-----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, VSovJ7KrM/jBRooSSHA4gDqouafqrJixDRN5ecEPjHRbYO6lpjEUzzcwEs8O40UZ Yk8NgsfAeBAwIukT//LYiA== 0000891020-98-000428.txt : 19980330 0000891020-98-000428.hdr.sgml : 19980330 ACCESSION NUMBER: 0000891020-98-000428 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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: 10-K405 SEC ACT: SEC FILE NUMBER: 000-28160 FILM NUMBER: 98575623 BUSINESS ADDRESS: STREET 1: 2001 NW SAMMAMISH RD CITY: ISSAQUAH STATE: WA ZIP: 98027 BUSINESS PHONE: 4253135200 MAIL ADDRESS: STREET 1: 2001 NW SAMMAMISH RD CITY: ISSAQUAH STATE: WA ZIP: 98027 10-K405 1 FORM 10-K 1 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, 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 (IRS Employer Identification No.) of 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) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock 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. [X] 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 2, 1998, was $517,174,730. 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 March 2, 1998 Class A Common Stock, no par value 22,846,192 Class B Common Stock, no par value 52,963,811 DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the indicated parts of this Form 10-K: 1997 Annual Report - Part II. 1998 Proxy Statement - Part III. 2 WESTERN WIRELESS CORPORATION FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS PART I Item 1. BUSINESS.................................................................3 Item 2. PROPERTIES..............................................................20 Item 3. LEGAL PROCEEDINGS.......................................................20 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................20 EXECUTIVE OFFICERS OF THE REGISTRANT.....................................21 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................................................23 Item 6. SELECTED FINANCIAL DATA.................................................23 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................................23 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................23 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................23 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................24 Item 11. EXECUTIVE COMPENSATION.................................................24 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.........24 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................24 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K......25 SIGNATURES......................................................................30
2 3 CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE LITIGATION REFORM ACT OF 1995. Statements contained or incorporated by reference 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 an aggregate of 199 cellular and personal communications services ("PCS") licenses for a geographic area covering approximately 68.0 million persons (counting only once those persons that may be served by either cellular or PCS systems owned by the Company). In addition, Western Wireless is a partner in ventures owning 21 PCS licenses covering 13.0 million persons, some of which overlap licenses owned by the Company. Western Wireless' combined cellular and PCS licenses, together with the ventures in which it is a partner, cover approximately 59% of the land in the continental United States. In its consolidated cellular and wholly-owned PCS markets, the Company served 648,600 subscribers at December 31, 1997. 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 72 Rural Service Areas ("RSA") and 16 Metropolitan Statistical Areas ("MSA") with an aggregate population of approximately 7.3 million persons. The Company holds 7 Major Trading Area ("MTA") broadband PCS licenses and 104 Basic Trading Area ("BTA") broadband PCS licenses covering approximately 64.2 million persons. Each of the Company's operational PCS systems utilizes Global System for Mobile Communications ("GSM") technology as the network standard. GSM is the leading digital wireless standard worldwide, with systems operating in approximately 109 countries, including the United States, and serving over 66 million subscribers. Western Wireless is also engaged in activities related to its principal wireless communications business. The Company has interests in entities which own wireless licenses in certain foreign countries, including Ghana, Haiti, Iceland, and the Republics of Latvia and Georgia. In addition, the Company has interests in entities which have made wireless license applications in certain other foreign countries. During 1997, two of these ventures commenced operations. In addition, since their acquisition in February 1996, the Company has operated paging systems in eight western states and served 31,900 customers at December 31, 1997. 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. YEAR OF 1997 The Company has grown rapidly over the years with an average of 84% growth in revenues each year from 1994 through 1997. The Company continued its strong growth in 1997 as evidenced by the following landmarks. In January, the Company was the high bidder on 100 PCS licenses in the Federal Communication Commission's ("FCC") D and E Block auctions; all such licenses were granted and paid for in 1997. In May, Western Wireless commenced operations in Denver, the last of the Company's MTA licenses from the FCC's A block auction. In June, Cook Inlet Western Wireless PV/SS PCS, LP ("Cook Inlets PCS"), in which the Company holds a 49.9% interest, launched VoiceStream service in the Tulsa BTA, thus becoming the first C Block licensee to become operational in a major market. In October, Western Wireless acquired the business and assets of another wireless provider with operations contiguous to that of the Company. The acquisition added 12 cellular licenses, 8 PCS licenses and 58,500 cellular subscribers. In November, an affiliate of Hutchison Telecommunications Limited ("HTL") acquired $74 million of the Company's common stock in a private placement. During the 3 4 fourth quarter, the Company also announced joint ventures that will further expand the VoiceStream brand name in PCS markets in the western United States. The Company anticipates continued growth in 1998. In February 1998, the Company and HTL completed a transaction whereby HTL acquired a 19.9% interest in the Company's subsidiary which owns and operates its PCS licenses and markets for approximately $248 million. 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 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, excluding the effect of licenses acquired through business acquisitions. 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) construct and commence operations with high quality systems and extensive coverage in rural areas with its cellular systems and in urban areas with its PCS systems; (ii) continue to expand its operations through increased subscriber growth and usage; (iii) utilize its centralized management and back office functions to support the 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, offering a wide range of products and services at competitive prices, continually upgrading the quality of its network, establishing strong brand recognition, creating a strong sales and marketing program tailored to local markets and providing a superior level of customer service. The Company plans to continue to take advantage of opportunities to enter new markets at a relatively low cost, including international ventures. 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, 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 June 30, 1997, according to Cellular Telecommunications Industry Association ("CTIA") there were over 48.7 million wireless subscribers in the United States, representing a penetration rate of 18% and a growth of 10.6% from December 31, 1996. 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, --------------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- --------- Total Service Revenues (in billions) .... $ 10.9 $ 14.2 $ 19.0 $ 23.6 $ 27.6 Ending Wireless Subscribers (in millions).......................... 16.0 24.1 33.8 44.0 53.4 Subscriber Growth ....................... 45.1% 50.8% 40.0% 30.4% 21.4% Average Monthly Service Revenue per Subscriber ....................... $ 67.13 $ 59.08 $ 54.90 50.61 $ 47.23 Average Monthly Subscriber Revenue per Subscriber ....................... $ 58.74 $ 51.48 $ 47.59 $ 44.66 $ 42.09 Ending Penetration ...................... 6.2% 9.4% 13.0% 17.0% 19.6%
4 5 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. The following chart illustrates the growth in United States wireless subscribers through December 31, 1997 (subscribers at December 31, 1997 were derived from the data survey results published semi-annually by the CTIA):
U.S. WIRELESS SUBSCRIBERS (MILLIONS OF SUBSCRIBERS) 1984...................... 0.20 1985...................... 0.34 1986...................... 0.68 1987...................... 1.23 1988...................... 2.00 1989...................... 4.00 1990...................... 5.00 1992......................11.00 1993......................16.00 1994......................24.00 1995......................34.00 1996......................44.00 1997......................53.40
Source: Cellular Telecommunications Industry Association 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 concluded simultaneous auctions of the D, E and F Blocks in 1997. This portion of radio spectrum is to be used by PCS licensees to provide wireless communications services. PCS competes directly with existing cellular telephone, paging and specialized mobile radio services. PCS also includes features that are not generally offered by cellular providers, such as data transmissions to and from portable computers, advanced paging services and facsimile services. 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. 5 6 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"). 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 is often 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 is also true for PCS subscribers seeking to roam in a PCS service area served by operators using different technical standards. PCS systems 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. CELLULAR OPERATIONS The Company operates cellular systems in 72 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. See the financial results of the Company's cellular operations in the footnotes to the consolidated financial statements located in Part II of the Form 10-K. 6 7 CELLULAR MARKETS AND SYSTEMS The Company owns FCC licenses to provide wireless cellular communications services in 88 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-6) 29,000 100 29,000 --------- --------- California Total 29,000 29,000 --------- --------- Colorado Pueblo 134,000 100 134,000 Elbert (CO-5) 34,000 100 34,000 Saguache (CO-7) 50,000 100 50,000 Kiowa (CO-8) 48,000 100 48,000 Costilla (CO-9) 30,000 100 30,000 --------- --------- Colorado Total 296,000 296,000 --------- --------- Idaho Idaho (ID-2)(3) 80,000 100 80,000 --------- --------- Idaho Total 80,000 80,000 --------- --------- Iowa Sioux City 123,000 100 123,000 Monona (IA-8) 55,000 100 55,000 --------- --------- Iowa Total 178,000 178,000 --------- --------- Kansas Jewell (KS-3) 54,000 100 54,000 Marshall (KS-4) 137,000 100 137,000 Ellsworth (KS-8) 131,000 100 131,000 Morris (KS-9) 59,000 100 59,000 Franklin (KS-10) 110,000 100 110,000 Reno (KS-14) 177,000 100 177,000 --------- --------- Kansas Total 668,000 668,000 --------- --------- Minnesota Kittson (MN-1) 49,000 100 49,000 Lake of the Woods (MN-2-A1) 26,000 100 26,000 Chippewa (MN-7) 172,000 100 172,000 Lac qui Parie (MN-8) 68,000 100 68,000 Pipestone (MN-9) 133,000 100 133,000 --------- --------- Minnesota Total 448,000 448,000 --------- --------- Missouri Bates (MO-9) 81,000 100 81,000 --------- --------- Missouri Total 81,000 81,000 --------- --------- Montana Billings 131,000 98 128,000 Great Falls 82,000 100 82,000 Lincoln (MT-1) 158,000 100 158,000 Toole (MT-2) 37,000 100 37,000 Malta (MT-3) 16,000 100 16,000 Daniels (MT-4) 41,000 100 41,000 Mineral (MT-5) 194,000 100 194,000 Deer Lodge (MT-6) 66,000 100 66,000 Fergus (MT-7) 31,000 100 31,000 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 906,000 903,000 --------- --------- Nevada Humbolt (NV-1) 44,000 100 44,000 Lander (NV-2) 50,000 100 50,000 Mineral (NV-4) 38,000 100 38,000 White Pine (NV-5) 14,000 100 14,000 --------- --------- Nevada Total 146,000 146,000 --------- --------- New Mexico Lincoln (NM-6) 255,000 100 255,000 --------- --------- New Mexico Total 255,000 255,000 --------- --------- North Dakota Bismarck 95,000 100 95,000 Fargo 171,000 100 171,000 Grand Forks 106,000 100 106,000 Divide (ND-1) 106,000 100 106,000 Bottineau (ND-2) 62,000 100 62,000 McKenzie (ND-4) 63,000 100 63,000 Kidder (ND-5) 48,000 100 48,000 --------- --------- North Dakota Total 651,000 651,000 --------- --------- Oklahoma Beckham (OK-7) 133,000 100 133,000 Jackson (OK-8) 99,000 100 99,000 --------- --------- Oklahoma Total 232,000 232,000 --------- --------- South Dakota Rapid City 114,000 100 114,000 Sioux Falls 142,000 99 141,000 Harding (SD-1) 38,000 100 38,000 Corson (SD-2) 23,000 100 23,000 McPherson (SD-3) 54,000 100 54,000 Marshall (SD-4) 71,000 100 71,000 Custer (SD-5) 27,000 100 27,000 Haakon (SD-6) 41,000 100 41,000 Sully (SD-7) 67,000 100 67,000 Kingsbury (SD-8) 74,000 100 74,000 Harrison (SD-9) 100,000 100 100,000 --------- --------- South Dakota Total 751,000 750,000 --------- --------- Texas Abilene 157,000 100 157,000 Lubbock 237,000 100 237,000 Midland 121,000 96 116,000 Odessa 125,000 96 120,000 San Angelo 103,000 100 103,000 Dallam (TX-1) 56,000 100 56,000 Hansford (TX-2) 89,000 100 89,000 Parmer (TX-3) 139,000 100 139,000 Briscoe (TX-4) 40,000 100 40,000 Hardeman (TX-5) 77,000 100 77,000 Gaines (TX-8) 136,000 100 136,000 Hudspeth (TX-12) 27,000 100 27,000 Reeves (TX-13) 33,000 100 33,000 Loving (TX-14) 45,000 100 45,000 --------- --------- Texas Total 1,385,000 1,375,000 --------- ---------
7 8
CELLULAR OWNERSHIP THE COMPANY'S MARKETS(1) POPULATION(2) PERCENTAGE POPULATION(2) ---------- ------------- ---------- ------------- Nebraska Lincoln 237,000 100 237,000 Cherry (NE-2) 31,000 100 31,000 Knox (NE-3) 120,000 100 120,000 Grant (NE-4) 36,000 100 36,000 Columbus (NE-5) (4) 149,000 100 149,000 Keith (NE-6) 110,000 100 110,000 Hall (NE-7) 94,000 100 94,000 Chase (NE-8) 58,000 100 58,000 Adams (NE-9) 82,000 100 82,000 Cass (NE-10) 88,000 100 88,000 --------- --------- Nebraska Total 1,005,000 1,005,000 --------- --------- Utah Juab (UT-3) 58,000 100 58,000 Beaver (UT-4) 119,000 100 119,000 Piute (UT-6) 30,000 100 30,000 --------- --------- Utah Total 207,000 207,000 --------- --------- Wyoming Casper 66,000 100 66,000 Sheridan (WY-2) 80,000 100 80,000 Douglas (WY-5) 13,000 49 6,000 --------- --------- Wyoming Total 159,000 152,000 --------- --------- Cellular Total 7,477,000 7,456,000 ========= =========
(1) Excludes two markets containing a population of 226,000 in which the Company operates under an Interim Operating Authority ("IOA"). (2) Estimated 1998 populations are based on 1997 estimates by Equifax adjusted by the Company by a growth factor based upon Equifax's growth factors from 1995 to 1997. (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. (4) The Company has entered into a definitive purchase agreement for this market. The transaction is expected to close during the third quarter of 1998. The Company previously operated this market under an IOA. PCS OPERATIONS The Company owns 111 PCS licenses, covering approximately 64.2 million persons. The Company operates PCS systems in the Honolulu, Salt Lake City, El Paso/Albuquerque, Portland, Oklahoma City, Des Moines/Quad Cities and Denver MTAs, and is constructing the initial phase of its PCS systems in the Seattle, Phoenix and Tucson BTAs. The Company has not yet finalized its construction plans for all of the licenses purchased in the D and E Block auctions. Cook Inlet PCS provides service in the Tulsa, Oklahoma BTA utilizing the VoiceStream brand name. Through joint ventures, PCS services are offered or will be offered under the VoiceStream brand name in the Wichita, Kansas BTA and certain BTAs in Iowa. 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 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 and an open system architecture that will 8 9 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 66 million customers in 109 countries. The Company has entered into roaming agreements or letters of intent with substantially all of the 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 over 70 reciprocal roaming agreements or letters of intent with a variety of 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. See the financial results of the Company's PCS operations in the footnotes to the consolidated financial statements located in Part II of the Form 10-K. PCS MARKETS AND SYSTEMS The Company owns 111 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) - --------------- --------------- ------------- Honolulu 1,198,000 Portland 3,561,000 Salt Lake City 3,120,000 St. George 130,000 Denver 4,641,000 El Paso/Albuquerque 2,540,000 Oklahoma City 2,009,000 Enid 87,000 Oklahoma City 1,416,000 Ponca City 47,000 Stillwater 77,000 Des Moines/Quad 3,124,000 Cities (2) (4) Seattle Seattle-Tacoma 2,988,000 Olympia-Centralia 323,000 Phoenix Phoenix 3,013,000 Tucson 812,000 Yuma 142,000 Prescott 149,000 Flagstaff 115,000 Sierra Vista-Douglas 117,000 Nogales 39,000 San Antonio San Antonio 1,783,000 Corpus Christi 559,000 McAllen 582,000 Brownsville- Harlingen 352,000 Laredo 213,000 San Francisco San Francisco 6,843,000 Spokane Billings 325,000 Great Falls 167,000 Walla Walla-Pendleton 168,000 Kennewick-Pasco- Richland 188,000 Missoula 171,000 Lewiston-Moscow 124,000 Butte 68,000 Bozeman 80,000 Kalispell 75,000 Helena 69,000 Wichita Wichita 637,000 Salina 147,000 Hutchinson 127,000 Tulsa Coffeyville 63,000 Omaha Lincoln 335,000 Grand Island-Kearney 149,000 Norfolk 115,000 North Platte 86,000 Hastings 74,000 McCook 35,000 Kansas City Manhattan-Junction City 124,000
9 10
PCS MTA MARKETS PCS BTA MARKETS POPULATION(1) - --------------- --------------- ------------- Dallas Austin 1,171,000 Amarillo 399,000 Abilene 261,000 Odessa (3) 220,000 San Angelo 164,000 Midland (3) 126,000 Paris 92,000 Clovis 81,000 Brownwood 63,000 Hobbs 58,000 Big Spring 35,000 Lubbock 405,000 St. Louis St. Louis 2,852,000 Carbondale-Marion 218,000 Columbia 208,000 Cape Girardeau- Sikeston 188,000 Quincy-Hannibal 182,000 Poplar Bluff 154,000 Jefferson City 154,000 Mount Vernon- Centralia 125,000 Rolla 93,000 West Plains 77,000 Kirksville 57,000 Milwaukee Milwaukee 1,808,000 Cleveland Cleveland-Akron 2,968,000 Canton-New Philadelphia 533,000 Youngstown-Warren 487,000 Erie 280,000 Mansfield 230,000 Sandusky 139,000 Sharon 122,000 East Liverpool- Salem 113,000 Ashtabula 104,000 Meadville 91,000 Minneapolis Fargo 314,000 Grand Forks 214,000 Sioux Falls 233,000 Bismarck 131,000 Aberdeen 88,000 Mitchell 85,000 Watertown 78,000 Bemidji 64,000 Huron 55,000 Willmar-Marshall 83,000 Worthington 96,000 Chicago Jacksonville 71,000 Little Rock Little Rock 944,000 Fort Smith 315,000 Fayetteville-Spring- dale-Rogers 292,000 Jonesboro-Paragould 176,000 Pine Bluff 151,000 Hot Springs 136,000 Russellville 96,000 Harrison 90,000 Cincinnati Dayton-Springfield 1,225,000 Richmond Norfolk-VA Beach 1,761,000 Richmond-Petersburg 1,179,000 Danville 168,000 Lynchburg 157,000 Staunton-Waynesboro 106,000 Martinsville 88,000 ========== PCS Total(5) 64,204,000 ==========
(1) Estimated 1998 populations are based on 1997 estimates by Equifax adjusted by the Company by a growth factor based upon Equifax's growth factors from 1995 to 1997. (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) The Company owns a license for the Des Moines/Quad Cities MTA consisting of the following: 30 MHz in seven urban counties within the Des Moines BTA, which is part of the Des Moines/Quad Cities MTA, and 10 MHz in all the other counties within the Des Moines/Quad Cities MTA. The Company contributed the other 20 MHz in the Des Moines/Quad Cities MTA to a joint venture that will operate such markets utilizing the VoiceStream brand name. The population of the markets to be served by this joint venture is 2,556,000. (5) Total PCS pops reflected here are net of the Oklahoma BTA markets which overlap the Oklahoma MTA markets and the Salt Lake City BTA markets which overlap the Salt Lake City MTA markets. 10 11 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. The Company has a 49.9% partnership interest in Cook Inlet PCS. Cook Inlet PCS began operations in the Tulsa BTA in June of 1997. Cook Inlet PCS has not yet finalized its construction plans for the other licenses it owns. Cook Inlet PCS owns FCC licenses to provide wireless PCS communications services in 21 separate BTA markets. The 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) 2,988,000 Yakima 249,000 Bremerton 239,000 Wenatchee 199,000 Aberdeen 89,000 Port Angeles 89,000 Bellingham (2) 155,000 Spokane Spokane 729,000 Walla Walla-Pendleton 168,000 Phoenix Phoenix (2) 3,013,000 Tucson (2) 812,000 Dallas Temple-Killeen (2) 361,000 Wichita Falls 216,000 Sherman-Denison 162,000 Tulsa Tulsa 905,000 Muskogee 161,000 Coffeyville 63,000 Bartlesville 47,000 Kansas City Pittsburg-Parsons (2) 92,000 Minneapolis Worthington (3) 96,000 Cincinnati Cincinnati (2) 2,136,000 ---------- Total 12,969,000 ==========
(1) Estimated 1998 populations are based on 1997 estimates by Equifax adjusted by the Company by a growth factor based upon Equifax's growth factors from 1995 to 1997. (2) Represents a 10 MHz license obtained in the F Block auctions. See -- "Governmental Regulation -- Licensing of PCS Systems." (3) Cook Inlet PCS has entered into an agreement to sell this license to a third party. This transaction is anticipated to close during the second quarter of 1998. 11 12 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, through its membership in North American Cellular Network ("NACN") and other regional networking arrangements, thereby allowing them to make and receive calls while in other cellular service areas without dialing special access codes. 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 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 and 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 are 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 the first half of 1998 and it has entered into agreements with suppliers to acquire dual-mode handsets when available. 12 13 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 191 million. The national advertising campaign conducted by the Cellular One Group enhances the Company's advertising exposure at a lesser cost than 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 234 local sales offices (which also serve as retail sales locations), including 149 under the CELLULAR ONE brand name, 14 under the CelluarOne Express brand name and 71 under the VoiceStream brand name, and utilizes a direct sales force of over 1,150 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. 13 14 The Company opened a customer call center in Albuquerque, New Mexico, during the second half of 1997. This facility, along with the Company's customer call center in 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. Under current FCC rules, there may be up to six PCS licenses in each geographic area in addition to the two existing cellular licenses. Also, the FCC has licensed Specialized Mobile Radio ("SMR") dispatch system operators to construct digital mobile communications systems on existing SMR frequencies, referred to as Enhanced Specialized Mobile Radio ("ESMR"), in many cities throughout the United States, including some of the markets in which the Company operates. The Company has one cellular competitor in each of its cellular markets including AirTouch Cellular Communications, Inc. ("AirTouch"), Aliant Communications, Inc., CommNet Cellular Inc., Kansas Cellular, Southwestern Bell Mobile Systems and United States Cellular Corporation ("US Cellular"), and there may be as many as six PCS licensees in each of its markets. Currently, the Company's principal competitors in its PCS business are PCS PrimeCo L.P., Sprint Spectrum L.P., and AT&T Wireless Services Inc. ("AT&T Wireless"), as well as the two existing cellular providers in its PCS markets. ESMR systems, including those operated by Nextel Communications, Inc., are competitive with the Company's cellular and PCS systems. The Company also competes with paging, dispatch and conventional mobile telephone companies, resellers and landline telephone service providers in its cellular and PCS markets. 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 directly competes 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, the Company expects to face increased competition from entities providing similar services using other communications technologies, including satellite-based telecommunications systems. While some of these technologies and services are currently operational, others are being developed or may be developed in the future. 14 15 The Company recognizes that technological advances and changing regulations have led to rapid evolution of the wireless telecommunications industry. At the end of 1996, the FCC, as required by the Omnibus Budget Reconciliation Act of 1993, transferred 200 MHz of spectrum previously allocated to Federal Government use to the private sector. In April of 1997, the FCC auctioned 30 MHz of spectrum for Wireless Communications Services, which can provide fixed or mobile telecommunications service. In late 1997, the FCC also auctioned 10 MHz of spectrum for Specialized Mobile Radio service, another potential competitor with PCS and cellular service. Moreover, in 1998, the FCC commenced the auction of more than 1000 MHz of spectrum for the Local Multipoint Distribution Service, in which the Company is participating [OPEN PENDING POTENTIAL CONCLUSION OF SUCH AUCTION]. It also plans 1998 to auction in 25 MHz of spectrum for the General Wireless Communications Service, plus additional spectrum in the 220 MHz and 39 GHz bands. The Company cannot foresee how technological progress or economic incentive will affect competition from these new services. In all instances, the FCC reserves the right to amend or repeal its service regulations and auction schedule. 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 generally issued for a 10-year term beginning on the date of the initial notification of construction by a cellular carrier. 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. 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. The Company has approximately 35 cellular licenses which will be subject to renewal in the next three years. While the Company believes that each of its cellular licenses will be renewed, there can be no assurance that all of the licenses will be renewed. Cellular radio service providers must also 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 and roaming 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, among other facilities, 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. 15 16 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"). 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 (proforma transfer of control does not require prior FCC approval). 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 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; however, a reauction of certain C Block licenses is currently scheduled for the second half of 1998. 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 and the Oklahoma City MTA, resulting in the Company exceeding the FCC's current 45 MHz CMRS crossownership restriction described above. The Company has filed waiver requests with the FCC with respect to both MTAs, both of which are pending, and has been allowed to delay compliance with the ownership restriction until the FCC rules on the waiver requests. In the event that this restriction is not waived or the rule itself revised, the Company will be obligated to divest sufficient portions of its Denver and Oklahoma City PCS markets 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 ten year term, 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. 16 17 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 ten 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 ten years after the grant of a PCS license (subject to extension), a PCS licensee will 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 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. The FCC has shortened the voluntary negotiation period by one year (without lengthening the mandatory negotiation period) for PCS licensees in the C, D, E and F Blocks. 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. 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 (proforma transfer of control does not require prior FCC approval). 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 the Communications Act, no more than 25% of an FCC licensee's capital stock may be indirectly owned or voted by non-U.S. citizens or their representatives, by a foreign government, or by a foreign corporation, absent a FCC finding that a higher level of alien ownership is not inconsistent with the public interest. In November 1997, the FCC adopted new rules, effective in February 1998, in anticipation of implementation of the World Trade Organization Basic Telecom Agreement ("WTO Agreement"). Formerly, potential licensees had to demonstrate that their markets offered effective competitive opportunities in order to obtain authorization to exceed the 25% indirect foreign ownership threshold. Under the new rules, this showing now only applies to non-WTO members. Applicants from WTO Agreement signatories have an "open entry" standard: they are presumed to offer effective competitive opportunities. However, the FCC reserves the right to attach additional conditions to a grant of authority, and, in the exceptional case in which an application poses a very high risk to competition, to deny the application. The limitation on direct foreign ownership in an FCC licensee remains fixed at 20%, with no opportunity to increase the percentage, and is unaffected by the FCC's new rules. The WTO Agreement also obligates signatories to open their domestic telecommunications markets to foreign investment and foreign corporations. The WTO Agreement will increase investment and competition in the United States, potentially leading to lower prices, enhanced innovation and better service. At the same time, market access commitments from WTO Agreement signatories will provide U.S. service suppliers opportunities to expand abroad. 17 18 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 in each others markets. To facilitate the entry of new carriers into existing markets, the Telecommunications Act imposes certain interconnection requirements on incumbent carriers. Additionally, all telecommunications providers are required to make an equitable and nondiscriminatory contribution to the preservation and advancement of univeral service. 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 telephone number, location and other useful information. 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. If a cost recovery mechanism is in place, and a Public Service Answering Point ("PSAP") requests and is capable of processing the caller's telephone number and location information, cellular, PCS, and other mobile service providers must relay a caller's automatic number identification and Cell Site location, 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 December 1, 1997, the FCC required wireless carriers to transmit all 911 calls without regard to validation procedures intended to identify and intercept calls from non-subscribers. 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 how such fixed services 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. 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. Under the rules adopted by the FCC, 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 established proxy rates to be used by states to set interim interconnection rates pending the establishment of cost-based rates. 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 vacated many of the rules adopted by the FCC, including those rules governing the pricing of interconnetin services, but specifically affirmed the FCC rules governing interconnection with CMRS providers. In January 1998, the U.S. Supreme Court agreed to review the Eighth Circuit decision. 18 19 In its implementation of the Telecommunications Act, the FCC recently established new federal universal service rules, under which wireless service providers for the first time are eligible to receive universal service subsidies, but also are required to contribute to both federal and state universal service funds. For the first quarter of 1998, the FCC's universal service assessments amount to 0.72% of interstate and intrastate telecommunications revenues for schools, libraries and rural healthcare support mechanisms and an additional 3.19% of interstate telecommunications revenues for high cost and low income support mechanisms. Various parties have challenged the FCC's universal service rules, and the cases have been consolidated in the U.S. Court of Appeals for the Fifth Circuit. The Company cannot predict the outcome of this proceeding. The FCC has 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. Various parties have challenged the number portability requirements as they apply to CMRS providers. These challenges are still pending at the FCC and in the courts. The Company can not predict the outcome of such challenges. 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. 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. 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, 1997, the Company employed a total of approximately 3,210 people in the following areas:
Category Number of Employees -------- ------------------- Sales and marketing .............................................. 1,670 Engineering ...................................................... 390 General and administration, including customer service ........... 1,150
19 20 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 located primarily in Issaquah and Bellevue, 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. The Company leases from the City of Albuquerque a customer call center in Albuquerque, New Mexico. This facility is approximately 65,000 square feet and, 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 A subsidiary of the Company received a Civil Investigative Demand (the "Demand") from the U.S. Department of Justice Antitrust Division (the "Antitrust Division") requiring the Company to produce certain documents and answer certain interrogatories in connection with the Antitrust Division's investigation of possible bid rigging and market allocation for licenses auctioned by the FCC for broadband PCS frequency blocks. The Company has cooperated with the Antitrust Division's requests. On March 16, 1998, the same subsidiary of the Company received a Notice of Apparent Liability for Forfeiture ("NALF") from the FCC in the amount of $1.2 million. This NALF was issued by the FCC in connection with its investigation of compliance by auction participants with FCC PCS auction rules. The Company has thoroughly cooperated with the FCC investigation and will continue to do so. The Company believes its conduct was consistent with FCC rules and regulations pertaining to the auction. The Company will promptly file its opposition to the NALF and believes the Company will prevail. The amount of the NALF, if upheld, is not material to the financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 20 21 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 42 Chairman, Director and Chief Executive Officer Donald Guthrie 42 Vice Chairman and Chief Financial Officer Robert A. Stapleton 39 President Mikal J. Thomsen 41 Chief Operating Officer Theresa E. Gillespie 45 Senior Vice President Alan R. Bender 43 Senior Vice President, General Counsel, and Secretary Cregg B. Baumbaugh 41 Senior Vice President - Corporate Development Timothy R. Wong 42 Vice President - Engineering Robert P. Dotson 37 Vice President - Marketing Bradley J. Horwitz 42 Vice President - International Patricia L. Miller 35 Controller and Principal Accounting Officer
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, Columbia Sportswear, Inc. 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 and Chief Financial Officer of the Company since February 1997. 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 A. Stapleton has been President of the Company since its formation in July 1994. Effective April 1998, Mr. Stapleton will be responsible for all PCS operations of the Company. Mr. Stapleton was President of GCC from November 1992 until the formation of the Company. 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. Effective April 1998, Mr. Thomsen will be responsible for all cellular operations of the Company. 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. 21 22 Theresa E. Gillespie has been Senior Vice President of the Company since February 1997. Prior to that, Ms. Gillespie was Chief Financial Officer of the Company since its formation in July 1994. 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 Senior Vice President, General Counsel, and Secretary 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). Patricia L. Miller has been Controller and Principal Accounting Officer of the Company since January 1998. From 1993 to 1997, Ms. Miller held various accounting positions with the Company. Prior to 1993, Ms. Miller held various accounting positions with a subsidiary of Weyerhaeuser Company. 22 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to the Company's 1997 Annual Report to Stockholders. As of March 2, 1998, there were approximately 251 and 113 shareholders of record of the Company's Class A and Class B Common Stock, respectively. The table below sets forth the sales of unregistered equity securities made by the registrant in 1997:
Title and Amount of Security Date of Sale Exemption ---------------------------- ------------ ------------- 1,600,000 shares of Class A Common Stock October 1997 Reg D (1)
(1) Issued to Stockholders of Triad Investment Minnesota, Inc. ("TIM") in consideration of all of the issued and outstanding stock of TIM. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference to the information included under the caption "Selected Financial Data" in the Company's 1997 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference to the information included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to the information included under the captions "Consolidated Statements of Operations", "Consolidated Balance Sheets", "Consolidated Statements of Cash Flows", "Consolidated Statements of Stockholders' Equity", "Notes to Consolidated Financial Statement", "Schecule I - Condensed Financial Information - (Parent Company Only)", Schedule II - Valuation and Qualifying Accounts" and "Report of Independent Auditors" in the Company's 1997 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 23 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information on directors of the registrant 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 1998 annual shareholders meeting to be filed with the United States Securities and Exchange Commission. The information on executive officers of the registrant called for by this Item is included herein in the section entitled "Executive Officers of the Registrant." 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 1998 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 1998 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 1998 annual shareholders meeting to be filed with the United States Securities and Exchange Commission. 24 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (A) Financial Statements and Schedule The financial statements and schedules are incorporated herein by reference to the Company's 1997 Annual Report to Stockholders. The Company's 1997 Annual Report to Stockholders is not deemed filed as part of this report except for those parts specifically incorporated herein by reference. (B) Reports on Form 8-K A Form 8-K was filed on October 14, 1997, reporting a proposed investment by Hutchison Telecommunications Limited ("HTL") in the Company and by a subsidiary of HTL, Hutchison Telecommunications PCS (USA) Limited, in Western PCS Corporation. A Form 8-K was filed on December 8, 1997, reporting the close of the initial investment by HTL in the Company. (C) Exhibits
Exhibit Description ------- ----------- 3.1(1) Amended and Restated Articles of Incorporation of the Registrant 3.2(1) Bylaws of the Registrant 4.1(2) Indenture between Western Wireless Corporation and Harris Trust Company of California, dated May 22, 1996 4.2(3) Indenture between Western Wireless Corporation and Harris Trust Company of California, dated October 24, 1996 4.3(6) Form of Supplemental Indenture to be entered into between Western Wireless Corporation and Harris Trust Company of California, relating to the 10 1/2% Senior Subordinated Notes Due 2007 4.4(6) Form of Supplemental Indenture to be entered into between Western Wireless Corporation and Harris Trust Company of California, relating to the 10 1/2% Senior Subordinated Notes Due 2006 10.1(1) Loan Agreement between Western PCS II Corporation and Northern Telecom Inc., dated June 30, 1995 10.2(1) PCS 1900 Project and Supply Agreement between Western PCS Corporation and Northern Telecom Inc., dated June 30, 1995 10.3(1) Purchase Agreement between Motorola Nortel Communications Co. and General Cellular Corporation, dated July 29, 1993 10.4(1) 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(1) 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(1) Supply Contract by and between Western PCS Corporation and Nokia Telecommunications Inc., dated December 14, 1995 10.7(1) Purchase and Sale Agreement, Nokia Mobile Phones, Inc. and Western Wireless Corporation, dated November 10, 1995
25 26
Exhibit Description ------- ----------- 10.8(1) 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(1) Stockholders Agreement by and among Western Wireless Corporation and certain of its shareholders, dated July 29, 1994 10.10(1) 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(1) 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(1) 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(1) Voting Agreement by and among Western Wireless Corporation and certain of its shareholders, dated July 29, 1994 10.14(1) Voting Agreement by and among Western Wireless Corporation and certain of its shareholders 10.15(1) 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 10.16(1) Lease Agreement by and between Western Wireless Corporation and Department of Natural Resources, dated August 25, 1995 10.17(1) First Amendment to Lease Agreement by and between Western Wireless Corporation and Department of Natural Resources, dated February 28, 1996 10.18(1) Form of Cellular One Group License Agreement 10.19(1) Asset Purchase Agreement between Western PCS III License Corporation as Buyer and GTE Mobilnet Incorporated as Seller, dated January 16, 1996 10.20(1) Purchase and Sale Agreement by and between Robert O. Tyler, Esq., as Trustee, Seller, and GCC License Corporation, Purchaser, dated December 22, 1995 10.21(1) 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 10.22(1) 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 10.23(1) 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 10.24(1) 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 10.25(1) Employment Agreement by and between John W. Stanton and Western Wireless Corporation, dated March 12, 1996 10.26(1) Employment Agreement by and between Robert A. Stapleton and Western Wireless Corporation, dated March 12, 1996 10.27(1) Employment Agreement by and between Mikal J. Thomsen and Western Wireless Corporation, dated March 12, 1996 10.28(1) Employment Agreement by and between Theresa E. Gillespie and Western Wireless Corporation, dated March 12, 1996
26 27
Exhibit Description ------- ----------- 10.29(1) Employment Agreement by and between Alan R. Bender and Western Wireless Corporation, dated March 12, 1996 10.30(1) Employment Agreement by and between Cregg B. Baumbaugh and Western Wireless Corporation, dated March 12, 1996 10.31(7) Employment Agreement by and between Donald Guthrie and Western Wireless Corporation, dated March 12, 1996 10.32(1) Form of Registrant's Restrictive Covenant and Confidentiality Agreement 10.33(1) Form of Director and Officer Indemnification Agreement 10.34(1) 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 10.35(1) 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 10.36(1) 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 10.37(1) 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 10.38(1) 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 10.39(3) 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 10.40(3) 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 10.41(3) General Agreement for Purchase of Cellular Systems between Lucent Technologies Inc. and Western Wireless Corporation, dated September 16, 1996 10.42(3) Amendment No. 1 to PCS 1900 Supply Agreement between Western PCS Corporation and Northern Telecom Inc., dated July 25, 1996 10.43(3) Amendment No. 2 to PCS 1900 Supply Agreement between Western PCS Corporation and Northern Telecom Inc., dated July 25, 1996 10.44(7) Amendment No. 3 to PCS Supply Agreement between Western PCS Corporation and Northern Telecom Inc., dated October 14, 1996 10.45(4) Western Wireless Corporation 1996 Employee Stock Purchase Plan 10.46(5) Western Wireless Corporation 1997 Executive Restricted Stock Plan 10.47(5) Form of First Amendment to 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 March 27, 1997 10.48(5) Purchase Agreement, dated April 24, 1997, by and among Western Wireless Corporation, Triad Texas, L.P., Triad Utah, L.P., Triad Oklahoma, L.P., Triad Cellular Corporation and Triad Cellular L.P.
27 28
Exhibit Description ------- ----------- 10.49(5) Purchase Agreement, dated April 24, 1997, by and between Western Wireless Corporation and Triad Cellular Corporation. 10.50(5) Agreement and Plan of Merger, dated April 24, 1997, by and among Western Wireless Corporation, Minnesota Cellular Corporation, Triad Investment Minnesota, Inc., Barry B. Lewis, Craig W. Viehweg, Terry E. Purvis, Triad Cellular Corporation, Triad Cellular L.P., and Triad Minnesota, L.P. 10.51(5) Purchase Agreement, dated April 24, 1997, by and between Western Wireless Corporation and Triad Cellular, L.P. 10.52(8) First Amendment to Loan Agreement, dated as of March 6, 1997, among Western PCS II Corporation, Northern Telecom Inc., NTFC Capital Corporation and Export Development Corporation 10.53(8) Second Amendment to Loan Agreement, dated as of April 15, 1997, among Western PCS II Corporation, Northern Telecom Inc., NTFC Capital Corporation and Export Development Corporation 10.54(9) 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. 10.55(10) Stock Subscription Agreement by and among Western Wireless Corporation, Hutchison Telecommunications Limited and Hutchison Telecommunications Holdings (USA) Limited dated October 14, 1997. 10.56(10) Purchase Agreement by and among Western PCS Corporation, Western Wireless Corporation, Hutchison Telecommunications Limited and Hutchison Telecommunications PCS (USA) Limited dated October 14, 1997. 10.57(10) Form of Cash Management Agreement by and between Western Wireless Corporation and Western PCS Corporation. 10.58(10) Form of Roaming Agreement by and between Western Wireless Corporation and Western PCS Corporation. 10.59(10) Form of Services Agreement by and between Western Wireless Corporation and Western PCS Corporation. 10.60(10) Form of Shareholders Agreement by and among Western Wireless Corporation, Hutchison Telecommunications PCS (USA) Limited and Western PCS Corporation. 10.61(10) Form of Tax Sharing Agreement by and between Western Wireless Corporation and Western PCS Corporation. 10.62(10) Agreement to Form Limited Partnership dated September 30, 1997, by and among Western PCS I Iowa Corporation, a Delaware corporation, INS Wireless, Inc., an Iowa corporation, Western PCS I Corporation, a Delaware corporation, and Iowa Network Services, Inc., an Iowa corporation. 10.63(10) Iowa Wireless Services, L.P. Limited Partnership Agreement dated as of September 30, 1997, by and between INS Wireless, Inc., as General Partner, and Western PCS I Iowa Corporation, as Limited Partner. 10.64(11) Software License Maintenance and Subscriber Billing Services Agreement dated June 1997. 10.65(11) First Amendment to Software License, Maintenance and Subscriber Billing Services Agreement dated December 1997, between CSC Intelicom, Inc., and Western Wireless Corporation. 10.66(11) Letter agreement dated December 16, 1997 between Western Wireless Corporation and Intelicom Services Inc. to provide products and services pursuant to the Software License Maintenance and Subscriber Billing Services Agreements and First Amendment thereto. 13.1 Market for Registrant's Common Equity and Related Stockholder Matters. 13.2 Selected Financial Data 13.3 Management's Discussion and Analysis of Financial Condition and Results of Operations 13.4 Financial Statements and Supplementary Data 21.1(1) Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP
28 29
Exhibit Description ------- ----------- 27.1 Financial Data Schedule 99.1(9) Report on Form 8-K dated June 19, 1997
- ---------- (1) Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-1 (Securities and Exchange Commission (the "Commission") File No. 333-2432). (2) Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-1 (Commission File No. 333-2688). (3) Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-4 (Commission File No. 333-14859). (4) Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-8 (Commission File No. 333-18137). (5) Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-1 (Commission File No. 333-14859) (6) Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-3 (Commission File No. 333-14859) (7) Incorporated herein by reference to the exhibit filed with the Company's Form 10-K for the year ended 12/31/96. (8) Incorporated herein by reference to the exhibit filed with the Company's Form 10-Q for the quarter ended 3/31/97. (9) Incorporated herein by reference to the exhibit filed with the Company's Form 10-Q for the quarter ended 6/30/97. (10) Incorporated herein by reference to the exhibit filed with the Company's Form 10-Q for the quarter ended 9/30/97. (11) Portions of this exhibit have been omitted and filed separately with the Secretary of the Commission pursuant to the Registrant's Application Requesting Confidential Treatment under Rule 246-2 of the Securities Exchange Act of 1934. 29 30 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 27, 1998 WESTERN WIRELESS CORPORATION By /s/ ------------------------------ 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 ---------- ----- Chairman of the Board and Chief /s/__________________________ Executive Officer Date: March 27, 1998 John W. Stanton (Principal Executive Officer) /s/ _________________________ Vice Chairman and Chief Financial Officer Date: March 27, 1998 Donald Guthrie (Principal Financial Officer) /s/__________________________ Controller Date: March 27, 1998 Patricia L. Miller (Principal Accounting Officer) /s/ _________________________ Director Date: March 27, 1998 John L. Bunce, Jr. /s/ _________________________ Director Date: March 27, 1998 Mitchell R. Cohen /s/ _________________________ Director Date: March 27, 1998 Daniel J. Evans /s/ _________________________ Director Date: March 27, 1998 Jonathan M. Nelson /s/ _________________________ Director Date: March 27, 1998 Terence O'Toole
30 31 EXHIBIT INDEX
Exhibit Description ------- ----------- 3.1(1) Amended and Restated Articles of Incorporation of the Registrant 3.2(1) Bylaws of the Registrant 4.1(2) Indenture between Western Wireless Corporation and Harris Trust Company of California, dated May 22, 1996 4.2(3) Indenture between Western Wireless Corporation and Harris Trust Company of California, dated October 24, 1996 4.3(6) Form of Supplemental Indenture to be entered into between Western Wireless Corporation and Harris Trust Company of California, relating to the 10 1/2% Senior Subordinated Notes Due 2007 4.4(6) Form of Supplemental Indenture to be entered into between Western Wireless Corporation and Harris Trust Company of California, relating to the 10 1/2% Senior Subordinated Notes Due 2006 10.1(1) Loan Agreement between Western PCS II Corporation and Northern Telecom Inc., dated June 30, 1995 10.2(1) PCS 1900 Project and Supply Agreement between Western PCS Corporation and Northern Telecom Inc., dated June 30, 1995 10.3(1) Purchase Agreement between Motorola Nortel Communications Co. and General Cellular Corporation, dated July 29, 1993 10.4(1) 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(1) 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(1) Supply Contract by and between Western PCS Corporation and Nokia Telecommunications Inc., dated December 14, 1995 10.7(1) Purchase and Sale Agreement, Nokia Mobile Phones, Inc. and Western Wireless Corporation, dated November 10, 1995 10.8(1) 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(1) Stockholders Agreement by and among Western Wireless Corporation and certain of its shareholders, dated July 29, 1994 10.10(1) 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(1) 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(1) 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(1) Voting Agreement by and among Western Wireless Corporation and certain of its shareholders, dated July 29, 1994 10.14(1) Voting Agreement by and among Western Wireless Corporation and certain of its shareholders 10.15(1) 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 10.16(1) Lease Agreement by and between Western Wireless Corporation and Department of Natural Resources, dated August 25, 1995
32
Exhibit Description ------- ----------- 10.17(1) First Amendment to Lease Agreement by and between Western Wireless Corporation and Department of Natural Resources, dated February 28, 1996 10.18(1) Form of Cellular One Group License Agreement 10.19(1) Asset Purchase Agreement between Western PCS III License Corporation as Buyer and GTE Mobilnet Incorporated as Seller, dated January 16, 1996 10.20(1) Purchase and Sale Agreement by and between Robert O. Tyler, Esq., as Trustee, Seller, and GCC License Corporation, Purchaser, dated December 22, 1995 10.21(1) 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 10.22(1) 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 10.23(1) 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 10.24(1) 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 10.25(1) Employment Agreement by and between John W. Stanton and Western Wireless Corporation, dated March 12, 1996 10.26(1) Employment Agreement by and between Robert A. Stapleton and Western Wireless Corporation, dated March 12, 1996 10.27(1) Employment Agreement by and between Mikal J. Thomsen and Western Wireless Corporation, dated March 12, 1996 10.28(1) Employment Agreement by and between Theresa E. Gillespie and Western Wireless Corporation, dated March 12, 1996 10.29(1) Employment Agreement by and between Alan R. Bender and Western Wireless Corporation, dated March 12, 1996 10.30(1) Employment Agreement by and between Cregg B. Baumbaugh and Western Wireless Corporation, dated March 12, 1996 10.31(7) Employment Agreement by and between Donald Guthrie and Western Wireless Corporation, dated March 12, 1996 10.32(1) Form of Registrant's Restrictive Covenant and Confidentiality Agreement 10.33(1) Form of Director and Officer Indemnification Agreement 10.34(1) 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 10.35(1) 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 10.36(1) 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 10.37(1) 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
33
Exhibit Description ------- ----------- 10.38(1) 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 10.39(3) 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 10.40(3) 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 10.41(3) General Agreement for Purchase of Cellular Systems between Lucent Technologies Inc. and Western Wireless Corporation, dated September 16, 1996 10.42(3) Amendment No. 1 to PCS 1900 Supply Agreement between Western PCS Corporation and Northern Telecom Inc., dated July 25, 1996 10.43(3) Amendment No. 2 to PCS 1900 Supply Agreement between Western PCS Corporation and Northern Telecom Inc., dated July 25, 1996 10.44(7) Amendment No. 3 to PCS Supply Agreement between Western PCS Corporation and Northern Telecom Inc., dated October 14, 1996 10.45(4) Western Wireless Corporation 1996 Employee Stock Purchase Plan 10.46(5) Western Wireless Corporation 1997 Executive Restricted Stock Plan 10.47(5) Form of First Amendment to 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 March 27, 1997 10.48(5) Purchase Agreement, dated April 24, 1997, by and among Western Wireless Corporation, Triad Texas, L.P., Triad Utah, L.P., Triad Oklahoma, L.P., Triad Cellular Corporation and Triad Cellular L.P. 10.49(5) Purchase Agreement, dated April 24, 1997, by and between Western Wireless Corporation and Triad Cellular Corporation. 10.50(5) Agreement and Plan of Merger, dated April 24, 1997, by and among Western Wireless Corporation, Minnesota Cellular Corporation, Triad Investment Minnesota, Inc., Barry B. Lewis, Craig W. Viehweg, Terry E. Purvis, Triad Cellular Corporation, Triad Cellular L.P., and Triad Minnesota, L.P. 10.51(5) Purchase Agreement, dated April 24, 1997, by and between Western Wireless Corporation and Triad Cellular, L.P. 10.52(8) First Amendment to Loan Agreement, dated as of March 6, 1997, among Western PCS II Corporation, Northern Telecom Inc., NTFC Capital Corporation and Export Development Corporation 10.53(8) Second Amendment to Loan Agreement, dated as of April 15, 1997, among Western PCS II Corporation, Northern Telecom Inc., NTFC Capital Corporation and Export Development Corporation 10.54(9) 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. 10.55(10) Stock Subscription Agreement by and among Western Wireless Corporation, Hutchison Telecommunications Limited and Hutchison Telecommunications Holdings (USA) Limited dated October 14, 1997. 10.56(10) Purchase Agreement by and among Western PCS Corporation, Western Wireless Corporation, Hutchison Telecommunications Limited and Hutchison Telecommunications PCS (USA) Limited dated October 14, 1997.
34
Exhibit Description ------- ----------- 10.57(10) Form of Cash Management Agreement by and between Western Wireless Corporation and Western PCS Corporation. 10.58(10) Form of Roaming Agreement by and between Western Wireless Corporation and Western PCS Corporation. 10.59(10) Form of Services Agreement by and between Western Wireless Corporation and Western PCS Corporation. 10.60(10) Form of Shareholders Agreement by and among Western Wireless Corporation, Hutchison Telecommunications PCS (USA) Limited and Western PCS Corporation. 10.61(10) Form of Tax Sharing Agreement by and between Western Wireless Corporation and Western PCS Corporation. 10.62(10) Agreement to Form Limited Partnership dated September 30, 1997, by and among Western PCS I Iowa Corporation, a Delaware corporation, INS Wireless, Inc., an Iowa corporation, Western PCS I Corporation, a Delaware corporation, and Iowa Network Services, Inc., an Iowa corporation. 10.63(10) Iowa Wireless Services, L.P. Limited Partnership Agreement dated as of September 30, 1997, by and between INS Wireless, Inc., as General Partner, and Western PCS I Iowa Corporation, as Limited Partner. 10.64(11) Software License Maintenance and Subscriber Billing Services Agreement dated June 1997. 10.65(11) First Amendment to Software License, Maintenance and Subscriber Billing Services Agreement dated December 1997, between CSC Intelicom, Inc., and Western Wireless Corporation. 10.66(11) Letter agreement dated December 16, 1997 between Western Wireless Corporation and Intelicom Services Inc. to provide products and services pursuant to the Software License Maintenance and Subscriber Billing Services Agreements and First Amendment thereto. 13.1 Market for Registrant's Common Equity and Related Stockholder Matters. 13.2 Selected Financial Data 13.3 Management's Discussion and Analysis of Financial Condition and Results of Operations 13.4 Financial Statements and Supplementary Data 21.1(1) Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule 99.1(9) Report on Form 8-K dated June 19, 1997
- ---------- (1) Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-1 (Securities and Exchange Commission (the "Commission") File No. 333-2432). (2) Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-1 (Commission File No. 333-2688). (3) Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-4 (Commission File No. 333-14859). (4) Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-8 (Commission File No. 333-18137). (5) Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-1 (Commission File No. 333-14859) (6) Incorporated herein by reference to the exhibit filed with the Company's Registration Statement on Form S-3 (Commission File No. 333-14859) (7) Incorporated herein by reference to the exhibit filed with the Company's Form 10-K for the year ended 12/31/96. (8) Incorporated herein by reference to the exhibit filed with the Company's Form 10-Q for the quarter ended 3/31/97. (9) Incorporated herein by reference to the exhibit filed with the Company's Form 10-Q for the quarter ended 6/30/97. (10) Incorporated herein by reference to the exhibit filed with the Company's Form 10-Q for the quarter ended 9/30/97. (11) Portions of this exhibit have been omitted and filed separately with the Secretary of the Commission pursuant to the Registrant's Application Requesting Confidential Treatment under Rule 246-2 of the Securities Exchange Act of 1934. EX-10.64 2 SOFTWARE LICENSE AGREEMENT 1 EXHIBIT 10.64 ================================================================================ SOFTWARE LICENSE, MAINTENANCE AND SUBSCRIBER BILLING SERVICES AGREEMENT BETWEEN WESTERN WIRELESS CORPORATION AND CSC INTELICOM, INC. ================================================================================ 2 SOFTWARE LICENSE, MAINTENANCE AND SUBSCRIBER BILLING SERVICES AGREEMENT THIS SOFTWARE LICENSE, MAINTENANCE AND SUBSCRIBER BILLING SERVICES AGREEMENT is made this __ day of June, 1997 by and among CSC Intelicom, Inc., a Delaware corporation, with its principal place of business at 6707 Democracy Boulevard, Suite 1000, Bethesda, Maryland 20817 (hereinafter "CSC") and Western Wireless Corporation, a Washington corporation, and its subsidiaries (hereinafter referred to as "Customer"), with offices located at 2001 NW Sammamish Rd. #100, Issaquah, WA 98027. BACKGROUND Whereas Customer is in the wireless telecommunication services business and CSC is in the subscriber billing business; and Whereas CSC has developed and owns certain proprietary software for use in the wireless telecommunications industry and has experience in providing third party subscriber billing services; and Whereas CSC and Customer are parties to a certain Software License, Maintenance and Subscriber Billing Services Agreement dated as of August 1, 1994 ("Prior Agreement"), and Whereas the parties desire to terminate the Prior Agreement and execute a new Software License, Maintenance and Subscriber Billing Services Agreement; and Whereas Customer desires to obtain a personal, non-exclusive, nontransferable, non-assignable license to use such software and purchase subscriber billing services and CSC desires to license such software and provide subscriber billing services to Customer on the terms and conditions set forth herein. IN CONSIDERATION of the foregoing and the mutual covenants set forth herein, and intending to be legally bound, the parties agree as follows: 1. DEFINITIONS The following words shall have the following meanings when used in this Agreement: 1.1 "Account" shall mean an aggregation of Subscribers. See Appendix I for a schematic diagram of Account and Service relationships within the Software. -1- CONFIDENTIAL: PROPRIETARY CSC/ITDS & WESTERN INFORMATION 3 1.2 "Affiliate(s)" or "Affiliate Company" shall mean any entity incorporated or formed in the United States in which Customer owns, directly or indirectly, a fifty-one percent (51%) or greater ownership interest, or any entity which owns or controls at least fifty-one percent (51%) of Customer, or with the written consent of CSC, which shall not be unreasonably withheld, any entity incorporated or formed in the United States in which Customer owns, directly or indirectly, less than a fifty-one percent (51%) ownership interest and which is an FCC licensee for telecommunications services, or with the written consent of CSC any entity not incorporated or formed in the United States. Consent is hereby given to include Cook Inlet Western Wireless PV/SS PCS L.P. as an Affiliate. 1.3 "Business Day" shall mean Monday through Friday, excluding weekends and CSC holidays, as detailed in Appendix E. 1.4 "Bypass" or "Work Around" shall mean a mutually agreeable procedure by which a user can avoid a reported problem, defined herein as a problem experienced by the Customer with a CSC product or service which is subsequently reported to CSC for analysis and correction, if applicable, by changes to the procedures followed or data supplied by the user when using the Software. 1.5 "Calendar Day" shall mean Monday through Sunday, excluding CSC holidays as detailed within Appendix E. 1.6 "Critical Error(s)" shall mean a failure of the Software which Severely Impacts Customer's ability to provide service or invoice its Subscribers for services provided and which cannot be temporarily eliminated through the use of a "Bypass" or "Work Around." 1.7 "Customer Business Hours" shall mean 8:00 A.M. - 8:00 P.M. Pacific Time Monday through Friday, excluding holidays. 1.8 "Data Receipt Date" shall mean that day as set forth in Appendix K, other than Sunday or a CSC holiday as detailed in Appendix E, on which CSC anticipates having received all of Customer's Data required by CSC for the purpose of beginning the production of Customer's Subscriber Billing Services statement data images. This date shall be adjusted as described within Section 12.2.e below based upon Customer's ability to provide necessary Data within the allowed timeframes. 1.9 "Data" shall mean all records, documents and other information, including but not limited to, all Subscriber-related service order records, Subscriber call records and payment records, in any form provided to CSC by Customer or required for CSC's performance of the Subscriber Billing Services to be provided under this Agreement. -2- 4 1.10 "Detailed Bid Proposal" shall mean a detailed written response to Customer's request for a Software Enhancement. The response will be prepared by a qualified CSC Software analyst and will outline CSC's understanding of the Software Enhancement request and provide Customer with an itemized breakdown of all work efforts required by CSC to complete the Software Enhancement. Detailed Bid Proposals will be prepared on a time and materials basis. 1.11 "Enhancement(s)" shall mean any improvement to or change in the Software Licensed by Customer that alters the original functional characteristics provided to Customer. Unless otherwise agreed in writing by CSC, all title, ownership, and intellectual property rights to the Enhancement(s) shall vest solely and exclusively with CSC. Customer's sole interest in the Enhancement(s) is a limited license to use the Enhancement(s) subject to the terms and conditions of this Agreement. 1.12 "Error(s)" shall mean a failure of the Software to: (a) comply with the provisions of the Order; (b) function in accordance with CSC's specifications (including producing the Subscriber Billing Services statement data images and reports applicable to the Software or Software Products); (c) be compatible and conform to user documentation and operating manuals furnished by CSC; or (d) comply with a mutually agreed upon Software Acceptance Plan which shall be developed and agreed to in writing by Customer and CSC prior to installation of the Software for which the Software Acceptance Plan has been established. Errors other than Critical Errors shall be categorized as: o "Priority Two Error - High" shall mean (a) a failure of the Software which Severely Impacts Customer's ability to provide service or accurately invoice its Subscribers for services provided, but which can be temporarily eliminated through the use of a "Bypass" or "Work Around," or (b) a problem is preventing full use of functionality but is not affecting critical system functionality or other customer data and a "Bypass" or "Work Around" is not available. o "Priority Three Error - Medium" shall mean a problem with the Software that can be tolerated temporarily but must be resolved before the next billing cycle. For example, a missing tax ID or a Software Error that prevents exclusion of a charge code. If the Priority Three Error is not resolved prior to the applicable billing cycle, then the Error will be reclassified as a Critical Error or a Priority Two Error as applicable. o "Priority Four Error - Low" shall mean a problem that interferes with optimal use of the Software but not with Subscriber Billing Services statement data images and reports or customer care operations. For example: error messages that are not user friendly; function keys that are not consistent with the rest of the application; spelling errors; and cosmetic improvements. 1.13 "Fix(es)" shall mean a correction of an Error(s). -3- 5 1.14 "Implementation Plan" shall mean the mutually agreed upon master project plan for delivering CSC Customer Care Software, Software Enhancements defined in Appendix C of this Agreement, and converting Customer's cellular and PCS markets to version 3.0 of the Software. The Implementation Plan defines the necessary tasks and responsibilities for both CSC and Customer, and includes the required delivery and acceptance dates. Those Customer tasks considered on the critical path for delivery of these items are detailed in Appendix H (PCS Conversion and Migration from TRIS+ 1.0 to TRIS+ 3.0) of this Agreement. The Implementation Plan and Customer Milestones may be modified periodically as mutually agreed upon between CSC and Customer. Customer delays in completing the Customer Milestones or other relevant tasks defined within the Implementation Plan will be analyzed by CSC, but CSC shall be given a one (1) day extension in associated delivery dates for every day of Customer delay to the extent Customer delay causes a CSC delay. 1.15 "Individual Account" shall mean a standalone Account within the Software that is not associated with a Master Account. See Appendix I for a schematic diagram of Account and Service relationships within the Software. 1.16 "License(s)" shall mean any personal, non-exclusive, nontransferable, non-assignable license or licenses granted by CSC to Customer to use the Software or Software Products under this Agreement. 1.17 "Master Account" shall mean an aggregation of Subordinate Accounts. See Appendix I for a schematic diagram of Account and Service relationships within the Software. 1.18 "Object Code" shall mean the binary machine readable version of the Software. 1.19 "Order" shall mean a formal written request by Customer to CSC indicating Customer's desire to License and/or purchase Software (other than that which is listed in Appendix B), Software Products and/or Subscriber Billing Services from CSC. This formal written request shall conform in all material respects to the form detailed as Appendix A, attached hereto, which may be amended from time to time. 1.20 "Planning Estimate" shall mean a high level written response to a Customer's request for a Software Enhancement. The response will contain the estimated time a Software Enhancement requested by the Customer shall take CSC to complete. The time estimate will be the consensus opinion of CSC's Software Enhancement Steering Committee and will be derived without any formal detailed analysis of the Software Enhancement request by a qualified CSC Software analyst. Planning Estimates will be provided to Customer at no additional charge and are not offers or quotations from CSC to complete such Software Enhancements. 1.21 "Service", as described within Appendix I, shall be identified by the following data elements: a) Market (i.e., SRVA, SLOC); b) Customer ID. (i.e., account number); c) Service ID. (sequential identifier that together with the Market and Customer ID uniquely -4- 6 identifies the service to the TRIS+ Software); d) Service Type (i.e., identifies the service type as voice, SMS, voice mail, or other service type); e) Depending upon the type of service, other identifiers may also be used including: i) Service Number (e.g., mobile number for voice or voice mail; fleet and fleet member ID. for dispatch; IP Address for data services, etc.) or ii) Other identifiers unique to various standards (e.g., International Mobile Subscriber Identifier). Each service may have charges associated with it as set forth in Appendix D. See Appendix I for a schematic diagram of Account and Service relationships within the Software. 1.22 "Severely Impacts" shall mean having a material negative impact on the Customer's ability to provide services to Customer's Subscribers or having a material negative impact on Customer's ability to manage or process information which is critical to the well being of the Customer and/or its operations. 1.23 "Site" shall mean a Customer's computer facility located in one specific geographic location, or in the case of a client-server configuration, all computer facilities housing either a client and/or a server computer. Customer may install the licensed Software at different Sites at no additional fee, but CSC will only support one version of the Software configuration installed at a designated primary Site. Customer shall be responsible for reproducing the Software on other Customer computers, or replicating multiple versions of the Software on a single Customer computer for training or testing purposes. 1.24 "Software" shall mean the Object Code version of all programs, data, routines, etc., known as TRIS+(TM) as identified in Appendix B, and Enhancements set forth in Appendix C, and future Enhancements. 1.25 "Software Acceptance Plan" shall mean a methodology mutually agreed upon by both CSC and Customer for determining whether the Software meets the performance and functionality criteria outlined by CSC, and which clearly identifies: o Those tests to be run to demonstrate that the Software meets the functional and performance requirements represented by CSC in this Agreement; o The parties responsible for running the Software tests; o The time frame in which the tests are to occur; o The method by which test results are to be classified and reported and the parties with whom test results are to be shared; o Procedures and timeframes required for the correction of Errors; o All criteria required for Software acceptance described in a mutually acceptable acceptance test plan document; -5- 7 o Any payments and payment terms related to the acceptance of Software. 1.26 "Software Maintenance" shall mean the work done by CSC to provide Fixes and Enhancements to the Software. 1.27 "Software Products" shall mean all physical components, other than Software, which are offered by CSC, including but not limited to, documentation, magnetic media, job aids, templates and other similar devices. 1.28 "Source Code" shall mean those statements in a computer language, which when processed by a compiler, assembler or interpreter become executable by a computer. 1.29 "Subordinate Account" shall mean an Account that is Subordinate to a Master Account. See Appendix I for a schematic diagram of Account and Service relationships within the Software. 1.30 "Subscriber" shall mean an end user of Customer's products and services. 1.31 "Subscriber Billing Fulfillment Time" shall mean the number of hours, rounded to the nearest hour, required by CSC or its third party fulfillment vendor to prepare and deliver Subscriber Billing Services statements to the United States Postal Service. Measurement of this time shall begin upon receipt by CSC of Customer written bill release notification to deliver such statements to the United States Postal Service and shall end based upon the Average Tray time reported by CSC's third party fulfillment vendor. "Average Tray" is a weighted average of mail times and number of bills mailed within those timeframes. 1.32 "Subscriber Billing Processing Time" shall mean the number of hours, rounded to the nearest hour, required by CSC to process a single Customer billing cycle and produce Subscriber Billing Services statement dataimages. Measurement of this time shall begin at noon Central Standard Time on the Data Receipt Date and shall end when Subscriber Billing Services statement data images are available for Customer to review on CSC's mainframe computer. 1.33 "Subscriber Billing Services" shall mean the calculation and creation of data print images of all Subscriber bills and reports as further detailed in Section 12 of this Agreement and Section 1 of Appendix D. 1.34 "Subscriber Billing Turnaround Time" shall mean the sum of Subscriber Billing Processing Time plus Subscriber Billing Fulfillment Time. 1.35 "Support Services" shall mean the work done by CSC in support of its Software and Software Products, including but not limited to, installation services for Software Enhancements, maintenance, training, consultant support, telephone support including support of -6- 8 CSC's Subscriber Billing Services provided to Customer under this Agreement, and such other services as may be defined in an accepted Order. 2. ORDERS Customer's Orders for Software, Software Products, and Subscriber Billing Services shall be subject to the terms of this Agreement and shall be evidenced by the execution and submission to CSC of an Order substantially in the form of Appendix A, attached hereto, which may be amended, upon mutual agreement of both CSC and Customer, from time to time. CSC will accept Orders only from those representatives of Customer authorized to place Orders with CSC. Customer has provided CSC with a written list of all of Customer's representatives empowered to execute Orders, attached as Appendix G, which listing may be revised by Customer from time to time. All Orders shall be deemed to incorporate the terms and conditions of this Agreement and any amendments hereto. However, if there are any inconsistencies between an Order and the terms of this Agreement, the terms of the Order shall control. This Agreement shall have control over typed, stamped, or preprinted portions of CSC's and Customer's Orders or acknowledgments or other communications unless mutually agreed upon in writing by a representative of Customer designated in Appendix G and an authorized representative of CSC. Such mutually agreed upon writings shall have control over this Agreement for that specific Order only. 3. LICENSE 3.1 Subject to the limitations contained within this Agreement, CSC grants Customer and its Affiliates a limited, personal, non-exclusive, nontransferable, non-assignable Object Code license to use and reproduce the Software and Software Products in the United States only to the extent Ordered by Customer, and subject to the provisions of this Agreement as well as the payment of all applicable License fees for the term of such License. Subject to the terms of this Agreement, licensee may utilize the Software and Software Products outside the United States solely in connection with its wholly-owned subsidiaries. CSC agrees to provide Customer with associated Software Products, Software Maintenance and Support Services subject to the provisions of this Agreement. There are no restrictions as to the number of users or Sites associated with this License, provided that CSC has consented to the use of the Software at any new Sites, and such consent shall not be unreasonably withheld or delayed. Software may be temporarily transferred to a backup computer while the Licensed computer is inoperative or for emergency testing purposes without prior consent from CSC. The backup computer may be at the same Customer Site, another Customer Site, or an off-site location under emergency conditions with reasonable notice to CSC of the name and location of the off-site operator. CSC shall not be obligated to provide Software Maintenance to Customer under this Agreement for Software transferred for testing and/or for training purposes. 3.2 All Software and Software Products used hereunder, in whatever form, including, without limitation, Source Code, Object Code, microcode and mask works, including any -7- 9 computer programs and any documentation relating to or describing such Software or Software Products, such as, but not limited to logic manuals and flow charts provided by CSC, including instructions for use of the Software or Software Products and formulation of theory upon which the Software or Software Products are based, are furnished to Customer only under a personal, non-exclusive, nontransferable, non-assignable license solely for Customer's and its Affiliates' own use. All of the Software and all computer program specifications, documentation, procedure manuals, disks and tapes utilized, processed or developed by CSC in connection with this Agreement or the services rendered to Customer hereunder shall be and remain the exclusive and confidential property of CSC or third parties from whom CSC has secured the right to use the same. The Subscriber Billing Services statements, reports, or other output created by CSC for Customer under this Agreement are the sole and exclusive property of CSC and shall remain the sole and exclusive property of CSC until payment is made in full on the invoice covering the same, at which time title shall transfer to Customer. However, even in the event of non-payment, Customer shall retain title to its Subscriber listings and any Data Customer provides to CSC and CSC shall release all such information to Customer upon Customer's request. 3.3 Except as provided in this Agreement or an Order, no license under any patents, copyrights, trademarks, trade secrets or any other intellectual property rights, express or implied, are granted by CSC to Customer under this Agreement. 4. TERM OF LICENSES The term of each individual License granted under this Agreement, as set forth in Appendices B and C, begins on the date of installation of the Software and shall be coterminous with this Agreement. The term of each individual License granted under subsequent Orders begins on the date of installation of the Software and shall terminate on the date set forth on the Software License and Software Maintenance Order which requested such License, unless earlier terminated as provided in this Agreement. 5. LICENSE FEES The price schedule for the License fees for Software, Software Products, Software Maintenance and Support Services ordered hereunder, including any applicable discount and payment schedules, is detailed in Appendix D, attached hereto. 6. CUSTOMER PREPARATION If the Software or Software Products are to be installed by CSC, the Customer shall have all things in readiness for installation, including, but not limited to, other equipment, connections and facilities for installation at the time the Software or Software Products are delivered. Unless otherwise agreed to in writing, CSC will provide to Customer in writing at least sixty (60) calendar days in advance of the scheduled date for Software installation a list detailing all other equipment, connections and facilities which CSC requires for installation. In the event the -8- 10 Customer shall fail to have all things in readiness for installation on the scheduled installation date, the Customer shall reimburse CSC for any and all reasonable expenses caused by Customer's failure to have things in readiness, unless Customer has notified CSC at least five (5) Business Days prior to the scheduled installation date. Customer agrees to provide and bear the cost of a dedicated communications line of sufficient capacity between Customer's Site(s) and CSC's Champaign, Illinois offices, including all equipment costs directly related to or reasonably required by CSC for the purposes of remote access and support by the CSC consultant or phone support group. CSC shall conform in all respects to Customer's written procedures for remote access to Customer's computer hardware, which Customer shall provide to CSC prior to any attempt by CSC to remotely access Customer's computer hardware for support purposes. Customer's procedures for remote access by CSC may be amended from time to time, and CSC must be provided with written notification of any changes in Customer's remote access procedures at least two (2) Business Days before any amended procedures are made effective. 7. REPRODUCTION OF MANUALS, DOCUMENTATION AND OBJECT CODE 7.1 Manuals and Documentation. Customer shall have the right, at no additional charge, to reproduce solely for its own use, all manuals and documentation, including user documentation and all training manuals, furnished by CSC pursuant to this Agreement and any Order, regardless of whether such manual or documentation is copyrighted or otherwise restricted as proprietary information. All copies of manuals or documentation made by Customer shall include any proprietary notice or stamp that has been affixed by CSC. CSC shall furnish for each License obtained by Customer, and at no additional charge to Customer, two (2) copies of the relevant Software manuals and documentation and any succeeding changes thereto, sufficient to enable Customer to maintain and operate the Software. [Section 8 intentionally omitted] 9. ACCEPTANCE OF SOFTWARE AND SOFTWARE PRODUCTS 9.1 Customer shall conduct Software and Software Products acceptance tests during the installation process at a Customer designated location(s) in accordance with the Software Acceptance Plan. The acceptance period will commence once the Software is operational in the Customer designated location(s). The Software and Software Products shall: (a) comply with the provisions of the Order; (b) function in accordance with CSC's specifications (including producing the Subscriber Billing Services statement data images and reports applicable to the Software or Software Products); (c) be compatible and conform to user documentation and operating manuals furnished by CSC; and (d) comply with a mutually agreed upon Software Acceptance Plan which shall be developed and agreed to in writing by Customer and CSC at least thirty (30) days prior to installation of the Software for which the Software Acceptance Plan has been established. The Software Acceptance Plan shall provide that Customer will have the -9- 11 option to require up to three (3) test billing runs with the Software for at least two different markets without Critical Errors or Priority Two Errors. 9.2 Unless otherwise detailed to the contrary herein, if, during the acceptance period, Customer determines that the Software and/or Software Products do not: (a) comply with the provisions of the Order; (b) function in accordance with CSC's specifications (including producing the Subscriber Billing Services statement data images and reports applicable to the Software or Software Products); (c) demonstrate compatibility and conformity to user documentation and operating manuals furnished by CSC; or (d) comply with a mutually agreed upon Software Acceptance Plan which shall be developed and agreed to in writing by Customer and CSC at least thirty (30) days prior to installation of the Software for which the Software Acceptance Plan has been established, Customer shall so notify CSC in writing (which may be by e-mail), specifying the area of noncompliance. In the event that Customer's notification to CSC identifies any Critical Errors or any Priority Two Errors, CSC shall use its best efforts to correct all such conditions within ten (10) Business Days from the date of receipt of Customer's notification. CSC shall use its good faith efforts to correct all other conditions reported by Customer which prevent the Software and/or Software Products from meeting the above requirements within forty-five (45) Calendar Days following receipt of notice from Customer. If all Customer reported conditions which prevent the Software and/or Software Products from substantially complying with the specific acceptance criteria detailed in the Software Acceptance Plan are not satisfied within this forty-five (45) day period, the Customer will notify CSC, in writing, within five (5) Business Days following the end of the forty-five (45) day period, indicating either Customer's acceptance of the Software and/or Software Products, Customer's desire to extend the Software acceptance period, or Customer's intent to terminate this Agreement or any License without penalty or further financial obligation. Notwithstanding any reported Errors, Customer's commercial use of any the items within a payment milestone shall constitute conditional acceptance of all of the items within the payment milestone. Upon conditional acceptance, Customer shall pay CSC 50% of any fees specifically withheld for acceptance for the applicable milestone. However if none of the items within a payment milestone contain Critical Errors or Priority Two Errors, Customer shall pay CSC 100% of any fees specifically withheld for acceptance of the payment milestone. If no Errors are reported to CSC in writing by Customer at the end of the acceptance period, CSC shall notify Customer that acceptance shall be assumed unless CSC is notified to the contrary within five (5) Business Days. Failure to notify CSC in writing of Errors during this five (5) Business Day period shall constitute complete acceptance of the applicable Software or Software Product. 9.3 As soon as it is feasible after the execution of this Agreement, CSC and Customer shall conduct tests of the Subscriber Billing Services to be performed under this Agreement for Customer's billing cycles detailed in Appendix H. CSC shall produce a reasonable number of test billing statements and reports at no charge to Customer so that Customer may verify the accuracy and adequacy of the Subscriber Billing Services. -10- 12 10. SOFTWARE MAINTENANCE IMPLEMENTATION CSC shall be responsible for performing and Customer desires CSC to perform Software Maintenance beginning with the expiration of the warranty period and ending with the termination of this Agreement. Such Software Maintenance shall include providing Customer with Fixes, regardless of how the need for such Fixes is brought to the attention of CSC. This Software Maintenance shall include standard software releases which contain Fixes and certain Enhancements that are generally made available to all CSC clients at no charge. CSC shall determine solely those Enhancements that are included in standard releases at no charge. 11. FIXES AND ENHANCEMENTS 11.1 Customer will notify CSC verbally of Errors, with written or e-mail follow-up notification to CSC by Customer in a CSC Problem Notification Form within five (5) Business Days of Customer's discovery of the Error(s). CSC shall provide Customer with a telephone number which is answered during the hours described in Section 2 of Appendix D, and with appropriate e-mail addresses. Customer shall have access via this telephone number to individuals who shall accept Error reports and are qualified to assist Customer with the verification of suspected Errors and who may provide Fixes for said Errors. Customer shall be provided with a telephone number which is answered by individuals who shall accept Error reports for all hours outside of those defined in Section 2 of Appendix D. 11.2 After acceptance or first commercial use, CSC will respond to Errors according to the priority of the Error as described in the table below. CSC's response will generally involve correcting the Data that may have been corrupted. CSC will make every effort to accomplish this according to the priority and associated timeframe below. CSC will also work to correct the Software, and the resulting Software modifications will be scheduled for a future Software release. - --------------------------------------- -------------------------------------- PRIORITY CSC CORRECTION EFFORTS - --------------------------------------- -------------------------------------- Critical Error CSC will use best efforts to promptly correct Critical Errors and devise and implement a Work Around or Bypass, and will provide an estimate of when the Critical Error will be corrected within twenty four (24) hours. - --------------------------------------- -------------------------------------- Priority Two Error- High CSC will use good faith efforts to correct the Error, will provide available Bypass or Workarounds within twenty four (24) hours, and will discuss plans with Customer for providing a Fix within seventy two (72) hours. -11- 13 - --------------------------------------- -------------------------------------- PRIORITY CSC CORRECTION EFFORTS - --------------------------------------- -------------------------------------- Priority Three Error- Medium CSC will use good faith efforts to correct the Error, and within five (5) Business Days will discuss plans with Customer for providing a Fix. - --------------------------------------- -------------------------------------- Priority Four Error- Low Within thirty (30) calendar days, CSC will discuss plans with Customer for providing a Fix. - --------------------------------------- -------------------------------------- 11.3 If requested by Customer, CSC agrees to incorporate any Customer specific or other third party Software in any new versions of CSC's Software, at CSC's charges to Customer detailed in Appendix D. 11.4 CSC and Customer warrant that each will establish regular and reasonable internal measures to verify the accuracy of all services performed by CSC on behalf of Customer. Each party shall notify the other party of all errors, omissions or inaccuracies in its Data or in any Data, record, statement or other document processed or delivered by CSC within sixty (60) calendar days after such work is delivered to or picked up by Customer, or is delivered according to Customer's instructions to the extent such Errors, omissions or inaccuracies are discoverable through reasonable diligence. Customer agrees that in the event of any Errors, omissions or inaccuracies in Subscriber Billing Services processing, CSC shall be given a reasonable period, not to exceed fifteen (15) calendar days, in which to run a rebilling to correct such Error. In the event CSC is unable to rebill the Subscriber, or Customer reasonably determines that rebilling will generate more costs than benefits to Customer, then CSC shall reimburse Customer for all charges billed to Customer by CSC, detailed in Section 1 of Appendix D, for such Subscribers impacted by the Error, omission or inaccuracy. All charges and expenses so reimbursed or paid to Customer shall be subject to the limitations set forth in Section 23. CSC agrees to take all reasonable steps to rebill in the event of any errors in Subscriber Billing Services processing, and to make best efforts in the event rebilling is a result of a Critical Error or Error or negligence caused by CSC or its agents, contractors (including IBS) or consultants. Customer agrees to reimburse CSC at the rates set forth in Section 1 of Appendix D if rebilling is required through no fault of CSC or its agents, contractors (including IBS) or consultants. If other CSC consulting or custom programming services are required to correct an Error, omission or inaccuracy caused through no fault of CSC or its agents, contractors (including IBS) or consultants, such services shall be performed in accordance with the rates set forth in Section 2 of Appendix D. The parties agree that the sixty (60) calendar day limitation period in this Section shall apply only to the matters arising under this Section, while all other matters under this Agreement shall be governed by the limitation periods set out in Sections 21 and 23. 11.5 CSC and Customer acknowledge the periodic need to change and/or provide Enhancements to CSC's Software to meet the changing needs of Customer. CSC and Customer -12- 14 hereby agree to the following procedures with regard to changes and Enhancements requested by Customer to CSC's Software: a. Changes not Requiring Additional Programming. Many of the Customer-specific parameters used by CSC in performing Subscriber Billing Services and other related services for Customer under this Agreement may be changed by CSC without additional programming through a procedure referred to as "table maintenance." Customer agrees to notify CSC in writing within the Required Notification Time as defined in Section 11 of Appendix D. In the event CSC is given at least this minimum time period to implement the desired table maintenance, CSC will provide these services at the rates specified within Sections 2 and 11 of Appendix D, if applicable. In the event that Customer requests that the change be implemented in less than the Required Notification Time, CSC will be reimbursed by Customer at CSC's rates for such premium services as set forth in Section 11 of Appendix D. b. Changes and Enhancements Requiring Additional Programming. Changes other than table maintenance and all Enhancements to CSC's Software cannot be implemented without additional programming on the part of CSC. Such changes and additional programming shall be performed in accordance with the rates detailed within Section 2 of Appendix D. Customer's requests for such changes or Enhancements to CSC's Software must be in writing in the form of a Client Business Requirements - Assessment Form. As a part of Customer's written request to CSC, Customer will indicate whether a Planning Estimate is desired or whether a Detailed Bid Proposal is required. In the event that Customer seeks only a Planning Estimate, CSC shall then have seven (7) Business Days from the date of receipt of the Customer's written request to return the completed Planning Estimate to the Customer via facsimile or e-mail. In addition to the Planning Estimate, CSC may provide Customer with a Fax Acknowledgment Form detailing a suggestion for continued analysis which is limited in scope, and will generally require less effort than a Detailed Bid Proposal. If Customer chooses to proceed with the Fax Acknowledgment, CSC will provide a delivery date for such work within ten (10) business days of receiving the signed Fax Acknowledgment. In the event a Detailed Bid Proposal is requested (either through a signed Client Business Requirements - Assessment Form or a signed Planning Estimate Form), CSC shall have ten (10) business days to provide a delivery date for the Detailed Bid Proposal, or indicate that such Enhancement is not feasible or cannot be incorporated into CSC's Software. CSC's Detailed Bid Proposal shall describe the following: (i) A description of the required functionality, along with relevant assumptions and restrictions; (ii) The approximate implementation date of such change or Enhancement; -13- 15 (iii) The charge for implementation of the change or Enhancement, including the number of hours required and the contractual rates applied to such hours. CSC shall have sole discretion as to whether a requested change or Enhancement is implemented on a chargeable basis or is implemented at no additional charge to Customer. In the event the change or Enhancement will be provided at no additional charge to Customer, CSC also will inform Customer of the estimated implementation date of the change or Enhancement. If the change or Enhancement will be implemented by CSC at no additional charge or the Enhancement is funded by the Customer, but Customer would like it handled on a higher priority basis, CSC will provide Customer with a quote on the cost to accomplish the change within Customer's desired time frame. In the event the request will be charged at CSC's rates detailed in Appendix D, CSC shall also provide Customer with a Detailed Bid Proposal detailing the total charges required to implement the requested change or Enhancement. Customer shall then have fourteen (14) calendar days from the receipt of CSC's written Detailed Bid Proposal in which to direct CSC to proceed, and if Customer does not notify CSC within the fourteen (14) calendar day period, the estimate shall no longer be effective and CSC may requote and/or revise the estimated completion date. All written estimates by CSC to Customer shall be deemed rejected if not accepted in writing within the fourteen (14) calendar day time frame. 11.6 CSC and Customer agree that the initial Software Enhancements to be provided by CSC to Customer under this Agreement shall be provided to Customer by CSC in accordance with the terms and conditions detailed in Appendix C, attached hereto. All future Enhancements to be provided by CSC to Customer under the terms of this Agreement shall be evidenced by an appendix to be attached to this Agreement outlining the major terms and conditions pertaining to the future Enhancements. This appendix will conform in all material respects to Appendix C. 12. SUBSCRIBER BILLING SERVICES 12.1 The parties agree that the geographic areas to be covered by this Agreement are Customer's cellular and PCS calling regions established for the geographic areas defined within Appendix K (Geographic Areas and Data Receipt Dates). However, Customer shall not be obligated to have CSC process all geographic areas defined within Appendix K if the monthly minimum Subscriber Bill and Report Computation minimum charges set forth in Section 8 of Appendix D are paid to CSC by Customer. The parties agree that new geographic areas of Customer or an Affiliate may be added to the coverage for services to be provided under this Agreement at the rates set forth in Appendix D, pursuant to an Order or a separate written agreement between the parties setting forth the geographic area or areas to be added and detailing -14- 16 any additional matters with regard to the conversion for each such area and how the provision of services for such area will otherwise be accomplished and compensated under this Agreement. 12.2 Customer shall be responsible for entering Customer's Data into CSC's Software. Customer shall be responsible for delivering to CSC all Data reasonably required by CSC to render Subscriber bills on behalf of Customer in a timely fashion to conform to the processing times required by CSC for each of Customer's billing cycles detailed below. CSC and Customer agree that Customer will provide all Data required by CSC for Subscriber Billing Services by 12:00 noon CST of the CSC Data Receipt Dates for each billing cycle defined within Appendix K. In the event that any of the CSC Data Receipt Dates falls on a Sunday or a CSC holiday as set out in Appendix E, then the CSC Data Receipt Date for that billing cycle shall be the next Calendar Day. Provided CSC has received all Data required by CSC for Subscriber billing purposes within one (1) hour after 12:00 noon CST of the CSC Data Receipt Date as defined within Appendix K, CSC agrees Subscriber Billing Turnaround Time will be within: a. Normal Billing Cycle Turnaround Prior to August 1, 1997 - * hours, excluding the time from 12:01A.M. to 11:59P.M. on Saturday, Sunday, and CSC holidays, as detailed in Appendix E. In the event CSC is unable to deliver Customer's Subscriber Billing Services statements to the U.S. Postal Service within this timeframe, CSC shall provide to Customer a credit as determined in Section 12.2 d. below. Beginning August 1, 1997 - * hours, excluding the time from 12:01A.M.to 11:59P.M.on CSC holidays, as detailed in Appendix E. In the event CSC is unable to deliver Customer's Subscriber Billing Services statements to the U.S. Postal Service within this time frame, CSC shall provide to Customer a credit as determined in Section 12.2 d. below. b. Initial Billing Cycle Turnaround - New SA/SL Prior to August 1, 1997 - * hours, excluding the time from 12:01A.M.to 11:59P.M.on Saturday, Sunday, and CSC holidays, as detailed in Appendix E. In the event CSC is unable to deliver Customer's Subscriber Billing Services statements to the U.S. Postal Service within this time frame, CSC shall provide to Customer a credit as determined in Section 12.2 d. below. Beginning August 1, 1997 - * hours, excluding the time from 12:01A.M.to 11:59P.M.on CSC holidays, as detailed in Appendix E. In the event CSC is unable to deliver Customer's Subscriber - ---------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. -15- 17 Billing Services statements to the U.S. Postal Service within this time frame, CSC shall provide to Customer a credit as determined in Section 12.2 d. below. This Subscriber Billing Turnaround Time requirement as set forth in this Section 12.2.b shall apply to the initial billing cycle for a new service area/service location. c. Initial Billing Cycle Turnaround - Initial Billing Cycle After a Cycle Change or Within an Existing SA/SL Prior to August 1, 1997 - * hours, excluding the time from 12:01A.M.to 11:59P.M.on Saturday, Sunday, and CSC holidays, as detailed in Appendix E. In the event CSC is unable to deliver Customer's Subscriber Billing Services statements to the U.S. Postal Service within this time frame, CSC shall provide to Customer a credit as determined in Section 12.2 d. below. Beginning August 1, 1997 - * hours, excluding the time from 12:01A.M.to 11:59P.M.on CSC holidays, as detailed in Appendix E. In the event CSC is unable to deliver Customer's Subscriber Billing Services statements to the U.S. Postal Service within this time frame, CSC shall provide to Customer a credit as determined in Section 12.2 d. below. This Subscriber Billing Turnaround Time requirement as set forth in this Section 12.2.c shall apply in the following situations: initial billing cycle after a cycle change; or initial billing cycle when added to an existing service area/service location d. Credit For Late Billings In the event that Customer's Subscriber Billing Services statements are not delivered in accordance with the turnaround times as detailed above, CSC shall provide to Customer a credit determined in the following manner: - ----------------------------------- -------------------------------------------- Delay Credit as a % of CSC Monthly Charge for the Applicable Billing Cycle - ----------------------------------- -------------------------------------------- Credit If Delivered within 24* hours after the required * Subscriber Billing Turnaround Time - ----------------------------------- -------------------------------------------- - ---------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. -16- 18 - ----------------------------------- -------------------------------------------- Delay Credit as a % of CSC Monthly Charge for the Applicable Billing Cycle - ----------------------------------- -------------------------------------------- Credit If Delivered between * and 48 hours after the required * Subscriber Billing Turnaround Time - ----------------------------------- -------------------------------------------- Credit If Delivered between * and 72 hours after the required * Subscriber Billing Turnaround Time - ----------------------------------- -------------------------------------------- Credit If Delivered between * and 96 hours after the required * Subscriber Billing Turnaround Time - ----------------------------------- -------------------------------------------- Credit If Delivered After * hours after the required Subscriber * Billing Turnaround Time - ----------------------------------- -------------------------------------------- In the event that the CSC Subscriber Billing Services statement turnaround time for any given cycle is less than or equal to * hours after the required Subscriber Billing Turnaround Time, CSC shall not be required to provide Customer with any credit for late delivery. In the event that the CSC Subscriber Billing Turnaround Time is greater than 24 hours after the required Subscriber Billing Turnaround Time, CSC shall be required to provide Customer with a credit equal to the applicable percentage, as detailed above, of the charges detailed in Section 1 of Appendix D applying only to those Subscriber Billing Services statements delivered after the Contractual Turnaround Requirement. For example, if the Subscriber Billing Turnaround Time for a cycle is * hours after the required Subscriber Billing Turnaround Time, a credit equal to 25% of the charges detailed in Section 1 of Appendix D for the billing cycle would be provided by CSC to Customer. -17- 19 In the event all Customer billing cycles are delivered after * hours of the required Subscriber Billing Turnaround Time for * consecutive months, CSC shall not be allowed the * hour grace period described above until a billing cycle is delivered within the required Subscriber Billing Turnaround Time. e. Late Receipt of Customer Data In the event that CSC has not received the Data from Customer within * after 12:00 noon CST of the CSC Data Receipt Date as defined within Appendix , then CSC shall be given * for each day or portion thereof of delay, except where such delay is caused by CSC. For example, if the Data is received * after noon on the Data Receipt Date, the required Subscriber Billing Turnaround Time defined above shall be extended by *. Similarly, if the Data is received * after noon on the Data Receipt Date, the required Subscriber Billing Turnaround Time shall be extended by *. CSC shall have no liability or responsibility for loss or damage due to late entry or late delivery of Data to CSC or due to any inaccuracy or incompleteness of the Data furnished by Customer. All costs for employee and equipment time expended by CSC in locating and correcting errors, omissions or inconsistencies in the Data submitted by Customer or Customer's agent shall be additional charges to Customer to be billed at CSC's fee schedules then in effect and added to Customer's invoice. 12.3 Customer agrees to prepay CSC * as a good faith estimate of the postage cost to be incurred by CSC in fulfillment of CSC's obligation to mail Subscriber Billing Services statements for the billing cycles processed by CSC. It is the intent of the Parties that the postage prepayment by Customer to CSC will occur monthly, and that the monthly postage prepayment will attempt to closely approximate the monthly postage expenses incurred by CSC on behalf of Customer relating to the fulfillment of CSC's obligation to mail Customer's Subscriber Billing Services statements. CSC and Customer agree to review the amount of prepaid postage costs semi-annually and to adjust the prepaid postage amount as required to reflect the actual postage due from Customer each month. 13. THIRD PARTY SOFTWARE Customer acknowledges and agrees, unless otherwise indicated in Appendix M, that all third party costs associated with the purchase, license, or ongoing maintenance of software run-time licenses required in connection with the operation of the TRIS+ Software shall be borne solely by Customer. If requested by Customer, CSC shall provide written estimates of all such charges at least thirty (30) days prior to the installation of the TRIS+ Software. To the extent credits for late billings or Fixes are required as a direct result of third party software, CSC shall provide such late billing credits or Fixes as defined within the Agreement in the event such third party is acting - ---------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. -18- 20 as a subcontractor for CSC. A listing of third party Software Products is set forth in Appendix M of this Agreement. 14. RISK OF LOSS Risk of loss or damage to Software and/or Software Products licensed by Customer under this Agreement and physically residing at Customer's Sites shall vest in Customer when the Software and/or Software Products have been accepted by Customer, or its representative, pursuant to Section 9, provided that such loss or damage is not caused by CSC, employees or its agents. In the event that CSC is required to replace Software and/or Software Products licensed by Customer as a result of loss or damage by Customer, Customer agrees to reimburse CSC for its out-of-pocket expenses and employee time involved with such replacement at CSC's charges detailed in Appendix D. 15. TRANSPORTATION OF DATA Customer shall, at its cost and expense, transport and deliver to and/or pick up from CSC all Data unless CSC otherwise agrees in writing. Customer agrees that in either event it shall bear all risk of loss or damage to such Data that may occur during transportation thereof, unless such damage shall be the result of CSC's negligent acts or omissions or willful misconduct. 16. SUPPLIES If CSC, with Customer's written approval, has purchased any specialized or preprinted forms or documents, which are not considered "Confidential Information" as defined herein, to be used in providing services solely to Customer hereunder, and if any of these forms or documents shall remain unused at the end of the term or at the termination of this Agreement, Customer shall, within sixty (60) calendar days of such termination or the end of the term, reimburse CSC on a pro rata basis for CSC's cost of all such unused forms or documents, including all shipping and handling costs. Within thirty (30) calendar days of such reimbursement, Customer shall either direct that said forms or documents be sent to Customer at Customer's expense, or shall abandon same and thereafter CSC shall destroy such forms or documents. 17. AUDITING The Subscriber Billing Services provided by CSC hereunder are subject to audit at the discretion of the Customer or Customer's authorized agent. CSC agrees that any and all information of Customer maintained by CSC shall be available for inspection by Customer or its internal auditors, independent public accountants or other authorized agents during CSC's regular business hours upon reasonable prior written notice to CSC. Customer agrees to reimburse CSC for its out-of-pocket expenses and employee time in excess of ten (10) hours involved with such audits at CSC's charges detailed in Appendix D. CSC agrees to provide a prior estimate of these charges upon request. -19- 21 18. TERM OF AGREEMENT This Agreement shall become effective upon execution and shall continue in effect until April 30, 2000 unless earlier terminated in accordance with this Agreement or renewed in accordance with the terms detailed below. This Agreement will automatically renew for a one (1) year period beginning May 1, 2000 and ending April 30, 2001 (the "First Year Renewal") unless Customer notifies CSC in writing as provided herein no later than October 31, 1999 that Customer does not wish to renew the Agreement for this first one (1) year period. In the event that Customer elects the First Year Renewal, the Agreement will again automatically renew for a one (1) year period beginning May 1, 2001 and ending April 30, 2002 (the "Second Year Renewal") unless Customer notifies CSC in writing as provided herein no later than October 31, 2000 that Customer does not wish to renew the Agreement for this second one (1) year period. In the event that Customer has elected the Second Year Renewal, no automatic renewal option shall be available to Customer after the Second Year Renewal, and the Agreement as renewed shall terminate on April 30, 2002. Customer shall pay for all services during the First Renewal Term and the Second Renewal Term, if applicable, in accordance with Appendix D of the Agreement and shall furthermore be subject to CPI adjustments as provided in Section 20 of the Agreement during the First Year Renewal and the Second Year Renewal. Termination during the initial term of the Agreement or during any subsequent renewal term of the Agreement shall not in any way relieve Customer of the obligation to pay for all services previously performed or then in progress by CSC. 19. TERMS OF PAYMENT In consideration for the Software, Software Products, Software Maintenance, and Subscriber Billing Services provided by CSC to Customer, Customer agrees to pay for all such Software, Software Products, Software Maintenance, and Subscriber Billing Services at the rates set forth in Appendix D. CSC shall provide, in accordance with its invoicing schedule, however in no event less frequently than monthly, a complete list of the Software, Software Products, Software Maintenance, and Subscriber Billing Services provided by CSC, and Customer agrees to make payment in full for the amount of such invoice within thirty five (35) calendar days from the date of the invoice. CSC has agreed to provide services on a credit basis only so long as Customer's bills are promptly paid in full when due. In the event any amount due CSC based on its invoices shall remain unpaid more than thirty five (35) calendar days past the date of such invoice, Customer hereby agrees to pay CSC simple interest on such unpaid balance at the rate of one percent (1%) per month until paid in full. In no event shall any interest charged exceed the maximum allowed by law. -20- 22 In the event Customer in good faith makes a claim that any amount is due to Customer from CSC and Customer claims the right of set off with respect to such amount against any of CSC's invoices, the parties agree the following procedure shall be followed by both parties: a. Customer shall, within thirty (30) calendar days of the date of any invoice against which Customer claims a right of set off, provide written notice to CSC clearly detailing the facts on which Customer bases its claim of right of set off and providing documentary evidence thereof. If such notice is not provided to CSC within the thirty (30) day time period, Customer shall have no right to claim a set off against any invoice dated prior to such thirty (30) day period, unless Customer is unable with reasonable diligence to discover its claimed right. b. CSC shall provide a detailed written response to Customer within thirty (30) calendar days of receipt by CSC of the written notice and documentary evidence from Customer. c. The parties shall participate in a telephone conference at a time mutually agreed upon between them, but in no event later than ten (10) calendar days after delivery by CSC of its response. The purpose of this telephone conference will be to discuss and in good faith negotiate to resolve Customer's claim. d. In the event the parties are unable to reach a mutually agreeable settlement in writing with respect to any such dispute within ninety (90) days of the date of the original invoice against which Customer in good faith disputed a charge, CSC shall have the right to declare Customer in default for failure to pay the invoice and the parties shall then be free to exercise all of their respective remedies and defense provided for in this Agreement or under law. The parties shall otherwise be obligated to continue fully fulfilling their obligations under this Agreement (including for example CSC's Software Maintenance, Support Services and Subscriber Billing Services) during the period of the dispute. e. Interest provided for in Section 19 that would otherwise accrue on any amount disputed by Customer pursuant to the procedure set forth herein shall not accrue during the period during which the procedure set forth herein is being followed by Customer provided, however, in the event the dispute by Customer is not resolved by mutual agreement in writing as provided herein and Customer shall thereafter make payment of all or any portion of such disputed amount, CSC shall be entitled to interest on such amount in accordance with the provisions of Section 19 as it would have accrued, but for the procedure set forth in this Section. f. Except with respect to the amount for which Customer in good faith disputes, the procedure set forth above shall not otherwise affect the rights and liabilities of the parties under this Agreement. -21- 23 20. PRICE * 21. TERMINATION OF AGREEMENT AND/OR LICENSE 21.1.1 CSC shall have the right to terminate this Agreement and, at its option, take possession of the Software and Software Products, if: (a) Customer makes an assignment for the benefit of creditors, or a receiver, trustee in bankruptcy or similar officer is appointed to take charge of all or any part of Customer's property or business; (b) Customer is adjudicated bankrupt; or (c) Customer fails to perform or observe any of its material obligations hereunder and such condition is not remedied within thirty (30) calendar days after written notice to Customer detailing the alleged breach. 21.1.2 If CSC elects not to terminate the Agreement after a material default by Customer, it may by written notice to Customer thereafter require that Customer pay cash, cashier's check or certified funds for the performance of services by CSC. 21.1.3 Customer shall have the right to terminate this Agreement if: (a) CSC makes an assignment for the benefit of creditors, or a receiver, trustee in bankruptcy or similar officer is appointed to take charge of all or any part of CSC's property or business; (b) CSC is adjudicated bankrupt; (c) CSC fails to perform or observe any of its obligations hereunder and such condition is not remedied within thirty (30) calendar days, except as otherwise provided herein, after written notice is received by CSC; or (d) CSC shall cease to conduct business as a going concern. 21.2.1 In the event either party shall be in breach or default of any of the terms, conditions, or covenants of this Agreement or any Orders, and such breach or default shall continue for a period of thirty (30) calendar days after the giving of written notice to the party in default, then in addition to all other rights and remedies of law or equity or otherwise, the injured party shall have the right to cancel this Agreement or any such Orders placed by Customer effective within five (5) Business Days of such notification without any charge, obligation, or liability whatsoever, except as to the payment for Software, Software Products, Software Maintenance, and/or Subscriber Billing Services already received and accepted by Customer. NEITHER CUSTOMER NOR CSC SHALL BE LIABLE FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL, PUNITIVE, OR SIMILAR DAMAGES ARISING FROM A BREACH OF THIS AGREEMENT OR OF ANY ORDER HEREUNDER. 21.2.2 Subject to the limitations contained within the Agreement, in the event of termination by CSC under this Section 21, Customer shall be given a grace period of ninety (90) days from the effective date of termination in which to transition its billing services requirements - ---------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. -22- 24 to another vendor. All services performed by CSC during this grace period shall be chargeable at the rates set forth in Appendix D. 21.3 Within one hundred twenty (120) days after the effective date of termination, cancellation or expiration of this Agreement, each party shall, upon request by the other party, return as soon as is reasonably possible all papers, materials and property of the other party including any Subscriber Billing Services statements completed or in progress by CSC and paid for by Customer, and without regard for whether or not such property is "Confidential Information" as defined herein. In lieu of the returning party physically returning the property to the receiving party and at the receiving party's option, the receiving party may instruct that any of its property which is "Confidential Information" be immediately shredded by the returning party. In addition, each party will assist the other in the orderly termination of this Agreement and in the transfer of all property, tangible and intangible, as may be necessary for the orderly, non-disrupted business continuation of each party. The obligation of each party to assist in the orderly termination of this Agreement shall include Customer's transition to another billing vendor. 21.4 Within one hundred twenty (120) calendar days after the effective date of termination, cancellation or expiration of this Agreement, Customer shall, upon CSC's request, certify in writing that to the best of its knowledge all copies of the Software, in whole or in part, have been removed from its production libraries. Concurrent with this certification, Customer will return to CSC all of CSC's "Confidential Information" relating to the Software License(s), including Software Products, required by CSC to be returned and Customer will certify to CSC that such Software has been destroyed or deleted and that all "Confidential Information" of CSC relating to the Software License(s), including Software Products, have been returned to CSC. 21.5 In the event CSC elects to terminate this Agreement as a result of a default by Customer, which default remains uncured after the applicable notice and cure period detailed above, CSC shall be entitled to recover immediately from Customer all sums due for services provided prior to such termination, together with liquidated damages in a sum equal to the lesser of: (1) the product of the average monthly charges to Customer for all services performed under Section 1 of Appendix D of this Agreement during the prior six (6) month period times the number of months remaining in the initial term of this Agreement; or (2) the product of the average monthly charge billed to Customer for all services performed under Section 1 of Appendix D of this Agreement during the prior six (6) month period times six (6). If CSC elects not to terminate the Agreement after a default by Customer, it may by written notice to Customer thereafter require that Customer pay cash, cashier's check or certified funds for the performance of services by CSC. 21.6 Upon termination of this Agreement as a result of a default by CSC, CSC agrees to convert Customer's Data into a machine readable, non-proprietary format within a reasonable time period at no cost to Customer upon Customer's request. Upon the expiration of the term of this Agreement or upon termination of this Agreement as a result of a default by Customer, CSC -23- 25 shall convert Customer's Data as described above, and Customer shall reimburse CSC in accordance with Appendix D for all time and expense involved. 22. INDEMNITY CSC agrees to indemnify and save harmless Customer, and Customer agrees to indemnify and save harmless CSC respectively, from any liabilities, lawsuits, penalties, claims or demands finally awarded or settled (including the costs, expenses and reasonable attorney's fees on account thereof) that may be made: (a) by any third party for injuries, including death to persons, or damage to property, including theft, resulting from the indemnifying party's negligent or willful acts or omissions or those of persons employed by the indemnifying party, its agents or subcontractors or as relating solely to CSC's indemnification of Customer, resulting from use of the Software, Software Products and/or Subscriber Billing Services furnished hereunder; or (b) by any employee or former employee of the indemnifying party or any of its subcontractors for which the indemnifying party or subcontractor's liability to such employee or former employee would otherwise be subject to payments under state worker's compensation or similar laws. CSC agrees to defend Customer, at Customer's request, and Customer agrees to defend CSC, at CSC's request, against any such liability, claim, or demand. Customer and CSC respectively agree to notify the other party promptly of any written claims or demands against the indemnified party for which the indemnifying party is responsible hereunder. The foregoing indemnity shall be in addition to any other indemnity obligations of CSC or Customer set forth in this Agreement. 23. LIMITATION OF LIABILITY 23.1 EXCEPT AS PROVIDED IN SECTION 25 OF THIS AGREEMENT, CSC MAKES NO EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE SOFTWARE, SOFTWARE PRODUCTS, OR SUBSCRIBER BILLING SERVICES OR THEIR CONDITION, MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE OR USE BY CUSTOMER. CSC SHALL NOT BE LIABLE FOR ANY: (A) SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES, INCLUDING LOSS OF PROFITS, ARISING FROM OR RELATED TO THE OPERATION OR USE OF THE SOFTWARE, SOFTWARE PRODUCTS, AND SUBSCRIBER BILLING SERVICES INCLUDING SUCH DAMAGES, WITHOUT LIMITATION, AS DAMAGES ARISING FROM LOSS OF DATA OR PROGRAMMING, LOSS OF REVENUE OR PROFITS, FAILURE TO REALIZE SAVINGS OR OTHER BENEFITS, DAMAGE TO EQUIPMENT, AND CLAIMS AGAINST CUSTOMER BY ANY THIRD PERSON, EVEN IF CSC HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; (B) DAMAGES (REGARDLESS OF THEIR NATURE) FOR ANY DELAY OR FAILURE BY CSC TO PERFORM ITS OBLIGATIONS UNDER THIS AGREEMENT DUE TO A FORCE MAJEUR EVENT; OR (C) CLAIMS MADE A SUBJECT OF A LEGAL PROCEEDING AGAINST CSC MORE THAN TWENTY-FOUR (24) MONTHS AFTER ANY SUCH CAUSE OF ACTION FIRST AROSE. -24- 26 NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, EXCEPT FOR THE CREDIT FOR LATE BILLINGS AS SET FORTH IN SECTION 11 ABOVE, AND EXCEPT FOR CSC'S OBLIGATIONS UNDER SECTIONS 24 AND 27 AS SET FORTH BELOW, AND CSC'S COMMISSION OF A CRIMINAL ACT, CSC'S LIABILITIES UNDER THIS AGREEMENT SHALL NOT EXCEED THE LESSER OF: (A) TWICE THE AVERAGE MONTHLY CHARGE, OR EQUIVALENT THEREOF, TO CUSTOMER FOR THE SERVICES PERFORMED UNDER THIS AGREEMENT FOR THE ACTUAL NUMBER OF MONTHS DURING WHICH THE PROBLEM EXISTED, OR (B) THE ACTUAL AMOUNT OF MONEY DAMAGES INCURRED BY CUSTOMER. CUSTOMER AGREES IT SHALL TAKE ALL REASONABLE STEPS TO COLLECT ALL AMOUNTS DUE AFTER ANY REBILLING, SUPPLEMENTAL BILLING OR ANY OTHER ACTION BY CSC TO RESOLVE ANY ERROR, OMISSION, INTERRUPTION, DELAY OR OTHER PROBLEM. IN THE EVENT SUCH AMOUNTS CANNOT BE RECOVERED AFTER TAKING SUCH REASONABLE EFFORTS, CSC, SUBJECT TO THE LIMITATIONS CONTAINED HEREIN, SHALL MAKE PAYMENT TO THE CUSTOMER IN THE AMOUNT CLAIMED, AND CUSTOMER SHALL PROVIDE CSC WITH ALL DOCUMENTATION REASONABLY REQUIRED BY CSC TO ESTABLISH THE AMOUNT OF LOSS CLAIMED, INCLUDING RECORDS OF ALL PAYMENTS RECEIVED BY CUSTOMER AFTER THE REMEDIAL ACTION TAKEN BY CSC AND SHALL ASSIGN ALL SUCH CLAIMS TO CSC. IN THE EVENT OF ANY PAYMENT OF MONEY DAMAGES BY CSC HEREUNDER TO CUSTOMER, CUSTOMER AGREES TO EXECUTE AND DELIVER TO CSC ANY AND ALL DOCUMENTS AS MAY BE REQUIRED TO SUBROGATE CSC TO ALL OF THE RIGHTS OF CUSTOMER TO COLLECT ANY AND ALL AMOUNTS DUE WHICH CONSTITUTE THE LOSS FOR WHICH DAMAGES ARE PAID. PROVIDED , HOWEVER, THAT CSC WILL HAVE NO RIGHT OF SUBROGATION IF CUSTOMER OPTS NOT TO REQUIRE REBILLING PURSUANT TO SECTION 11.4. THE LIMITATIONS ON THE ACTUAL AMOUNT OF DIRECT DAMAGES INCURRED BY CUSTOMER SET FORTH HEREIN SHALL NOT APPLY WITH RESPECT TO THE LIABILITY OF CSC TO INDEMNIFY CUSTOMER PURSUANT TO SECTION 24 (PATENT AND OTHER PROPRIETARY RIGHTS INDEMNIFICATION) AND SECTION 27 (CONFIDENTIAL INFORMATION). 23.2 Customer shall not be liable for any: (a) special, indirect, incidental, punitive or consequential damages, including loss of profits, arising from or related to operation or use of the Software, Software Products, Software Maintenance, or Subscriber Billing Services, including such damage, without limitation, as damages arising from loss of data or programming, loss of revenue or profits, failure to realize savings or other benefits, damage to equipment, and claims against CSC by any third person, even if Customer has been advised of the possibility of such damages; (b) damages (regardless of their nature) for any delay or failure by Customer to perform its obligations under the Agreement due to any force majeur event; or (c) claims made a subject -25- 27 of a legal proceeding against Customer more than twenty-four (24) months after such cause of action first arose. 24. PATENT AND OTHER PROPRIETARY RIGHTS INDEMNIFICATION 24.1 CSC warrants to Customer that the Software and Software Products do not infringe on any United States patent, copyright, trade secret or other proprietary interest of any third party. 24.2 The following terms apply to any infringement or claim of infringement of any patent, trademark, copyright, trade secret or other proprietary interest based on the licensing, use, or sale of any Software, Software Products, Software Maintenance and/or Subscriber Billing Services furnished to Customer under this Agreement or in contemplation hereof. CSC shall indemnify Customer, Affiliates, its officers, directors, employees and agents for any loss, damage, expense or liability finally awarded, including costs and reasonable attorney's fees in defending or appealing such claims, that may result by reason of any such infringement or claim, except where such infringement or claim arises solely from CSC's adherence to Customer's written instructions or directions which involve the use of merchandise or items other than: (a) commercial merchandise which is available on the open market or is the same as such merchandise; or (b) items of CSC's origin, design or selection, and Customer shall so indemnify CSC in such excepted cases. Each party shall defend or settle, at its own expense, any action or suit against the other for which it is responsible hereunder. Each party shall notify the other promptly of any claim of infringement for which the other is responsible, and shall cooperate with the other in every reasonable way to facilitate the defense of any such claim. 24.3 In addition, in the event an injunction or order shall be obtained against Customer's use of any item by reason of any such infringement allegation or if, in CSC's sole opinion, the item is likely to become the subject of a claim of infringement or violation of patent, copyright, trademark, trade secret, or other proprietary right of a third party, CSC will, without in any way limiting the foregoing, in CSC's sole discretion and at CSC's expense either: (a) procure for Customer the right to continue using the item; (b) replace or modify the item so that it becomes non-infringing, but only if the modification or replacement does not, in CSC's reasonable opinion, adversely affect the functional performance or specifications for the item or its use by Customer; or (c) if neither (a) nor (b) above is financially reasonable, remove the item from Customer's Site and refund to Customer any charges paid by Customer for that item, and release Customer from any further liability relating to the particular item. 24.4 In no event shall Customer be liable to CSC for any charges after the date that Customer no longer uses the item because of actual or claimed infringement. -26- 28 25. WARRANTY Except as provided below, CSC warrants (1) that it owns all rights, title and interest in and to the Software and Software Products, except for any third party software listed in Appendix M, and that it has the right to grant the licenses granted hereunder; (2) that all Software and Software Products shall: (a) comply with the provisions of the Order; (b) function in accordance with CSC's specifications (including producing the Subscriber Billing Services statements and reports applicable to the Software or Software Products); (c) be compatible and conform to user documentation and operating manuals furnished by CSC; and (d) comply with a mutually agreed upon Software Acceptance Plan which shall be developed and agreed to in writing by Customer and CSC prior to installation of the Software for which the Software Acceptance Plan has been established. This warranty coverage shall include all Software Maintenance performed and any Enhancements or Fixes to the Software by CSC. Such warranty shall extend for ninety (90) calendar days from the date of acceptance except for the warranty of title which shall extend for the duration of this Agreement. (3) without limiting the foregoing, that system response for all of the versions of the Software subsequent to version 1.8.3 shall function equal to or better than version 1.8.3 as further defined within Section 49; and (4) that any services provided by CSC under this Agreement shall be performed in a fully workmanlike manner and in accordance with the prevailing professional standards of the software industry. CSC's responsibility under the warranties provided under subsections (2), (3) and (4) shall be to correct or replace, at no additional charge to Customer, any part of the Software or Software Products found to be defective. This warranty shall survive inspection, test, acceptance, use and payment. CSC FURNISHES THE ABOVE WARRANTIES IN LIEU OF ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. Any and all warranties shall be void as to Software or Software Products damaged or rendered unserviceable by: (a) the acts or omissions of non-CSC personnel except when CSC instructs or requires Customer to perform any modifications with respect to the Software; (b) misuse by Customer, its employees or agents, theft, vandalism, fire, water, or other peril; (c) moving, relocation, alterations or additions not performed in accordance with this Agreement. -27- 29 26. TAXES There shall be added to the charges provided for in this Agreement amounts equal to any taxes, whether federal, state, or local, however designated, which may be validly levied or based upon this Agreement or upon the Software, Software Products, Software Maintenance, and Subscriber Billing Services furnished hereunder, excluding, however, ad valorem personal property taxes, if any, state and local privilege, excise, or use taxes based on gross revenue, taxes based on or measured by CSC's net income, and any taxes or amounts in lieu thereof paid or payable by CSC in respect of the foregoing excluded items. Taxes payable by Customer shall be billed as separate items on CSC's invoices and shall not be included in CSC's prices. CSC agrees to notify Customer in advance of any taxes incurred by CSC for which Customer will be invoiced under this Section, and Customer shall have the right to have CSC contest with the imposing jurisdiction, at Customer's expense, any such taxes that Customer deems are improperly levied. 27. CONFIDENTIAL INFORMATION Each party acknowledges and agrees that any and all information emanating from the other's business in any form, including the terms of this Agreement and Customer's Subscriber listings, is "Confidential Information," and each party agrees that it will not, during or after the term of this Agreement, permit the duplication, use, or disclosure of any such Confidential Information to any person (other than an employee, agent or representative of the other party who must have such information for the performance of its obligation hereunder), unless such duplication, use or disclosure is specifically authorized by the other party in writing. Each party shall: (a) not disclose any Confidential Information to any third person without the express written consent of the disclosing party; (b) not use, directly, indirectly or in concert with any other person, any Confidential Information for any purpose other than the performance of their obligations under this Agreement; (c) use reasonable diligence, and in no event less than that degree of care which such party uses in respect to its own confidential information of like nature, to prevent the unauthorized disclosure or reproduction of such information. Without limiting the generality of the foregoing, to the extent that this Agreement permits the copying of Confidential Information, all such copies shall bear the same confidentiality notices, legends, and intellectual property rights designations that appear in the original versions. For the purposes of this Section, the term "Confidential Information" shall not include: information which is in the public domain; information known to the recipient party as of the date of this Agreement as indicated by the recipient's written records, unless the recipient party agreed to keep such information in confidence at the time of its receipt; and information properly obtained hereafter from a source who is not under an obligation of confidentiality with respect to such information; is independently developed by the receiving party through persons who have not had, either directly or indirectly, access or knowledge of such Confidential Information which can be verified by independent evidence; or is obligated to be produced under a court order of competent jurisdiction or a valid administrative or congressional subpoena. -28- 30 Apart from CSC's obligations to Customer under this Section 27 concerning confidentiality, CSC shall have no obligation to delete or destroy Customer's information, including Customer's Subscriber listings, from its computer systems or backup and archival libraries until such time as CSC's regular procedures for elimination of such data would normally delete or destroy such information. CSC's procedure for the elimination of data from its backup and archival libraries is detailed in Appendix F. Customer shall have the right to require the elimination of its Data maintained within CSC's backup and archival libraries prior to the time the Data would normally be deleted or destroyed by CSC, and Customer shall pay for all expenses associated with the early deletion or destruction of all such Data in accordance with Appendix D. Any logo, program names, trademarks, service marks, programs, manuals, documentation, and other support materials which are covered under this Agreement or otherwise provided by one party to the other are either copyrighted, trademarked, or are held as proprietary by the providing party. The receiving party agrees not to remove any such notices and product identification and additionally agrees to take all action necessary to protect the providing party's rights thereto. 28. SECURITY, ACCESS AND SAFETY REQUIREMENTS Customer shall provide to CSC in writing Customer's security, access, and safety requirements for the protection of the Software and Customer's software, data, facilities, and employees and CSC agrees to instruct its employees, agents and subcontractors concerning all such requirements. 29. NOTICES With the exception of invoices, insurance papers, shipping papers, reports, and correspondence in the normal course of business, all notices, demands, or other communications herein provided to be given or which may be given by any party to the other shall be deemed to have been duly given when made in writing and delivered in person, or upon receipt, if deposited in the United States mail, postage prepaid, certified mail, return receipt requested or via overnight courier, as follows: Notices to CSC: Notices to Customer: Michael P. McCray, Vice President Bob Stapleton, President CSC Intelicom, Inc. Western Wireless Corporation 2109 S. Fox Drive 2001 NW Sammamish Rd. #100 Champaign, Illinois 61824-0770 Issaquah, WA 98027 Fax # - 217.351.8256 Fax # - 425.313.7731 -29- 31 With a required copy to: H. Ward Classen, Esquire Alan Bender, General Counsel General Counsel Western Wireless Corporation CSC Intelicom, Inc. 2001 NW Sammamish Rd. #100 Two Democracy Plaza Issaquah, WA 98027 6707 Democracy Boulevard Fax # - 425.313.7960 Suite 1000 Bethesda, Maryland 20817 Jim Medick, Executive Dir. of IT Fax # - 301.897.1169 Western Wireless Corporation 2001 NW Sammamish Rd. #100 Issaquah, WA 98027 Fax # - 425.313.7731 or to such address as the parties may provide to each other in writing from time to time. 30. ASSIGNMENT Customer may not assign or transfer its interests, rights or obligations under this Agreement by written agreement, merger, consolidation, operation of law or otherwise, without the prior written consent of an authorized executive officer of CSC, which consent may not be unreasonably withheld. 31. FORCE MAJEURE Neither party shall be responsible for any delay or failure in performance of any part of this Agreement to the extent that such delay or failure is caused by fire, flood, explosion, war, embargo, government requirement, civil or military authority, act of God, act or omission of common carriers or other similar causes beyond its control. If any such event of force majeure occurs, the party delayed or unable to perform shall give immediate notice to the other party, and the party affected by the other's delay or inability to perform may elect at its sole discretion to: (a) terminate this Agreement or the affected Order; (b) suspend such Order for the duration of the condition and obtain or sell elsewhere Software, Software Products, or Subscriber Billing Services comparable to the Software, Software Products, or Subscriber Billing Services that have been obtained under the Order; or (c) resume performance of such Order once the condition ceases with an option in the affected party to extend the period of this Agreement up to the length of time the condition endured. Unless written notice is given within thirty (30) calendar days after the affected party is notified of the condition, this option (c) shall be deemed selected. 32. PUBLICITY Each party agrees to submit to the other all advertising, sales promotions, press releases and other publicity matters relating to the Software, Software Products, or Subscriber Billing Services -30- 32 provided under this Agreement wherein the other party's corporate or trade names or trademarks are mentioned or language from which the connection of said names or trademarks therewith may be inferred or implied. Each party further agrees not to publish or use such advertising, sales promotions, press releases or publicity matters without the other party's prior written approval, which approval may be unreasonably withheld. Unless specifically permitted within this Agreement, neither party to this Agreement shall disclose the terms, conditions, or provisions of this Agreement without the prior written consent of the other party. 33. INDEPENDENT CONTRACTOR All work performed by CSC in connection with the Software, Software Products, Software Maintenance, and/or Subscriber Billing Services described in this Agreement shall be performed by CSC as an independent contractor and not as the agent or employee of Customer. All persons furnished by CSC shall be for all purposes solely CSC's employees or agents and shall not be deemed to be employees of Customer for any purpose whatsoever. CSC shall furnish, employ and have exclusive control of all persons to be engaged in performing services under this Agreement and shall prescribe and control the means and methods of performing such services by providing adequate and proper supervision. CSC shall be solely responsible for compliance with all rules, laws and regulations relating to employment of labor, hours of labor, working conditions, payment of wages, and payment of taxes, such as employment, Social Security, and other payroll taxes including applicable contributions from such persons when required by law. 34. NON-HIRING OF EMPLOYEES Unless agreed to in writing in advance by both CSC and Customer, neither party to this Agreement shall solicit or hire employees of the other party during the term of this Agreement and for a period of one (1) year after termination hereof. 35. CONFLICT OF INTEREST CSC stipulates no officer or employee of Customer has been employed, retained, induced or directed by CSC to solicit or secure this Agreement with Customer upon agreement, offer, understanding or implication involving any form of remuneration whatsoever. CSC agrees, in the event of an allegation of substance that there has been a violation hereof, CSC will cooperate in every reasonable manner with Customer in establishing whether the allegation is true. Notwithstanding any provisions of this Agreement to the contrary, if a violation of this provision is found to have occurred and is deemed material by Customer, Customer may request that CSC take the appropriate legal action to discipline the responsible party. -31- 33 36. WAIVER OF BREACH No waiver of breach or failure to exercise any option, right or privilege under the terms of this Agreement by either party on any occasion or occasions shall be construed to be a waiver of the same or any other option, right or privilege on any other occasion. 37. RELEASES VOID Neither party shall require waivers or releases of any personal rights from representatives of the other in connection with visits to CSC's and Customer's respective premises. No such releases or waivers shall be pleaded by CSC or Customer or third persons in any action or proceeding against an employee. [Section 38 intentionally deleted] 39. GOVERNING LAW The validity, construction, interpretation and performance of this Agreement shall be governed by and construed in accordance with the domestic laws of the State of Maryland except as to its principals of conflicts of laws. This governing law provision shall have no weight in determining the proper venue for any action arising out of this Agreement. 40. COMPLIANCE WITH LAWS CSC and Customer each shall comply with the provision of all applicable federal, state, county and local laws, ordinances, regulations, and codes, including, but not limited to, CSC's and Customer's obligations as an employer with regard to the health, safety and payment of its employees, and identification and procurement of required permits, certificates, approvals, and inspections in CSC's and Customer's performance of this Agreement. 41. OBLIGATIONS WHICH SURVIVE TERMINATION Each party recognizes and agrees that its obligations under Sections 5, 6, 17, 19, 21.4, 22, 23, 24, 27,39 and 50 of this Agreement survive the cancellation, termination or expiration of this Agreement for any reason. These same Sections shall apply for the duration of Customer's use of Software licensed under the License granted in Section 3 hereof. 42. SEVERABILITY If any of the provisions of this Agreement shall be invalid or unenforceable under the laws of the State of Maryland applicable to the entire Agreement, such invalidity or unenforceability shall not invalidate or render unenforceable the entire Agreement but rather the entire Agreement shall -32- 34 be construed as if not containing the particular invalid or unenforceable provision or provisions, and the rights and obligations of CSC and Customer shall be construed and enforced accordingly. 43. INCORPORATION OF APPENDICES Appendices A through M, referred to in this Agreement and attached hereto, are integral parts of this Agreement and are incorporated herein by this reference. 44. ENUMERATIONS, BACKGROUND AND HEADINGS The enumerations, "Background" and headings contained in this Agreement are inserted for convenience only and are not intended to have any substantive significance in interpreting this Agreement. 45. AMENDMENTS, MODIFICATIONS OR SUPPLEMENTS Amendments, modifications or supplements to this Agreement shall be permitted, provided: (a) changes shall be in writing signed by the authorized representatives of both parties; (b) changes shall reference this Agreement and identify the specific articles or sections contained herein which are amended, modified or supplemented; (c) changes shall not adversely affect vested rights or causes of action which have accrued prior to the effective date of such change. 46. AUTHORITY AND NO CONFLICTING AGREEMENT The officers signing on behalf of the parties to this Agreement acknowledge that they have read and understand this Agreement and hereby warrant that each has full power and authority to execute this Agreement and bind the respective parties hereto. Each party further represents that it is not bound by any other contract or agreement that would prevent full performance of this Agreement. 47. ENTIRE AGREEMENT This Agreement, the Orders, appendices, and subordinate documents referenced in such Orders constitute the entire agreement between the parties with respect to the subject matter contained herein, superseding all previous agreements pertaining to such subject matter, and may be modified only by an amendment executed in writing by authorized representatives of both parties hereto. All prior agreements, representations, statements, negotiations, understandings and undertakings are superseded hereby. Both parties hereto represent that they have read this Agreement, understand it, agree to be bound by all terms and conditions stated herein, and acknowledge receipt of a signed, true and exact copy of this Agreement. -33- 35 49. SOFTWARE PERFORMANCE MEASUREMENTS CSC warrants that system response within release 3.1 of the Software will be better than the performance Customer has experienced with release 1.8.3 of the Software. CSC has performed benchmarks of various processes with release 3.1 of the Software. A summary of the results of those benchmarks is listed in Appendix J along with hardware and operational commitments required of Customer to ensure Customer will achieve comparable system performance to that which was observed during the benchmark test. CSC agrees to perform additional benchmarks with each major release of the Software and will share the results of those benchmarks with Customer. 50. TERMINATION CSC and Customer are parties to a certain Software License, Maintenance and Subscriber Billing Services Agreement dated as of August 1, 1994 ("Prior Agreement"). This Agreement supersedes the Prior Agreement to the extent this Agreement is inconsistent with the Prior Agreement. In the event Customer elects not to convert its existing PCS MTA markets as set forth in Appendix K to TRIS+, or in the event Customer shall unreasonably delay the start of the PCS conversion and related Software Enhancements beyond April 1, 1998, Customer shall pay CSC the $1,500,000 allocated to PCS items within Appendix L as compensation for efforts expended by CSC to modify the Software and convert Customer PCS data, less the 1st, 2nd, 3rd, or 4th payments set forth in Appendix L, to the extent such payments have been made by Customer to CSC. In the event Customer elects not to convert its cellular markets as set forth in Appendix K to TRIS+, Customer shall pay CSC a pro-rata portion of the $1,100,000 allocated to cellular items within Appendix L on a percentage completion basis as compensation for efforts expended by CSC to modify the Software and convert Customer cellular data, less any progress or delivery payments made by Customer specifically allocated to cellular items. IN WITNESS WHEREOF, the parties have executed this Agreement under seal as of the day and year first written above. WESTERN WIRELESS CORPORATION CSC INTELICOM, INC. BY: /s/ Bob Stapleton BY: /s/ Michael P. McCray --------------------------- ------------------------------- TITLE: President TITLE: Vice President ------------------------ ---------------------------- -34- EX-10.65 3 FIRST AMENDMENT TO SOFTWARE LICENSE AGREEMENT 1 EXHIBIT 10.65 FIRST AMENDMENT TO SOFTWARE LICENSE, MAINTENANCE AND SUBSCRIBER BILLING SERVICES AGREEMENT THIS FIRST AMENDMENT TO SOFTWARE LICENSE, MAINTENANCE AND SUBSCRIBER BILLING SERVICES AGREEMENT is made effective this __ day of December, 1997 by and between CSC Intelicom, Inc., a Delaware corporation, having its address at 6707 Democracy Boulevard, Suite 1000, Bethesda, Maryland 20817 ("CSC") and Western Wireless Corporation, a Washington corporation having its address at 2001 N.W. Sammamish Road, Suite 100, Issaquah, Washington 98027 ("Customer"). BACKGROUND The parties hereto have executed that certain Software License, Maintenance and Subscriber Billing Services Agreement dated June 1997 (the "Agreement"). The parties now desire to amend the Agreement to clarify certain existing provisions as set forth below. NOW, THEREFORE, in consideration of the mutual promises of the parties hereinafter set forth, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties, subject to the terms and conditions hereof, agree as follows: 1. A new Section 8 is inserted as follows: 8.1 Late Delivery Credits. CSC will provide delivery guarantees to Customer in the form of credits which may be applied first against the scheduled delivery payment and then against the final scheduled acceptance payment as defined in Sections 8 and 51 herein for the applicable deliverable. These credits shall be calculated on the following basis as a percentage of the total fees of the deliverable, for each month or prorated portion thereof of delay: PENALTY (PERCENTAGE OF TOTAL FEES OF DELIVERABLE) MONTH * month 1 * month 2 * month 3 * month 4 * month 5 * month 6 - -------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. 2 The total of all credits provided by CSC under this Section 8 and Section 11.5(b) shall not exceed * of the fees for the associated deliverable. This credit shall be in full satisfaction of any liability CSC may have to Customer for late delivery. 8.2Correction of Software Errors or Enhancement Errors. CSC shall provide to Customer a credit which may be applied against the total fees of the deliverable for the failure of CSC to correct any Critical or Priority Two-High Errors within the time frames set forth below. These credits shall be calculated on the following basis as a percentage of the total fees of the deliverable for each month or prorated portion thereof of during which the Error(s) is not corrected:
PENALTY (PERCENTAGE OF TOTAL FEES OF DELIVERABLE) MONTH * month 1 * month 2 * month 3 * month 4 * month 5 * month 6
Customer shall have 30 days after delivery to complete user acceptance testing, and will report all Critical or Priority Two-High Errors discovered during this period to CSC. CSC shall have 30 days from the end of this acceptance test period ("UAT period") to correct such Errors. Software quality credits shall begin to accrue 30 days after the end of the UAT period if Critical or Priority Two-High Errors continue to exist. Upon correction of such Critical or Priority Two-High Errors (or if no such Errors are discovered during the UAT period), Customer shall use the software within their production environment for an additional 30 days and will report all Critical or Priority Two-High Errors discovered during this period to CSC. CSC shall have 30 days from the end of this production test period to correct such Errors. If no Critical or Priority Two-High Errors are discovered during the 30 day production testing period, Customer shall be deemed to have accepted such Software. Software quality credits shall begin to accrue 30 days after the production testing period if Critical or Priority Two-High Errors continue to exist. In no event shall the aggregate credits under this Section 8 and Section 11.5(b) exceed * of the fees associated with any deliverable. The credits provided under this Section 8.s shall be in full satisfaction of any liability that CSC may have to Customer for the failure to timely correct any Error (except as such Errors may affect the timeliness of bill cycle turnaround as provided in Section 12.) - -------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. - 2 - 3 The foregoing procedures replace those set forth in Section 9.2 of the Agreement. There is no payment associated with "conditional acceptance," as set forth therein. 8.3 Limitation and Applicability of Credits. The total of all credits provided by CSC under Sections 8 and 11.5(b) shall not exceed * of the fee for the associated deliverable. Credits shall apply to the following deliverables and delivery dates: Software Enhancements. Delivery of software enhancements shall be deemed to have occurred when CSC makes such software available to Customer's test environment, and such software has passed CSC's internal testing and quality assurance process. Late delivery credits shall begin to accrue on a daily basis the day after the software enhancement delivery date provided by CSC, to the extent such delay is caused by CSC or any of its agents or contractors. Detailed Bid Documents. Delivery of Detailed Bid Documents shall be deemed to have occurred upon submission of a completed Detailed Bid Document to Customer representatives. Implementation and Conversion Services. Delivery of implementation and conversion services shall be deemed to have occurred when CSC makes final conversion or implementation information available for Customer review. Late delivery credits shall begin to accrue on a daily basis after the delivery date, to the extent such delay is caused by CSC or any of its agents or contractors. 2. Section 11.5(b) is hereby amended by inserting the following language: "CSC shall provide Customer a * which will be applied against the Detailed Bid Document preparation fees if a Detailed Bid Document delivery date is not provided to Customer within 10 business days of CSC's receipt of Customer's request (assuming all necessary information is provided by Customer at the time of Customer's request to evaluate the enhancement request and such delay is caused by CSC). The total of all credits provided by CSC to Customer shall not exceed 100% of the fees for detailed bid preparation. This credit shall be in full satisfaction of any liability CSC may have to Customer for such delay." 3. Section 12.2(b) is hereby amended by deleting "*" in the first and second paragraphs and inserting "*". 4. Section 12.2(b) is hereby amended by inserting the following language: "CSC's meeting this time period is contingent upon: - -------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. - 3 - 4 1. All necessary data required to perform the requested function as requested by CSC is provided to CSC at the beginning of the time period. 2. Any necessary data or information provided to CSC per CSC's request by Customer or a vendor of Customer found to be incomplete or erroneous (CSC will respond within 48 hours if data is incomplete or erroneous) will reset the agreed-upon beginning date to the date that the correct data or information is provided to CSC. 3. Any necessary test data provided to CSC by Customer or a vendor of Customer that is incomplete or does not agree with documentation provided to CSC by Customer or Customer's vendors (CSC will respond within 48 hours if data is incomplete or erroneous) will reset the agreed-upon beginning date. The new beginning date will be the date the correct data is provided. 4. Any necessary system or TRIS+ function or actions required to be performed by Customer and agreed to by Customer must be completed by the mutually agreed-upon date. Failure by Customer to perform by the agreed-upon date will reset the beginning date to the date the function or action is actually completed. 5. Customer and CSC will each furnish a dedicated point of contact to the other to insure accurate and timely involvement by Customer in the process." 5. Section 12.2(c) is hereby amended by deleting "*" in the first and second paragraphs and inserting "*". 6. Section 12.2(c) is hereby amended by inserting the following language: "CSC's meeting this time period is contingent upon: 1. All necessary data required to perform the requested function as requested by CSC is provided to CSC at the beginning of the time period. 2. Any necessary data or information provided to CSC per CSC's request by Customer or a vendor of Customer found to be incomplete or erroneous (CSC will respond within 48 hours if data is incomplete or erroneous) will reset the agreed-upon beginning date to the date that the correct data or information is provided to CSC. - -------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. - 4 - 5 3. Any necessary test data provided to CSC by Customer or a vendor of Customer that is incomplete or does not agree with documentation provided to CSC by Customer or Customer's vendors (CSC will respond within 48 hours if data is incomplete or erroneous) will reset the agreed-upon beginning date. The new beginning date will be the date the correct date is provided. 4. Any necessary system or TRIS+ function or actions required to be performed by Customer and agreed to by Customer must be completed by the mutually agreed-upon date. Failure by Customer to perform by the agreed-upon date will reset the beginning date to the date the function or action is actually completed. 5. Customer and CSC will furnish a dedicated point of contract to insure accurate and timely involvement by Customer in the process." 7. Section 12.2 is hereby amended by deleting "In the event that the CSC Subscriber Billing Services statement turnaround time for any given cycle is less than or equal to * after the required Subscriber Billing Turnaround Time, CSC shall not be required to provide Customer with any credit for late delivery." and inserting "In the event that the CSC Subscriber Billing Services statement turnaround time for any normal billing cycle (as defined in Section 12.2.a) is less than or equal to * after the required Subscriber Billing Turnaround Time, CSC shall not be required to provide Customer with any credit for late delivery. Credit for late delivery of initial billing cycles as defined within Sections 12.2.b and 12.2.c shall be calculated as set forth above without such * grace period." 8. Section 21.2.2 is hereby deleted in its entirety and a new Section 21.2.2 is hereby inserted as follows: "21.2.2 Subject to the limitations contained within the Agreement, in the event of termination by CSC under this Section 21, Customer shall be given a period of * days from the effective date of termination in which to transition its billing services requirements to another vendor, provided Customer and CSC, using good faith, can agree on mutually-acceptable terms for the provision of such services. All services performed by CSC during this period shall be chargeable at the rates set forth in Appendix D." 9. Section 25 is amended by adding the following provision as Section 25(5): (5) that all databases, operating systems, and voicemail and switch interfaces now or in the future supported by the Software will be maintained with all new third party vendor's releases within 180-360 days after such release is made commercially available, unless - -------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. - 5 - 6 CSC and Customer mutually agree that such release of third party software is not desirable. 10. The second and third paragraphs of Section 50 are hereby deleted in their entirety. 11. A new Section 51 is inserted as follows: "51. Payment 51.1.1 Customer shall pay * to CSC for the TRIS+ Software and services under Appendix L of the Agreement, in lieu of the payments set forth therein, as follows: *, to be wired within the second business day following the date of execution of this First Amendment. *, spread evenly upon acceptance of the 5 deliverables listed in section 51.1.3, below. Customer acknowledges that fees associated with the TRIAD conversion are not included within the * detailed above. 51.1.2 CSC shall provide, without charge, SIM re-use functionality, zone rating (up to 100 hours of programming), and its Point of Sale Interface to Customer and will waive the Right to Use license fees and maintenance fees associated with such Software. Customer shall pay for any customization or implementation costs necessary to implement such Software in accordance with a separately executed statement of work. 51.1.3 For the purposes of payment of penalties under Section 8, the price for the different releases and activities shall be allocated as follows:
AMOUNT SUBJECT DELIVERABLE TO PENALTY DELIVERY DATE (1) Book Bill Format * * (2) Release 3.1.1 * * (3) Cellular Conversion * * (4) Release 3.1.2 * * (5) Release 3.2 * *
- -------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. - 6- 7 * (1) Book Bill Format includes the functionality defined within the Book Bill functional requirements document. (2) Release 3.1.1 will include, at a minimum, Selective Messaging and corrections for all Software Errors that have been coded and unit tested by *. (3) Cellular Conversion will include conversion of all cellular billing cycles from Release 1.x to Release 3.x. (4) Release 3.1.2 will include, at a minimum, SIM re-use functionality and corrections for all Software Errors that have been coded and unit tested by *. (5) Release 3.2 will include, at a minimum, Cross Market Billing and corrections for all Software Errors that have been coded and unit tested by *. 51.2 Payment for all future enhancements and other conversions provided by CSC at the request of Customer shall be made as follows: * upon delivery (30 day invoice) * upon final scheduled acceptance of the deliverable (30 day invoice) 12. Appendix D, Section 11(e) is amended by inserting the following language: "CSC shall provide a late delivery penalty equal in amount to the current CSC "Premium Charge," to the extent CSC is unable to implement changes within the specified time periods, provided that: 1. All necessary data required to perform the requested function as requested by CSC is provided to CSC at the beginning of the time period. 2. Any necessary data or information provided to CSC per CSC's request by Customer or a vendor of Customer found to be incomplete or erroneous (CSC will respond within 48 hours if date is incomplete or erroneous) will reset the agreed upon beginning date to the date that the correct data or information is provided to CSC. 3. Any necessary test data provided to CSC by Customer or a vendor of Customer that is incomplete or does not agree with documentation provided to CSC by Customer or its vendors (CSC will respond within 45 hours if date is incomplete or erroneous) will reset the agreed upon - -------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. - 7 - 8 beginning date. The new beginning date will be the date that the correct data is provided to CSC. 4. Any necessary system or TRIS+ functions or actions required to be performed by Customer and agreed to by Customer must be completed by the mutually-agreed upon date. Failure by Customer to perform by the agreed-upon date will reset the beginning date to the date the function or action is actually completed. 5. Customer and CSC will each furnish a dedicated point of contact to the other to insure accurate and timely involvement by Customer in the process. 6. The number and scope of the requested changes are reasonable to be completed within the agreed time and within parameters that limit the number and scope of the changes. The maximum numbers and scope of the changes allowable are as follows: RATE PLAN CHANGES - no programming: (max 10 unique plans within 5 days) RATE PLAN CHANGES - programming required: (not greater than 80 hours of programming within 1 month) FE OR BE TABLE CHANGES: (20 unique FE Additions/changes within 5 days) and (15 unique BE Additions/changes within 5 days) UNBILLABLE UPDATE FORMS: (5000 customers within 5 days) SWITCH SOFTWARE MODIFICATIONS - Software Upgrade/change: (2 switches within 30 days) SWITCH SOFTWARE MODIFICATIONS - Hardware Upgrade/change: (2 switches within 30 days) SWITCH SOFTWARE MODIFICATIONS - Trunk records/cell sites: (max 20 unique cell sites/trunks within 5 days) TRIS+ FE FILE/DIRECTORY STRUCTURE CHANGES: (15 unique directory changes within 2 weeks) BILL STATEMENT MESSAGE PAGE: (20 different message pages -combination of markets or messages- within 3 days)" 13. Section 2(c) of Appendix D is hereby modified by inserting the following language: - 8 - 9 "Effective March 8, 1998, CSC shall provide Customer a point of contact for resolving technical production issues twenty-four hours a day, seven days a week (excluding CSC Holidays)." 14. Appendix J is hereby modified by adding the attached "Addendum to Appendix J -- Performance Penalties". 15. A new Section 52 is inserted as follows: "52. Software Release Schedule CSC shall provide Customer, at a minimum, two (2) maintenance Software releases intended to correct Errors and two (2) feature Software releases intended to provide new features and functionality." 16. The Production conversions for the TRIAD conversion shall start on *, and the production conversions shall all be complete by *. All other scheduling to the contrary in the Agreement is hereby superceded. Triad conversion will include conversion of all TRIAD bill cycles to release 3.x. 17. All other provisions contained in the Agreement are hereby reaffirmed and shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this 1st Amendment to Software License, Maintenance and Subscriber Billing Services Agreement to be duly executed on the day and year first above written. ATTEST: CSC INTELICOM, INC. /s/ By: /s/ Errol James (SEAL) - -------------------------------- ---------------------------- Errol James, Senior Vice President ATTEST: WESTERN WIRELESS CORPORATION /s/ Angela Schwab By: /s/ Bob Stapleton (SEAL) - -------------------------------- ---------------------------- [12.4.97] - -------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. - 9 - EX-10.66 4 LETTER AGREEMENT DATED DECEMBER 16, 1997 1 EXHIBIT 10.66 225 High Ridge Road Stamford, Connecticut 06905 [ITDS Logo] International Telecommunication 203/329/3300 Telephone Data Systems 203/323/1314 FAX December 16, 1997 Mr. Bob Stapleton VIA FAX @ 1-425-313-7731 President Western Wireless Corporation 2001 NW Sammamish Road, #100 Issaquah, WA 98027 Dear Bob: Thank you for your letter that I received this morning dated December 15, 1997. The following is my understanding of the agreement between Western Wireless Corporation ("WWC") and ITDS Intelicom Services, Inc. ("ITDS") to provide products and services pursuant to the Software License, Maintenance and Subscriber Billing Services Agreement and First Amendment thereto (collectively, the "Agreement") between WWC and ITDS. 1.* 2.* 3. ITDS represents and warrants that any billing system to which WWC converts will be at least as functional as the TRIS product at the time of the conversion. 4. WWC commits to providing its input to ITDS to assist in the design of ITDS's next generation billing and customer care systems. 5. The Agreement between CSC and WWC will continue to apply, except to the extent any provision therein is inconsistent with the terms of this letter. Very truly yours, ITDS INTELICOM SERVICES, INC. s/ Lewis D. Bakes Lewis D. Bakes COO AGREED AND ACCEPTED THIS - ---------- * Information omitted and filed separately with the SEC pursuant to request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. 2 Mr. Bob Stapleton December 16, 1997 Page 2 _18th_ DAY OF DECEMBER, 1997; WESTERN WIRELESS CORPORATION By /s/ Bob Stapleton Bob Stapleton President EX-13.1 5 MARKET FOR REGISTRANT'S COMMON EQUITY 1 EXHIBIT 13.1 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 on the NASDAQ Stock Market 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 on the NASDAQ Stock Market. These quotations reflect the inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
1997 High Low - ---- ---- --- First quarter .......................... $16 1/8 $12 Second quarter ......................... $16 7/8 $10 Third quarter .......................... $19 1/8 $13 5/8 Fourth quarter ......................... $22 1/4 $16 1/2
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. EX-13.2 6 SELECTED FINANCIAL DATA 1 EXHIBIT 13.2 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 five years in the period ended December 31, 1997, which was derived from the Company's consolidated financial statements and notes thereto that have been audited by Arthur Andersen LLP, independent public accountants. 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.
(Dollars in thousands, except YEAR ENDED DECEMBER 31, per share data) ------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues .............................. $ 380,578 $ 243,085 $ 146,555 $ 63,108 $ 20,734 Operating Expenses .................... 540,239 329,971 170,490 86,676 25,596 ------------ ------------ ------------ ------------ ------------ Operating loss ........................ (159,661) (86,886) (23,935) (23,568) (4,862) Other income (expense) ................ (105,873) (43,219) (25,374) (2,392) 8,191 ------------ ------------ ------------ ------------ ------------ Income (loss) before extraordinary item .................................. (265,534) (130,105) (49,309) (25,960) 3,329 Extraordinary item .................... (6,645) ------------ ------------ ------------ ------------ ------------ Net income (loss) .................. $ (265,534) $ (130,105) $ (55,954) $ (25,960) $ 3,329 ============ ============ ============ ============ ============ Share data (1): Basic income (loss) per common share before extraordinary item ..... $ (3.76) $ (2.00) $ (0.87) $ (0.59) $ 0.10 Per common share effect of extraordinary item ................ (0.12) ------------ ------------ ------------ ------------ ------------ Basic income (loss) per common share .. $ (3.76) $ (2.00) $ (0.99) $ (0.59) $ 0.10 ============ ============ ============ ============ ============ Weighted average common shares used in computing basic income/loss per common share ........................ 70,692,000 65,196,000 56,470,000 43,949,000 32,253,000 ============ ============ ============ ============ ============ OTHER DATA: EBITDA (2) ............................ $ (26,191) $ (7,145) $ 25,521 $ 2,102 $ 537
(1) The number of shares outstanding has been calculated based on the requirements of Statement of Financial Accounting Standards No.128. (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. 2
DECEMBER 31, ---------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- CONSOLIDATED BALANCE SHEETS DATA: Current assets ................................... $ 138,752 $ 149,790 $ 37,508 $ 36,769 $ 14,686 Property and equipment, net ...................... 699,129 538,617 193,692 120,648 48,591 Licensing costs and other intangible assets, net.. 807,409 540,482 417,971 211,309 86,270 Other assets ..................................... 74,683 12,814 9,857 1,468 6,219 ---------- ---------- ---------- ---------- ---------- Total assets ................................... $1,719,973 $1,241,703 $ 659,028 $ 370,194 $ 155,766 ========== ========== ========== ========== ========== Current liabilities .............................. $ 130,545 $ 144,454 $ 55,936 $ 39,214 $ 16,447 Total long-term debt and other liabilities, net of current portion .............. 1,395,000 743,000 362,487 200,587 53,430 Minority interests in equity of consolidated subsidiary ........................ 3,376 Shareholders' equity ............................. 194,428 354,249 240,605 127,017 85,889 ---------- ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity ..... $1,719,973 $1,241,703 $ 659,028 $ 370,194 $ 155,766 ========== ========== ========== ========== ========== OTHER DATA: Cellular subscribers ............................. 520,000 324,200 209,500 112,800 30,000 PCS subscribers .................................. 128,600 35,500
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- CONSOLIDATED STATEMENTS OF CASH FLOWS DATA: Cash flows provided by (used in) Operating activities ............... $(114,498) $ (61,333) $ (745) $ (998) $ (255) Investing activities ............... $(652,304) $(489,086) $(293,579) $ (70,190) $ (32,535) Financing activities ............... $ 727,376 $ 596,732 $ 295,109 $ (70,777) $ 36,212
EX-13.3 7 MANAGEMENT'S DISCUSSION AND ANALYSIS 1 EXHIBIT 13.3 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 88 Rural Service Areas ("RSA") and Metropolitan Statistical Areas including 12 RSAs acquired from Triad Cellular Corporation, Triad Cellular L.P. and certain of their affiliates (collectively "Triad") in October 1997. The Company owns broadband personal communications services ("PCS") licenses in seven Major Trading Areas ("MTA"), each of which has commenced commercial operations. During 1997, the Company was granted 100 additional PCS licenses in the Federal Communication Commission's ("FCC") D and E Block auctions and acquired eight PCS licenses as part of its acquisition of Triad in October 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 ("BTA") including seven 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. 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. 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 United States 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. 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 and operate in rural markets while its PCS systems did not commence operations until 1996 and operate in urban markets. 2 RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 CELLULAR OPERATIONS The Company had 520,000 cellular subscribers at December 31, 1997, representing an increase of 195,800 or 60.4% during 1997. At December 31, 1996 and 1995, the Company had 324,200 and 209,500 cellular subscribers, respectively, representing an increase of 54.7% during 1996 and 85.7% during 1995. In 1997, 1996, and 1995 the net number of subscribers added through system acquisitions was approximately 58,500, 4,900 and 3,300, respectively. Removing the effect of the Triad subscribers acquired in October 1997, the subscriber growth would have been 42.4% during 1997. During the fourth quarter of 1997, the Company purchased from Triad the cellular business and assets of 12 RSAs in Texas, Utah, Oklahoma and Minnesota. This purchase was consummated on October 31, 1997, thus the operating results of the Company's cellular business for the twelve months ended December 31, 1997, may not be indicative of future performance. The following table sets forth certain financial data as it relates to the Company's cellular operations:
(Dollars in thousands) YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1997 % CHANGE 1996 % CHANGE 1995 --------- -------- -------- -------- -------- Cellular revenues: Subscriber revenues ............ $245,364 40.5% $174,647 65.7% $105,430 Roamer revenues ................ 39,750 16.7% 34,065 14.9% 29,660 Equipment sales and other revenues ..................... 17,734 5.3% 16,834 46.8% 11,465 -------- -------- -------- Total revenues ............. $302,848 $225,546 $146,555 Cellular operating expenses: Cost of service ................ $ 47,001 14.3% $ 41,130 48.6% $ 27,686 Cost of equipment sales ........ 29,698 16.4% 25,516 23.2% 20,705 General and administrative ..... 60,865 31.0% 46,464 64.9% 28,184 Sales and marketing ............ 61,409 17.8% 52,147 27.0% 41,051 Depreciation and amortization .. 66,595 1.9% 65,346 32.9% 49,187 -------- -------- -------- Total operating expenses ... $265,568 $230,603 $166,813
CELLULAR REVENUES Subscriber revenues have increased over the past three years due to the growth in the number of subscribers offset slightly by a decrease in the average monthly cellular subscriber revenue per subscriber. Average monthly cellular subscriber revenue per subscriber was $51.13 in 1997, a 7.0% decline from $54.96 in 1996, which was a 4.0% decline from $57.25 in 1995. The Company anticipates this downward trend will continue in 1998. 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. Removing the effect of the Triad subscribers acquired in October 1997, the average monthly cellular subscriber revenue per subscriber was $51.38 in 1997. The increase in roamer revenues over the past three years was caused by an increase in roaming traffic and partially offset by decreases in the rates charged between carriers. While the Company expects total roamer minutes to continue to increase, the decline in the rates charged between carriers will limit the growth of roamer revenues. Cellular equipment sales, which consist primarily of handset sales, decreased in 1997 primarily due to the decrease in the average cellular handset sales price despite the increase in net subscriber additions. 3 CELLULAR OPERATING EXPENSES The increase in cost of service is primarily attributable to the increased number of subscribers. While cost of service increased in total dollars, it decreased as a percentage of service revenues to 16.2% in 1997 from 19.3% in 1996 and 20.5% in 1995 due primarily to efficiencies gained from the growing subscriber base. 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 increases in total dollars are primarily attributable to the increase in costs associated with supporting the increased subscriber base. However, the general and administrative cost per average subscriber continues to decrease as a result of efficiencies gained from the growing subscriber base. The general and administrative cost per average subscriber decreased to $12.60 in 1997 from $14.58 in 1996 and $15.08 in 1995. 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. Increases in sales and marketing costs are primarily due to the increase in net subscriber additions over the past three years. Although sales and marketing costs have increased, sales and marketing cost per net subscriber added, including the loss on equipment sales, declined to $574 in 1997 from $593 in 1996. This decrease is a result of strategically reduced advertising costs and is partially offset by an increase in the churn rate. Sales and marketing cost per net subscriber added increased to $593 in 1996 from $546 in 1995 largely due to an increase in the number of disconnected subscribers relative to the number of gross subscriber additions. Removing the effect of the Triad properties acquired in October 1997, sales and marketing costs would have been approximately $59.8 million in 1997 and the cost per net subscriber added, including the loss on equipment sales, would have been $578. Cost of equipment sales increased primarily due to the increase in the number of handsets sold in 1997 as compared to 1996 and 1995. Offsetting this increase is a decrease caused by the decline in the average cost of handsets sold. Increases in depreciation and amortization expense over the past three years are primarily due to the purchase of additional wireless communications system assets by the Company. In 1997, the increase in depreciation and amortization expense caused by the purchase of additional assets, including the acquisition of the Triad properties, was offset by the change in the life by which cellular licenses are amortized. 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. The effect of this change in 1997 was to decrease net loss by approximately $15 million and decrease the basic loss per share by $0.21. PCS OPERATIONS The Company's PCS business did not commence operations in any of its markets until February 1996. From that date through the end of 1996 six of the original seven MTA licenses purchased by the Company launched service at various times. The last of the original seven MTA licenses, Denver, became operational in May of 1997. Due to the varying dates at which each of the MTAs became operational, the expenses and revenues incurred may not be representative of future operations. Additionally, during each period being discussed a portion of the operating expenses incurred in the Company's PCS operations were related to start-up costs incurred prior to the commencement of operations in each of the systems. Exclusive of depreciation and amortization expense, which was not material, approximately $5.4 million and $17.0 million of start-up costs were incurred in 1997 and 1996, respectively. The Company had 128,600 PCS subscribers at December 31, 1997, representing an increase of 262.3% during 1997. At December 31, 1996, the Company had 35,500 PCS subscribers. 4 The following table sets forth certain financial data as it relates to the Company's PCS operations:
(Dollars in thousands) YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1997 % CHANGE 1996 % CHANGE 1995 -------- -------- --------- -------- ------- PCS revenues: Service revenues ............... $ 52,587 574.7% $ 7,794 Equipment revenues ............. 25,143 158.0% 9,745 -------- -------- Total revenues ............. $ 77,730 $ 17,539 PCS operating expenses: Cost of service ................ $ 43,183 246.3% $ 12,470 Cost of equipment sales ........ 53,469 157.2% 20,789 General and administrative ..... 51,678 155.7% 20,209 N.M. $ 3,069 Sales and marketing ............ 59,466 88.8% 31,505 N.M. 339 Depreciation and amortization .. 66,875 364.6% 14,395 N.M. 269 -------- -------- -------- Total operating expenses ... $274,671 $ 99,368 $ 3,677
PCS REVENUES PCS service revenues grew in 1997 primarily because all seven of the original MTAs were operational during the majority of 1997 while these same MTAs were only operational during a portion of 1996. Average monthly PCS subscriber revenue per subscriber was $57.48 for 1997 as compared to $62.85 for 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. PCS equipment sales increased as a result of commercial operations in six of the Company's PCS MTAs during the entire twelve months of 1997 and the Denver MTA for eight months of 1997 as compared to only six MTAs having operations of various lengths throughout 1996. The Company anticipates continued growth in equipment sales as a result of increases in PCS subscriber additions and the commencement of commercial operations in other PCS markets. PCS OPERATING EXPENSES Cost of service expenses, cost of equipment sales, and depreciation and amortization expenses largely represent the expenses incurred by the operational PCS systems. Six of the PCS MTAs were operational during the entire twelve months in 1997 and the Denver MTA was operational for eight months of that period. Six of the PCS MTAs became operational during various times throughout 1996. Accordingly, cost of service expenses, cost of equipment sales, and depreciation and amortization expenses increased in 1997 over 1996. Similarly, general and administrative costs increased due to the costs associated with supporting the additional markets in which the Company has operations and sales and marketing costs increased as a result of the effort to increase net subscriber additions and promote the Company's PCS brand name. As the Company's PCS systems only commenced operations during 1996, the year over year trend is not necessarily representative of future trends. OTHER INCOME (EXPENSE); EXTRAORDINARY LOSS; NET OPERATING LOSS CARRYFORWARDS Interest and financing expense, net of capitalized interest, increased in 1997 from 1996 and 1995 due to the increase in long-term debt. Long-term debt was incurred primarily to fund the Company's capital expenditures associated with the build-out of the Company's PCS systems. Interest expense will continue to increase in 1998 as a result of increased borrowings the Company has incurred, and will continue to incur, to fund this expansion. The weighted average interest rate, before the effect of capitalized interest, was 10.2%, 9.8% and 9.2% in 1997, 1996 and 1995, respectively. 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. 5 The Company had available at December 31, 1997, net operating loss carryforwards ("NOLs") of approximately $640 million which will expire in the years 2002 through 2012. 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 that formed the Company in July 1994. 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 $623 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 9 of the Company's Notes to the consolidated financial statements. EBITDA Consolidated EBITDA declined to negative $26.2 million in 1997 from negative $7.1 million in 1996 and $25.5 million in 1995 primarily due to the negative $130.1 million and negative $67.4 million EBITDA in 1997 and 1996, respectively, attributable to PCS operations offset by an increase in cellular EBITDA. Cellular EBITDA increased to $103.9 million in 1997 from $60.3 million in 1996 and $28.9 million in 1995, primarily as a result of increased revenues due to the increased subscriber base and the related cost efficiencies gained. As a result, cellular operating margin (cellular EBITDA as a percentage of cellular service revenues) increased to 35.8% in 1997 from 28.3% in 1996 and 21.4% in 1995. 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 "PCS Vendor Facility" and, together with the Credit Facility, the "Senior Secured Facilities") with a consortium of lenders providing for $300 million of revolving credit. As of December 31, 1997, $695 million and $300 million were outstanding under the Credit Facility and the PCS Vendor Facility, respectively. Amounts available for borrowing under the Credit Facility, which is limited by certain financial covenants, was $239 million. Indebtedness under the Credit Facility and the PCS Vendor Facility matures on March 31, 2006, 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 terms of the PCS Vendor Facility restrict, among other things, the sale of assets, distribution of dividends or other distributions and loans by the subsidiary of the Company. In October 1997, the Company entered into an agreement with Hutchison Telecommunications Limited ("HTL") and a subsidiary of HTL pursuant to which the HTL subsidiary agreed to purchase approximately 5% of the outstanding capital stock of the Company for a purchase price of $74.3 million. This transaction closed in November 1997. The proceeds from the sale of the stock were used to reduce the revolving Credit Facility. The Company and its subsidiary, Western PCS Corporation ("Western PCS") also entered into an agreement with HTL and another HTL subsidiary pursuant to which the HTL subsidiary agreed to purchase 19.9% of the outstanding capital stock of Western PCS for an aggregate purchase price of $248.4 million. This transaction closed in February 1998. Approximately $135 million of the proceeds will be used by Western PCS for the continued build-out of its PCS systems during 1998. The remainder of the proceeds was paid to the Company as a repayment of advances made to Western PCS and was used by the Company to reduce the revolving Credit Facility. The Company currently anticipates that it will require approximately $260 million for the continued build-out of its PCS systems during 1998. 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. Part of the funds needed to finance the PCS build-out and operations will come from the investment by HTL. The Company will utilize cash on hand, including the proceeds of the HTL investments described above, and amounts available for borrowing under the Credit Facility for such purposes. The Company believes such sources will be sufficient for the operations of the business. The Company continues to consider and expects to pursue additional sources of funding to enable the further development of the PCS business. Such sources may include the issuance of additional indebtedness and/or the sale of additional equity at the parent or subsidiary level. 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 was $114.5 million in 1997. Adjustments to the $265.5 million net loss to reconcile to net cash used in operating activities primarily included $133.5 million of depreciation and amortization. Other adjustments included changes in operating assets and liabilities, net of effects from consolidating acquired interests, consisting of an increase of $54.9 million in accrued liabilities, primarily attributable to an increase in property taxes and 6 interest, an increase of $23.9 million in accounts receivable, net, as a result of the increase in total revenues, and an increase of $16.9 million in prepaid expenses and other current assets, primarily due to $15 million in escrow for the final payment to Triad which was released in January 1998. Net cash used in operating activities was $61.3 million and $0.7 million in 1996 and 1995, respectively. Net cash used in investing activities was $652.3 million in 1997. Investing activities for such period consisted primarily of purchases of wireless licenses and other intangible assets of $71.9 million of which $71.6 was attributable to the purchase of the PCS licenses that the Company was the high bidder on in the FCC's D and E Block auctions, purchases of property and equipment of $318.8 million of which $264.4 was attributable to PCS capital expenditures incurred in relation to the build out and expansion of the PCS MTAs, and acquisitions of wireless properties, net of cash acquired, of $195.8 million primarily attributable to the purchase of the Triad licenses and properties during the fourth quarter of 1997. Net cash used in investing activities was $489.1 million and $293.6 million in 1996 and 1995, respectively. Net cash provided by financing activities was $727.4 million in 1997. Financing activities for such period consisted of $652 million of net additions to long-term debt and the issuance of 3,888,888 shares of Class A Common stock to Hutchison in November in consideration for $74.3 million. Net cash provided by financing activities was $596.7 million and $295.1 million in 1996 and 1995, respectively. In the ordinary course of business, the Company continues to evaluate acquisition opportunities, joint ventures and other potential business transactions. Such acquisitions, joint ventures and business transactions may be material. Such transactions may also require the Company to seek additional sources of funding, either through the issuance of additional debt and/or additional equity at the parent or subsidiary level. There can be no assurance that such funds will be available to the Company on acceptable or favorable terms. As previously mentioned, the Company holds a 49.9% interest in Cook Inlet PCS. 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 and F 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. To date, the Company has funded the operations of Cook Inlet PCS through the issuance of promissory notes. At December 31, 1997, the Company had advanced funds totaling $36.0 million to Cook Inlet PCS under such promissory notes. YEAR 2000 ISSUES The Company, like most owners of computer software, will be required to modify significant portions of its software so that it will function properly in the year 2000. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disrupti ons of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company is in the planning phase of its year 2000 compliance project and does not, as of yet, have a determinable estimate of the costs to be incurred. The Company expects to incur internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare the systems for the year 2000. The Company expects its year 2000 compliance project to be completed on a timely basis. 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. EX-13.4 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 1 EXHIBIT 13.4 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS WESTERN WIRELESS CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Public Accountants ............................. 2 Consolidated Balance Sheets as of December 31, 1997 and 1996 ......... 3 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 ..................................... 4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 ..................................... 5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 ..................................... 6 Notes to Consolidated Financial Statements ........................... 7 Schedule I - Condensed Financial Information - (Parent Company Only).. 20 Schedule II - Valuation and Qualifying Accounts ...................... 24
2 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, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and schedules 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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 schedules listed in the index of consolidated financial statements are presented for purposes of complying with the Securities and Exchange Commission rules and are not a required part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Seattle, Washington February 17, 1998 3 WESTERN WIRELESS CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
As of December 31, ---------------------------- 1997 1996 ----------- ----------- ASSETS Current assets: Cash and cash equivalents ................................................. $ 15,459 $ 54,885 Accounts receivable, net of allowance for doubtful accounts of $9,931 and $4,266, respectively .................................... 55,652 28,958 Inventory ................................................................. 36,425 26,138 Prepaid expenses and other current assets ................................. 31,216 14,809 Deposit held by FCC ....................................................... 25,000 ----------- ----------- Total current assets ................................................. 138,752 149,790 Property and equipment, net of accumulated depreciation of $221,031 and $107,685, respectively .................................... 699,129 538,617 Licensing costs and other intangible assets, net of accumulated amortization of $73,049 and $55,363, respectively ......................... 807,409 540,482 Investments in and advances to unconsolidated affiliates ..................... 64,156 12,655 Other assets ................................................................. 10,527 159 ----------- ----------- $ 1,719,973 $ 1,241,703 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .......................................................... $ 11,519 $ 14,122 Accrued liabilities ....................................................... 104,595 40,749 Construction accounts payable ............................................. 14,431 89,583 ----------- ----------- Total current liabilities ............................................ 130,545 144,454 ----------- ----------- Long-term debt ............................................................... 1,395,000 743,000 ----------- ----------- 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, 22,201,336 and 14,540,691 shares issued and outstanding, respectively, and; Class B, 53,431,163 and 55,239,157 shares issued and outstanding, respectively ........................................ 675,036 569,278 Deferred compensation ..................................................... (845) (800) Deficit ................................................................... (479,763) (214,229) ----------- ----------- Total shareholders' equity ........................................... 194,428 354,249 ----------- ----------- $ 1,719,973 $ 1,241,703 =========== ===========
See accompanying notes to consolidated financial statements 3 4 WESTERN WIRELESS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)
For the year ended December 31, ------------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ Revenues: Subscriber revenues ............................. $ 297,724 $ 182,441 $ 105,430 Roamer revenues ................................. 39,977 34,065 29,660 Equipment sales and other revenues .............. 42,877 26,579 11,465 ------------ ------------ ------------ Total revenues ...................... 380,578 243,085 146,555 ------------ ------------ ------------ Operating expenses: Cost of service ................................. 90,184 53,600 27,686 Cost of equipment sales ......................... 83,167 46,305 20,705 General and administrative ...................... 112,543 66,673 31,253 Sales and marketing ............................. 120,875 83,652 41,390 Depreciation and amortization ................... 133,470 79,741 49,456 ------------ ------------ ------------ 540,239 329,971 170,490 ------------ ------------ ------------ Operating loss .............................................. (159,661) (86,886) (23,935) ------------ ------------ ------------ Other income (expense): Interest and financing expense, net ............. (98,964) (44,690) (25,428) Equity in net loss of unconsolidated affiliates.. (11,058) (968) (236) Other, net ...................................... 4,149 2,439 290 ------------ ------------ ------------ Total other income (expense) ........ (105,873) (43,219) (25,374) ------------ ------------ ------------ Loss before extraordinary item .............................. (265,534) (130,105) (49,309) Extraordinary loss on early extinguishment of debt .......... (6,645) ------------ ------------ ------------ Net loss ............................ (265,534) (130,105) (55,954) ============ ============ ============ Basic loss per common share before extraordinary item ....... $ (3.76) $ (2.00) $ (0.87) Per common share effect of extraordinary item ............... (0.12) ------------ ------------ ------------ Basic loss per common share ................................. $ (3.76) $ (2.00) $ (0.99) ============ ============ ============ Weighted average common shares used in computing basic loss per common share .................... 70,692,000 65,196,000 56,470,000 ============ ============ ============
See accompanying notes to consolidated financial statements 4 5 WESTERN WIRELESS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands)
Common Stock ----------------------------------------------- Class A Class B Par value and Deferred shares shares paid-in capital compensation Deficit ------------ -------------- --------------- ------------- ------------- Balance, January 1, 1995 .................. 42,983,360 $ 155,187 $ (28,170) Shares issued: For cash, net of costs .............. 12,665,905 143,002 In exchange for shareholder loans plus accrued interest .......... 1,245,998 14,068 For minority interests in GCC, net.. 896,210 9,944 In exchange for wireless properties.. 217,000 2,450 Upon exercise of stock options ...... 38,762 78 Net loss ............................... (55,954) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1995 .............. 58,047,235 324,729 (84,124) Shares issued: For cash, net of costs .............. 10,664,800 88,567 234,724 Upon exercise of stock options ...... 383,937 879 In exchange for wireless properties.. 595,309 7,117 Class B shares exchanged for Class A shares .................. 3,491,954 (3,491,954) Deferred compensation .................. 1,829 $ (800) Net loss ............................... (130,105) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1996 .............. 14,540,691 55,239,157 569,278 (800) (214,229) Shares issued: Upon exercise of stock options ...... 268,763 1,077 In exchange for wireless properties.. 1,600,000 28,600 Private placement ................... 3,888,888 74,300 Class B shares exchanged for Class A shares .................. 1,807,994 (1,807,994) Deferred compensation .................. 95,000 1,781 (45) Net loss ............................... (265,534) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 .............. 22,201,336 53,431,163 $ 675,036 $ (845) $ (479,763) ============ ============ ============ ============ ============
Total shareholders' equity ------------- Balance, January 1, 1995 .................. $ 127,017 Shares issued: For cash, net of costs .............. 143,002 In exchange for shareholder loans.... plus accrued interest .......... 14,068 For minority interests in GCC, net.. 9,944 In exchange for wireless properties.. 2,450 Upon exercise of stock options ...... 78 Net loss ............................... (55,954) ------------ Balance, December 31, 1995 .............. 240,605 Shares issued: For cash, net of costs .............. 234,724 Upon exercise of stock options ...... 879 In exchange for wireless properties.. 7,117 Class B shares exchanged for Class A shares .................. Deferred compensation .................. 1,029 Net loss ............................... (130,105) ------------ Balance, December 31, 1996 .............. 354,249 Shares issued: Upon exercise of stock options ...... 1,077 In exchange for wireless properties.. 28,600 Private placement ................... 74,300 Class B shares exchanged for Class A shares .................. Deferred compensation .................. 1,736 Net loss ............................... (265,534) ------------ Balance, December 31, 1997 ............. $ 194,428 ============
See accompanying notes to consolidated financial statements 5 6 WESTERN WIRELESS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
For the year ended December 31, --------------------------------------- 1997 1996 1995 --------- --------- --------- Operating Activities: Net loss: ........................................................... $(265,534) $(130,105) $ (55,954) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .................................. 133,470 79,741 49,456 Extraordinary loss on early extinguishment of debt............. 6,645 Employee equity compensation ................................... 1,835 1,029 Equity in net loss of unconsolidated affiliates ................ 11,058 968 236 Other, net ..................................................... 5,157 3,088 864 Changes in operating assets and liabilities, net of effects from consolidating acquired interests: Accounts receivable, net ................................ (23,871) (10,309) (5,748) Inventory ............................................... (9,481) (20,493) (239) Prepaid expenses and other current assets ............... (16,913) (10,979) (1,284) Accounts payable ........................................ (4,807) 5,771 (272) Accrued liabilities ..................................... 54,911 19,956 5,551 Other assets ............................................ (323) --------- --------- --------- Net cash used in operating activities .......................... (114,498) (61,333) (745) --------- --------- --------- Investing activities: Purchase of property and equipment .................................. (318,750) (333,315) (79,464) Additions to licensing costs and other intangible assets ............ (71,917) (86,097) (137,805) Acquisition of wireless properties, net of cash acquired ............ (195,790) (40,180) (60,700) Investments in and advances to unconsolidated affiliates ............ (63,402) (5,994) (8,268) Purchase of subsidiary stock, including fees ........................ (5,842) Deposit held by FCC, net ............................................ 7,749 (23,500) (1,500) Other assets ........................................................ (10,194) --------- --------- --------- Net cash used in investing activities .......................... (652,304) (489,086) (293,579) --------- --------- --------- Financing activities: Proceeds from issuance of common stock, net ......................... 75,376 235,603 143,080 Additions to long term debt ......................................... 722,000 893,000 438,000 Payment of debt ..................................................... (70,000) (512,722) (277,015) Deferred financing costs ............................................ (19,149) (12,798) Loans from shareholders ............................................. 3,842 --------- --------- --------- Net cash provided by financing activities ...................... 727,376 596,732 295,109 --------- --------- --------- Change in cash and cash equivalents .................................... (39,426) 46,313 785 Cash and cash equivalents, beginning of year ........................... 54,885 8,572 7,787 --------- --------- --------- Cash and cash equivalents, end of year ................................. 15,459 54,885 8,572 ========= ========= =========
See accompanying notes to consolidated financial statements 6 7 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION: 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 cellular operations are primarily in rural areas and the PCS operations are primarily in urban areas due to the Company's belief that there are certain strategic advantages to operating each technology in these respective areas. As of December 31, 1997, the Company provides cellular services in 72 Rural Service Areas ("RSA") and 16 Metropolitan Statistical Areas ("MSA") and PCS services in nine metropolitan markets in seven Metropolitan Trading Areas ("MTA"). The Company expanded its cellular footprint in 1997 by acquiring 12 RSAs from Triad Corporation, Triad Cellular L.P. and certain of their affiliates (collectively "Triad") (see Note 12). Also during 1997 the Company acquired 100 additional PCS licenses in the Federal Communication Commission's ("FCC") D and E Block auctions and acquired eight more PCS licenses as part of its acquisition of Triad. 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 ("BTA") including seven 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 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. 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 that is not temporary. All affiliate investments in which the Company has between a 20% and 50% interest and those that are temporarily greater than 50% 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 and marketable securities that have original maturity dates not exceeding three months. Such investments are stated at cost, which approximates fair 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. 7 8 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Licensing costs and other intangible assets and amortization: Licensing costs primarily represent costs incurred to acquire 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. The effect of this change in 1997 was to decrease net loss by approximately $15 million and decrease the loss per share by $0.21. Amortization of PCS 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: The Company's PCS licenses represent qualified assets pursuant to Statement of Financial Accounting Standards ("SFAS") No. 34, "Capitalization of Interest Cost." For the years ended December 31, 1997, 1996, and 1995, the Company had interest expense of $99.0 million, $44.7 million and $25.4 million, respectively, net of capitalized interest in the amount of $4.0 million, $5.2 million and $0.4 million, respectively, pertaining to the build out of its PCS markets. Income taxes: The Company accounts for deferred taxes using the asset and liability method. Loss per common share: Loss per common share is calculated using the weighted average number of shares of outstanding common stock during the period. The number of shares outstanding has been calculated based on the requirements of SFAS No. 128, "Earnings Per Share." Due to the net loss incurred during the periods presented, all options outstanding are anti-dilutive, thus basic and 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 11 for discussion of the effect on net loss and other related disclosures had the Company accounted for these plans under SFAS No. 123, "Accounting for Stock-Based Compensation." 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. The carrying value of the Company's short-term financial instruments approximates fair value due to the short maturity of these instruments. The fair value of long-term debt is based on incremental borrowing rates currently available on loans with similar term and maturities. The Company does not hold or issue any financial instruments for trading purposes. 8 9 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Supplemental cash flow disclosure: Cash paid for interest (net of amounts capitalized) was $87.4 million, $36.2 million, and $21.7 million for the years ended December 31, 1997, 1996 and 1995, respectively. Non-cash investing and financing activities were as follows:
(Dollars in thousands) YEAR ENDED DECEMBER, 31 ---------------------------------- 1997 1996 1995 -------- -------- -------- Conversion of FCC deposit to wireless license ............ $ 17,251 $ 10,000 Conversion of revolving debt to term debt ................ $200,000 Issuance of common stock in exchange for wireless assets.. $ 28,600 $ 7,117 $ 2,450 Exchange of shareholder loans and accrued interest for common stock ......................................... $ 14,068
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. Reclassifications: Certain amounts in prior year's financial statements have been reclassified to conform to the 1997 presentation. 3. PROPERTY AND EQUIPMENT: (Dollars in thousands)
DECEMBER 31, ------------------------- 1997 1996 --------- ---------- Land, buildings and improvements.. $ 20,406 $ 8,433 Wireless communications systems.. 697,319 370,628 Furniture and equipment .......... 74,768 49,351 --------- --------- 792,493 428,412 Less accumulated depreciation .... (221,031) (107,685) --------- --------- 571,462 320,727 Construction in progress ......... 127,667 217,890 --------- --------- $ 699,129 $ 538,617 ========= =========
Depreciation expense was $119.1 million, $54.9 million and $30.2 million for the years ended December 31, 1997, 1996 and 1995, respectively. 9 10 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. LICENSING COSTS AND OTHER INTANGIBLE ASSETS: (Dollars in thousands)
DECEMBER 31, ----------------------------- 1997 1996 --------- --------- License costs .......................... $ 846,466 $ 560,232 Other intangible assets ................ 33,992 35,613 --------- --------- 880,458 595,845 Accumulated amortization ............... (73,049) (55,363) --------- --------- $ 807,409 $ 540,482 ========= =========
5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES: (Dollars in thousands)
DECEMBER 31, ----------------------- 1997 1996 -------- -------- Cook Inlet PCS .................................. $ 36,055 $ 8,142 Latcom Wireless Telephone Co. ("Latcom") ........ 11,791 4,663 ACG Telesystems Ghana, LLC ("Ghana") ............ 8,706 Icesco. Ltd ("Iceland") ......................... 4,002 Telcell Wireless LLC ("Georgia") ................ 3,261 Other ........................................... 341 (150) -------- -------- $ 64,156 $ 12,655 ======== ========
The Company's ownership interest in these unconsolidated affiliates range from 30% to 75%. Those ownership interests greater than 50% are temporary, therefore the entities are not consolidated. The assets, liabilities and results of operations of Cook Inlet PCS and other unconsolidated affiliates were not material to the Company during 1997 and 1996. 6. ACCRUED LIABILITIES: (Dollars in thousands)
DECEMBER 31, ------------------------- 1997 1996 -------- -------- Accrued payroll and benefits ................. $ 15,111 $ 11,192 Accrued interest expense ..................... 17,831 10,265 Accrued taxes, other than income ............. 19,398 5,096 Final payment for acquisition ................ 15,000 Accrued interconnect charges ................. 8,149 5,261 Other ........................................ 29,106 8,935 -------- -------- $104,595 $ 40,749 ======== ========
10 11 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM DEBT: (Dollars in thousands)
DECEMBER 31, ------------------------- 1997 1996 ---------- ---------- Credit Facility (a): Revolver ................................... $ 495,000 Term Loan .................................. 200,000 $ 200,000 10-1/2% Senior Subordinated Notes Due 2006 (b) ... 200,000 200,000 10-1/2% Senior Subordinated Notes Due 2007 (c) ... 200,000 200,000 PCS Vendor Facility (d) .......................... 300,000 143,000 ---------- ---------- $1,395,000 $ 743,000 ========== ==========
(a) Credit Facility The Company has a credit facility with a group of banks (the "Credit Facility") pursuant to which 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") and a term loan (the "Term Loan") of $200 million. The Revolving Loans are limited to the principal amount outstanding on December 31, 2000. The Company is required to make quarterly payments on the outstanding principal of the Revolving Loans and Term Loan beginning March 31, 2001, and June 30, 2001, respectively. These payments increase each year on the anniversary date of the initial payment, until paid in full on December 31, 2005, for the Revolving Loans and March 31, 2006, 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 2.5%. During 1997 and 1996, 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, 1997 and 1996, was 8.22% and 7.79%, respectively. The Credit Facility also provides for an annual fee ranging from 0.25% to 0.375% on the unused commitment, payable quarterly. As of December 31, 1997 and 1996, the unused portion of the commitment under the Credit Facility was $239 million and $750 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, 1997 and 1996, the Company had entered into interest rate caps and swaps with a total notional amount of $365 million and $205 million, respectively. Generally these instruments have initial terms ranging from three to 3-1/2 years and effectively convert variable rate debt to fixed rate. The weighted average interest rate under these agreements was approximately 7.40% and 6.76% at December 31, 1997 and 1996, respectively. The amount of unrealized loss attributable to changing interest rates at December 31, 1997 and 1996, 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 PCS subsidiaries. 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"). 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. 11 12 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM DEBT (CONTINUED): (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. 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 PCS Vendor 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 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 PCS Vendor Facility. (d) PCS Vendor Facility A subsidiary of the Company has a credit facility (the "PCS Vendor Facility" formerly known as the "NORTEL Facility") with a consortium of lenders which expires on December 31, 2003. In the first quarter of 1997 this agreement was amended to increase the credit facility from $200 million to $300 million. The PCS Vendor 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, 1997, all outstanding borrowings were drawn under the LIBOR rate option. The weighted average interest rate, including margin, for the years ended December 31, 1997 and 1996, was 8.20% and 8.06%, respectively. The PCS Vendor 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. The terms of this agreement restrict, among other things, the sale of assets, distribution of dividends or other distributions and loans by the subsidiary of the Company. 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 PCS Vendor Facility in increasing quarterly installments. The aggregate amounts of principal maturities as of December 31, 1997, of the Company's debt are as follows (dollars in thousands): Year ending December 31, 1998............................................................... $ 0 1999............................................................... 0 2000............................................................... 30,000 2001............................................................... 123,000 2002............................................................... 170,270 Thereafter......................................................... 1,071,730 ----------- $ 1,395,000 ===========
12 13 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. 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 the year 2027. 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. 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, 1997, are summarized below (dollars in thousands): Year ending December 31, 1998...................................... $ 23,758 1999...................................... 22,063 2000...................................... 20,206 2001...................................... 15,237 2002...................................... 7,580 Thereafter................................ 26,179 ----------- $ 115,023 ===========
Aggregate rental expense for all operating leases was approximately $28.0 million, $14.2 million and $4.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. 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 million. At December 31, 1997, the Company has ordered approximately $246 million under all of these agreements, of which approximately $16 million is outstanding. In March 1998, a subsidiary of the Company entered into an agreement with a vendor to purchase $150 million of PCS equipment and services in relation to the buildout of its Seattle and Phoenix BTAs. 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. INCOME TAXES: Significant components of deferred income tax assets and liabilities are as follows :
DECEMBER 31, (Dollars in thousands) ------------------------ 1997 1996 --------- --------- Deferred tax assets: Net operating loss carryforwards .................. $ 228,800 $ 100,000 Other temporary differences ....................... 17,200 12,000 --------- --------- Total deferred tax assets ............................. 246,000 112,000 Valuation allowance ................................... (195,600) (90,000) --------- --------- 50,400 22,000 Deferred tax liabilities: Property and wireless licenses basis differences.. (50,400) (22,000) --------- --------- $ 0 $ 0 ========= =========
13 14 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. INCOME TAXES (CONTINUED): For tax purposes, the Company had available at December 31, 1997, net operating loss carryforwards for regular tax purposes of approximately $640 million which will expire in 2002 through 2012. 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 that formed the Company in July 1994. The change in the valuation allowance was an increase of approximately $107 million, $56 million and $16 million in 1997, 1996 and 1995, respectively. 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. 10. SHAREHOLDERS' EQUITY: (a) Business combinations On October 31, 1997, the Company issued 1,600,000 shares of its' Class A Common Stock as a portion of the consideration given to purchase the cellular business and assets of Triad (see Note 12). On December 29, 1995, the shareholders of the Company, Palouse Paging Inc. ("Palouse"), and Sawtooth Paging Inc. ("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. (b) General Cellular Corporation minority interest During 1995 the Company completed a cash redemption of the remaining common stock shares (the "Redemption") of General Cellular Corporation's ("GCC'"), the Company's predecessor company, common stock. As part of this Redemption, the Company issued 896,210 shares of the Company's common stock for GCC common stock in a one-for-one exchange. This redemption 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 during 1995. (c) Stock issuances In January 1998, the Company issued 100,000 shares of its Class A Common Stock pursuant to an Executives Restricted Stock Plan to certain key executives. The vesting of these shares are subject to certain performance thresholds as determined by the Board of Directors. In November 1997, the Company issued 3,888,888 shares of its Class A common stock (approximately 5% of the outstanding capital stock of the Company) to a subsidiary of Hutchison Telecommunications Limited ("HTL") for a purchase price of approximately $74 million. 14 15 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. SHAREHOLDERS' EQUITY (CONTINUED): In January 1997, the Company issued 95,000 shares of its Class A Common Stock to certain key executives pursuant to an Executives Restricted Stock Plan. The vesting of these shares are subject to certain performance thresholds as determined by the Board of Directors. 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. 11. 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. 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 their 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. 15 16 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. STOCK-BASED COMPENSATION PLANS (CONTINUED): At December 31, 1997, 1996, and 1995 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 defined in SFAS No. 123, the Company's net loss and basic loss per share would have increased to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, (Dollars in thousands, --------------------------------------------- except per share data) 1997 1996 1995 ------------ ----------- ----------- Net loss: As reported .................... $ (265,534) $ (130,105) $ (55,954) Pro forma ...................... $ (271,745) $ (134,255) $ (57,388) Basic and diluted loss per share: As reported .................... $ (3.76) $ (2.00) $ (0.99) Pro forma ...................... $ (3.84) $ (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:
1997 1996 1995 ---- ---- ---- Weighted average risk free interest rates.. 6.28% 6.33% 6.30% Expected dividend yield ................... 0% 0% 0% Expected volatility ....................... 50% 50% 0% Expected lives (in years) ................. 7.5 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. Options granted, exercised and canceled under the above MISOP are summarized as follows : (In thousands, except pricing information)
YEAR ENDED DECEMBER 31, (in thousands, except -------------------------------------------------------------------------- pricing information) 1997 1996 1995 ---------------------- --------------------- --------------------- Weighted Weighted Weighted average average average Shares price Shares price Shares price ------ --------- ----- --------- ----- --------- Outstanding, beginning of period .. 4,165 $ 9.66 3,538 $ 8.02 2,182 $ 5.15 Options granted .................. 18 $ 14.65 1,139 $ 12.54 1,453 $ 12.15 Options exercised ................ (269) $ 4.85 (384) $ 2.28 (39) $ 2.02 Options canceled ................. (203) $ 13.12 (128) $ 12.06 (58) $ 7.73 ----- ----- ----- Outstanding, end of the period ... 3,711 $ 9.79 4,165 $ 9.65 3,538 $ 8.02 ===== ===== ===== Exercisable, end of period ....... 2,384 $ 8.23 1,877 $ 6.36 1,582 $ 3.69
The weighted average fair value of stock options granted for the years ended 1997 and 1996 was $9.34 and $9.79, respectively. 16 17 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. STOCK-BASED COMPENSATION PLANS (CONTINUED): The following table summarizes information about fixed price stock options outstanding at December 31, 1997: (In thousands, except pricing information)
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 - $ 4.03 891 5 years $ 2.61 849 $ 2.69 $ 9.68 - $ 9.68 660 7 years $ 9.68 660 $ 9.68 $ 11.29 - $ 12.90 1,263 8 years $ 12.04 653 $ 12.06 $ 13.73 - $ 16.13 897 9 years $ 13.84 222 $ 13.83 - -------------------- ----- ----- $ 1.10 - $ 16.13 3,711 7 years $ 9.79 2,384 $ 8.23 ===== =====
12. ACQUISITIONS: On October 31, 1997, the Company consummated the purchase of the cellular business and assets of Triad in the 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 $194.5 million, plus (ii) 1,600,000 shares of the Company's Class A Common Stock. The transaction was accounted for using the purchase method of accounting. In accordance with its agreement with Triad, the Company filed a shelf Registration Statement on Form S-3 covering future resales of such shares. The Company also acquired from Triad certain D and E Block PCS licenses for an aggregate purchase price of approximately $4.6 million, such amount being the aggregate amount Triad paid the FCC in its successful bids for such licenses in the FCC's auction of such licenses. During 1996 and 1995 the Company acquired six cellular RSAs and one cellular MSA throughout the western United States, respectively. The aggregate cash paid for these transactions was $35.6 million and $38.6 million, in 1996 and 1995, respectively. All of these transactions were accounted for using the purchase method of accounting. Six of the transactions were asset purchases while one was a stock purchase in which the Company issued 217,000 shares of common stock at $11.29 per share. Substantially all of the purchase price of each acquisition was allocated to licensing costs. 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, its ownership interests in three other markets and $3.0 million in cash for the cellular assets and license of the Lubbock, TX MSA market. There was no gain or loss recognized on the transaction. 17 18 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. SEGMENT INFORMATION: The company's operations are classified into two principal reportable segments: cellular and PCS. The Company provides cellular services in rural markets and provides PCS services in urban markets, both in the western United States. The type of service provided in each segment is similar, although PCS generally offers more features. Certain centralized costs and assets benefit all of the Company's operations. These items are allocated to the segments in a manner which reflects management's judgment as to the nature of the activity causing those items to be incurred.
CELLULAR PCS OTHER (Dollars in thousands) OPERATIONS OPERATIONS OPERATIONS CONSOLIDATED ---------- ---------- ---------- ----------- YEAR ENDED DECEMBER 31, 1997 Total revenues ........................ $ 302,848 $ 77,730 $ 380,578 Interest expense ...................... $ 41,406 $ 57,558 $ 98,964 Depreciation and amortization expense.. $ 66,595 $ 66,875 $ 133,470 Operating income (loss) ............... $ 37,280 $ (196,941) $ (159,661) Total capital expenditures ............ $ 54,318 $ 264,432 $ 318,750 Total assets .......................... $ 866,805 $ 822,291 $ 30,877 $1,719,973 YEAR ENDED DECEMBER 31, 1996 Total revenues ........................ $ 225,546 $ 17,539 $ 243,085 Interest expense ...................... $ 41,083 $ 3,607 $ 44,690 Depreciation and amortization expense.. $ 65,346 $ 14,395 $ 79,741 Operating income (loss) ............... $ (5,057) $ (81,829) $ (86,886) Total capital expenditures ............ $ 98,953 $ 234,362 $ 333,315 Total assets .......................... $ 622,197 $ 614,127 $ 5,379 $1,241,703 YEAR ENDED DECEMBER 31, 1995 Total revenues ........................ $ 146,555 $ 146,555 Interest expense ...................... $ 25,388 $ 40 $ 25,428 Depreciation and amortization expense.. $ 49,187 $ 269 $ 49,456 Operating income (loss) ............... $ (20,258) $ (3,677) $ (23,935) Total capital expenditures ............ $ 62,573 $ 16,891 $ 79,464 Total assets .......................... $ 465,193 $ 193,810 $ 25 $ 659,028
14. SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED): Selected quarterly consolidated financial information for the years ended December 31, 1997 and 1996 is as follows:
(Dollars in thousands, except per share data) BASIC LOSS TOTAL OPERATING PER COMMON QUARTER ENDED REVENUES LOSS NET LOSS SHARE ------------- -------- --------- -------- ----------- March 31, 1997 $ 71,560 $(37,391) $(55,173) $ (0.79) June 30, 1997 $ 90,642 $(45,269) $(70,025) $ (1.00) September 30, 1997 $104,994 $(38,233) $(68,043) $ (0.97) December 31, 1997 $113,382 $(38,768) $(72,293) $ (0.99) March 31, 1996 $ 46,035 $(10,505) $(18,574) $ (0.31) June 30, 1996 $ 58,569 $(13,158) $(21,596) $ (0.35) September 30, 1996 $ 67,339 $(27,489) $(38,605) $ (0.56) December 31, 1996 $ 71,142 $(35,734) $(51,330) $ (0.74)
18 19 WESTERN WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. 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. 16. HUTCHISON TRANSACTION: In addition to the shares issued by the Company to a subsidiary of HTL (as discussed in Note 10) during the fourth quarter of 1997, the Company and its subsidiary, Western PCS Corporation ("Western PCS"), entered into an agreement with HTL and another subsidiary of HTL (the "HTL Sub") pursuant to which the HTL Sub agreed to purchase 19.9% of Western PCS for an aggregate purchase price of $248.4 million. In the first quarter of 1998, this purchase received a favorable declaratory ruling by the FCC granting a waiver from the indirect foreign ownership restrictions under the Communications Act of 1934, as amended; and the expiration or early termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended has passed. The Company and Western PCS have amended certain outstanding financing agreements to which they are subject, and unless otherwise agreed to by HTL Sub and the Company, neither the Company nor Western PCS shall have any liability regarding any indebtedness of the other. The HTL Sub has designated two directors to a ten person Board of Directors of Western PCS who have certain rights with respect to certain transactions and actions of Western PCS. Western PCS and the Company received $248.4 million in February 1998 upon closing of this transaction. 19 20 WESTERN WIRELESS CORPORATION SCHEDULE I - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) BALANCE SHEETS (Dollars in thousands)
As of December 31, ---------------------------- 1997 1996 ----------- ----------- ASSETS Current assets: Cash and cash equivalents .................................... $ 15,177 $ 49,762 Accounts receivable, net of allowance for doubtful accounts of $8,725 and $3,580, respectively ............................ 47,082 24,356 Inventory .................................................... 19,794 14,324 Prepaid expenses and other current assets .................... 26,264 11,907 Deposit held by FCC .......................................... 25,000 ----------- ----------- Total current assets ................................... 108,317 125,349 Property and equipment, net of accumulated depreciation of $175,753 and $98,974, respectively ............................ 471,646 367,668 Licensing costs and other intangible assets, net of accumulated amortization of $68,086 and $53,951, respectively ............... 651,538 386,163 Investments in and advances to affiliates .......................... 157,320 162,986 Other assets ....................................................... 10,527 159 ----------- ----------- $ 1,399,348 $ 1,042,325 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ................................................. $ 9,973 $ 4,238 Accrued liabilities .............................................. 88,227 35,448 Construction accounts payable .................................... 11,720 48,390 ----------- ----------- Total current liabilities .............................. 109,920 88,076 ----------- ----------- Long-term debt ..................................................... 1,095,000 600,000 ----------- ----------- 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, 22,201,336 and 14,540,691 shares issued and outstanding and; Class B, 53,431,163 and 55,239,157 shares issued and outstanding, respectively .................................. 675,036 569,278 Deferred compensation .............................................. (845) (800) Deficit ............................................................ (479,763) (214,229) ----------- ----------- Total shareholders' equity ............................. 194,428 354,249 ----------- ----------- $ 1,399,348 $ 1,042,325 =========== ===========
See notes to condensed financial information 20 21 WESTERN WIRELESS CORPORATION SCHEDULE I - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)
For the year ended December 31, ------------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ Revenues: Subscriber revenues ............................ $ 257,397 $ 175,354 $ 105,430 Roamer revenues ................................ 39,793 34,065 29,660 Equipment sales and other revenues ............. 23,569 18,674 11,465 ------------ ------------ ------------ Total revenues .............................. 320,759 228,093 146,555 ------------ ------------ ------------ Operating expenses: Cost of service ................................ 62,384 43,914 27,686 Cost of equipment sales ........................ 42,596 29,414 20,705 General and administrative ..................... 79,893 53,355 29,057 Sales and marketing ............................ 80,267 60,394 41,053 Depreciation and amortization .................. 93,207 69,869 49,311 ------------ ------------ ------------ Total operating expenses .................... 358,347 256,946 167,812 ------------ ------------ ------------ Operating loss ................................... (37,588) (28,853) (21,257) ------------ ------------ ------------ Other income (expense): Interest and financing expense, net ............ (71,999) (42,786) (25,388) Equity in net loss of affiliates ............... (160,092) (60,841) (2,954) Other, net ..................................... 4,145 2,375 290 ------------ ------------ ------------ Total other income (expense) ................ (227,946) (101,252) (28,052) ------------ ------------ ------------ Loss before extraordinary item ................... (265,534) (130,105) (49,309) Extraordinary loss on early extinguishment of debt......................................... (6,645) ------------ ------------ ------------ Net loss .................................... $ (265,534) $ (130,105) $ (55,954) ============ ============ ============ Basic loss per common share before extraordinary item ............................................. $ (3.76) $ (2.00) $ (0.87) Per common share effect of extraordinary item .... (0.12) ------------ ------------ ------------ Basic loss per common share ...................... $ (3.76) $ (2.00) $ (0.99) ============ ============ ============ Weighted average common shares used in computing basic loss per common share ......... 70,692,000 65,196,000 56,470,000 ============ ============ ============
See notes to condensed financial information 21 22 WESTERN WIRELESS CORPORATION SCHEDULE I - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) STATEMENTS OF CASH FLOWS (Dollars in thousands)
For the year ended December 31, --------------------------------------- 1997 1996 1995 --------- --------- --------- Operating activities: Net loss ..................................................... $(265,534) $(130,105) $ (55,954) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................. 93,207 69,869 49,311 Extraordinary loss on early extinguishment of debt ........ 6,645 Employee equity compensation .............................. 1,835 1,029 Equity in net loss of unconsolidated affiliates ........... 160,092 60,841 2,954 Other, net ................................................ 4,476 3,049 864 Changes in operating assets and liabilities, net of effects from consolidating acquired interests: Accounts receivable, net ............................. (19,903) (5,707) (5,748) Inventory ............................................ (4,664) (8,679) (239) Prepaid expenses and other current assets ............ (14,863) (9,668) 307 Accounts payable ..................................... 3,531 (3,448) (937) Accrued liabilities .................................. 43,844 14,655 5,551 Other assets ......................................... (323) --------- --------- --------- Net cash provided by(used in) operating activities ........ 1,698 (8,164) 2,754 --------- --------- --------- Investing activities: Purchase of property and equipment ........................... (169,184) (208,087) (66,292) Additions to licensing costs and other intangible assets ..... (66,771) (8,210) (60,304) Acquisition of wireless properties, net of cash acquired ..... (195,790) (40,180) (60,700) Investments in and advances to unconsolidated affiliates ..... (172,469) (136,514) (13,826) Purchase of subsidiary stock, including fees ................. (5,842) Deposit held by FCC .......................................... (23,500) (1,500) Refund of deposit held by FCC ................................ 7,749 Other assets ................................................. (10,194) (880) 880 --------- --------- --------- Net cash used in investing activities ..................... (606,659) (417,371) (207,584) --------- --------- --------- Financing activities: Proceeds from issuance of common stock, net ....................................................... 75,376 235,603 66,236 Additions to long-term debt .................................. 565,000 763,000 425,000 Payment of debt .............................................. (70,000) (512,722) (277,015) Deferred financing costs ..................................... (19,149) (12,455) Loans from shareholders ...................................... 3,842 --------- --------- --------- Net cash provided by financing activities ................. 570,376 466,732 205,608 --------- --------- --------- Change in cash and cash equivalents ............................ (34,585) 41,197 778 Cash and cash equivalents, beginning of year ................... 49,762 8,565 7,787 --------- --------- --------- Cash and cash equivalents, end of year ......................... $ 15,177 $ 49,762 $ 8,565 ========= ========= =========
See notes to condensed financial information 22 23 WESTERN WIRELESS CORPORATION SCHEDULE I - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) NOTES TO CONDENSED FINANCIAL INFORMATION This Schedule I and the related notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto. 1. BASIS OF PRESENTATION: The condensed financial information presented in Schedule I represents the balance sheet, statements of operations and cash flows of the Company as if the subsidiary that is restricted under the PCS Vendor Facility was an unconsolidated entity. The Company less this subsidiary is referred to as "Parent Company Only" in Schedule I. The Company's ownership in such subsidiary has been reflected in this condensed financial information as if the investment was accounted for using the equity method. 2. LONG TERM DEBT MATURITIES: The aggregate amounts of principal maturities as of December 31, 1997, of the Company's debt excluding the PCS Vendor Facility are as follows (dollars in thousands):
Year ending December 31, 1998.................................. $ 0 1999.................................. 0 2000.................................. 0 2001.................................. 51,000 2002.................................. 76,250 Thereafter............................ 967,750 ---------- $1,095,000 ==========
23 24 WESTERN WIRELESS CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS (Dollars in thousands)
Balance at Charged to Charged beginning of costs and to other Deductions Balance at Description period expenses accounts (1) (2) end of period ----------- ------------ ---------- ------------ ---------- -------------- Year ended December 31, 1997 $ 4,266 $ 16,442 $ 1,121 $(11,898) $ 9,931 ======== ======== ======== ======== ======== 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 ======== ======== ======== ======== ========
(1) Represents market acquisitions and dispositions, late fees and net fraud credits given to customers. (2) Write-offs, net of bad debt recovery. 24 EX-23.1 9 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent pulic accountants, we hereby consent to the incorporation of our report incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements, File Numbers 333-28959, 333-14859, 333-10421, 333-39721 and 333-18137. ARTHUR ANDERSEN LLP Seattle, Washington March 26, 1998 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WESTERN WIRELESS CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10K. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 15,459 0 65,583 9,931 36,425 138,752 920,160 221,031 1,719,973 130,545 1,395,000 0 0 675,036 (480,608) 1,719,973 37,496 380,578 83,167 540,239 105,873 15,206 98,964 (265,534) 0 (265,534) 0 0 0 (265,534) (3.76) 0 For Purposes of This Exhibit, Primary means Basic.
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