-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q6G5pF6TmF+yR4JdD3jbjvU+Gwpknmv/aTUDwhJvKlHO2Ec+V/9MjJxVNzFdelJ8 3EyNTtWm5VYZ1tfvYGfnjg== 0000891020-97-001130.txt : 19970814 0000891020-97-001130.hdr.sgml : 19970814 ACCESSION NUMBER: 0000891020-97-001130 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN WIRELESS CORP CENTRAL INDEX KEY: 0000930738 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 911638901 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-14859 FILM NUMBER: 97658666 BUSINESS ADDRESS: STREET 1: 2001 NW SAMMAMISH RD CITY: ISSAQUAH STATE: WA ZIP: 98027 BUSINESS PHONE: 2063135200 MAIL ADDRESS: STREET 1: 2001 NW SAMMAMISH RD CITY: ISSAQUAH STATE: WA ZIP: 98027 424B3 1 PROSPECTUS SUPPLEMENT 1 Prospectus Supplement Filed under Rule 424(b)(3) Registration Number 333 - 14859 PROSPECTUS SUPPLEMENT NO. 3 TO PROSPECTUS DATED MAY 1, 1997 ----------------------------- [LOGO] WESTERN WIRELESS CORPORATION CLASS A COMMON STOCK (NO PAR VALUE PER SHARE) 10-1/2% SENIOR SUBORDINATED NOTES DUE 2006 10-1/2% SENIOR SUBORDINATED NOTES DUE 2007 SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE CLASS A COMMON STOCK, 10-1/2% SENIOR SUBORDINATED NOTES DUE 2006 OR 10-1/2% SENIOR SUBORDINATED NOTES DUE 2007. The Class A Common Stock is quoted on the Nasdaq National Market under the symbol "WWCA." ----------------------------- EACH OF THE 10-1/2% SENIOR SUBORDINATED NOTES DUE 2006 (THE "2006 NOTES") AND THE 10-1/2% SENIOR SUBORDINATED NOTES DUE 2007 (THE "2007 NOTES," AND, TOGETHER WITH THE 2006 NOTES, THE "SENIOR SUBORDINATED NOTES") ARE SENIOR UNSECURED OBLIGATIONS OF THE COMPANY AND ARE SUBORDINATED IN RIGHT OF PAYMENT TO THE PRIOR PAYMENT IN FULL OF ALL SENIOR INDEBTEDNESS AND SENIOR IN RIGHT OF PAYMENT TO ANY CURRENT OR FUTURE SUBORDINATED INDEBTEDNESS OF THE COMPANY. IN ADDITION, ALL EXISTING AND FUTURE INDEBTEDNESS AND OTHER LIABILITIES OF THE COMPANY'S SUBSIDIARIES WILL BE EFFECTIVELY SENIOR IN RIGHT OF PAYMENT TO THE SENIOR SUBORDINATED NOTES. THE 2006 NOTES AND THE 2007 NOTES RANK PARI PASSU WITH ONE ANOTHER. THE COMPANY HAS NOT ISSUED, AND DOES NOT HAVE ANY FIRM ARRANGEMENT TO ISSUE, ANY SIGNIFICANT INDEBTEDNESS TO WHICH THE SENIOR SUBORDINATED NOTES WOULD BE SENIOR. AT JUNE 30, 1997, SENIOR INDEBTEDNESS AGGREGATED APPROXIMATELY $1,065 MILLION. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------------------------- This Prospectus has been prepared for and is to be used by Goldman, Sachs & Co. in connection with offers and sales of the shares of Class A Common Stock, the 10-1/2% Senior Subordinated Notes Due 2006 and the 10-1/2% Senior Subordinated Notes Due 2007 related to market-making transactions, at prevailing market prices, related prices or negotiated prices. The Company will not receive any of the proceeds of such sales. Goldman, Sachs & Co. may act as principal or agent in such transactions. See "Plan of Distribution." GOLDMAN, SACHS & CO. ----------------------------- The date of this Prospectus Supplement is August 13, 1997. 2 This Prospectus Supplement is intended to be read in conjunction with the Prospectus dated May 1, 1997 (the "Prospectus"), as supplemented by Prospectus Supplement No. 1 thereto dated May 9, 1997 ("Prospectus Supplement No. 1") and Prospectus Supplement No. 2 thereto dated June 19, 1997 ("Prospectus Supplement No. 2"), with respect to the Class A Common Stock, 10-1/2% Senior Subordinated Notes Due 2006 and 10-1/2% Senior Subordinated Notes Due 2007. Capitalized terms used in this Prospectus Supplement and not otherwise defined herein have the same meanings as in the Prospectus. On May 9, 1997, the Company filed with the Securities and Exchange Commission a report on Form 10-Q, a copy of which is attached to Prospectus Supplement No. 1. On June 19, 1997, the Company filed with the Securities and Exchange Commission a report on Form 8-K, a copy of which is attached to Prospectus Supplement No. 2. On August 13, 1997, the Company filed with the Securities and Exchange Commission a report on Form 10-Q, a copy of which is attached hereto and deemed to be a part hereof. 3 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 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) (425) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title Shares Outstanding as of August 1, 1997 - -------------------------------------------------------------------------------- Class A Common Stock, no par value 15,935,421 Class B Common Stock, no par value 54,111,048 Page 1 of 23 sequentially numbered pages 4 WESTERN WIRELESS CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 TABLE OF CONTENTS
Page PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of June 30, 1997, and December 31, 1996..........................3 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1997 and June 30, 1996..4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and June 30, 1996............5 Notes to Consolidated Financial Statements..........................6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................11 PART II - OTHER INFORMATION.................................................21 ITEM 1. LEGAL PROCEEDINGS..................................................21 ITEM 2. CHANGES IN SECURITIES..............................................21 ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................21 ITEM 5. OTHER INFORMATION..................................................22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................22
2 5 WESTERN WIRELESS CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited)
June 30, December 31, 1997 1996 ---------- ----------- ASSETS Current assets: Cash and cash equivalents ........................................................... $ 16,276 $ 54,885 Accounts receivable, net of allowance for doubtful accounts of $6,348 and $4,266, respectively .............................................. 35,424 28,958 Inventory ........................................................................... 26,478 26,138 Prepaid expenses and other current assets ........................................... 12,462 14,809 Deposit held by FCC ................................................................. 3,642 25,000 ----------- ----------- Total current assets ......................................................... 94,282 149,790 Property and equipment, net of accumulated depreciation of $160,181 and $107,685, respectively ............................................ 679,200 538,617 Licensing costs and other intangible assets, net of accumulated amortization of $63,741 and $55,363, respectively ................................. 599,125 540,482 Investments in and advances to unconsolidated affiliates ................................ 49,804 12,655 Other assets ............................................................................ 75 159 ----------- ----------- $ 1,422,486 $ 1,241,703 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .................................................................... $ 15,675 $ 14,122 Accrued liabilities ................................................................. 46,534 36,652 Construction accounts payable ....................................................... 60,265 89,583 Unearned revenue and customer deposits .............................................. 4,714 4,097 ----------- ----------- Total current liabilities .................................................... 127,188 144,454 ----------- ----------- Long-term debt .......................................................................... 1,065,000 743,000 ----------- ----------- Commitments (Note 8) 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, 15,891,577 and 14,540,691 shares issued and outstanding, respectively; Class B, 54,143,139 and 55,239,157 shares issued and outstanding, respectively ................................................ 571,272 569,278 Deferred compensation ............................................................... (1,547) (800) Deficit ............................................................................. (339,427) (214,229) ----------- ----------- Total shareholders' equity .................................................... 230,298 354,249 ----------- ----------- $ 1,422,486 $ 1,241,703 =========== ===========
See accompanying notes to consolidated financial statements 3 6 WESTERN WIRELESS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (Unaudited)
Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Revenues: Subscriber revenues ...................................... $ 71,003 $ 43,814 $ 127,688 $ 79,151 Roamer revenues .......................................... 8,873 9,114 15,567 15,871 Equipment sales and other revenues ....................... 10,766 5,641 18,947 9,582 ---------- ---------- ---------- ---------- Total revenues ...................................... 90,642 58,569 162,202 104,604 ---------- ---------- ---------- ---------- Operating expenses: Cost of service .......................................... 22,286 10,739 42,523 19,554 Cost of equipment sales .................................. 22,442 8,438 35,507 14,792 General and administrative ............................... 25,486 16,139 50,189 28,409 Sales and marketing ...................................... 32,496 18,587 57,021 32,078 Depreciation and amortization ............................ 33,201 17,824 59,622 33,434 ---------- ---------- ---------- ---------- Total operating expenses ............................ 135,911 71,727 244,862 128,267 ---------- ---------- ---------- ---------- Operating loss ................................................. (45,269) (13,158) (82,660) (23,663) ---------- ---------- ---------- ---------- Other income (expense): Interest and financing expense ........................... (23,148) (8,880) (40,508) (17,014) Equity in net loss of unconsolidated affiliates .......... (2,221) (13) (3,308) (53) Other, net ............................................... 613 455 1,278 560 ---------- ---------- ---------- ---------- Total other income (expense) ........................ (24,756) (8,438) (42,538) (16,507) ---------- ---------- ---------- ---------- Net loss ............................................ $(70,025) $(21,596) $(125,198) $ (40,170) ========== ========== ========== ========== Net loss per common share ...................................... $ (1.00) $ (0.35) $ (1.79) $ (0.66) ========== ========== ========== ========== Weighted average common shares and common equivalent shares outstanding ............................ 70,021,000 62,363,000 69,978,000 60,925,000 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements 4 7 WESTERN WIRELESS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Six months ended June 30, ------------------------- 1997 1996 --------- ---------- Operating activities: Net loss............................................................ $(125,198) $ (40,170) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .................................. 61,680 33,972 Employee equity compensation ................................... 658 725 Equity in net loss of unconsolidated affiliates ................ 3,308 53 Other, net ..................................................... 153 655 Changes in operating assets and liabilities, net of effects from consolidating acquired interests: Accounts receivable, net .................................. (6,466) (4,929) Inventory ................................................. (340) (10,957) Prepaid expenses and other current assets ................. 2,051 (3,241) Accounts payable .......................................... 1,553 (539) Accrued liabilities ....................................... 9,882 3,066 Unearned revenue and customer deposits .................... 617 814 -------- -------- Net cash used in operating activities .......................... (52,102) (20,551) -------- -------- Investing activities: Purchase of property and equipment .................................. (222,976) (89,825) Purchase of wireless licenses and other ............................. (53,412) (77,346) Acquisition of wireless properties, net of cash acquired ............ (849) (40,102) Investments in and advances to unconsolidated affiliates ............ (39,608) 2,478 Refund of deposit held by FCC ....................................... 7,749 1,500 -------- -------- Net cash used in investing activities .......................... (309,096) (203,295) -------- -------- Financing activities: Proceeds from issuance of common stock, net ......................... 589 234,949 Additions to long-term debt ......................................... 322,000 548,800 Payment of debt .................................................... (465,011) Deferred financing costs ........................................... (12,735) -------- -------- Net cash provided by financing activities ...................... 322,589 306,003 -------- -------- Change in cash and cash equivalents ....................................... (38,609) 82,157 Cash and cash equivalents, beginning of period ............................ 54,885 8,572 -------- -------- Cash and cash equivalents, end of period .................................. 16,276 90,729 ======== ========
See accompanying notes to consolidated financial statements 5 8 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 services ("PCS") systems. The Company has acquired seven PCS licenses covering seven Major Trading Areas ("MTAs"). The Company has initiated service in all seven MTAs, including the Denver MTA which initiated wireless services on May 1, 1997. During the first quarter of 1997, the Company was the high bidder on 100 additional PCS licenses in the Federal Communication Commission's ("FCC") D and E Block auctions, of which 95 have been granted as of June 30, 1997. Cook Inlet Western Wireless PV/SS PCS, LP ("Cook Inlet PCS") a partnership in which the Company holds a 49.9% limited partnership interest owns broadband PCS licenses in 21 Basic Trading Areas ("BTAs") including 7 that were acquired in the FCC F Block auction during the first quarter of 1997. Cook Inlet PCS initiated service in one of these in June 1997. The Company expects to incur significant operating losses and to generate negative cash flows from operating activities during the next several years while it expands its PCS systems and builds a PCS customer base. The accompanying interim consolidated financial statements and the financial information included herein are unaudited, but reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal, recurring nature. Results of operations for interim periods presented herein are not necessarily indicative of results of operations for the entire year. For further information, refer to the Company's annual audited financial statements and footnotes thereto for the year ended December 31, 1996, contained in the Company's Form 10-K dated March 28, 1997. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 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. Supplemental cash flow disclosure: Cash paid for interest (net of amounts capitalized) was $34.2 million and $19.6 million for the six months ended June 30, 1997 and 1996, respectively. Non-cash investing and financing activities were as follows (in thousands):
Six Months Ended June 30, ------------------------- 1997 1996 ---------- -------- Conversion of FCC deposit to wireless license................$ 13,609 Conversion of revolving debt to term debt.................... $200,000 Issuance of common stock in exchange for wireless properties. 7,117
6 9 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) 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 these licenses begins with the commencement of service to customers and is computed using the straight-line method over 40 years. 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 which have terms ranging from 9 to 10 years. Capitalized interest: During the three months ended June 30, 1997 and 1996, the Company had interest expense of $23.1 million and $8.9 million, respectively, net of capitalized interest in the amount of $1.0 million and $2.4 million, respectively, pertaining to the build out of its PCS markets. During the six months ended June 30, 1997 and 1996, the Company had interest expense of $40.5 million and $17.0 million, respectively, net of capitalized interest in the amount of $4.0 million and $2.4 million, respectively, pertaining to the build out of its PCS markets. Recently issued accounting standards: The Financial Accounting Standards Board ("FASB") has recently issued Statement No. 128 "Earnings Per Share", Statement No. 129 "Disclosure of Information about Capital Structure", Statement No. 130 "Reporting Comprehensive Income", and Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information". The Company does not expect implementation of these statements to have a material effect on the Company's financial statements. Reclassifications: Certain amounts in prior year's financial statements have been reclassified to conform to the 1997 presentation. Financial instruments: As required under the Credit Facility (as defined in Note 7), 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. In addition, the Company has historically held derivative financial instruments to maturity and has never recognized a gain or loss on disposal. It is the Company's intent to hold existing derivatives to maturity. 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. 7 10 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) 3. PROPERTY AND EQUIPMENT: Property and equipment consists of (in thousands):
JUNE 30, DECEMBER 31, 1997 1996 --------- ------------ Land, buildings and improvements......................... $ 11,724 $ 8,433 Wireless communications systems.......................... 630,597 370,628 Furniture and equipment.................................. 69,589 49,351 --------- --------- 711,910 428,412 Less accumulated depreciation............................ (160,181) (107,685) --------- --------- 551,729 320,727 Construction in progress................................. 127,471 217,890 --------- --------- $ 679,200 $ 538,617 ========= =========
Depreciation expense was $29.8 million and $12.0 million for the three months ended June 30, 1997 and 1996, respectively, and $53.0 million and $21.4 million for the six months ended June 30, 1997 and 1996, respectively. 4. LICENSING COSTS AND OTHER INTANGIBLE ASSETS: Licensing costs and other intangible assets consists of (in thousands):
JUNE 30, DECEMBER 31, 1997 1996 --------- ------------ Licensing costs.......................................... $ 629,056 $ 562,039 Other intangible assets.................................. 33,810 33,806 --------- --------- 662,866 595,845 Accumulated amortization................................. (63,741) (55,363) --------- --------- $ 599,125 $ 540,482 ========= =========
5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES: During the second quarter of 1997, the Company entered into two joint ventures. The first was to form Telcell Wireless LLC ("Georgia"). Georgia is a partner in Magticom Ltd. which owns a cellular license in the Republic of Georgia. The second joint venture entered into formed Icesco, Ltd. ("Iceland"). Iceland is the parent company to Icelandic Mobile Phone Company which owns a cellular license in Iceland. At June 30, 1997 and 1996 the Company's investment in Cook Inlet PCS was $28.1 million and $8.1 million, respectively. All other investments and advances to unconsolidated affiliates were $21.7 and $4.6 for the period ended June 30, 1997 and 1996, respectively. 6. ACCRUED LIABILITIES: Accrued liabilities consist of (in thousands):
JUNE 30, DECEMBER 31, 1997 1996 --------- ------------ Accrued payroll and benefits............................. $ 10,317 $ 11,192 Accrued interest expense................................. 14,534 10,265 Accrued taxes, other than income......................... 11,301 5,096 Other.................................................... 10,382 10,099 ======== ======== $ 46,534 $ 36,652 ======== ========
8 11 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) 7. LONG-TERM DEBT: Long-term debt consists of (in thousands):
JUNE 30, DECEMBER 31, 1997 1996 ---------- ------------- Credit Facility: Revolver ........................... $ 165,000 Term Loan .......................... 200,000 $ 200,000 10-1/2% Senior Subordinated Notes Due 2006 200,000 200,000 10-1/2% Senior Subordinated Notes Due 2007 200,000 200,000 NORTEL Facility .......................... 300,000 143,000 ---------- ---------- $1,065,000 $ 743,000 ========== ==========
The Company has a $950 million credit facility with a consortium of lenders (the "Credit Facility"), in the form of a $750 million revolving credit loan ("the Revolver") and a $200 million term loan (the "Term Loan"). In addition, a wholly owned subsidiary of the Company has a $300 million credit facility (the "NORTEL Facility") with Northern Telecom Inc. ("NORTEL"). At June 30, 1997, the unused portion of the Credit Facility was $585 million and the NORTEL Facility was fully drawn. The aggregate amounts of principal maturities of the Company's debt are as follows (in thousands): Six months ending December 31, 1997. $ 0 Year ending December 31, 1998 ..................................... 0 1999 ..................................... 0 2000 ..................................... 42,300 2001 ..................................... 94,450 Thereafter ............................... 928,250 ---------- $1,065,000 ==========
8. COMMITMENTS: Future minimum payments required under operating leases and agreements that have initial or remaining noncancellable terms in excess of one year as of June 30, 1997, are summarized below (in thousands): Six months ending December 31, 1997 $10,553 Year ending December 31, 1998...................................... 19,791 1999...................................... 17,933 2000...................................... 16,468 2001...................................... 11,909 Thereafter................................ 15,399 ------- $92,053 =======
Aggregate rental expense for all operating leases was approximately $7.2 million and $2.7 million for the three months ended June 30, 1997 and 1996, respectively, and $13.6 million and $4.9 million for the six months ended June 30, 1997 and 1996, respectively. 9 12 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) 8. 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 $453.6 million. At June 30, 1997, the Company has ordered approximately $249.1 million under all of these agreements, of which approximately $14.0 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. 9. SHAREHOLDERS' EQUITY: During the six months ended June 30, 1997, the Company issued 159,868 shares of its common stock and received $0.6 million of net proceeds as a result of employee stock options that were exercised. In January 1997, the Company granted 95,000 shares under its restricted stock plan. Compensation expense recognized related to these shares was approximately $0.5 million for the three months ended June 30, 1997, and $0.9 million for the six months ended June 30, 1997. 10. ACQUISITIONS AND DISPOSITIONS: On April 24, 1997, the Company and Triad Cellular Corporation, Triad Cellular L.P. and certain of their affiliates (collectively "Triad") entered into agreements whereby the Company has agreed to acquire from Triad the cellular business and assets of Triad in the Rural Service Areas ("RSAs") designated as Texas 1, 2, 4, and 5, Utah 3, 4 and 6, Oklahoma 7 and 8 and Minnesota 7, 8 and 9, for an aggregate purchase price of (i) approximately $180 million, subject to adjustment, plus (ii) 1,600,000 shares of the Company's Class A Common Stock, or, if a registration statement covering such shares of Class A Common Stock is not effective within 90 days after the date of acquisition of such assets, at the option of Triad, $20.0 million. In addition, the Company has entered into an agreement with Triad whereby the Company agrees to acquire from Triad their rights in and to certain PCS D and E Block licenses with respect to which Triad was the high bidder in the recently conducted FCC auctions, in Oklahoma City, OK, Enid, OK, Stillwater, OK, Ponca City, OK, Lubbock, TX, St. George, UT, Worthington, MN and Wilmer-Marshall, MN for an aggregate purchase price equal to the amounts paid through the closing to the FCC by Triad for such licenses. Triad's successful bids for such licenses aggregated approximately $4.8 million. The closing of each of the acquisitions is conditional upon the satisfaction of certain conditions, including obtaining all necessary FCC approvals. 10 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Statements contained in this Quarterly Report that are not based on historical fact are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The "Risk Factors" and cautionary statements identify important factors, among others, that could cause actual results to differ materially from those in the forward looking statements, where such factors are detailed in the Company's 1996 prospectuses, as amended, filed with the Securities and Exchange Commission. 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 and in the Company's annual report on Form 10-K for the year ended December 31, 1996. As a result of PCS operations, 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 June 30, 1997, the Company owns broadband personal communications services ("PCS") licenses in seven Major Trading Areas ("MTAs"), each of which has commenced commercial operations. During the first quarter of 1997, the Company was the high bidder on 100 additional PCS licenses in the Federal Communication Commission's ("FCC") D and E Block auctions, of which 95 have been granted as of June 30, 1997. During the second quarter of 1997, the Company converted a portion of the deposits held with the FCC into 20% of the consideration for these licenses as well as paid cash for the remainder of the purchase price. Cook Inlet Western Wireless PV/SS PCS, LP ("Cook Inlet PCS"), a partnership in which the Company holds a 49.9% limited partnership interest owns broadband PCS licenses in 21 Basic Trading Areas ("BTAs") including 7 that were acquired in the FCC F Block auction during the first quarter of 1997. The first of these BTAs commenced commercial operations in June 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 accounted for less than 2% of the Company's total revenues in 1996, which is expected to be the case throughout 1997. 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 revenues. 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 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. 11 14 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 and PCS EBITDA represents EBITDA from the Company's PCS operations. The Company expects a continued decline in consolidated EBITDA as it continues to develop, construct and operate 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. 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 first PCS system commenced operations during the first quarter of 1996. RESULTS OF OPERATIONS Results of Operations for the Three Months Ended June 30, 1997, Compared to the Three Months Ended June 30, 1996 The Company had 389,900 cellular subscribers at June 30, 1997, representing an increase of 38,700 or 11.0% from March 31, 1997. At June 30, 1996, the Company had 264,200 cellular subscribers representing a net increase of 25,000 or 10.5% from March 31, 1996. The Company had 74,400 PCS subscribers at June 30, 1997, representing an increase of 25,400 or 51.8% from March 31, 1997. The Company had 6,400 PCS subscribers at June 30, 1996, an increase of 4,200 or 191% from March 31, 1996. REVENUES
THREE MONTHS ENDED JUNE 30, ---------------------------------------- 1997 1996 ------------------- ------------------ CELLULAR PCS CELLULAR PCS -------- --- -------- --- (IN THOUSANDS) Subscriber revenues...... $58,490 $12,513 $43,109 $ 705 Roamer revenues.......... 8,873 9,114 Equipment sales.......... 3,012 6,357 3,304 1,213 Other revenues(1)........ 1,397 1,124 ------- ------- ------- ------ Total revenues...... $71,772 $18,870 $56,651 $1,918 ======= ======= ======= ======
---------- (1) Primarily revenue from paging services Cellular subscriber revenues increased to $58.5 million for the three months ended June 30, 1997, from $43.1 million for the three months ended June 30, 1996. This $15.4 million or 35.7% increase is primarily due to the growth in the number of subscribers partially offset by 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, declined 8.0% to $52.46 for the three months ended June 30, 1997, compared to $57.04 for the three months ended June 30, 1996. 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 for the three months ended June 30, 1997, were $12.5 million, representing operations in six of the Company's PCS MTAs for the entire three months and the Denver MTA for two months. PCS subscriber revenues for the three months ended June 30, 1996, were $0.7 million, primarily representing 12 15 operations in the Hawaii MTA. Average monthly PCS subscriber revenue per subscriber was $68.64 for the three months ended June 30, 1997, compared to $54.65 for the three months ended June 30, 1996. As the Company's PCS operations only began generating revenue during 1996, the year over year trend is not necessarily representative of future trends. Roamer revenues were $8.9 million for the three months ended June 30, 1997, compared to $9.1 million for the three months ended June 30, 1996, a decrease of $0.2 million or 2.6%. The decline in the Company's roamer revenues generally reflects the decline in rates charged by carriers between each other in the industry, offset by increased roaming traffic. Roamer revenues as a percentage of total cellular revenues declined to 12.4% for the three months ended June 30, 1997, from 16.1% for the three months ended June 30, 1996. While the Company expects total roamer minutes to continue to increase, further declines in the rates charged between carriers will limit roamer revenues in 1997. Cellular equipment sales, which consist primarily of handset sales, decreased to $3.0 million for the three months ended June 30, 1997, from $3.3 million for the three months ended June 30, 1996. This $0.3 million or 8.8% decrease is primarily due to a slight decrease in the average cellular handset sales price. PCS equipment sales were $6.4 million for the three months ended June 30, 1997, compared to $1.2 million for the three months ended June 30, 1996. This $5.2 million increase is due to the increase in handsets sold as a result of commercial operations in six of the Company's PCS MTAs during the entire second quarter of 1997 compared to only one for the entire second quarter of 1996. The higher revenue generated from PCS equipment sales as compared to cellular equipment sales is the result of a higher average selling price for PCS handsets of approximately $108 and $309 per handset sold for the three months ended June 30, 1997 and 1996, respectively. Other revenue, which consists primarily of paging revenues, were $1.4 million for the three months ended June 30, 1997, compared to $1.1 million for the three months ended June 30, 1996, primarily as a result of subscriber growth. OPERATING EXPENSES
THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------- 1997 1996 ---------------------------- --------------------------- CELLULAR PCS CELLULAR PCS -------- --- -------- --- (IN THOUSANDS) Cost of service........................... $ 11,406 $ 10,880 $ 9,570 $ 1,169 Cost of equipment sales................... 7,009 15,433 6,115 2,323 General and administrative................ 12,989 12,497 11,633 4,506 Sales and marketing....................... 15,342 17,154 12,813 5,774 Depreciation and amortization............. 16,674 16,527 16,389 1,435 ------------ ------------ ------------- ------------ Total operating expenses............. $ 63,420 $ 72,491 $ 56,520 $ 15,207 ============ ============ ============= ============
CELLULAR OPERATING EXPENSES Cost of service increased to $11.4 million for the three months ended June 30, 1997, from $9.6 million for the three months ended June 30, 1996. This increase is primarily attributable to the increased number of subscribers which resulted in increased costs to access local exchange and long distance carrier facilities and to maintain the Company's expanding wireless network. While cost of service increased $1.8 million or 19.2%, it decreased as a percentage of service revenues to 16.6% for the three months ended June 30, 1997, from 17.9% for the three months ended June 30, 1996, which is due primarily to efficiencies gained from the growing subscriber base. Cost of equipment sales increased to $7.0 million for the three months ended June 30, 1997, from $6.1 million for the three months ended June 30, 1996. This $0.9 million or 14.6% increase is due primarily to the 31.2% increase in handsets sold, offset by a decline in the cost of handsets, for the three months ended June 30, 1997, compared to the three months ended June 30, 1996. General and administrative costs increased to $13.0 million for the three months ended June 30, 1997, from $11.6 million for the three months ended June 30, 1996, an increase of $1.4 million or 11.7%. The 13 16 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 $15.3 million for the three months ended June 30, 1997, from $12.8 million for the three months ended June 30, 1996, primarily due to net subscriber additions. Sales and marketing costs per net subscriber added, excluding subscribers added from acquisitions, decreased to $396 for the three months ended June 30, 1997, from $499 for the three months ended June 30, 1996. This 20.6% decrease is primarily a result of reduced advertising and restructuring of sales compensation. Including the losses on equipment sales, the cost per net subscriber added decreased to $500 for the three months ended June 30, 1997, from $608 for the three months ended June 30, 1996. Depreciation expense increased to $14.6 million for the three months ended June 30, 1997, from $10.6 million for the three months ended June 30, 1996. This increase of $4.0 million or 37.7%, is attributable to the continued expansion of the Company's cellular systems. Amortization expense decreased to $2.1 million for the three months ended June 30, 1997, from $5.8 million for the three months ended June 30, 1996. This $3.7 million or 63.8% decrease is primarily attributable to the Company prospectively changing its amortization period for cellular licensing costs from 15 years to 40 years, effective January 1, 1997, to conform more closely with industry practices. PCS OPERATING EXPENSES Total PCS operating expenses were $72.5 million for the three months ended June 30, 1997, compared to $15.2 million for the three months ended June 30, 1996. This 377% increase is due to the fact that there were six PCS systems operational during the entire second quarter of 1997 while only one PCS system was operational during the entire second quarter of 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. Approximately $1.5 million of start-up costs was incurred for the three months ended June 30, 1997, compared to $6.8 million for the three months ended June 30, 1996. As the subscriber base continues to grow during 1997, the Company expects total operating expenses to increase. Accordingly, the PCS operating expenses are not representative of future operations. Cost of service expenses and cost of equipment sales represents the expenses incurred by the operational PCS systems. In addition to the six PCS MTAs that were operational during the entire second quarter of 1997, Denver was operational for two months of this quarter. Hawaii was the only operational market during the entire second quarter of 1996. Accordingly, cost of service increased to $10.9 million and cost of equipment sales increased to $15.4 million for the three months ended June 30, 1997, from $1.2 million and $2.3 million, respectively, for the three months ended June 30, 1996. General and administrative costs increased to $12.5 million for the three months ended June 30, 1997, from $4.5 million for the three months ended June 30, 1996, due to the costs associated with supporting the additional markets in which the Company has operations. Sales and marketing costs increased to $17.2 million for the three months ended June 30, 1997, from $5.8 million for the three months ended June 30, 1996, as a result of the increase in net subscriber additions. Depreciation expense and amortization expense increased to $15.2 million and $1.3 million, respectively, for the three months ended June 30, 1997, from $1.3 million and $.1 million, respectively, for the three months ended June 30, 1996. This increase is due to the increased number of operational systems in 1997 over 1996. OPERATING INCOME (LOSS)
THREE MONTHS ENDED JUNE 30, -------------------------------------- 1997 1996 ---------------- -------------- CELLULAR PCS CELLULAR PCS -------- --- -------- --- (IN THOUSANDS) Operating Income (loss)............. $ 8,352 $(53,621) $ 131 $(13,289) ======== ======== ======= ========
Although cellular operating income increased to $8.4 million for the three months ended June 30, 1997 from $.1 million for the three months ended June 30, 1996, total operating loss increased to $45.3 million for the 14 17 three months ended June 30, 1997, from $13.2 million for the three months ended June 30, 1996. This increase is primarily due to the increased operating loss attributable to PCS of $53.6 million for the three months ended June 30, 1997 from an operating loss of $13.3 million for the three months ended June 30, 1996. OTHER INCOME (EXPENSE) Interest and financing expense, net of capitalized interest, increased to $23.1 million for the three months ended June 30, 1997, from $8.9 million for the three months ended June 30, 1996. The increase of $14.3 million or 160.7%, is primarily attributable to an increase in long-term debt, which increased to $1,065 million at June 30, 1997, from $446.5 million at June 30, 1996, 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 the increased borrowings the Company has incurred, and will continue to incur, to fund its expansion. The weighted average interest rate before the effect of capitalized interest was 9.9% for the three months ended June 30, 1997, and 9.1% for the three months ended June 30, 1996. EBITDA
THREE MONTHS ENDED JUNE 30, ------------------------------------------- 1997 1996 ------------------ ---------------- CELLULAR PCS CELLULAR PCS -------- --- -------- --- (IN THOUSANDS) EBITDA................... $ 25,026 $ (37,094) $ 16,520 $ (11,854) ========= ========= ========= =========
EBITDA declined to negative $12.1 million for the three months ended June 30, 1997, from $4.7 million for the three months ended June 30, 1996, primarily due to the negative $37.1 million EBITDA attributable to PCS operations offset by an increase in cellular EBITDA. Cellular EBITDA increased 51.5% to $25.0 million for the three months ended June 30, 1997, from $16.5 million for the three months ended June 30, 1996, 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 36.4% for the three months ended June 30, 1997, from 31.0% for the three months ended June 30, 1996. Results of Operations for the Six Months Ended June 30, 1997, Compared to the Six Months Ended June 30, 1996 The Company had 389,900 cellular subscribers at June 30, 1997, representing an increase of 65,700 or 20.3% from December 31, 1996. At June 30, 1996, the Company had 264,200 cellular subscribers representing a net increase of 50,000 or 23.9% from December 31, 1995. For the six months ended June 30, 1996, the net number of cellular subscribers added through system acquisitions was approximately 4,700. The Company had 74,400 PCS subscribers at June 30, 1997, representing an increase of 38,900 or 109.6% from December 31, 1996. At June 30, 1996 the Company had 6,400 PCS subscribers. REVENUES
SIX MONTHS ENDED JUNE 30, ------------------------------------------- 1997 1996 ------------------ ---------------- CELLULAR PCS CELLULAR PCS -------- --- -------- --- (IN THOUSANDS) Subscriber revenues......... $ 107,872 $ 19,816 $ 78,297 $ 854 Roamer revenues............. 15,567 15,871 Equipment sales............. 5,917 10,356 5,999 1,633 Other revenues (1).......... 2,674 1,950 --------- -------- -------- ------- Total revenues......... $ 132,030 $ 30,172 $102,117 $ 2,487 ========= ======== ======== =======
---------- (1) Primarily revenue from paging services 15 18 Cellular subscriber revenues increased to $107.9 million for the six months ended June 30, 1997, from $78.3 million for the six months ended June 30, 1996. This $29.6 million or 37.8% increase is primarily due to the growth in the number of subscribers partially offset by 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, declined 7.2% to $50.69 for the six months ended June 30, 1997, compared to $54.60 for the six months ended June 30, 1996. 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 for the six months ended June 30, 1997, were $19.8 million, representing operations in six of the Companies PCS MTAs for the entire six months and the Denver MTA for two months. PCS subscriber revenues for the six months ended June 30, 1996, were $0.9 million, primarily representing operations in the Hawaii MTA. Average monthly PCS subscriber revenue per subscriber was $64.44 for the six months ended June 30, 1997, compared to $61.00 for the six months ended June 30, 1996. As the Company's PCS operations only began generating revenue during 1996, the year over year trend is not necessarily representative of future trends. Roamer revenues were $15.6 million for the six months ended June 30, 1997, compared to $15.9 million for the six months ended June 30, 1996, a decrease of $0.3 million or 1.9%. A decline in the Company's roamer revenues generally reflects the decline in rates charged by carriers between each other in the industry, offset by increased roaming traffic. Roamer revenues as a percentage of total cellular revenues declined to 11.8% for the six months ended June 30, 1997, from 15.5% for the six months ended June 30, 1996. While the Company expects total roamer minutes to continue to increase, further declines in the rates charged between carriers will limit roamer revenues in 1997. Cellular equipment sales, which consist primarily of handset sales, decreased to $5.9 million for the six months ended June 30, 1997, from $6.0 million for the six months ended June 30, 1996. This $0.1 million or 1.4% decrease is primarily due to a slight decrease in the average cellular handset sales price. PCS equipment sales were $10.4 million for the six months ended June 30, 1997, compared to $1.6 million for the six months ended June 30, 1996. This $8.7 million increase is due to the increase in handsets sold as a result of the commercial operations in six of the Company's PCS MTAs during the entire six months of 1997. The Company anticipates continued growth in equipment sales as a result of increases in cellular and PCS subscriber additions. The higher revenue generated from PCS equipment sales as compared to cellular equipment sales is the result of a higher average selling price for PCS handsets of approximately $125 and $226 per handset sold for the six months ended June 30, 1997 and 1996, respectively. Other revenue, which consists primarily of paging revenues, were $2.7 million for the six months ended June 30, 1997, compared to $2.0 million for the six months ended June 30, 1996. This increase is primarily due to the additional month of operations in 1997 as compared to 1996 due to the acquisition of paging operations in February of 1996. OPERATING EXPENSES
SIX MONTHS ENDED JUNE 30, ------------------------------------------- 1997 1996 ------------------ ---------------- CELLULAR PCS CELLULAR PCS -------- --- -------- --- (IN THOUSANDS) Cost of service..................$ 22,472 $ 20,051 $ 17,977 $ 1,577 Cost of equipment sales.......... 12,952 22,555 11,552 3,240 General and administrative....... 26,576 23,613 20,802 7,607 Sales and marketing.............. 27,397 29,624 23,817 8,261 Depreciation and amortization.... 32,598 27,024 31,549 1,885 =========== =========== =========== ========== Total operating expenses....$ 121,995 $ 122,867 $ 105,697 $ 22,570 =========== =========== =========== ==========
16 19 CELLULAR OPERATING EXPENSES Cost of service increased to $22.5 million for the six months ended June 30, 1997, from $18.0 million for the six months ended June 30, 1996. This increase is primarily attributable to the increased number of subscribers which resulted in increased costs to access local exchange and long distance carrier facilities and to maintain the Company's expanding wireless network. While cost of service increased $4.5 million or 25.0%, it decreased as a percentage of service revenues to 17.8% for the six months ended June 30, 1997, from 18.7% for the six months ended June 30, 1996, which is due primarily to efficiencies gained from the growing subscriber base. Cost of equipment sales increased to $13.0 million for the six months ended June 30, 1997, from $11.6 million for the six months ended June 30, 1996. This $1.4 million or 12.1% increase is due primarily to the 21.5% increase in handsets sold, offset by a decline in the cost of handsets, for the six months ended June 30, 1997, compared to the six months ended June 30, 1996. General and administrative costs increased to $26.6 million for the six months ended June 30, 1997, from $20.8 million for the six months ended June 30, 1996, an increase of $5.8 million or 27.8%. 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 $27.4 million for the six months ended June 30, 1997, from $23.8 million for the six months ended June 30, 1996, primarily due to net subscriber additions. Sales and marketing costs per net subscriber added, excluding subscribers added from acquisitions, decreased to $417 for the six months ended June 30, 1997, from $476 for the six months ended June 30, 1996. This 12.4% decrease is primarily a result of reduced advertising and restructuring of sales compensation. Including the losses on equipment sales, the cost per net subscriber added decreased to $524 for the six months ended June 30, 1997, from $587 for the six months ended June, 30 1996. Depreciation expense increased to $28.6 million for the six months ended June 30, 1997, from $19.8 million for the six months ended June 30, 1996. This increase of $8.8 million or 44.4%, is attributable to the continued expansion of the Company's cellular systems. Amortization expense decreased to $4.0 million for the six months ended June 30, 1997, from $11.7 million for the six months ended June 30, 1996. This $7.7 million or 65.8% decrease is primarily attributable to the Company prospectively changing its amortization period for cellular licensing costs from 15 years to 40 years, effective January 1, 1997, to conform more closely with industry practices. PCS OPERATING EXPENSES Total PCS operating expenses were $122.9 million for the six months ended June 30, 1997, compared to $22.6 million for the six months ended June 30, 1996. This 444% increase is due to the fact that there were six PCS systems operational for the entire six months ended June 30, 1997 while only one PCS system was operational during a significant portion of the six months ended June 30, 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. Approximately $3.9 million of start-up costs was incurred for the six months ended June 30, 1997, compared to $10.6 million for the six months ended June 30, 1996. As the subscriber base continues to grow during 1997, the Company expects total operating expenses to increase. Accordingly, the PCS operating expenses are not representative of future operations. Cost of service expenses and cost of equipment sales represents the expenses incurred by the operational PCS systems. In addition to the six PCS MTAs that were operational during the entire six months ended June 30, 1997, Denver was operational for two months of this period. Hawaii was the only operational PCS MTA during the majority of the six months ended June 30, 1996. Accordingly, cost of service increased to $20.1 million and cost of equipment sales increased to $22.6 million for the six months ended June 30, 1997, from $1.6 million and $3.2 million, respectively, for the six months ended June 30, 1996. General and administrative costs increased to $23.6 million for the six months ended June 30, 1997, from $7.6 million for the six months ended June 30, 1996, due to the costs associated with supporting the additional markets in which the Company has operations. Sales and marketing costs increased to $29.6 million for the six months ended June 30, 1997, from 17 20 $8.3 million for the six months ended June 30, 1996, as a result of the increase in net subscriber additions. Depreciation expense and amortization expense increased to $24.4 million and $2.6 million, respectively, for the six months ended June 30, 1997, from $1.6 million and $.3 million, respectively, for the six months ended June 30, 1996. This increase is due to the increased number of operational systems in 1997 over 1996. OPERATING INCOME (LOSS)
SIX MONTHS ENDED JUNE 30, ------------------------------------------- 1997 1996 ------------------ ---------------- CELLULAR PCS CELLULAR PCS -------- --- -------- --- (IN THOUSANDS) Operating Income (loss)....... $10,035 $ (92,695) $ (3,580) $ (20,083) ======= ========= ======== =========
Although cellular operating income increased to $10.0 million for the six months ended June 30, 1997 from an operating loss of $3.6 million for the six months ended June 30, 1996, total operating loss increased to $82.7 million for the six months ended June 30, 1997, from $23.7 million for the six months ended June 30, 1996. This increase is primarily due to the increased operating loss attributable to PCS of $92.7 million for the six months ended June 30, 1997 and from an operating loss of $20.1 million for the six months ended June 30, 1996. OTHER INCOME (EXPENSE) Interest and financing expense, net of capitalized interest, increased to $40.5 million for the six months ended June 30, 1997, from $17.0 million for the six months ended June 30, 1996. The increase of $23.5 million or 138.1%, is primarily attributable to an increase in long-term debt, which increased to $1,065 million at June 30, 1997, from $446.5 million at June 30, 1996, incurred primarily to fund the Company's capital expenditures associated with the build-out of the Company's PCS systems. Interest expense will increase in 1997 as a result of the increased borrowings the Company has incurred, and will continue to incur, to fund its expansion. The weighted average interest rate before the effect of capitalized interest was 10.1% for the six months ended June 30, 1997, and 8.5% for the six months ended June 30, 1996. EBITDA
SIX MONTHS ENDED JUNE 30, ------------------------------------------- 1997 1996 ------------------ ---------------- CELLULAR PCS CELLULAR PCS -------- --- -------- --- (IN THOUSANDS) EBITDA........................$ 42,633 $ (65,671) $ 27,969 $(18,198) ========== ========= ========= ========
EBITDA declined to negative $23.0 million for the six months ended June 30, 1997, from $9.8 million for the six months ended June 30, 1996, primarily due to the negative $65.7 million EBITDA attributable to PCS operations offset by an increase in cellular EBITDA. Cellular EBITDA increased 52.4% to $42.6 million for the six months ended June 30, 1997, from $28.0 million for the six months ended June 30, 1996, 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 33.8% for the six months ended June 30, 1997, from 29.1% for the six months ended June 30, 1996. LIQUIDITY AND CAPITAL RESOURCES 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. and a consortium of lenders. The NORTEL Facility was amended during the second quarter of 1997 to increase the amount of the facility from $200 million to $300 million. As of June 30, 1997, $365 million and $300 million were outstanding under the Credit Facility and the NORTEL Facility, respectively. The amount currently available at June 30, 1997, for borrowing under the Credit Facility was $185 million and the total unused portion of the Credit Facility was $585 million. Indebtedness under the Credit Facility and the NORTEL Facility matures on 18 21 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. On April 24, 1997, the Company and Triad Cellular Corporation, Triad Cellular L.P. and certain of their affiliates (collectively "Triad") entered into agreements whereby the Company has agreed to acquire from Triad the cellular business and assets of Triad in the Rural Service Areas ("RSAs") designated as Texas 1, 2, 4, and 5, Utah 3, 4 and 6, Oklahoma 7 and 8 and Minnesota 7, 8 and 9, for an aggregate purchase price of (i) approximately $180 million, subject to adjustment, plus (ii) 1,600,000 shares of the Company's Class A Common Stock, or, if a registration statement covering such shares of Class A Common Stock is not effective within 90 days after the date of acquisition of such assets, at the option of Triad, $20.0 million. In addition, the Company has entered into an agreement with Triad whereby the Company agrees to acquire from Triad their rights in and to certain PCS D and E Block licenses with respect to which Triad was the high bidder in the recently conducted FCC auctions, for an aggregate purchase price equal to the amounts paid through the closing to the FCC by Triad for such licenses. Triad's successful bids for such licenses aggregated approximately $4.8 million. Over the next six months the Company currently anticipates spending approximately $30.0 million to expand the initial build-out of its PCS MTA systems and to begin construction of the Seattle and Phoenix/Tucson BTA systems and approximately $14.6 million for the acquisition of the five remaining D and E Block PCS licenses for which it was the high bidder in the recently concluded FCC auction in 1997. The Company will also require approximately $185 million to complete the acquisition of Triad in the fourth quarter of 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 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 for the six months ended June 30, 1997, was $52.1 million. Adjustments to the $125.2 million net loss for such period to reconcile to net cash used in operating activities primarily included $61.7 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 $9.9 million in accrued liabilities and $6.5 million in accounts receivable, net, as a result of the increase in total revenues and $3.3 million increase in equity in net loss of unconsolidated affiliates as a result of increased activity in the Company's investments in international ventures as well as its investment in Cook Inlet PCS. Net cash used in operating activities was $20.6 million for the six months ended June 30, 1996. Net cash used in investing activities was $309.1 million for the six months ended June 30, 1997. Investing activities for such period consisted primarily of purchases of property and equipment of $223.0 million, of which $194.8 million was attributable to PCS capital expenditures, and purchase of wireless licenses of $53.4 million as a result of the PCS licenses purchased by the Company from the FCC's D and E Block auctions. Advances made to affiliates increased $39.6 million primarily due to a revolving loan agreement with Cook Inlet PCS and funding of international ventures partially offset by a $7.7 million refund of deposits held by the FCC. Net cash used in investing activities was $203.3 million for the six months ended June 30, 1996. Net cash provided by financing activities was $322.6 million for the six months ended June 30, 1997. Financing activities for such period consisted primarily of additions to long-term debt, which provided cash of $322.0 million. Net cash provided by financing activities was $306.0 million for the six months ended June 30, 1996. Cook Inlet PCS owns licenses in 21 PCS BTAs, 7 of which were acquired in the FCC F Block auction in the first quarter of 1997. Cook Inlet PCS is subject 19 22 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 license purchase prices. The potential sources of such additional funding include vendor loans, loans or capital contributions by the partners of the partnership or other third party financing. The Company funded the operations of the partnership during the six months ended June 30, 1997, and has entered into a loan agreement with the partnership whereby the Company agreed to provide a revolver/term loan to the partnership at an interest rate equal to the higher of fifteen percent or the London Interbank Offer Rate ("LIBOR") plus 5%. At June 30, 1997, the Company had advanced funds totaling $21.6 million to the partnership. 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 Credit Facility 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 its highest usage and revenue per subscriber during the summer months. The Company expects these trends to continue. 20 23 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 29, 1997, Western PCS BTA I Corporation, a wholly-owned subsidiary of the Company ("Western BTA"), received a civil investigative demand from the Department of Justice ("DOJ") requiring production of certain documents and responses to certain interrogatories in connection with the DOJ's investigation of bid rigging and market allocation for PCS licenses auctioned by the FCC. Western BTA understands that similar demands were issued to numerous other participants in the FCC PCS auctions. Western BTA believes that its conduct throughout the PCS auctions was consistent with all FCC regulations and applicable laws and intends to cooperate fully with the DOJ's investigative demand. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of shareholders of Western Wireless Corporation was held on May 21, 1997. (b) The following directors were elected to serve a one year term: John W. Stanton, John L. Bunce, Mitchell Cohen, Daniel J. Evans, Jonathan M. Nelson, and Terence O'Toole. (c) The following matters were voted upon at the meeting: 1. For the election of directors:
For Withheld --- -------- John W. Stanton 523,386,453 95,680 John L. Bunce 523,386,142 95,991 Mitchell L. Cohen 523,387,142 94,991 Daniel J. Evans 523,457,960 24,173 Jonathan M. Nelson 523,387,732 94,401 Terence M. O'Toole 523,387,742 94,391
2. Approval of the Company's 1996 Employee Stock Purchase Plan. For: 521,545,052 Against: 548,079 Withheld: 16,130 Broker Non-votes: 1,376,197 21 24 3. Approval of the Company's 1997 Executive Restricted Stock Plan. For: 521,446,389 Against: 609,727 Withheld: 33,145 Broker Non-votes: 1,376,197 4. Ratification of selection of Arthur Andersen LLP as the Company's independent public accounts for fiscal year 1997. For: 522,035,580 Against: 1,441,577 Withheld: 8,301 ITEM 5. OTHER INFORMATION None. ITEM 6. (a) Exhibit Description ------- ----------- 10.1 Second Amendment to Amended and Restated Loan Agreement by and among Western Wireless Corporation, various financial institutions, and The Toronto- Dominion Bank, Barclays Bank plc and Morgan Guaranty Trust Company of New York as Managing Agents dated May 28, 1997. 27.1 Financial Data Schedule 99.1 Current Report on Form 8-K dated June 19, 1997 (Item 5. Other Events) (b) Reports on Form 8-K Date of Report: June 19, 1997 22 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Western Wireless Corporation By s:\Donald Guthrie Donald Guthrie Chief Financial Officer Dated: August 13, 1997 -----END PRIVACY-ENHANCED MESSAGE-----