-----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, EicxX0SQnxbDCKmgx+b99ezzoyXIsUo7UO6BL+RZMKl7UOkl6SqrnZOCyeivp8rh Uh0BdQV3GahWbl+aMirLDg== 0000891020-99-000578.txt : 19990402 0000891020-99-000578.hdr.sgml : 19990402 ACCESSION NUMBER: 0000891020-99-000578 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19990331 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/A SEC ACT: SEC FILE NUMBER: 000-28160 FILM NUMBER: 99580463 BUSINESS ADDRESS: STREET 1: 3650 131 ST AVENUE SE STREET 2: SUITE 400 CITY: BELLEVUE STATE: WA ZIP: 98006 BUSINESS PHONE: 4255868700 MAIL ADDRESS: STREET 1: 2001 NW SAMMAMISH RD CITY: ISSAQUAH STATE: WA ZIP: 98027 10-K405/A 1 AMENDED FORM 10-K405 FOR THE PERIOD ENDED 12.31.97 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K/A [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 an auction of more than 1000 MHz of spectrum for the Local Multipoint Distribution Services. 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 R. 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 R. 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(12) 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(12) 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. (12) Previously filed as exhibit to Form 10-K for the year ended Decemeber 31, 1997. 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 31, 1999 WESTERN WIRELESS CORPORATION By /s/ JOHN W. STANTON ------------------------------ John W. Stanton Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title ---------- ----- /s/ JOHN W. STANTON Chairman of the Board and Chief Date: March 31, 1999 - --------------------------- Executive Officer John W. Stanton (Principal Executive Officer) /s/ DONALD GUTHRIE Vice Chairman and Chief Financial Officer Date: March 31, 1999 - --------------------------- (Principal Financial Officer) Donald Guthrie /s/ PATRICIA L. MILLER Controller Date: March 31, 1999 - --------------------------- (Principal Accounting Officer) Patricia L. Miller /s/ JOHN L. BUNCE, JR. Date: March 31, 1999 - --------------------------- Director John L. Bunce, Jr. /s/ MITCHELL R. COHEN Date: March 31, 1999 - --------------------------- Director Mitchell R. Cohen /s/ DANIEL J. EVANS Date: March 31, 1999 - --------------------------- Director Daniel J. Evans /s/ JONATHAN M. NELSON Date: March 31, 1999 - --------------------------- Director Jonathan M. Nelson /s/ TERENCE O'TOOLE Date: March 31, 1999 - --------------------------- Director 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
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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
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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.
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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(12) Financial Statements and Supplementary Data 21.1(1) Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP 27.1(12) 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. (12) Previously filed as exhibit to Form 10-K for the year ended December 31, 1997. EX-13.1 2 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 1996 - ---- Second quarter ......................... $25 1/2 $19 7/8 Third quarter .......................... $22 1/8 $13 3/4 Fourth quarter ......................... $18 1/8 $13
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 3 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 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. EBITDA is presented because it is a commonly used financial indicator in the wireless industry. It is used as an indicator of a company's ability to service and/or incur debt. Because EBITDA is not calculated in the same manner by all companies, Western Wireless presentation may not be comparable to other similarly titled measures of other companies. 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 4 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. Sales and marketing costs do not include the revenue or costs of handset sales. However, when sales and marketing costs per net subscriber addition are discussed, the revenue and costs from handset sales are included because such measure is commonly used in the wireless industry. 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 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. EBITDA is presented because it is a commonly used financial indicator in the wireless industry. It is used as an indicator of a company's ability to service and/or incur debt. Because EBITDA is not calculated in the same manner by all companies the Company's presentation may not be comparable to other similarly titled measures of other companies. 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. The Company expects this trend to continue in 1998. 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 general industry practice and expects to continue to do so in the future. 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. The Company's PCS business plan is to grow the business rapidly which would cause all PCS operating expenses to increase significantly in 1998. 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. The Company has issued $200 million principal amount of 10-1/2% Senior Subordinated Notes due 2006 (the "2006" Notes) at par and $200 million principal amount of 10-1/2% Senior Subordinated Notes due 2007 (the "2007" Notes) at par. Indebtedness under the 2006 Notes and 2007 Notes matures in June 1, 2006 and February 1, 2007, respectively. The Credit Facility prohibits the repayment of all or any portion of the principal amounts of the 2006 Notes or 2007 Notes prior to the repayment of all indebtedness under the Credit Facility. The 2006 and 2007 Notes contain certain restrictive covenants which impose limitations on the operations and activities of the Company and certain of its subsidiaries, including the issuance of other indebtedness, the creation of liens, the sale of assets, issuance of preferred stock of subsidiaries and certain investments and acquisitions. 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. In addition to the aforementioned capital expenditures the Company expects to incur in 1998, WWC has noncancellable lease agreements for various facilities, including cell site locations, of approximately $24 million in 1998. The source of funding for such expenditures will come from the sources discussed above. The Company currently anticipates that it will require approximately $260 million for the continued build-out of its PCS systems during 1998, including anticipated spending by Cook Inlet PCS. 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-23.1 5 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/A, into the Company's previously filed Registration Statements, File Numbers 333-28959, 333-10421, and 333-18137. /s/ ARTHUR ANDERSEN LLP Seattle, Washington March 30, 1999 -----END PRIVACY-ENHANCED MESSAGE-----