion Bank, Barclays
Bank, PLC, and Morgan Guaranty Trust Company of New York, as
Managing Agents for the Various Lenders, dated January 11,
1996
10.6++ Supply Contract by and between Western PCS Corporation and
Nokia Telecommunications Inc., dated December 14, 1995
10.7++ Purchase and Sale Agreement, Nokia Mobile Phones, Inc. and Western Wireless
Corporation, dated November 10, 1995
10.8++ Western Wireless Corporation, 1994 Management Incentive Stock
Option Plan, approved, as adopted and amended, by Shareholders
November 16, 1995 together with form of Stock Option Agreement
for offers thereunder
10.9++ Stockholders Agreement by and among Western Wireless Corporation and
certain of its shareholders, dated July 29, 1994
10.10++ First Amendment to Stockholders Agreement by and among Western
Wireless Corporation and certain of its shareholders, Adding
as a Party Western PCS Corporation, dated November 30, 1994
10.11++ Waiver Agreement by and among Western Wireless Corporation,
Western PCS Corporation and certain of Western Wireless
Corporation's shareholders, dated November 30, 1994
10.12++ Waiver Agreement by and among Western Wireless Corporation,
Western PCS Corporation and certain of Western Wireless
Corporation's shareholders, dated February 15, 1996
10.13++ Voting Agreement by and among Western Wireless Corporation and certain of
its shareholders
10.14++ Lease Agreement by and between WWC Holding Co., Inc.,
successor in interest to MARKETS Cellular Limited Partnership,
and WRC Properties, Inc., dated May 1, 1994
10.15++ Lease Agreement by and between Western Wireless Corporation
and Department of Natural Resources, dated August 25, 1995
10.16++ First Amendment to Lease Agreement by and between Western Wireless
Corporation and Department of Natural Resources, dated February 28, 1996
10.17++ Form of Cellular One Group License Agreement
10.18++ Asset Purchase Agreement between Western PCS III License
Corporation as Buyer and GTE Mobilnet Incorporated as Seller,
dated January 16, 1996
10.19++ Purchase and Sale Agreement by and between Robert O. Tyler, Esq., as
Trustee, Seller, and GCC License Corporation, Purchaser, dated December 22, 1995
10.20++ Agreement for Purchase and Sale of Autoplex Cellular
Equipment, Software and Services by and among American
Telephone and Telegraph Company, WWC Holding Co., Inc.,
successor to MARKETS Cellular Limited Partnership and MCII
General Partnership, dated March 17, 1993
10.21++ Agreement and Plan of Reorganization by and among Palouse
Paging, Inc., the Shareholders of 100% of the Stock of Palouse
Paging, Inc., Western Paging I Corporation and Western
Wireless Corporation, dated February 5, 1996
63
\
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
10.22++ First Amendment to Agreement and Plan of Reorganization by and among
Western Paging I Corporation, the former Shareholders of 100% of the
Stock of Palouse Paging, Inc. and Western Wireless Corporation
10.23++ Agreement and Plan of Reorganization by and among Sawtooth Paging,
Inc., the Shareholders of 52.93% of the Stock of Sawtooth Paging, Inc.,
Western Paging II Corporation and Western Wireless Corporation, dated
February 5, 1996
10.24++ Employment Agreement by and between John W. Stanton and Western
Wireless Corporation, dated March 12, 1996
10.25++ Employment Agreement by and between Robert R. Stapleton and Western
Wireless Corporation, dated March 12, 1996
10.26++ Employment Agreement by and between Mikal J. Thomsen and Western
Wireless Corporation, dated March 12, 1996
10.27++ Employment Agreement by and between Theresa E. Gillespie and Western
Wireless Corporation, dated March 12, 1996
10.28 Employment Agreement by and between Donald Guthrie and Western Wireless
Corporation, dated March 12, 1996
10.29++ Form of Registrant's Restrictive Covenant and Confidentiality Agreement
10.30++ Form of Director and Officer Indemnification Agreement
10.31++ Western PCS Corporation Series A Preferred Stock Purchase Agreement
among Western Wireless Corporation, Western PCS Corporation
and the Purchasers listed therein, dated April 10, 1995
10.32 Intentionally omitted
10.33++ PCS Block "C" Organization and Financing Agreement by and
among Western PCSBTA I Corporation, Western Wireless
Corporation, Cook Inlet PV/SS PCS Partners, L.P., Cook Inlet
Telecommunications, Inc., SSPCS Corporation and Providence
Media Partners L.P. dated as of November 5, 1995
10.34++ Limited Partnership Agreement by and between Cook Inlet PV/SS PCS
Partners, L.P. and Western PCS BTA I Corporation dated as of November
5, 1995
10.35++ First Amendment to Block "C" Organization and Financing
Agreement and Cook Inlet Western Wireless PV/SS PCS, L.P.
Limited Partnership Agreement by and among Western PCS BTA I
Corporation, Western Wireless Corporation, Cook Inlet PV/SS
PCS Partners, L.P., Cook Inlet Telecommunications, Inc.,
SSPCS Corporation and Providence Media Partners L.P. dated
as of April 8, 1996
10.36++ Amended and Restated Loan Agreement among Western Wireless
Corporation and The Toronto-Dominion Bank, Barclays Bank,
PLC, and Morgan Guaranty Trust Company of New York, as
Managing Agents for the Various Lenders, dated May 6, 1996
10.37** Second Amendment to Block "C" Organization and Financing Agreement and
Cook Inlet Western Wireless PV/SS PCS, L.P. Limited Partnership
Agreement by and among Western PCS BTA I Corporation, Western Wireless
Corporation, Cook Inlet PV/SS PCS Partners, L.P., Cook Inlet
Telecommunications, Inc., SSPCS Corporation and Providence Media
Partners L.P. dated as of June 27, 1996
10.38** Third Amendment to Block "C" Organization and Financing Agreement and
Cook Inlet Western Wireless PV/SS PCS, L.P. Limited Partnership
Agreement and First Amendment to Technical Services Agreement by and
among Western PCS BTA I Corporation, Western Wireless Corporation, Cook
Inlet PV/SS PCS Partners, L.P., Cook Inlet Telecommunications, Inc.,
SSPCS Corporation, Providence Media Partners L.P. and Cook Inlet
Western Wireless PV/SS PCS, L.P., dated July 30, 1996
10.39** General Agreement for Purchase of Cellular Systems between Lucent
Technologies Inc. and Western Wireless Corporation, dated September 16,
1996
10.40** Amendment No. 1 to PCS 1900 Supply Agreement between Western PCS
Corporation and Northern Telecom Inc., dated July 25, 1996
10.41** Amendment No. 2 to PCS 1900 Supply Agreement between Western PCS
Corporation and Northern Telecom Inc., dated July 25, 1996
10.42+ Amendment No. 3 to PCS Supply Agreement between Western PCS Corporation
and Northern Telecom Inc., dated October 14, 1996
10.43+++ Western Wireless Corporation 1996 Employee Stock Purchase Plan
21.1++ Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
- --------------------
* Incorporated herein by reference to the exhibit filed with the
Company's Registration Statement on Form S-1 (Commission File No.
333-2688).
** Incorporated herein by reference to the exhibit filed
with the Company's Registration Statement on Form S-4 (Commission File
No. 333-14859).
+ Portions of this exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 406 of the Act.
++ Incorporated herein by reference to the exhibit filed with the
Company's Registration Statement on Form S-1 (Commission File No.
333-2432).
+++ Incorporated herein by reference to the exhibit filed with the
Company's Registration Statement on Form S-8 (Commission File No.
333-18137)