<PAGE> 1
Filed Pursuant to Rule 424(B)(3)
Registration #333-2432
11,000,000 SHARES
LOGO
WESTERN WIRELESS CORPORATION
CLASS A COMMON STOCK
(NO PAR VALUE PER SHARE)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 HEREOF FOR CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
The Class A Common Stock is quoted on the Nasdaq National Market under the
symbol "WWCA."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus has been prepared for and is to be used by Goldman, Sachs &
Co. in connection with offers and sales of the shares of Class A Common Stock
related to market-making transactions, at prevailing market prices, related
prices or negotiated prices. The Company will not receive any of the proceeds of
such sales. Goldman, Sachs & Co. may act as principal or agent in such
transactions. The closing of the Offerings referred to herein, which will
constitute the initial public offering of the Class A Common Stock of the
Company, is expected to occur on May 29, 1996. See "Plan of Distribution."
GOLDMAN, SACHS & CO.
------------------------
The date of this Prospectus is May 22, 1996.
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(WESTERN WIRELESS LOGO)
Western Wireless(R) is a registered service mark of the Company. CELLULAR
ONE(R) is a registered service mark of Cellular One Group. See
"Business -- Intellectual Property."
------------------------
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and an opinion thereon expressed by
independent public accountants and with unaudited quarterly reports for the
first three quarters of each fiscal year containing unaudited summary financial
information.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements and the notes thereto appearing elsewhere in this
Prospectus. Unless the context otherwise requires, the term "Company" or
"Western Wireless" when used in this Prospectus refers to Western Wireless
Corporation, a Washington corporation which is the successor to a Delaware
corporation pursuant to a reincorporation merger that was effected in May 1996,
and its subsidiaries and predecessors. All share and per share data in this
Prospectus assume no exercise of the Underwriters' over-allotment options and
reflect the reclassification in May 1996 of each share of the Company's
outstanding common stock, par value $0.001 per share, into 3.1 shares of the
Company's Class B Common Stock, no par value (the "Class B Common Stock"), which
together with the Company's Class A Common Stock, no par value (the "Class A
Common Stock"), is referred to herein as the "Common Stock." In addition, all
references to Class B Common Stock prior to the date of the reclassification
refer to the common stock, par value $0.001 per share, of Western Wireless
Corporation. Unless the context otherwise requires, when used herein with
respect to a licensed area, "persons" and "population" are interchangeable and
refer to the aggregate number of persons located in such licensed area, and
"pops" refers to the number of such persons in a licensed area multiplied by a
company's ownership interest in the license for such licensed area. Persons,
population and pops data are estimated for 1996 based upon 1995 estimates by
Equifax Marketing Decision Systems, Inc. ("Equifax") adjusted by the Company by
applying Equifax's growth factors from 1990 to 1995 to the 1990 U.S. Census
Bureau population figures, unless otherwise specified.
THE COMPANY
Western Wireless provides wireless communications services in the western
United States. The Company owns or has the right to acquire an aggregate of 80
cellular and PCS licenses for a geographic area covering approximately 25.5
million pops and 41% of the continental United States. The Company owns and
operates cellular communications systems in 57 Rural Service Areas ("RSAs"),
including one RSA which it has the right to acquire, and 16 Metropolitan
Statistical Areas ("MSAs") with an aggregate population of approximately 6.0
million persons. In its cellular markets, the Company uses the CELLULAR ONE
brand name and currently serves over 240,000 subscribers.
Through the Federal Communications Commission ("FCC") auction concluded in
1995, the Company acquired broadband personal communications services ("PCS")
licenses for six Major Trading Areas ("MTAs") with an aggregate population of
approximately 15.1 million persons -- Honolulu, Salt Lake City, Portland, Des
Moines/Quad Cities, El Paso/Albuquerque and Oklahoma City -- for an aggregate
purchase price of $144 million. In January 1996, the Company agreed to acquire a
broadband PCS license for the Denver MTA from GTE Mobilnet Incorporated ("GTE")
for a purchase price of $66 million. The Company's seven PCS licenses cover
markets with an aggregate population of approximately 19.5 million persons,
including approximately 4.4 million persons covered by the Denver MTA. In all of
its PCS markets, the Company intends to use its proprietary VoiceStream(SM)
brand name. In February 1996, the Company's PCS system in the Honolulu MTA
became the first auction-awarded PCS system to commence commercial operations in
the United States. See "Business -- Introduction," "-- Markets and Systems" and
"-- PCS Operations."
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
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related transactions, Western Wireless Corporation became the owner of all of
the issued and outstanding shares of common stock of GCC and the owner of all of
the assets of MCLP. The Business Combination constituted an acquisition of MCLP
by GCC for accounting purposes. As a result, all financial data relating to the
Company herein with respect to periods after the date of the Business
Combination reflect the combined operations of GCC and MCLP and all such data
with respect to prior periods reflect only the operations of GCC, which, for
accounting purposes, is considered Western Wireless Corporation's predecessor.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
STRATEGY
The Company believes that its combination of cellular and PCS licenses
creates a unique opportunity in the wireless communications industry. The
Company has focused on the acquisition and operation of cellular communications
systems in RSAs and small MSAs in the western United States, which the Company
believes it has acquired at attractive prices. The Company's recent 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 is to commence operations in the
more densely populated areas within its MTAs. The Company believes that cellular
is the optimum technology for rural, less densely populated areas 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 and, prior to the Business Combination, MCLP entered
markets at a relatively low cost, having purchased cellular licenses for an
average of $45.68 per pop and PCS licenses for an average of $10.81 per pop.
The Company's operating strategy is to (i) achieve a critical
time-to-market advantage by rapidly constructing and commencing operations of
PCS systems in urban areas within its PCS markets; (ii) continue to expand its
operations through increased subscriber growth and usage; (iii) utilize its
centralized management and back office functions to support the combined needs
of its cellular and PCS subscribers, thereby further improving operating
efficiencies and generating greater economies of scale; and (iv) selectively
acquire cellular and PCS properties primarily in contiguous markets. The Company
is implementing its strategy by aggressively building 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 believes the wireless communications industry will continue to
grow due to enhanced service offerings, the emergence of PCS systems, increased
awareness of the productivity, convenience and security benefits associated with
wireless communications services and anticipated declines in service prices. The
Company believes it is well positioned to take advantage of these growth
opportunities as a result of its existing operations and systems infrastructure,
its wide geographic coverage and the experience and expertise of its management
team. See "Business -- Strategy," "-- Cellular Operations," "-- PCS Operations,"
"-- Products and Services" and "-- System Equipment, Development and Expansion."
CELLULAR OPERATIONS
The Company owns and operates high quality cellular systems in 15 western
states and generally owns 100% of each of its cellular licenses. The Company
focuses on RSAs and small MSAs because it perceives such markets, which are less
densely populated, to be less susceptible to competition and to have greater
capacity for future growth than most major markets. Cellular service was
generally introduced later in RSAs and small MSAs than in major markets. As a
result, cellular penetration is currently lower and subscriber growth rates are
significantly higher than in major markets. Although two cellular operators
exist in all markets, the Company's competitor in many of its markets tends to
be smaller and less well capitalized than the large market operators.
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The Company's cellular markets exhibit positive characteristics for
wireless communications, including a high percentage of business customers with
substantial needs for wireless communications, such as those employed in
agriculture, mining, oil and gas, and populations accustomed to long travel
times. Additionally, the Company's service areas cover over 20,000 highway miles
and the popular destination areas of Yellowstone National Park, Glacier National
Park and Mount Rushmore National Monument, providing attractive sources of
roaming revenues.
In its rural markets, the Company believes that its cellular systems, which
can cover large geographic areas with relatively few cell sites, provide the
optimum cost efficient wireless service technology. In contrast, PCS technology
requires more closely located cell sites to broadcast over extended geographic
areas. Accordingly, PCS service will be less efficient and more expensive to
deploy in rural markets than cellular service, making it likely that PCS
competitors will delay or avoid entry into such markets.
The Company has experienced rapid growth of its cellular operations during
the last three years. The number of the Company's cellular subscribers grew to
239,200 at March 31, 1996 from 13,700 at January 1, 1993. Service (subscriber
and roamer) revenues grew to $135.1 million in 1995 from $18.4 million in 1993
and operating income (loss) from cellular operations before interest, taxes and
depreciation and amortization increased to $28.9 million in 1995 from $0.5
million in 1993. In addition, during the three year period ended December 31,
1995, the monthly subscriber revenue per subscriber in the industry declined
while the Company's monthly subscriber revenue per subscriber increased to
$57.25 for 1995 from $49.72 for 1993. The Company believes these results reflect
the strong demand for wireless services in its markets, the success of its
marketing strategy and its management capabilities. See "Risk
Factors -- Seasonality," "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company offers its subscribers high quality cellular service, as well
as custom calling services such as call forwarding, call waiting, conference
calling, voice message storage and retrieval and no-answer transfer. The Company
also acts as a retail distributor of wireless handsets. The Company sells its
products and services primarily through its direct sales force and 108 retail
locations, as well as through a network of independent agents and national
retailers. In addition, the Company recently began providing replacement
wireless services for rural customers in sparsely populated areas where the cost
of providing wired telephone services is relatively high. The Company markets
its cellular services under the CELLULAR ONE brand name, allowing it to enjoy
the strength of a nationally recognized service mark in its cellular markets.
The Company has roaming arrangements with virtually every cellular carrier
in North America and has entered into agreements or letters of intent with a
number of PCS carriers which, when the technology is available, will enable PCS
subscribers of these carriers to roam on the Company's cellular systems. The
Company is also a member of North American Cellular Network ("NACN"), a wireless
network linking cellular operations throughout the United States, Canada, Puerto
Rico and the Virgin Islands. NACN participation allows the Company to offer
convenient access to the Company's subscribers when roaming throughout the
United States and Canada. See "Business -- Strategy," "-- Cellular Operations"
and "-- Products and Services - Cellular."
PCS OPERATIONS
The Company has completed initial construction and commenced commercial
operations of its PCS system in the Honolulu MTA and is in the initial
construction phase of its PCS systems in the Portland, Salt Lake City and El
Paso/Albuquerque MTAs. Design and engineering have been initiated in the
Company's remaining PCS markets. When completed, the Company's PCS systems will
cover a substantial geographic area in the western United States complementary
to the Company's cellular operations. The Company expects to extend its PCS
systems based on economic factors, customer demand and FCC licensing
requirements. The Company believes its
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PCS service offerings will be broader than those currently offered by cellular
systems in the Company's PCS markets. PCS service offerings will initially
include all of the services typically provided by cellular systems, as well as
paging, caller identification, text messaging, smart cards, over-the-air
activation and over-the-air subscriber profile management. To date, the Company
has not derived significant revenues from its PCS operations.
The following table sets forth certain information regarding the MTAs in
which the Company intends to operate PCS systems:
<TABLE>
<CAPTION>
MTA POPULATION SYSTEM STATUS
----------------------------------------------- ---------- -----------------------
<S> <C> <C>
Honolulu....................................... 1,215,729 commercial service
Portland....................................... 3,460,182 construction
Salt Lake City................................. 2,999,636 construction
El Paso/Albuquerque............................ 2,387,710 construction
Denver......................................... 4,411,211 design and engineering
Des Moines/Quad Cities......................... 3,067,795 design and engineering
Oklahoma City.................................. 1,945,271 design and engineering
</TABLE>
The Company believes that being the first to offer PCS services in a market
will be a key competitive advantage. 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 currently provided by analog or digital cellular operators and
providing superior customer service. In addition, the Company believes it can
become a low-cost provider of PCS services by taking advantage of the existing
business infrastructure established for its cellular operations, including
centralized management, marketing, billing and customer service functions, and
by focusing on efficient customer acquisition and retention.
The Company uses the internationally-proven Global System for Mobile
Communications ("GSM") as the network standard for its PCS systems. GSM is the
leading digital wireless standard worldwide, with approximately 120 systems
operating in 92 countries serving over 13 million subscribers. In the United
States, GSM has been chosen by six other companies as the network standard in
their 18 MTAs which, together with the Company's seven MTAs, cover markets
containing approximately 149.2 million persons, representing approximately 55.7%
of the U.S. population. The Company has entered into roaming agreements or
letters of intent with all of the companies in the United States that have
chosen to deploy the GSM standard in their PCS markets, which will provide for
roaming by the Company's PCS subscribers into these carriers' PCS markets, and
vice versa, when such systems are operational. As of March 31, 1996, the Company
also had reciprocal roaming agreements or letters of intent with 28
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.The Company will seek to
enter into reciprocal roaming agreements with cellular carriers in markets where
the GSM standard will not be initially deployed to enable the Company's PCS
subscribers to roam in such markets when dual-mode handsets are available. See
"Risk Factors -- Risks Relating to GSM Technical Standard," " -- Absence of PCS
Operating History in the United States; Handset Availability,"
"Business -- Markets and Systems," "-- PCS Operations" and " -- Products and
Services - PCS."
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FINANCING PLAN
The Company believes that access to capital and financial flexibility are
necessary to successfully implement its strategy. The Company currently
anticipates that it will require approximately $500 million to finance the
build-out of its PCS systems through the end of 1998. The Company will require
additional funds to finance the continued growth of its cellular operations,
provide for working capital, service debt and finance potential acquisitions.
Such additional financing requirements will be dependent upon a variety of
factors including the rate of growth of the Company's cellular operations.
Historically, the Company has relied on a combination of private equity
financings and borrowings. Since January 1, 1993, the Company has raised over
$185.8 million of equity through issuances of capital stock. From inception
until the Business Combination, MCLP had raised $79.0 million of partner
capital. See "Certain Transactions." 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 $200 million credit facility (the "NORTEL Facility" and, together with the
Credit Facility, the "Senior Secured Facilities") with Northern Telecom Inc.
("NORTEL"). As of March 31, 1996, $435.8 million was outstanding under the
Senior Secured Facilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Indebtedness."
The Company is offering 7,211,840 shares of Class A Common Stock in the
offering in the United States (together with the 1,588,160 shares of Class A
Common Stock offered by the Selling Shareholders, the "U.S. Offering"),
1,802,960 shares of Class A Common Stock in the offering outside the United
States (together with the 397,040 shares of Class A Common Stock offered by the
Selling Shareholders, the "International Offering" and, together with the U.S.
Offering, the "Offerings") and $200 million principal amount of 10 1/2% Senior
Subordinated Notes Due 2006 (the "Senior Subordinated Notes") to be issued
pursuant to an indenture (the "Indenture"), between the Company and Harris Trust
Company of California, as Trustee, in the concurrent debt offering (the "Debt
Offering") for estimated aggregate net proceeds to the Company of $391.6 million
($428.2 million if the Underwriters' over-allotment options are exercised in
full). The Company believes these proceeds, in combination with the Senior
Secured Facilities, will be sufficient to fund operating losses, capital
expenditures and working capital necessary for the build-out of its PCS systems
and the continued growth of its cellular operations through December 31, 1998.
In the event the Debt Offering is not consummated, the Company would use its
existing Senior Secured Facilities, which consist of the Credit Facility and the
NORTEL Facility, to fund such expenditures. To the extent that the build-out of
the PCS systems is faster than expected, the costs are greater than anticipated
or the Company takes advantage of additional acquisition opportunities,
including those that may arise through current or future FCC auctions, the
Company may require additional funding to implement its business strategy. See
"Risk Factors -- High Leverage; Debt Service; Restrictive Covenants," "-- PCS
Build-out and Capital Expenditures," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Use of Proceeds."
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THE OFFERINGS
<TABLE>
<S> <C>
Class A Common Stock offered by the Company(1):
U.S. Offering.......................................... 7,211,840 shares
International Offering................................. 1,802,960 shares
Total............................................... 9,014,800 shares
Class A Common Stock offered by the Selling Shareholders:
U.S. Offering.......................................... 1,588,160 shares
International Offering................................. 397,040 shares
Total............................................... 1,985,200 shares
Common Stock to be outstanding after the Offerings:
Class A Common Stock(1)(2)(3).......................... 11,000,000 shares
Class B Common Stock(2)(3)............................. 56,745,911 shares
Total(1)(2)......................................... 67,745,911 shares
Voting Rights............................................ The holders of Class A Common Stock
have identical rights to holders of
Class B Common Stock, except that
holders of Class A Common Stock are
entitled to one vote per share and
holders of Class B Common Stock are
entitled to ten votes per share. See
"Description of Capital Stock."
Use of proceeds.......................................... Estimated net proceeds to the
Company from the Offerings and Debt
Offering of approximately $198.5
million and $193.1 million,
respectively, will be used to
finance a portion of the Company's
PCS build-out, to fund the purchase
of the Denver MTA license, to fund
expansion of existing cellular
operations and for general corporate
purposes; and, pending such uses,
for working capital and to repay
revolving credit indebtedness under
the Credit Facility. See "Use of
Proceeds."
Nasdaq National Market Symbol............................ WWCA
</TABLE>
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(1) Assumes no exercise of Underwriters' over-allotment options to purchase up
to an additional 1,650,000 shares of Class A Common Stock from the Company.
See "Underwriting."
(2) Does not include an aggregate of 3,992,760 shares of Class B Common Stock
issuable upon exercise of outstanding stock options and exchange rights and
an aggregate of 2,195,220 shares of Class A Common Stock reserved for
issuance pursuant to future option grants under the Company's stock option
plan and issuable under an agreement with an employee of the Company. See
"Dilution," "Certain Transactions," "Shares Eligible for Future Sale" and
Note 11 to the Company's consolidated financial statements.
(3) Shares of Class B Common Stock are convertible at any time into Class A
Common Stock on a one-for-one basis and generally convert automatically into
Class A Common Stock upon a transfer. See "Risk Factors -- Control by
Management and Existing Shareholders; Anti-Takeover Effect of Dual Classes
of Common Stock" and "Description of Capital Stock."
RISK FACTORS
Certain factors should be considered in connection with an investment in
the Class A Common Stock. See "Risk Factors."
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables set forth certain summary consolidated financial data
for the Company for each of the three years in the period ended December 31,
1995, which was derived from the Company's consolidated financial statements and
notes thereto that have been audited by Arthur Andersen LLP. The table also sets
forth certain unaudited summary consolidated financial data as of March 31, 1996
and for the three months ended March 31, 1996 and 1995. The Company has
experienced rapid growth in its revenues and assets during the periods set forth
below, which rate of growth will not necessarily continue over the next few
years. In addition, the Company has made and expects to make substantial capital
expenditures in connection with its wireless communications systems.
Accordingly, the operating results set forth below will not necessarily be
indicative of future performance.
The summary consolidated financial and operating data set forth below
should be read in conjunction with "Use of Proceeds," "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto and other financial and operating information included
elsewhere in this Prospectus. All financial data relating to the Company herein
with respect to periods after the date of the Business Combination reflect the
combined operations of GCC and MCLP and all such data with respect to prior
periods reflect only the operations of GCC, which, for accounting purposes, is
considered Western Wireless Corporation's predecessor. Accordingly, the
financial data of the Company for the periods subsequent to the Business
Combination are not comparable to financial data for prior periods. See Note 12
to the Company's consolidated financial statements for pro forma information
presenting the results of operations of the Company as if the Business
Combination occurred on January 1, 1993, and see the consolidated financial
statements of MCLP included herein for financial information of MCLP prior to
the Business Combination.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues.................................. $ 46,035 $ 26,084 $ 146,555 $ 63,108 $ 20,734
-------- -------- --------
Operating expenses:
Cost of service............................... 8,815 5,786 27,686 13,303 4,310
Cost of equipment sales....................... 6,354 3,870 20,705 11,446 3,533
General and administrative.................... 12,270 6,254 31,253 15,226 6,253
Sales and marketing........................... 13,491 7,164 41,390 18,553 6,101
Depreciation and amortization................. 15,610 10,776 49,456 25,670 5,399
Provision for restructuring costs............. 2,478
-------- -------- --------
Total operating expenses.................... 56,540 33,850 170,490 86,676 25,596
-------- -------- --------
Operating loss.................................. (10,505) (7,766) (23,935) (23,568) (4,862)
Interest and financing expense.................. (8,134) (5,027) (25,428) (10,659) (2,242)
Other, net(1)................................... 65 330 (6,591) 8,267 10,433
-------- -------- --------
Net income (loss)............................. $ (18,574) $ (12,463) $ (55,954) $ (25,960) $ 3,329
======== ======== ========
Net income (loss) per share before extraordinary
item.......................................... $ (0.31) $ (0.24) $ (0.87) $ (0.59) $ 0.10
Net income (loss) per share(2).................. $ (0.31) $ (0.24) $ (0.99) $ (0.59) $ 0.10
======== ======== ========
Weighted average common shares and common
equivalent shares outstanding................. 59,486,512 52,363,838 56,469,990 43,949,101 32,253,303
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Working capital (deficiency)......................................................... $(27,006) $156,897
Property and equipment, net.......................................................... 231,488 231,488
Licensing costs and other intangible assets, net..................................... 455,371 467,946
Total assets......................................................................... 737,446 933,924
Long-term debt....................................................................... 438,480 436,480
Common stock and paid-in capital..................................................... 334,675 533,153
Total shareholders' equity........................................................... 230,263 428,741
</TABLE>
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(1) Includes an extraordinary loss on early extinguishment of debt of $6.6
million for the year ended December 31, 1995.
(2) The Company has never paid dividends on its Common Stock and does not
anticipate paying any dividends in the foreseeable future. See "Dividend
Policy."
(3) Adjusted to reflect (i) the sale of 9,014,800 shares of Class A Common Stock
offered by the Company in the Offerings, and (ii) the sale of $200 million
principal amount of the 10 1/2% Senior Subordinated Notes in the Debt
Offering, and the application of the estimated net proceeds therefrom for
working capital and to repay revolving credit indebtedness. See "Use of
Proceeds."
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SUMMARY OPERATING DATA
The following table sets forth summary operating data of the Company for
its cellular operations.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ----------------------------------------
1996 1995 1994 1993
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cellular pops(1)....................... 6,030,208 5,764,152 5,240,702 2,190,104
Cellular subscribers................... 239,200 209,500 112,800 30,000
Penetration level(2)................... 4.0% 3.6% 2.2% 1.4%
Average monthly cellular service
revenue
per subscriber(3).................... $ 63.04 $ 73.36 $ 77.79 $ 82.34
Average monthly cellular subscriber
revenue
per subscriber(4).................... $ 51.87 $ 57.25 $ 54.35 $ 49.72
Cellular EBITDA (thousands)(5)......... $ 11,449 $ 28,929 $ 2,102 $ 537
Cellular capital expenditures
(thousands).......................... $ 18,500 $ 62,573 $ 47,423 $ 25,113
Cellular cash flows provided by (used
in):
Operating activities.............. $ 6,670 $ 3,370 $ (988) $ (255)
Investing activities.............. $ (55,789) $ (140,332) $ (70,190) $ (32,535)
Financing activities.............. $ 46,503 $ 137,724 $ 70,777 $ 36,212
</TABLE>
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(1) Based upon 1995 estimates by Equifax. For 1994 and 1993, the Company has
evenly applied Equifax's growth factors from 1990 to 1995 to the 1990 U.S.
Census Bureau population figures. See "Business -- Markets and Systems."
(2) Determined by dividing the aggregate number of cellular subscribers by
cellular pops.
(3) Cellular service revenues include subscriber, roamer and, beginning in 1996,
other revenues; average monthly service revenue per subscriber is determined
for each of the periods by dividing cellular service revenues by the average
monthly cellular subscribers, and dividing the result by the number of
months in the period. Average monthly subscribers for the period is computed
by adding the average of monthly subscribers, which is computed by adding
beginning and ending monthly subscribers and dividing by two, and dividing
the result by the number of months in the period.
(4) Determined for each of the periods by dividing cellular subscriber revenues
by the average monthly cellular subscribers for the period, and dividing the
result by the number of months in the period.
(5) EBITDA represents operating income (loss) from operations before interest,
taxes and depreciation and amortization. EBITDA is a measure commonly used
in the industry but is not prepared in accordance with United States
generally accepted accounting principles ("GAAP") and should not be
considered as a measurement of net cash flows from operating activities.
Cellular EBITDA represents EBITDA from cellular operations. In 1994, the
Company recorded a provision for restructuring costs of $2.5 million. EBITDA
before such provision for restructuring costs would have been $4.6 million
in 1994.
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RISK FACTORS
In addition to the other information in this Prospectus, the following
should be considered carefully in evaluating the Company and its business before
investing in the Class A Common Stock.
HIGH LEVERAGE; DEBT SERVICE; RESTRICTIVE COVENANTS
The Company is, and will continue to be, highly leveraged and subject to
significant financial restrictions and limitations. As of March 31, 1996, on an
as adjusted basis after giving effect to the Offerings and the Debt Offering and
the application of the net proceeds therefrom for working capital and to
initially reduce revolving credit indebtedness under the Credit Facility, the
Company's total indebtedness would have been $436.5 million or approximately
50.4% of its total capitalization. Indebtedness under the Credit Facility and
the NORTEL Facility matures on March 31, 2005 and December 31, 2003,
respectively, and bears interest at variable rates. Substantially all the assets
of the Company are pledged as security for such indebtedness. See "Use of
Proceeds," "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Description of Indebtedness."
For the three months ended March 31, 1996 and the year ended December 31,
1995, the Company had negative ratios of earnings to fixed charges and earnings
coverage deficiencies of approximately $18.6 million and $49.7 million,
respectively. There can be no assurance that the Company will generate
sufficient cash flow from operating activities to meet its debt service and
working capital requirements. In such event, the Company may need to seek
additional financing. There can be no assurance that any such financing or
refinancing could be obtained on terms that are acceptable to the Company. In
the absence of such financing or refinancing, the Company could be materially
limited in its ability to build out its existing cellular and PCS systems or be
forced to dispose of assets in order to make up for any shortfall in the
payments due on its indebtedness under circumstances that might not be favorable
to the realization of the highest price for such assets. Given that a
substantial portion of the Company's assets consists of intangible assets,
principally licenses granted by the FCC, the value of which will depend upon a
variety of factors (including the success of the Company's PCS and cellular
businesses and the wireless communications industry in general), there can be no
assurance that the Company's assets could be sold quickly enough, or for
sufficient amounts, to enable the Company to meet its obligations.
The Company intends to continue pursuing opportunities to acquire
additional wireless communications systems that complement its existing systems.
The Company believes that borrowings available under the Senior Secured
Facilities and the proceeds from the Offerings and the Debt Offering will be
sufficient to fund operating losses, capital expenditures and working capital
necessary for the build-out of its PCS systems and the continued growth of its
cellular operations through December 31, 1998. At March 31, 1996, the amounts
available for borrowings under the Credit Facility and the NORTEL Facility were
$48.2 million and $43.0 million, respectively. In the event the Debt Offering is
not consummated, the Company would use its existing Senior Secured Facilities to
fund such expenditures. To the extent that the build-out of the PCS systems is
faster than expected, the costs are greater than anticipated or the Company
takes advantage of acquisition opportunities, including those that may arise
through current or future FCC auctions, the Company may require additional
funding to implement its business strategy. There can be no assurance that the
Company will be able to obtain such financing on acceptable terms and in
adequate amounts to accomplish its objectives.
The Senior Secured Facilities contain, and the Indenture for the Senior
Subordinated Notes will contain, and any additional financing agreements may
contain, certain restrictive covenants. The Senior Secured Facilities require
and the Indenture will require the Company to comply with certain financial and
operational performance covenants, and, while the Company expects to remain in
compliance with such covenants, there can be no assurance to that effect. The
restrictions contained in the Senior Secured Facilities and the Indenture will
affect, and in some cases will
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significantly limit or prohibit, among other things, the ability of the Company
to incur indebtedness, make prepayments of certain indebtedness, pay dividends,
make investments, create liens, sell assets and engage in mergers and
consolidations. In addition to such covenants, the Credit Facility requires the
Company to maintain certain financial ratios. The financial ratio covenants in
the Credit Facility include, among others, a limitation on the incurrence of
indebtedness based on the ratio of the Company's indebtedness to operating cash
flow (as defined in the Credit Facility) and a requirement that the Company's
ratio of operating cash flow to cash interest expense be not less than specified
levels. The NORTEL Facility contains, among others, covenants of Western PCS II
Corporation, a subsidiary of the Company and the borrower thereunder, relating
to minimum gross revenues and the ratio of cash coverage (as defined in the
NORTEL Facility) to operating cash flow (as defined in the NORTEL Facility). The
Indenture will contain a limitation, among others, on the incurrence of
indebtedness based on the ratio of the Company's indebtedness to EBITDA. See
"Description of Indebtedness" for a more detailed description of the restrictive
covenants and other terms of the Senior Secured Facilities and the Indenture. An
event of default under the Senior Secured Facilities or the Indenture would
allow the lenders thereunder to accelerate the maturity of the indebtedness
thereunder. In such event, it is likely that all of the Company's indebtedness,
which at March 31, 1996 amounted to $438.5 million, would become immediately due
and payable. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and "Description
of Indebtedness."
LIMITED OPERATING HISTORY; PAST AND FUTURE OPERATING LOSSES AND NEGATIVE CASH
FLOW
Western Wireless Corporation was formed in July 1994 as a result of the
Business Combination among various companies, including MCLP and GCC. The
Business Combination constituted an acquisition of MCLP by GCC for accounting
purposes. As a result, all financial data relating to the Company herein with
respect to periods after the date of the Business Combination reflect the
combined operations of GCC and MCLP and all such data with respect to prior
periods reflect only the operations of GCC, which, for accounting purposes, is
considered Western Wireless Corporation's predecessor. GCC commenced operations
in 1989 and MCLP was formed in 1992. As a result of an inability to service
then-existing debt requirements, GCC filed a voluntary petition for bankruptcy
under Chapter 11 of the United States Bankruptcy Code in October 1991 and,
pursuant to a prepackaged plan, emerged from bankruptcy in March 1992. Certain
individuals who currently serve as executive officers of the Company were, at
the time of such filing, executive officers of GCC. As a result of the Business
Combination and a series of related transactions, the Company became the owner
of all of the issued and outstanding shares of common stock of GCC and all of
the assets of MCLP. See "Business -- Introduction," "Management," "Principal and
Selling Shareholders" and "Certain Transactions."
The Company sustained operating losses of approximately $10.5 million
(including $6.8 million of losses attributable to the Company's PCS operations),
$23.9 million (including $3.7 million of losses attributable to the Company's
PCS operations), $23.6 million and $4.9 million in the three months ended March
31, 1996 and the years ended December 31, 1995, 1994 and 1993, respectively. At
March 31, 1996, the Company had an accumulated deficit of $102.7 million. The
Company expects to incur significant operating losses and to generate negative
cash flow from operating activities during the next several years, while it
develops and constructs its PCS systems and builds a PCS subscriber base. There
can be no assurance that the Company will achieve or sustain profitability or
positive cash flow from operating activities in the future or that it will
generate sufficient cash flow to service its debt requirements. See "-- High
Leverage; Debt Service; Restrictive Covenants" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
COMPETITION
Competition for subscribers among wireless licensees is based principally
upon the services and enhancements offered, the technical quality of the system,
customer service, system coverage, capacity and price. In the future, the
Company expects to face increased competition from entities
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providing similar services using other communications technologies and services.
While some of these technologies and services are currently operational, others
are being developed or may be developed in the future. As the Company enters the
PCS business in new markets, its principal competitors initially will be
providers of cellular service. The Company will face additional competition in
these markets as other providers of PCS services enter the markets. Under
current FCC rules, there may be up to six PCS licenses granted 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. ESMR systems, including those operated by Nextel Communications, Inc.,
could be competitive with the Company's cellular and PCS systems. The Company
has one cellular competitor in each of its cellular markets, including CommNet
Cellular, Inc. ("CommNet"), Lincoln Telecommunications Company, Kansas Cellular,
Southwestern Bell Mobile Systems ("Southwestern Bell") and U S WEST Cellular ("U
S WEST"), and there will be up to six PCS licensees in each of its markets. The
Company's principal competitors in its PCS business are PCS PrimeCo L.P.
("PrimeCo"), Sprint Spectrum L.P. ("Sprint Spectrum") and AT&T Wireless Services
("AT&T Wireless"), as well as the two existing cellular providers in its PCS
markets. These cellular competitors include AT&T Wireless, U S WEST and United
States Cellular Corporation ("U.S. Cellular"). The Company also competes with
paging, dispatch and conventional mobile telephone companies, resellers and
landline telephone service providers.
All of such competition may be intense. Given the rapid advances in the
wireless communications industry, there can be no assurance that new
technologies will not evolve that will compete with the Company's products and
services. In addition, a number of the Company's competitors have substantially
greater financial, technical, marketing, sales, manufacturing and distribution
resources than those of the Company and have significantly greater experience
than the Company in testing new or improved communications products and services
and obtaining regulatory approvals. Some competitors are expected to market
other services, such as landline telephone and cable services, with their
wireless communications service offerings. Several of the Company's competitors
are operating, or planning to operate, through joint ventures and affiliation
arrangements, wireless communications systems that encompass most of the
continental United States. See "-- Absence of PCS Operating History in the
United States; Handset Availability," "-- Risks Relating to GSM Technical
Standard" and "Business -- Competition."
RISKS RELATING TO GSM TECHNICAL STANDARD
When the FCC first licensed cellular systems in the United States, it
specified the technical standards of analog cellular system operation to ensure
nationwide compatibility between all analog cellular carriers. In contrast, the
FCC has not mandated the technology standard for digital cellular or PCS
operations, leaving each licensee free to select among several competing
technologies that have sufficient technological differences to preclude their
interoperability. The Company has chosen the GSM technical standard in its PCS
markets and believes that GSM offers the Company significant advantages over the
other competing technologies. There are, however, certain risks with respect to
the deployment of GSM.
As of the date hereof, six other PCS licensees (Pacific Telesis Mobile
Services Corp., American Portable Telecom, Inc. ("APT"), BellSouth Personal
Communications, Inc., InterCel, Inc., Omnipoint Corporation and American
Personal Communications, Inc. ("APC")) have announced that they intend to deploy
GSM-based PCS systems. These six companies and the Company together cover 25
MTAs awarded in the A and B Block auctions containing approximately 149.2
million persons, representing approximately 55.7% of the U.S. population. PCS
licensees in several markets adjacent to the Company's PCS markets, including
California, Minnesota, Missouri and Nevada, have announced that they intend to
use the GSM standard. In order for the Company's PCS
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subscribers to roam in other markets, and vice versa, at least one PCS licensee
in the other market must utilize the GSM standard, or the subscribers must use
dual-mode handsets that would permit the subscriber to use the cellular system
in the other market. Dual-mode handsets which would permit such usage are not
currently available. See "--Absence of PCS Operating History in the United
States; Handset Availability."
The Company's principal PCS competitors have committed to standards other
than GSM and, as a result, without PCS handsets that can access both GSM and
competing systems, there is a risk that customers of the Company's PCS services
may not be able to conveniently use PCS services while roaming in certain
geographic areas outside the Company's PCS markets. PrimeCo and Sprint Spectrum
have publicly announced that they intend to deploy PCS systems based on a Code
Division Multiple Access ("CDMA") standard. AT&T Wireless and Southwestern Bell
have selected the Time Division Multiple Access ("TDMA") standard. It is
anticipated that together, CDMA-based PCS providers, including competitors in
several of the Company's markets, own licenses covering approximately 87% of the
U.S. population (based on 1990 U.S. Census Bureau figures used by the FCC for
auction purposes) and AT&T Wireless and Southwestern Bell, with their TDMA
standard, own PCS licenses which contain approximately 45% of the U.S.
population (based on 1990 U.S. Census Bureau figures used by the FCC for auction
purposes). Licensees in the FCC's recently completed C Block auction and in
future auctions of PCS licenses may or may not select GSM technology; certain
purchasers of licenses in the C Block auction have announced their intention not
to utilize the GSM standard in such markets. Accordingly, certain major
metropolitan areas will not be served by GSM-based PCS systems. The Company's
ability to establish a PCS subscriber base and to compete successfully in the
PCS business with those operators offering greater roaming capabilities may be
adversely affected by the fact that the Company's PCS subscribers will only be
able to roam into regions served by GSM-based PCS systems until dual-mode
handsets permitting them to use the existing cellular system become available.
See "Business -- PCS Operations."
ABSENCE OF PCS OPERATING HISTORY IN THE UNITED STATES; HANDSET AVAILABILITY
PCS systems have no significant operating history in the United States and
there can be no assurance that these businesses will become profitable. In
addition, the extent of potential demand for PCS in the Company's markets cannot
be estimated with any degree of certainty. The inability of the Company to
establish PCS services or to obtain appropriate equipment for the PCS business
could have a material adverse effect on the Company.
Handsets used for GSM-based PCS systems cannot currently be used with
cellular systems, and vice versa. While the Company believes that dual-mode
handsets that allow a user to access both GSM networks and analog cellular
networks will be commercially available in sufficient quantities by 1997, there
can be no assurance that such handsets can be successfully manufactured or that
the Company can obtain such handsets at competitive prices. Such dual-mode
handsets are not yet commercially available and are expected to be larger and
more expensive than single-mode handsets. The lack of interoperability or the
comparatively higher cost of such handsets may impede the Company's ability to
retain current cellular subscribers or attract potential new wireless
communications subscribers. See "Business -- PCS Operations" and "-- System
Equipment, Development and Expansion - PCS."
INTELLECTUAL PROPERTY AND BRANDING
The Company currently uses the registered service mark CELLULAR ONE to
market its cellular services. The Company's use of this service mark is governed
by five-year contracts between the Company and Cellular One Group, the owner of
the service mark. Each of these agreements may be renewed at the Company's
option for three additional five-year terms. Under these agreements, the Company
has agreed to meet operating and service quality standards for its cellular
service areas. If these agreements were not renewed upon expiration or if the
Company were to fail to meet the applicable operating or service quality
standards, and therefore were no longer permitted to use the CELLULAR ONE
service mark, the Company's ability to attract new subscribers and retain
existing
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subscribers could be materially impaired. AT&T Wireless, which had been the
single largest user of the CELLULAR ONE brand name, has reduced its use of the
brand as a primary service mark. In addition, if for some reason beyond the
Company's control the name CELLULAR ONE were to suffer diminished marketing
appeal, the Company's ability both to attract new subscribers and retain
existing subscribers could be materially impaired. In such circumstances or
otherwise, the Company may explore development or acquisition of a new service
mark.
The Company has an application pending to obtain federal trademark
registration for the name "VoiceStream" which the Company is using in the
Honolulu MTA and intends to use in its remaining MTAs. There can be no assurance
that such registration will be granted or, if granted, that it will provide any
meaningful benefit to the Company. Competitors of the Company possess, and
others may develop over time, branding with significantly greater name
recognition than that of the Company. A failure by the Company to maintain
existing rights to its current cellular branding, to successfully develop value
in its "VoiceStream" mark or to develop suitable alternatives thereto would have
a material adverse effect on the Company's ability to market its products and
services and could require the Company to invest significant additional funds to
develop such alternatives. See "Business -- Intellectual Property."
HOLDING COMPANY STRUCTURE
Substantially all of the Company's assets and operations are held by or
conducted through subsidiaries and, to that extent, the Company is effectively a
holding company. The Company relies on dividends, loan repayments and other
intercompany cash flows from its subsidiaries to generate the funds necessary to
meet its debt service obligations. The payment of dividends and the repayment of
loans and advances by the Company to its subsidiaries are subject to statutory,
contractual and other restrictions, are dependent upon the earnings of such
subsidiaries and are subject to various business considerations. As of March 31,
1996, the total outstanding indebtedness of the Company's subsidiaries not
eliminated in the Company's consolidated financial statements was approximately
$36.5 million. Moreover, claims of creditors of the Company's subsidiaries,
including tax authorities and trade creditors, will generally have a priority
claim to the assets of such subsidiaries over the claims of the Company and the
holders of indebtedness of the Company. See "Description of Indebtedness."
PCS BUILD-OUT AND CAPITAL EXPENDITURES
The Company is currently in the engineering, design and construction phase
of the initial build-out of its PCS systems. The Company's PCS licenses are
subject to a requirement that the Company construct network facilities that
offer coverage to at least one-third of the population in the relevant MTA by
June 2000, five years from the grant of the license (the "Five-Year Build-out
Requirement"), and to at least two-thirds of the population by June 2005, 10
years from the grant of the license (the "10-Year Build-out Requirement"). In
the Honolulu MTA, the Company currently has sufficient coverage to satisfy the
10-Year Build-out Requirement. The Company anticipates that its build-out in all
of its MTA markets, if completed as currently planned by the end of 1998, will
satisfy the 10-Year Build-out Requirement. Should the Company fail to meet these
coverage requirements, it may be subject to forfeiture of the license or the
imposition of fines by the FCC. See "Business -- Governmental Regulation." The
PCS build-out in each MTA is subject to successful completion of the network
design, site and facility acquisitions, the purchase and installation of the
network equipment, network testing and satisfactory accommodation of microwave
users currently using the spectrum. Delays in any of these areas could have a
material adverse effect on the Company's ability to complete the build-out in a
timely manner.
The successful build-out of the Company's PCS systems will depend to a
significant degree upon the Company's ability to lease or acquire appropriate
sites for the location of its base station equipment. The Company has begun the
site selection and acquisition process. The site selection process will require
the continued successful negotiation of use agreements for or acquisitions of
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<PAGE> 17
numerous additional sites, and may require the Company to obtain zoning
variances or other governmental or local regulatory approvals, which are beyond
the Company's control. Delays in the site selection process, as well as
construction delays and other factors, could adversely affect the timing of the
commencement of commercial service in the Company's PCS systems. See
"-- Relocation of Fixed Microwave Licensees" and "Business -- Governmental
Regulation."
The Company believes that borrowings available under the Senior Secured
Facilities and the proceeds from the Offerings and the Debt Offering will be
sufficient to fund operating losses, capital expenditures and working capital
necessary for the build-out of its PCS systems and the continued growth of its
cellular operations through December 31, 1998. The build-out of the Company's
PCS systems is currently in its early stages and the capital cost of completing
the project in any particular MTA and overall could vary materially from such
estimates. If adequate funds are not available from its existing capital
resources, the Company may be required to curtail its service operations or to
obtain additional funds on terms less favorable than those contained in the
Company's current arrangements.
In addition, the implementation of the PCS build-out plan is subject to the
availability from suppliers of the infrastructure equipment and subscriber
equipment the Company plans to use. Accordingly, there are risks associated with
the completion of development, timely manufacture and successful implementation
of newly developed wireless equipment in the build-out of the Company's PCS
systems. The Company has entered into agreements for the supply of
infrastructure equipment with NORTEL and Nokia Telecommunications Inc. In
addition, the Company has entered into an agreement with Nokia Mobile Phones,
Inc. (together with its affiliate, Nokia Telecommunications Inc., "Nokia"),
pursuant to which the Company has committed to purchase PCS and dual-mode
handsets totaling approximately $43.7 million through October 1, 1999. See
"-- Absence of PCS Operating History in the United States; Handset
Availability," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and
"Business -- Products and Services."
The cost to the Company of PCS handsets initially will be higher than its
cost of cellular handsets. In order to compete effectively with sellers of
analog cellular handsets, the Company may have to subsidize the sale of its PCS
handsets to a greater extent than cellular handsets. There can be no assurance
it will be able to sell such handsets on commercially favorable terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RELOCATION OF FIXED MICROWAVE LICENSEES
For a period of up to five years after the grant of a PCS license (subject
to extension), a PCS licensee will be required to share spectrum with existing
licensees that operate certain fixed microwave systems, which exist within each
of the Company's MTAs. To secure a sufficient amount of unencumbered spectrum to
operate its PCS systems efficiently, the Company may need to negotiate
agreements to relocate many of these existing licensees. In such places where
relocation is necessary to permit operation of the Company's PCS systems, any
delay in the relocation of such licensees may adversely affect the Company's
ability to commence timely commercial operation of its PCS systems. In an effort
to balance the competing interests of existing microwave users and newly
authorized PCS licensees, the FCC has adopted a transition plan to relocate such
microwave operators to other spectrum blocks. This transition plan allows most
microwave users to operate in the PCS spectrum for a two-year voluntary
negotiation period and an additional one-year mandatory negotiation period. For
public safety entities dedicating a majority of their system communications for
police, fire or emergency medical services operations, the voluntary negotiation
period is three years, with a 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 existing microwave user is permitted to continue its
operations until final FCC resolution of the matter. There can be no assurance
that the Company will be successful in reaching timely agreements with the
existing
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<PAGE> 18
microwave licensees or that any such agreements will be on terms favorable to
the Company. Further, depending on the terms of such agreements, the Company's
ability to operate its PCS systems profitably may be adversely affected. The
Company estimates that to complete its construction schedule through December
31, 1997 it may be required to relocate approximately 105 microwave links.
Through May 1, 1996, the Company has relocated or reached agreement to relocate
67 microwave links. See "Business -- Governmental Regulation."
GOVERNMENTAL REGULATION
The licensing, construction, operation, acquisition and sale of cellular
and PCS systems, as well as the number of cellular and other wireless licensees
permitted in each market, are regulated by the FCC. Changes in the regulation of
such activities, such as a decision by the FCC to issue new licenses or permit
more than two licenses in each market for cellular communications services,
could have a material adverse effect on the Company's operations. In addition,
all cellular licenses in the United States, including the Company's licenses,
were granted for an initial 10-year term and are subject to renewal. Licenses
may be revoked by the FCC at any time for cause. One of the Company's cellular
licenses expires on October 1, 1996 and four others expire on October 1, 1997.
While the Company believes that each of its cellular licenses will be renewed
based upon FCC rules establishing a presumption in favor of licensees that have
provided "substantial" service during the past license term and have
substantially complied with their regulatory obligations during the initial
license period, there can be no assurance that all of the Company's cellular
licenses will be renewed.
All PCS licenses will be granted for a 10-year period, at the end of which
period the licensee must apply for renewal. Licenses may be revoked by the FCC
at any time for cause. All 30 MHz broadband PCS licenses, including those of the
Company, are subject to the Five-Year Build-out Requirement and the 10-Year
Build-out Requirement. While the Company believes that each of its PCS licenses
will be renewed based upon FCC rules establishing a presumption in favor of
licensees that have provided "substantial" service during the past license term
and have substantially complied with their regulatory obligations during the
initial license period, there can be no assurance that all of the Company's PCS
licenses will be so renewed. See "-- PCS Build-out and Capital Expenditures."
The Company also must obtain a number of approvals, licenses and permits in
the operation of its business, including licenses from the Federal Aviation
Administration (the "FAA") in connection with cellular and PCS towers.
Additionally, the wireless communications industry is subject to certain state
and local governmental regulation. Operating costs are also affected by other
governmental actions that are beyond the Company's control. There is no
assurance that the various federal, state and local agencies responsible for
granting such licenses, approvals and permits will do so or that, once granted,
will not revoke or fail to renew them. The absence of such licenses, approvals
and permits would adversely affect existing operations and could delay
commencement of or prohibit certain business operations proposed by the Company.
See "Business -- Governmental Regulation."
The wireless communications industry also is subject to continually
evolving regulation. There are a number of issues on which regulation has been
or in the future may be suggested, including the effect of wireless
communications equipment on medical equipment and devices, electromagnetic
interference and cancer, as well as interference between types of wireless
systems. As new regulations are promulgated on these subjects or other subjects,
the Company may be required to modify its business plans or operations in order
to comply with any such regulations. There can be no assurance that the Company
will be able to do so in a cost effective manner, if at all. See "-- Radio
Frequency Emission Concerns; Medical Device Interference" and
"Business -- Governmental Regulation."
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RADIO FREQUENCY EMISSION CONCERNS; MEDICAL DEVICE INTERFERENCE
Media reports have suggested that certain radio frequency ("RF") emissions
from wireless handsets may be linked to various health concerns, including
cancer, and may interfere with various electronic medical devices, including
hearing aids and pacemakers. Concerns over RF emissions may have the effect of
discouraging the use of wireless handsets, which could have an adverse effect
upon the Company's business. The FCC has a rulemaking proceeding pending to
update the guidelines and methods it uses for evaluating RF emissions from radio
equipment, including wireless handsets. While the proposal would impose more
restrictive standards on RF emissions from lower power devices such as wireless
handsets, it is believed that all wireless handsets currently marketed by the
Company and in use by the Company's subscribers already comply with the new
proposed standards.
Certain interest groups have requested that the FCC investigate claims that
the GSM technology poses health concerns and causes interference with hearing
aids and other medical devices. The Center for the Study of Electromagnetic
Compatibility at the University of Oklahoma, which was founded in 1994 with
funds from the wireless industry, is studying this issue and recently released
its findings with respect to the first phase of its study. Such phase of the
study, which was designed to examine extreme conditions, found that digital
technologies cause interference with hearing aids in certain instances. In
addition, the Personal Communications Industry Association ("PCIA") announced in
July 1995 that it was undertaking an industry-wide study to gather information
on possible PCS interference with medical devices for all PCS standards. There
can be no assurance that the findings of such studies will not have an adverse
effect on the Company's business (including its use of GSM technology) or that
such findings will not lead to governmental regulations that will have an
adverse effect on the Company's business. See "Business -- Governmental
Regulation."
FINALITY OF PCS AUCTIONS
Through the FCC auction concluded in 1995, the Company acquired broadband
PCS licenses for the following MTAs: Honolulu, Salt Lake City, Portland, Des
Moines/Quad Cities, El Paso/Albuquerque and Oklahoma City. In January 1996, the
Company entered into an agreement to purchase a broadband PCS license for the
Denver MTA. Although all of the MTA PCS licenses, including those of the
Company, have been awarded by the FCC and the holders of the licenses are
permitted to construct their PCS systems and commence operations, the licenses
have not been issued by a grant that is "final" (i.e., not subject to
administrative reconsideration or administrative or judicial review) because of
certain actions before the FCC challenging the validity of the auction. These
actions fall into two categories: (i) those stemming from the November 9, 1995
decision of the United States Court of Appeals for the Sixth Circuit in
Cincinnati Bell Telephone Co. v. FCC, 69 F.3d 752 (which held that the FCC's
cellular eligibility restriction and twenty percent bright line cellular
attribution standard were arbitrary and remanded the rules to the FCC for
further proceedings) and (ii) those claiming that the delay in the C Block
auction gave the A and B Block PCS licensees an unfair headstart over subsequent
licensees. The Cincinnati Bell decision raises a possibility that all of the PCS
auctions could be invalidated, including the A and B Blocks. As to the actions
claiming unfair headstart, the FCC recently affirmed the grants of the A and B
Block licenses. The time for filing an appeal or petition for reconsideration of
the FCC's affirmance of the grants ended on May 1, 1996, and no appeals or
petitions for reconsideration have been filed in the appropriate court or with
the FCC. As a result of the challenges, although it currently appears unlikely,
the Company could lose its PCS licenses or have adverse conditions imposed on
them, and in such event the loss resulting from any adverse conditions or, in
the case of license revocation, from its costs and expenses in bidding for and
obtaining the licenses and in beginning the site acquisition and build-out for
its PCS systems could have a material adverse effect on the Company. In
addition, all licenses which were the subject of the recently completed C Block
auction are subject to completion of acquisition requirements and FCC grant. See
"The Company -- Recent Developments" and "Business -- Governmental Regulation."
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CONTROL BY MANAGEMENT AND EXISTING SHAREHOLDERS; ANTI-TAKEOVER EFFECT OF DUAL
CLASSES OF COMMON STOCK; CERTAIN CHARTER PROVISIONS AND WASHINGTON LAW
Holders of Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to ten votes per share. Each share
of Class B Common Stock is convertible at any time into one share of Class A
Common Stock. Immediately after the Offerings, John W. Stanton and Theresa E.
Gillespie, the Company's Chairman and Chief Executive Officer, and Chief
Financial Officer, respectively, and certain other holders of shares of Class B
Common Stock who will be parties to an agreement (the "Shareholders Agreement"),
will beneficially own 47,386,040 shares of outstanding Class B Common Stock,
which will represent approximately 70.0% of the outstanding shares of Common
Stock and 82.0% of the combined voting power of the Common Stock. These
shareholders have agreed to vote their shares for each other's designees,
subject to certain ownership requirements, and initially will be able to control
the election of the entire Board of Directors. Such voting control by such
holders of Class B Common Stock, and certain provisions of Washington law
affecting acquisitions and business combinations, which have been incorporated
by the Company into its Articles of Incorporation, may discourage certain
transactions involving an actual or potential change of control of the Company,
including transactions in which the holders of Class A Common Stock might
receive a premium for their shares over the then-prevailing market price, and
may have a depressive effect on the market price for Class A Common Stock. See
"Principal and Selling Shareholders," "Certain Transactions" and "Description of
Capital Stock."
DEPENDENCE UPON KEY PERSONNEL
The Company will be dependent to a large degree on the services of Mr.
Stanton, as Chairman of the Board and Chief Executive Officer, and other current
members of management. The Company and Mr. Stanton have entered into an
employment agreement which provides that Mr. Stanton's employment may be
terminated at any time by the Company, specifies base compensation of $180,000
per year with a targeted annual bonus of 100% of the base compensation, as
determined by the Board of Directors. The Board of Directors may, in its
discretion, increase Mr. Stanton's compensation, either permanently or for a
limited period, if the Board of Directors shall deem it advisable in order to
fairly compensate Mr. Stanton for the value of his services. Severance is
payable under the agreement in the event Mr. Stanton's employment with the
Company is involuntarily terminated for other than Cause (as defined in the
agreement) in an amount equal to any accrued target bonus through the date of
termination, 12 months base salary and 12 months annual targeted bonus. The
Company will also make specified insurance benefit payments on behalf of Mr.
Stanton and his dependents for 12 months following involuntary termination. In
addition, in such event unvested stock options become vested in accordance with
a schedule provided in the agreement; however, Mr. Stanton currently holds no
stock options. In the event of a voluntary termination or a termination for
Cause, no severance is payable by the Company. In addition, the agreement
provides that during the term of the agreement and for one year following the
termination of Mr. Stanton's employment for any reason, Mr. Stanton may not
engage in a business which is substantially the same as or similar to the
business of the Company; provided, that such prohibition shall not preclude Mr.
Stanton's investment in other companies engaged in the wireless communications
business or his ability to serve as a director of other companies engaged in the
wireless communications business, in each case subject to his fiduciary
obligations as a director of the Company.
Loss of the services of Mr. Stanton or other members of management could
have a material adverse effect on the business of the Company and qualified
replacements may be difficult or impossible to find or retain. An event of
default under the Credit Facility would occur if Mr. Stanton (or a suitable
replacement) ceases, for any reason, to be the Chairman of the Company's Board
of Directors. See "Description of Indebtedness" and "Management -- Employment
Agreements."
20
<PAGE> 21
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Seasonality."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There has been no public market for the shares of Class A Common Stock
prior to the Offerings, and there is no assurance that a significant public
market for the Class A Common Stock will develop or be sustained after the
Offerings. The initial public offering price of the Class A Common Stock was
determined by negotiations among the Company and the representatives of the U.S.
Underwriters and the International Underwriters. See "Underwriting." The market
price of the Class A Common Stock may be extremely volatile. Factors such as
fluctuations in the valuation of wireless licenses, results of current and
future FCC auctions, acquisitions by the Company, significant announcements by
the Company and its competitors, quarterly fluctuations in the Company's
operating results and general conditions in the communications market may have a
significant impact on the market price of the Class A Common Stock. In addition,
in recent years the stock market has experienced extreme price and volume
fluctuations. These fluctuations have had a substantial effect on the market
prices for many high technology and communications companies, often unrelated to
the operating performance of the specific companies.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Class A Common Stock in the public market
after the Offerings could adversely affect prevailing market prices. Shares sold
in the Offerings will be freely tradable in the public market. Shares of Class B
Common Stock are convertible at any time into shares of Class A Common Stock on
a one-for-one basis and such shares generally convert automatically into Class A
Common Stock upon a transfer. In addition to the 11,000,000 shares (12,650,000
shares if the Underwriters' over-allotment options are exercised in full) of
Class A Common Stock offered by the Company and the Selling Shareholders in the
Offerings, beginning 90 days after the date of this Prospectus, 987,285
additional outstanding shares of Class A Common Stock (assuming the conversion
of Class B Common Stock into Class A Common Stock on a one-for-one basis) will
be eligible for sale in the public market and, beginning 180 days after the date
of this Prospectus, following the expiration of certain lock-up agreements
between the Underwriters, the Selling Shareholders, the Company's executive
officers and directors and certain other shareholders of the Company, 37,663,974
additional outstanding shares of Class A Common Stock (assuming the conversion
of Class B Common Stock into Class A Common Stock on a one-for-one basis) will
be eligible for sale in the public market. In addition, up to an aggregate of
22,096,272 shares of Class A Common Stock, including an aggregate of 4,001,620
shares (assuming the conversion of Class B Common Stock into Class A Common
Stock on a one-for-one basis) issuable upon exercise of outstanding stock
options ("Option Shares") and exchange rights, may become eligible for resale in
the public market at various times after the expiration of the 180 day lock-up
period, depending upon when such shares are actually issued, if at all, and
whether such shares are registered for resale under the Securities Act of 1933,
as amended (the "Securities Act"), or are subject to Rule 144 or Rule 701 under
the Securities Act. See "Description of Capital Stock" and "Shares Eligible for
Future Sale."
The Company intends to register all or a portion of the Option Shares for
resale in the public market 90 days after the effective date of the Offerings. A
portion of such Option Shares will be subject to the lock-up agreements with the
Underwriters. Options with respect to 1,636,356 of the
21
<PAGE> 22
Options Shares are currently exercisable. In addition, 2,186,360 additional
shares of Class A Common Stock are reserved for issuance pursuant to future
option grants under the Company's stock option plan. See
"Management -- Executive Compensation," "Principal and Selling Shareholders" and
"Shares Eligible for Future Sale."
DILUTION
Purchasers of the Class A Common Stock offered hereby will suffer immediate
dilution of $23.94 in the net tangible book value per share of the Class A
Common Stock from the initial public offering price. See "Dilution."
ABSENCE OF DIVIDENDS
The Company has never paid dividends on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future. In addition, the
Senior Secured Facilities and the Indenture contain restrictions on the
Company's ability to declare and pay dividends on its Common Stock. See
"Description of Indebtedness" and "Dividend Policy."
22
<PAGE> 23
THE COMPANY
Western Wireless provides wireless communications services in the western
United States. The Company owns or has the right to acquire 80 cellular and PCS
licenses for a geographic area covering approximately 25.5 million pops and 41%
of the geography in the continental United States. The Company owns and operates
cellular communications systems in 57 RSAs, including one RSA which it has the
right to acquire, and 16 MSAs with an aggregate population of approximately 6.0
million persons. In its cellular markets, the Company uses the CELLULAR ONE
brand name and currently serves over 240,000 subscribers.
Through the FCC auction concluded in 1995, the Company acquired broadband
PCS licenses for six MTAs with an aggregate population of over 15.1 million
persons -- Honolulu, Salt Lake City, Portland, Des Moines/Quad Cities, El
Paso/Albuquerque and Oklahoma City -- for an aggregate purchase price of $144
million. In January 1996, the Company agreed to acquire a broadband PCS license
for the Denver MTA from GTE for a purchase price of $66 million. The Company's
seven PCS licenses cover markets with an aggregate population of approximately
19.5 million persons, including approximately 4.4 million persons covered by the
Denver MTA. In all of its PCS markets the Company intends to use its proprietary
VoiceStream brandname. In February 1996, the Company's PCS system in the
Honolulu MTA became the first auction-awarded PCS system to commence commercial
operations in the United States.
The wireless communications industry is in a period of tremendous growth in
the United States. Since its introduction in 1983, commercial cellular telephone
service has grown dramatically and now dominates the wireless communications
market. The Company has experienced rapid growth of its cellular operations,
having increased its cellular subscriber base to 239,200 at March 31, 1996 from
13,700 at January 1, 1993. Service revenues grew to $135.1 million in 1995 from
$18.4 million in 1993. The Company believes the wireless communications market
will continue to grow due to enhanced service offerings, the emergence of PCS
systems, increased awareness of the productivity, convenience and security
benefits associated with wireless communications services and anticipated
declines in pricing for its services. The Company believes it is well positioned
to take advantage of these growth opportunities as a result of its existing
operations and systems infrastructure, wide geographic coverage area and the
experience and expertise of its management team. See "Business" and
"Management."
The Company is a Washington corporation which is the successor to a
Delaware corporation incorporated in January 1994. The Company's principal
executive offices are located at 2001 N.W. Sammamish Road, Issaquah, Washington
98027, and its telephone number is (206) 313-5200.
RECENT DEVELOPMENTS
On May 6, 1996, the FCC completed its C Block auction of licenses to
provide broadband PCS services in 493 Basic Trading Areas ("BTAs"). The Company
holds a 49.9% limited partnership interest in Cook Inlet Western Wireless PV/SS
PCS, L.P. ("Cook Inlet PCS") which was the high bidder for licenses for the
following BTAs: Tulsa, Oklahoma; Spokane, Washington; Yakima, Washington;
Wichita Falls, Texas; Wenatchee, Washington; Sherman-Denison, Texas; Walla
Walla, Washington/Pendleton, Oregon; Muskogee, Oklahoma; Worthington, Minnesota;
Aberdeen, Washington; Port Angeles, Washington; Coffeyville, Kansas and
Bartlesville, Oklahoma. The foregoing BTAs contain aggregate pops of
approximately 2.9 million (based on 1990 U.S. Census Bureau population figures)
and the licenses will be acquired by Cook Inlet PCS (subject to FCC grant) for
an aggregate cost of $67.7 million, or an average cost per pop of $23.65. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- PCS Operations."
23
<PAGE> 24
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Class A
Common Stock in the Offerings are estimated to be approximately $198.5 million
($235.0 million if the Underwriters' over-allotment options are exercised in
full), after deducting underwriting discounts and estimated offering expenses
payable by the Company. The net proceeds to the Company from the Debt Offering
are estimated to be approximately $193.1 million, after deducting underwriting
discount and estimated offering expenses. The Company intends to use the
proceeds from the Offerings and the Debt Offering as follows: (i) to finance a
portion of the build-out of the Company's PCS business in its PCS markets in the
amount of approximately $202.7 million during the remainder of 1996; (ii) to pay
for the purchase of the Denver MTA license from GTE in the amount of $66.0
million (or $33.0 million if the Company exercises its right to pay $33.0
million of the purchase price by delivery of a promissory note having a maturity
date 18 months from the closing date); (iii) to fund expansion of the Company's
existing cellular operations in the amount of approximately $51.5 million during
the remainder of 1996; and (iv) the remainder for general corporate purposes,
including possible future acquisitions and working capital. Prior to their use,
$202.0 million of the net proceeds from the Offerings and the Debt Offering will
be used to repay revolving credit indebtedness under the Credit Facility. As of
March 31, 1996, approximately $402.0 million was outstanding under the Credit
Facility with a weighted average interest rate (including commitment fees) of
7.8% and a weighted average maturity of 6.3 years. Net proceeds from the
Offerings and the Debt Offering will be invested in short-term, investment
grade, interest-bearing securities pending such uses. See "Description of
Indebtedness." In the event the Debt Offering is not consummated, the Company
would use its existing Senior Secured Facilities, which include the Credit
Facility and the NORTEL Facility, to fund such expenditures.
The Company will not receive any proceeds from the sale of Class A Common
Stock by the Selling Shareholders in the Offerings. See "Principal and Selling
Shareholders."
DIVIDEND POLICY
The Company has never paid dividends on its Common Stock and does not
anticipate paying any dividends on its Common Stock in the foreseeable future.
The Company's Senior Secured Facilities and the Indenture contain certain
restrictions on the Company's ability to declare and pay dividends on the Common
Stock. See "Description of Indebtedness." The declaration and payment of
dividends by the Company are subject to the discretion of the Board of
Directors. Any determination as to the payment of dividends in the future will
depend upon results of operations, capital requirements, restrictions in loan
agreements, if any, and such other factors as the Board of Directors may deem
relevant.
24
<PAGE> 25
DILUTION
As of March 31, 1996, the net tangible book value (deficit) of the
Company's Common Stock was $(225.7) million, or $(3.84) per share. Net tangible
book value (deficit) per share represents the amount of the Company's tangible
net worth (total tangible assets less total liabilities) divided by the total
number of shares of Common Stock outstanding. The following table demonstrates
the increase in the net tangible book value (deficit) per share to the Company's
existing shareholders and the dilution to the new investors if the 9,014,800
shares of Class A Common Stock offered by the Company in the Offerings had been
sold at March 31, 1996.
<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $ 23.50
Net tangible book value (deficit) per share before the
Offerings(2).............................................. $ (3.84)
Increase per share attributable to the Offerings(1).......... 3.40
-------
Net tangible book value (deficit) per share after the
Offerings(1)(2).............................................. (0.44)
-------
Dilution of net tangible book value (deficit) per share to new
investors.................................................... $ 23.94
=======
</TABLE>
- ---------------
(1) After deducting underwriting discounts and estimated expenses of the
Offerings.
(2) Does not include (i) 3,664,878 shares of Class B Common Stock issuable upon
exercise of outstanding stock options, (ii) 2,186,360 shares of Class A
Common Stock reserved for issuance pursuant to future option grants under
the Company's stock option plan, (iii) up to 327,882 shares of Class B
Common Stock issuable upon exercise of exchange rights exercisable no sooner
than 2001 issued to the Company's partners in Cook Inlet PCS (as defined in
"Business -- PCS Operations") or (iv) 8,860 shares of Class A Common Stock
(based on the fair market value of the stock of Western Wireless
International Corporation ("International") on the date hereof) issuable
under the Horwitz Agreement (as defined in "Certain Transactions"). See
"Certain Transactions" and "Shares Eligible for Future Sale."
The following table summarizes, as of March 31, 1996, the differences
between the existing shareholders and the new investors with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid therefor and the average price per share paid by the existing
shareholders and the new investors.
<TABLE>
<CAPTION>
SHARES PURCHASED(1)(2)
TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 58,731,111 86.7% $334,675,000 61.2% $ 5.70
New investors........... 9,014,800 13.3 211,847,800 38.8 $ 23.50
------ --- -------- ---
Total................... 67,745,911 100.0% $546,522,800 100.0% $ 8.07
====== === ======== ===
</TABLE>
- ---------------
(1) Sales by Selling Shareholders in the Offerings will reduce the number of
shares held by existing shareholders to approximately 56,745,911 or 83.8% of
the total shares of Common Stock outstanding, and will increase the number
of shares held by new investors to 11,000,000 or 16.2% of the total shares
of Common Stock outstanding after the Offerings. See "Principal and Selling
Shareholders."
(2) Does not include (i) 3,664,878 shares of Class B Common Stock issuable upon
exercise of outstanding stock options, (ii) 2,186,360 shares of Class A
Common Stock reserved for issuance pursuant to future option grants under
the Company's stock option plan, (iii) up to 327,882 shares of Class B
Common Stock issuable upon exercise of exchange rights exercisable no sooner
than 2001 issued to the Company's partners in Cook Inlet PCS or (iv) 8,860
shares of Class A Common Stock (based on the fair market value of the stock
of International on the date hereof) issuable under the Horwitz Agreement.
See "Certain Transactions" and "Shares Eligible for Future Sale."
25
<PAGE> 26
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996, and as adjusted to give effect to the sale by the Company and the
Selling Shareholders of the shares of Class A Common Stock in the Offerings
(after deducting underwriting discounts and estimated offering expenses payable
by the Company), the sale of the Senior Subordinated Notes in the Debt Offering
and the application of the net proceeds therefrom for working capital and to
repay revolving credit indebtedness. See "Use of Proceeds." The Company will not
receive any proceeds from the sale of shares of Class A Common Stock by the
Selling Shareholders. See "Principal and Selling Shareholders."
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents....................................... $ 6,204 $ 190,107
========= =========
Long-term debt:
Credit Facility:
Revolver................................................... $ 402,000
Term....................................................... $ 200,000
NORTEL Facility............................................... 33,800 33,800
Senior Subordinated Notes..................................... 200,000
Other......................................................... 2,680 2,680
--------- ---------
Total long-term debt....................................... 438,480 436,480
--------- ---------
Shareholders' equity(2):
Preferred Stock, no par value, 50,000,000 shares authorized;
no shares issued and outstanding...........................
Common Stock, no par value, 300,000,000 shares authorized:
Class A, no shares issued and outstanding and 11,000,000 as
adjusted and Class B, 58,731,111 shares issued and
outstanding and 56,745,911 as adjusted................... 334,675 533,153
Deferred compensation......................................... (1,714) (1,257)
Deficit....................................................... (102,698) (103,155)
--------- ---------
Total shareholders' equity................................. 230,263 428,741
--------- ---------
Total capitalization............................................ $ 668,743 $ 865,221
========= =========
</TABLE>
- ---------------
(1) In the event the Debt Offering is not consummated, the Company would pay
down less revolving credit indebtedness under the Credit Facility and would
have substantially less cash and cash equivalents. See "Use of Proceeds."
(2) Does not include (i) 3,664,878 shares of Class B Common Stock issuable upon
exercise of outstanding options, (ii) 2,186,360 shares of Class A Common
Stock reserved for issuance pursuant to future option grants under the
Company's stock option plan, (iii) up to 327,882 shares of Class B Common
Stock issuable upon exercise of exchange rights exercisable no sooner than
2001 issued to the Company's partners in Cook Inlet PCS or (iv) 8,860 shares
of Class A Common Stock (based on the fair market value of the stock of
International on the date hereof) issuable under the Horwitz Agreement.
Class B Common Stock actually outstanding at March 31, 1996 consists of
shares of common stock, par value $0.001 per share, which was reclassified
in May 1996 into shares of Class B Common Stock, no par value. See "Certain
Transactions," "Shares Eligible for Future Sale" and "Description of Capital
Stock."
26
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial and
operating data for the Company as of and for each of the three years in the
period ended December 31, 1995, which was derived from the Company's
consolidated financial statements and notes thereto that have been audited by
Arthur Andersen LLP, independent public accountants. The table also sets forth
certain unaudited selected consolidated financial and operating data for the
Company as of March 31, 1996 and for the three months ended March 31, 1996 and
1995, as of and for the nine months ended December 31, 1992, as of and for the
three months ended March 31, 1992 and as of and for the year ended December 31,
1991. The information as of March 31, 1996 and for the three months ended March
31, 1996 and 1995 is unaudited but in the opinion of the Company reflects all
adjustments necessary for the fair presentation of the Company's financial
position and results of operations for such periods, and may not be indicative
of the results of operations for a full year. MCLP, a predecessor of the
Company, was not formed until October 1992. In March 1992, GCC reorganized under
Chapter 11 of the U.S. Bankruptcy Code and, as part of the reorganization, GCC
adopted fresh-start reporting in conformity with procedures specified by the
American Institute of Certified Public Accountants Statement of Position 90-7.
Accordingly, the financial data of the Company prepared as of March 31, 1992 and
for subsequent periods are stated on a basis different from, and are not
comparable to, financial data for prior dates and periods. All financial data
relating to the Company herein with respect to periods after the date of the
Business Combination reflect the combined operations of GCC and MCLP and all
such data with respect to prior periods reflect only the operations of GCC,
which, for accounting purposes, is considered Western Wireless Corporation's
predecessor. Accordingly, the financial data of the Company for periods
subsequent to the Business Combination are not comparable to financial data for
prior periods. All 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. See Note 12
to the Company's consolidated financial statements for pro forma information
presenting the results of operations of the Company as if the Business
Combination occurred on January 1, 1993, and see the consolidated financial
statements of MCLP included herein for financial information of MCLP prior to
the Business Combination.
<TABLE>
<CAPTION>
THREE MONTHS NINE THREE
ENDED MONTHS MONTHS YEAR
MARCH 31, YEAR ENDED DECEMBER 31, ENDED ENDED ENDED
-------------------- -------------------------------- DECEMBER 31, MARCH 31, DECEMBER 31,
1996 1995 1995 1994 1993 1992 1992 1991
-------- -------- -------- -------- -------- ------------ --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Subscriber revenues..... $ 35,337 $ 18,967 $105,430 $ 38,838 $ 11,105 $ 4,861 $ 1,072 $ 3,392
Roamer revenues......... 6,757 4,802 29,660 16,746 7,285 4,468 881 2,760
Equipment sales and
other revenue......... 3,941 2,315 11,465 7,524 2,344 1,208 262 883
-------- -------- -------- -------- -------- ------- ------- --------
Total revenues........ 46,035 26,084 146,555 63,108 20,734 10,537 2,215 7,035
-------- -------- -------- -------- -------- ------- ------- --------
Operating expenses:
Cost of service......... 8,815 5,786 27,686 13,303 4,310 2,730 655 2,840
Cost of equipment
sales................. 6,354 3,870 20,705 11,446 3,533 1,818 400 1,113
General and
administrative........ 12,270 6,254 31,253 15,226 6,253 5,048 1,156 5,226
Sales and marketing..... 13,491 7,164 41,390 18,553 6,101 3,074 812 2,948
Depreciation and
amortization.......... 15,610 10,776 49,456 25,670 5,399 3,746 2,787 12,276
Provision for
restructuring costs... 2,478 3,137
-------- -------- -------- -------- -------- ------- ------- --------
Total operating
expenses............ 56,540 33,850 170,490 86,676 25,596 16,416 5,810 27,540
-------- -------- -------- -------- -------- ------- ------- --------
Operating loss............ (10,505) (7,766) (23,935) (23,568) (4,862) (5,879) (3,595) (20,505)
-------- -------- -------- -------- -------- ------- ------- --------
Other income (expense):
Interest and financing
expense............... (8,134) (5,027) (25,428) (10,659) (2,242) (1,666) (169) (8,273)
Gain (loss) on
dispositions, net..... (573) 6,202 10,102 1,876 4,024 (14,404)
Other , net............. 65 330 627 2,065 331 130 (189) (1,116)
-------- -------- -------- -------- -------- ------- ------- --------
Income (loss) before
extraordinary
items................... (18,574) (12,463) (49,309) (25,960) 3,329 (5,539) 71 (44,298)
Extraordinary items....... (6,645) 63,569
-------- -------- -------- -------- -------- ------- ------- --------
Net income (loss)..... $(18,574) $(12,463) $(55,954) $(25,960) $ 3,329 $ (5,539) $63,640 $(44,298)
======== ======== ======== ======== ======== ======= ======= ========
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
THREE MONTHS NINE THREE
ENDED MONTHS MONTHS YEAR
MARCH 31, YEAR ENDED DECEMBER 31, ENDED ENDED ENDED
-------------------- -------------------------------- DECEMBER 31, MARCH 31, DECEMBER 31,
1996 1995 1995 1994 1993 1992 1992 1991
-------- -------- -------- -------- -------- ------------ --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Share data:
Income (loss) per share
before extraordinary
item.................. $ (0.31) $ (0.24) $ (0.87) $ (0.59) $ 0.10 $ (0.22) * *
Per share effect of
extraordinary
item.................. (0.12) * *
-------- -------- -------- -------- -------- ------- ------- --------
Net income (loss) per
share(1)............ $ (0.31) $ (0.24) $ (0.99) $ (0.59) $ 0.10 $ (0.22) * *
======== ======== ======== ======== ======== ======= ======= ========
Weighted average common
shares and common
equivalent shares
outstanding........... 59,486,512 52,363,838 56,469,990 43,949,101 32,253,303 25,665,437 * *
======== ======== ======== ======== ======== ======= ======= ========
</TABLE>
- ---------------
* Not meaningful
(1) The Company has never paid dividends on its Common Stock and does not
anticipate paying any dividends in the foreseeable future. See "Dividend
Policy."
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------------------------------- MARCH 31, DECEMBER 31,
1996 1995 1994 1993 1992 1992 1991
--------- ---------- ---------- ---------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEETS DATA:
Current assets........................ $ 41,697 $ 37,508 $ 36,769 $ 14,686 $ 8,098 $ 4,685 $ 2,469
Property and equipment, net........... 231,488 193,692 120,648 48,591 27,528 20,984 23,076
Licensing costs and other intangible
assets, net......................... 455,371 417,971 211,309 86,270 43,873 41,941 11,945
Other assets.......................... 8,890 9,857 1,468 6,219 5,522 2,083 8,133
-------- -------- -------- -------- --------- --------
Total assets...................... $737,446 $ 659,028 $ 370,194 $ 155,766 $ 85,021 $ 69,693 $ 45,623
======== ======== ======== ======== ========= ========
Current liabilities................... $ 68,703 $ 55,936 $ 39,214 $ 16,447 $ 5,806 $ 5,373 $ 19,580
Long-term debt, net of current
portion............................. 438,480 362,487 200,587 53,430 14,893 20,086 85,460
Minority interests in equity of
consolidated subsidiary............. 3,376
Shareholders' equity (deficiency)..... 230,263 240,605 127,017 85,889 64,322 44,234 (59,417)
-------- -------- -------- -------- --------- --------
Total liabilities and
shareholders' equity............ $737,446 $ 659,028 $ 370,194 $ 155,766 $ 85,021 $ 69,693 $ 45,623
======== ======== ======== ======== ========= ========
OTHER DATA:
Cellular pops(1)...................... 6,030,208 5,764,152 5,240,702 2,190,104 1,749,999 1,579,051 1,712,519
Ending cellular subscribers........... 239,200 209,500 112,800 30,000 13,700 8,300 7,700
EBITDA(2)............................. $ 5,105 $ 25,521 $ 2,102 $ 537 $ (2,133) $ (808) $ (8,229)
CASH FLOWS PROVIDED BY (USED IN):
Operating activities................ $ (219) $ (745) $ (988) $ (255) $ (1,490) $ (2,376) $ (11,284)
Investing activities................ $(78,949) $ (293,579) $ (70,190) $ (32,535) $ (13,159) $ 12,953 $ (7,412)
Financing activities................ $ 76,800 $ 295,109 $ 70,777 $ 36,212 $ 16,552 $ (8,131) $ 18,397
</TABLE>
- ---------------
(1) Based upon 1995 estimates by Equifax for 1995. For periods between 1990 and
1995, the Company has evenly applied Equifax's growth factors from 1990 to
1995 to the 1990 U.S. Census Bureau population figures. See
"Business -- Markets and Systems."
(2) EBITDA represents operating income (loss) from operations before interest,
taxes and depreciation and amortization. EBITDA is a measure commonly used
in the industry but is not prepared in accordance with GAAP and should not
be considered as a measurement of net cash flows from operating activities.
In 1994 and 1991, the Company recorded provisions for restructuring costs of
$2.5 million and $3.1 million, respectively. EBITDA before such provisions
for restructuring costs would have been $4.6 million and $5.1 million in
1994 and 1991, respectively.
28
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto and other
financial information included elsewhere in this Prospectus.
OVERVIEW
The Company provides wireless communications services in the western United
States through the ownership and operation of cellular communications systems in
73 RSAs and MSAs, including one RSA which the Company has the right to acquire.
The Company has acquired PCS licenses in six MTAs. In January 1996, the Company
agreed to acquire a PCS license for the Denver MTA. In February 1996, the
Company's PCS system in the Honolulu MTA became the first auction-awarded PCS
system to commence commercial operations in the United States.
Western Wireless Corporation was formed in July 1994 as the result of the
Business Combination among various companies, including MCLP and 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 issued and outstanding shares of
common stock of GCC and the owner of all of the assets of MCLP. The Business
Combination constituted an acquisition of MCLP by GCC for accounting purposes.
As a result, all financial data relating to the Company herein with respect to
periods after the date of the Business Combination reflects the combined
operations of GCC and MCLP and all such data with respect to prior periods
reflects only the operations of GCC, which, for accounting purposes, is
considered Western Wireless Corporation's predecessor. Accordingly, the
financial data of the Company for periods subsequent to the Business Combination
are not comparable to financial data for prior periods. See Note 12 to the
Company's consolidated financial statements for pro forma information presenting
the results of operations of the Company as if the Business Combination occurred
on January 1, 1993, and see the consolidated financial statements of MCLP
included herein for financial information of MCLP prior to the Business
Combination.
The Company has operated the cellular systems in its markets, on average,
for approximately three years and has experienced rapid growth during such
periods. The Company's cellular subscribers and penetration were 239,200 and
4.0%, respectively, at March 31, 1996 compared to 13,700 and 0.8%, respectively,
at January 1, 1993. The Company intends to continue to increase its total number
of subscribers in its cellular markets, but expects the rate of growth in
subscriber penetration to slow.
The Company's revenues primarily consist 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, which are included in other revenue,
are expected to account for less than 3% of the Company's total revenues in
1996. The Company expects to continue to sell cellular and PCS handsets below
cost and regards these losses as a cost of building its subscriber base.
Average monthly subscriber revenue per subscriber from its cellular
operations increased to $57.25 in 1995 compared to $49.72 in 1993. The Company
believes its generally favorable average monthly subscriber revenue per
subscriber reflects its efforts to expand its geographic coverage and focus
subscribers on higher-end rate plans, and reflects the positive characteristics
for wireless communications in RSAs and small MSAs. The Company expects that the
average monthly subscriber revenue per subscriber from its cellular operations
may decline due to a number of
29
<PAGE> 30
factors, including the addition of new subscribers which may have lower usage
rates, potential price decreases and increased competition.
Cost of service consists of the cost of providing wireless service to
subscribers, primarily including costs to access local exchange and long
distance carrier facilities and maintain the Company's wireless network. General
and administrative expenses include the costs associated with billing a
subscriber and the administrative cost associated with maintaining subscribers,
including customer service, accounting and other centralized functions. General
and administrative expenses also include provisions for unbillable fraudulent
roaming charges and subscriber bad debt. Sales and marketing costs include costs
associated with acquiring a subscriber, including direct and indirect sales
commissions, salaries, all costs of sales offices and retail locations,
advertising and promotional expenses. Depreciation and amortization includes
primarily depreciation expense associated with the Company's property and
equipment in service and amortization associated with its wireless licenses for
operational markets. The Company amortizes licensing costs associated with PCS
systems once they become operational.
Certain headquarter costs, including customer service, accounting and other
centralized functions, are incurred on behalf of 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.
Cellular EBITDA was $28.9 million in 1995 compared to $0.5 million in 1993.
However, the Company expects a decline in consolidated EBITDA as it develops,
constructs and operates its PCS systems and seeks aggressively to build its PCS
subscriber base. To the extent that the time to complete the PCS build-out is
faster or the costs are greater than expected, operating losses will increase
and consolidated EBITDA may be negative for some periods. The Company has
experienced rapid growth in its revenues and assets during the periods set forth
below, which rates of growth will not necessarily continue over the next few
years. The Company has made and expects to make substantial capital expenditures
in connection with the expansion of its wireless communications systems. The
Company's results of operations for the periods described herein will not be
indicative of future performance.
EBITDA represents operating income (loss) from operations before interest,
taxes and depreciation and amortization. EBITDA is a measure commonly used in
the industry but is not prepared in accordance with GAAP and should not be
considered as a measurement of net cash flows from operating activities.
Cellular EBITDA represents EBITDA from the Company's cellular 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 while its PCS systems had not
commenced commercial operations until 1996, although the Company incurred
start-up costs beginning in the third quarter of 1995 in connection with such
operations.
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
The Company had 239,200 cellular subscribers at March 31, 1996, an increase
of 29,700 or 14.2% from December 31, 1995. At March 31, 1995, the Company had
128,200 cellular subscribers, an increase of 15,400 or 13.7% from December 31,
1994. For the three months ended March 31, 1996 and March 31, 1995, the net
number of cellular subscribers added through cellular system acquisitions were
approximately 5,400 and 0, respectively. Excluding such acquired cellular
subscribers, the percentage of such net cellular subscriber additions through
independent agents and retailers increased to 34% for the three months ended
March 31, 1996 from 27% for the three months ended March 31, 1995 as a result of
the Company's efforts to further expand distribution channels. The Company had
2,200 PCS subscribers at March 31, 1996 as a result of initiating commercial
service in its Honolulu MTA on February 29, 1996.
30
<PAGE> 31
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1996 1995
----------------- --------
CELLULAR PCS CELLULAR
-------- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Subscriber revenues.......................................... $35,188 $149 $18,967
Roamer revenues.............................................. 6,757 4,802
Equipment sales.............................................. 2,695 420 2,315
Other revenues(1)............................................ 826
-------- ----- --------
Total revenues............................................. $45,466 $569 $26,084
======== ===== ========
</TABLE>
- ---------------
(1) Primarily revenues from paging services.
Cellular subscriber revenues increased to $35.2 million for the three
months ended March 31, 1996 from $19.0 million for the three months ended March
31, 1995. This $16.2 million or 85.3% increase is primarily due to the increased
number of cellular subscribers in the 1996 period. Average monthly cellular
subscriber revenue per subscriber was $51.87 for the three months ended March
31, 1996 compared to $52.80 for the three months ended March 31, 1995. This 1.8%
decrease is a result of a decrease in minutes of use primarily due to unusually
severe weather in the month of January.
PCS subscriber revenues for the three months ended March 31, 1996 were $0.1
million. Due to the single month of operation, no average PCS revenue statistics
are reflected herein.
Roamer revenues were $6.8 million for the three months ended March 31, 1996
compared to $4.8 million for the three months ended March 31, 1995, an increase
of $2.0 million or 41.7%. Growth in the Company's roamer revenues generally
reflects increases in the Company's geographical coverage and market penetration
levels in adjacent markets and the cellular industry as a whole. Roamer revenues
as a percentage of total cellular revenues declined to 14.9% for the three
months ended March 31, 1996 from 18.4% for the three months ended March 31, 1995
as a result of the 85.3% growth in subscriber revenues, which exceeded the 41.7%
increase in roamer revenues. Although the Company expects total roamer revenues
to continue to increase as the Company and the cellular industry grow, it
expects its roamer revenues as a percentage of total revenues to continue to
decline as its subscriber base grows and it reduces roaming rates.
Cellular equipment sales, which consist primarily of handset sales,
increased to $2.7 million for the three months ended March 31, 1996 from $2.3
million for the three months ended March 31, 1995. This $0.4 million or 17.4%
increase is primarily due to the increase in net subscriber additions partially
offset by a decrease in the average handset sales price. PCS equipment sales
were $0.4 million as a result of the commencement of commercial operations in
the Honolulu MTA in February 1996. The Company anticipates continued growth in
equipment sales as a result of increases in net cellular and PCS subscriber
additions and the commencement of commercial operations in its remaining MTAs.
Other revenues, which consist primarily of paging revenues, were $0.8
million for the three months ended March 31, 1996, following the acquisition of
paging operations in February 1996.
31
<PAGE> 32
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1996 1995
---------------------- -------
CELLULAR(1) PCS CELLULAR
----------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost of service........................................... $ 8,407 $ 408 $ 5,786
Cost of equipment sales................................... 5,437 917 3,870
General and administrative................................ 9,169 3,101 6,254
Sales and marketing....................................... 11,004 2,487 7,164
Depreciation and amortization............................. 15,160 450 10,776
----------- ------ -------
Total operating expenses................................ $49,177 $7,363 $33,850
========= ====== ========
</TABLE>
- ---------------
(1) Includes expenses attributable to paging services.
PCS operating expenses of $7.4 million for the three months ended March 31,
1996 relate primarily to start-up costs in all of the Company's MTAs and to a
lesser extent to the one month of operations in the Honolulu MTA. Therefore, the
operating expenses for PCS are not representative of future operations.
The comparisons below only relate to the Company's cellular operations
(which include paging operations after February 1, 1996).
Cost of service increased to $8.4 million for the three months ended March
31, 1996 from $5.8 million for the three months ended March 31, 1995. This
increase is primarily attributable to the increased number of subscribers which
resulted in increased costs to access local exchange and long distance carrier
facilities and maintain the Company's expanding wireless network. While cost of
service increased $2.6 million or 44.8%, it decreased as a percentage of service
revenues to 19.6% for the three months ended March 31, 1996 from 24.4% for the
three months ended March 31, 1995, which is primarily due to efficiencies gained
from the growing subscriber base. Service revenues includes subscriber, roamer
and other revenues.
General and administrative costs increased to $9.2 million for the three
months ended March 31, 1996 from $6.3 million for the three months ended March
31, 1995, an increase of $2.9 million or 46.0%, which is primarily attributable
to the increase in the costs associated with supporting the increased subscriber
base. However, these costs continue to decline as a percentage of service
revenues to 21.5% for the three months ended March 31, 1996 from 26.5% for the
three months ended March 31, 1995, primarily due to improved efficiency and as a
result of continuing economies of scale arising from the Business Combination.
Sales and marketing costs increased to $11.0 million for the three months
ended March 31, 1996 from $7.2 million for the three months ended March 31, 1995
primarily due to net subscriber additions. Sales and marketing costs per net
subscriber added decreased to $455 for the three months ended March 31, 1996
from $503 for the three months ended March 31, 1995 primarily attributable to
improved efficiencies. Including the losses on equipment sales, the costs per
net subscriber added decreased to $566 for the three months ended March 31, 1996
from $615 for the three months ended March 31, 1995.
Depreciation expense increased to $9.2 million for the three months ended
March 31, 1996 from $6.5 million for the three months ended March 31, 1995. This
$2.7 million or 41.5% increase is attributable to the expansion of the Company's
cellular systems. Amortization expense increased to $6.0 million for the three
months ended March 31, 1996 from $4.3 million for the three months ended March
31, 1995. This $1.7 million or 39.5% increase is primarily attributable to an
increase in gross
32
<PAGE> 33
cellular licensing costs and other intangible assets to $341.4 million at March
31, 1996 from $240.1 million at March 31, 1995.
OPERATING LOSS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1996 1995
------------------------ -------
CELLULAR(1) PCS CELLULAR
----------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating loss........................................... $(3,711) $(6,794) $(7,766)
</TABLE>
- ---------------
(1) Includes paging operations.
Total operating loss increased to $10.5 million for the three months ended
March 31, 1996 from $7.8 million for the three months ended March 31, 1995 as a
result of the $6.8 million operating loss attributable to PCS operations offset
by the reduced cellular operating loss. Cellular operating loss improved to $3.7
million for the three months ended March 31, 1996 from $7.8 million for the
three months ended March 31, 1995 due to increased revenues, which exceeded
increases in operating expenses.
OTHER INCOME (EXPENSE)
Interest and financing expense increased to $8.1 million for the three
months ended March 31, 1996 from $5.0 million for the three months ended March
31, 1995. The $3.1 million or 62.0% increase is primarily attributable to an
increase in borrowings, which increased to $438.5 million at March 31, 1996 from
$260.9 million at March 31, 1995, to fund the Company's expansion and capital
expenditures, partially offset by a decrease in the weighted average interest
rate to 8.1% for the three months ended March 31, 1996 from 9.1% for the three
months ended March 31, 1995.
EBITDA
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1996 1995
------------------------ ------
CELLULAR(1) PCS CELLULAR
----------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
EBITDA.................................................... $11,449 $(6,344) $3,010
</TABLE>
- ---------------
(1) Includes paging operations.
EBITDA improved to $5.1 million for the three months ended March 31, 1996
from $3.0 million for the three months ended March 31, 1995 as a result of
increased cellular EBITDA offset by the $(6.3) million EBITDA attributable to
PCS operations. Cellular EBITDA increased 280% to $11.4 million for the three
months ended March 31, 1996 from $3.0 million for the three months ended March
31, 1995, primarily as a result of increased revenues due to the increased
subscriber base and the related cost efficiencies. As a result, cellular
operating margin (cellular EBITDA as a percentage of cellular service revenues)
increased to 26.6% for the three months ended March 31, 1996 from 12.6% for the
three months ended March 31, 1995. EBITDA is a measure commonly used in the
industry but is not prepared in accordance with GAAP and should not be
considered as a measurement of net cash flows from operating activities.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company had 209,500 cellular subscribers at December 31, 1995, an
increase of 96,700 or 85.7% during 1995. At December 31, 1994, the Company had
112,800 cellular subscribers, an increase of 82,800 or 276% during 1994. In 1995
and 1994, the net number of subscribers added through system acquisitions was
approximately 3,300 and 37,500 (including 29,000 through the acquisition of
MCLP), respectively. Excluding such acquired subscribers, the percentage of such
33
<PAGE> 34
net subscriber additions through independent agents and retailers was 35% in
1995, which reflects the Company's efforts to further expand distribution
channels.
REVENUES
All revenues below are from cellular operations. The Company commenced
paging operations and PCS commercial operations in February 1996 and therefore
had no PCS or paging revenues in prior years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Subscriber revenues............................................. $105,430 $ 38,838
Roamer revenues................................................. 29,660 16,746
Equipment sales................................................. 11,465 7,524
-------- --------
Total revenues................................................ $146,555 $ 63,108
========= ========
</TABLE>
Subscriber revenues increased to $105.4 million in 1995 from $38.8 million
in 1994. This $66.6 million or 172% increase is due primarily to the 85.7%
growth in the number of subscribers (including as a result of the Business
Combination). Average monthly cellular subscriber revenue per subscriber was
$57.25 in 1995, compared to $54.35 in 1994. This $2.90 or 5.3% increase is a
result of the Company's efforts to expand its geographical coverage and focus
subscribers on higher-end rate plans, and reflects the positive characteristics
for wireless communications services in RSAs and small MSAs.
Roamer revenues were $29.7 million in 1995 compared to $16.7 million in
1994, an increase of $13.0 million or 77.8%. Growth in the Company's roamer
revenues generally reflects increases in the Company's geographical coverage
(including as a result of the Business Combination) and market penetration
levels in adjacent markets and the cellular industry as a whole. Roamer revenues
as a percentage of total revenues declined to 20.3% in 1995 from 26.5% in 1994,
as a result of the 172% increase in subscriber revenues which exceeded the 77.8%
increase in roamer revenues.
Equipment sales, which consist primarily of handset sales, increased to
$11.5 million in 1995 from $7.5 million in 1994. This $4.0 million or 53.3%
increase is primarily due to the increase in net subscriber additions (including
as a result of the Business Combination), partially offset by a decrease in the
average handset sales price. The Company anticipates continued growth in
equipment sales as a result of increases in net cellular subscriber additions
and the commencement of commercial operations of its PCS systems.
OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994
------------------- --------
CELLULAR PCS CELLULAR
-------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost of service............................................ $ 27,686 $ 13,303
Cost of equipment sales.................................... 20,705 11,446
General and administrative................................. 28,184 $3,069 15,226
Sales and marketing........................................ 41,051 339 18,553
Depreciation and amortization.............................. 49,187 269 25,670
Provision for restructuring costs.......................... 2,478
-------- ------ --------
Total operating expenses................................. $166,813 $3,677 $ 86,676
======== ====== ========
</TABLE>
Operating expenses in 1995 include $3.7 million of costs relating to the
start-up of PCS commercial operations.
34
<PAGE> 35
The comparisons below refer only to the Company's cellular operations.
Cost of service increased to $27.7 million in 1995 from $13.3 million in
1994, primarily as a result of the 85.7% increase in the number of subscribers
(including as a result of the Business Combination), which resulted in increased
costs to access local exchange and long distance carrier facilities and to
maintain the Company's wireless network. While this represents a $14.4 million
or 108% increase for the year, it represents a decrease as a percentage of
service revenues to 20.5% in 1995 from 23.9% in 1994, which is primarily due to
efficiencies gained from the growing subscriber base.
General and administrative costs increased to $28.2 million in 1995 from
$15.2 million in 1994, an increase of $13.0 million or 85.5%, which is primarily
attributable to the increase in the costs associated with supporting the
increased subscriber base (including as a result of the Business Combination).
However, these costs continued to decline as a percentage of service revenues to
20.9% in 1995 from 27.3% in 1994, primarily attributable to improved efficiency.
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 in the
aggregate or as a percentage of total revenues.
Sales and marketing costs increased to $41.1 million in 1995 from $18.6
million in 1994 primarily due to net subscriber additions (including as a result
of the Business Combination), an increase in the Company's use of indirect sales
channels and an increase in churn (subscriber base attrition). For these
reasons, sales and marketing costs per net subscriber added increased to $446 in
1995 from $411 in 1994. Including the losses on equipment sales, the costs per
net subscriber added increased to $546 in 1995 from $497 in 1994.
Depreciation expense was $30.1 million in 1995 compared to $17.0 million in
1994. This $13.1 million or 77.1% increase is attributable to the expansion of
the Company's cellular systems (including as a result of the Business
Combination). Amortization expense increased to $19.1 million in 1995 from $8.7
million in 1994. This $10.4 million or 120% increase is attributable to an
increase in gross cellular licensing costs and other intangible assets to $300.5
million at December 31, 1995 from $223.0 million at December 31, 1994.
Provision for restructuring costs of $2.5 million in 1994 consists of costs
relating to the Business Combination, which primarily relates to the elimination
of duplicative headquarters and other facilities.
OPERATING LOSS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994
-------------------- ------------
CELLULAR PCS CELLULAR
-------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating loss......................................... $(20,258) $(3,677) $(23,568)
</TABLE>
Total operating loss increased to $23.9 million in 1995 from $23.6 million
in 1994 as a result of the $3.7 million operating loss attributable to PCS
operations offset by the improved cellular operating loss. Cellular operating
loss decreased to $20.3 million in 1995 from $23.6 million in 1994. Cellular
operating loss in 1994 included a one-time provision for restructuring costs of
$2.5 million.
OTHER INCOME (EXPENSE); EXTRAORDINARY LOSS; NET OPERATING LOSS
CARRYFORWARDS
Interest and financing expense increased to $25.4 million in 1995 from
$10.7 million in 1994. The $14.7 million or 137% increase is primarily
attributable to an increase in borrowings to $362.5 million at December 31, 1995
from $211.5 million at December 31, 1994, to fund the Company's expansion and
capital expenditures. The weighted average interest rate was 9.2% in 1995 and
1994.
35
<PAGE> 36
The $6.2 million gain in 1994 on dispositions represents gains associated
with the exchange or sale of certain cellular systems. Such gains are
nonrecurring.
Extraordinary loss on early extinguishment of debt of $6.6 million in 1995
represents the charge for the unamortized portion of financing costs incurred in
connection with the refinancing of the Company's then outstanding credit
facility.
The Company had available at December 31, 1995 net operating loss
carryforwards ("NOLs") of approximately $94 million which will expire in the
years 2002 through 2010. The Company may be limited in its ability to use these
carryforwards in any one year due to ownership changes that preceded the
Business Combination. Approximately $17 million of such NOLs are subject to such
limitations, which under current rules will result in an annual limit of $2.8
million. 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 $77
million. Therefore, in the opinion of management, all NOLs will be utilized
prior to their expiration. See Note 10 of notes to the Company's consolidated
financial statements.
EBITDA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994
-------------------- --------
CELLULAR PCS CELLULAR
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
EBITDA....................................................... $ 28,929 $(3,408) $ 2,102
</TABLE>
EBITDA improved to $25.5 million for the year ended December 31, 1995 from
$2.1 million for the year end December 31, 1994, as a result of increased
cellular EBITDA offset by the negative $3.4 million EBITDA attributable to PCS
operations. Cellular EBITDA increased to $28.9 million in 1995 from $2.1 million
in 1994, primarily as a result of the increased subscriber base and the related
cost efficiencies (including as a result of the Business Combination). As a
result, cellular operating margin (cellular EBITDA as a percentage of cellular
service revenues) increased to 21.4% in 1995 from 3.8% in 1994. EBITDA is a
measure commonly used in the industry but is not prepared in accordance with
GAAP and should not be considered as a measurement of net cash flows from
operating activities. In 1994, the Company recorded a provision for
restructuring costs of $2.5 million. EBITDA before provision for restructuring
costs would have been $4.6 million in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The Company had 112,800 cellular subscribers at December 31, 1994 an
increase of 82,800 or 276% during 1994. At December 31, 1993, the Company had
30,000 subscribers, an increase of 16,300 or 119% during 1993. In 1994 and 1993,
the number of net subscribers added through system acquisitions was
approximately 37,500 (including 29,000 through the acquisition of MCLP) and
2,600, respectively.
REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993
---------- ----------
<S> <C> <C>
Subscriber revenues............................................. $ 38,838 $ 11,105
Roamer revenues................................................. 16,746 7,285
Equipment sales................................................. 7,524 2,344
------- -------
Total revenues........................................ $ 63,108 $ 20,734
======= =======
</TABLE>
Subscriber revenues increased to $38.8 million in 1994 from $11.1 million
in 1993. This $27.7 million or 250% increase is primarily due to the 276% growth
in the number of subscribers (including as a result of the Business
Combination). Average monthly cellular subscriber revenue per
36
<PAGE> 37
subscriber was $54.35 in 1994, compared to $49.72 in 1993. This $4.63 or 9.3%
increase is a result of the Company's efforts to expand its geographical
coverage and focus subscribers on higher-end rate plans, and reflects the
positive characteristics for wireless communications services in RSAs and MSAs.
Roamer revenues were $16.7 million in 1994 compared to $7.3 million in
1993, an increase of $9.4 million or 129%. Growth in the Company's roamer
revenues generally reflects increases in the Company's geographical coverage
(including as a result of the Business Combination) and market penetration
levels in adjacent markets and the cellular industry as a whole. Roamer revenues
as a percentage of total revenues declined to 26.5% in 1994 from 35.3% in 1993
as a result of the 250% increase in subscriber revenues, which exceeded the 129%
increase in roamer revenues.
Equipment sales revenues increased to $7.5 million in 1994 from $2.3
million in 1993. This $5.2 million or 226% increase is primarily due to the
increase in net subscriber additions (including as a result of the Business
Combination).
OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993
------- -------
<S> <C> <C>
Cost of service.................................................. $13,303 $ 4,310
Cost of equipment sales.......................................... 11,446 3,533
General and administrative....................................... 15,226 6,253
Sales and marketing.............................................. 18,553 6,101
Depreciation and amortization.................................... 25,670 5,399
Provision for restructuring costs................................ 2,478
------- -------
Total operating expenses............................... $86,676 $25,596
======= =======
</TABLE>
Cost of service increased to $13.3 million in 1994 from $4.3 million in
1993 primarily as a result of the 276% increase in the number of subscribers
(including as a result of the Business Combination), which resulted in increased
costs to access local exchange and long distance carrier facilities and to
maintain the Company's wireless network. This represents a $9.0 million or 209%
increase for the year, and 23.9% and 23.4% of service revenues for 1994 and
1993, respectively.
General and administrative costs increased to $15.2 million in 1994 from
$6.3 million in 1993, an increase of $8.9 million or 141%, which is primarily
attributable to the increase in the costs associated with supporting the
increased subscriber base (including as a result of the Business Combination).
However, these costs declined as a percentage of service revenues to 27.3% in
1994 from 34.2% in 1993, primarily attributable to improved efficiency.
Sales and marketing costs increased to $18.6 million in 1994 from $6.1
million in 1993 primarily due to net subscriber additions (including as a result
of the Business Combination). Sales and marketing costs per net subscriber added
were $411 in 1994 and $445 in 1993. Including the losses on equipment sales, the
costs per net subscriber added were $497 in 1994 and $533 in 1993. The decrease
in costs per net subscriber added from 1993 to 1994 is a result of the
efficiencies gained during 1994 from the ability to spread certain fixed costs
associated with the Company's retail stores and advertising over a larger number
of net subscriber additions.
Depreciation expense increased to $17.0 million in 1994 from $4.1 million
in 1993. This $12.9 million or 315% increase is attributable to the expansion of
the Company's cellular systems (including as a result of the Business
Combination). Amortization expense increased to $8.7 million in 1994 from $1.3
million in 1993. This $7.4 million or 569% increase is attributable to an
increase in gross cellular licensing costs and other intangible assets
(including as a result of the Business Combination) to $223.0 million at
December 31, 1994 from $88.2 million at December 31, 1993.
37
<PAGE> 38
Provision for restructuring costs of $2.5 million in 1994 consists of costs
relating to the Business Combination, which primarily relates to the elimination
of duplicative headquarters and other facilities.
OPERATING LOSS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993
-------- -------
<S> <C> <C>
Operating loss.................................................. $(23,568) $(4,862)
</TABLE>
Operating loss increased to $23.6 million in 1994 from $4.9 million in
1993. Operating loss in 1994 included a one-time provision for restructuring
costs of $2.5 million.
OTHER INCOME (EXPENSE)
Interest and financing expense increased to $10.7 million in 1994 from $2.2
million in 1993. This $8.5 million or 386% increase is primarily attributable to
an increase in borrowings to $211.5 million at December 31, 1994 from $60.8
million at December 31, 1993 to fund the Company's expansion and capital
expenditures, partially offset by a decrease in the weighted average interest
rate to 9.2% in 1994 from 9.4% in 1993.
The $6.2 million gain in 1994 on dispositions represents gains associated
with the exchange or sale of certain cellular systems. The $10.1 million gain in
1993 is attributable to the sale of certain cellular systems and minority
interests. Such gains are nonrecurring.
EBITDA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1994 1993
------ ----
<S> <C> <C>
EBITDA............................................................... $2,102 $537
</TABLE>
EBITDA increased to $2.1 million in 1994 from $0.5 million in 1993,
primarily as a result of increased subscriber base and the related cost
efficiencies. EBITDA is a measure commonly used in the industry but is not
prepared in accordance with GAAP and should not be considered as a measurement
of net cash flows from operating activities. In 1994, the Company recorded a
provision for restructuring costs of $2.5 million. EBITDA before provision for
restructuring costs would have been $4.6 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently anticipates that it will require approximately $500
million to finance the build-out of its PCS systems through the end of 1998, and
will require additional funds to finance the continued growth of its cellular
operations, provide for working capital, service debt and finance potential
acquisitions. Such additional financing requirements will be dependent upon a
variety of factors including the rate of growth of the Company's cellular
operations. Historically, the Company has relied on a combination of private
equity financings and borrowings. Since January 1, 1993, the Company raised over
$185.8 million of equity through issuances of capital stock. From January 1,
1993, until the Business Combination, MCLP had raised $79.0 million of partner
capital. Following the Offerings and the Debt Offering, the Company does not
currently intend to rely on private equity financings or shareholder loans as
sources of capital.
The Company's long-term borrowings during 1994 and 1995 were primarily made
under a prior credit facility, bore variable rates of interest which ranged from
7.7% to 9.1% and would have matured on June 30, 2002. The amount of outstanding
long-term debt increased to $438.5 million at March 31, 1996 from $53.4 million
at December 31, 1993. At March 31, 1996, $402.0 million and $33.8 million were
outstanding under the Credit Facility and the NORTEL Facility, respectively, and
the amounts available for borrowing under the Credit Facility and the NORTEL
Facility were
38
<PAGE> 39
$48.2 million and $43.0 million, respectively. Indebtedness under the Credit
Facility and the NORTEL Facility matures on March 31, 2005 and December 31,
2003, respectively, and bears interest at variable rates. Substantially all the
assets of the Company are pledged as security for such indebtedness. See
"Description of Indebtedness."
The Company uses various financial instruments as part of its overall
strategy to manage the Company's exposure to market risks associated with
interest rate fluctuations. The Company has only limited involvement with these
financial instruments, and does not use them for trading purposes. Interest rate
swaps allow the Company to raise long-term borrowings at variable rates and swap
them into fixed rates for shorter durations. This enables the Company to
separate interest rate management from debt funding decisions. Interest rate cap
agreements are used to reduce the potential impact of increases in interest
rates on borrowings based upon variable interest rates. These transactions do
not subject the Company to risk of loss because gains and losses on these
contracts are offset against losses and gains on the underlying liabilities. No
collateral is held in relation to the Company's financial instruments.
At March 31, 1996, the Company had entered into interest rate caps and
swaps with a total notional amount of $390 million, of which $185 million is of
a short-term duration. The remaining $205 million had initial terms of three
years or more and effectively converted $205 million of variable rate debt to
fixed rate. Such caps and swaps expire between August 1997 and March 1999. The
amount of net unrealized loss attributable to changing interest rates at March
31, 1996 was immaterial.
The NORTEL Facility finances the purchase of PCS switching and transmission
system equipment pursuant to a PCS Project and Supply Agreement that commits the
Company to purchase $200 million in equipment prior to June 30, 2000. Also as
part of its capital expenditure plan and in order to ensure adequate supply of
certain inventory requirements, the Company has entered into two agreements with
Nokia under which the Company has committed to purchase (i) a minimum number of
PCS and dual-mode handsets totaling approximately $43.7 million through October
1, 1999 and (ii) a minimum of $50 million of wireless communications equipment
and services for the Company's PCS systems prior to December 31, 1998.
The Company believes the proceeds from the Offerings and the Debt Offering,
together with availability under the Credit Facility and the NORTEL Facility,
will be sufficient to fund operating losses, capital expenditures and working
capital necessary for the build-out of its PCS systems and the continued growth
of its cellular operations through December 31, 1998. In the event the Debt
Offering is not consummated, the Company would use its existing Senior Secured
Facilities, which includes the Credit Facility and the NORTEL Facility, to fund
such expenditures. To the extent that the build-out of the PCS systems is faster
than expected, the costs are greater than anticipated or the Company takes
advantage of acquisition opportunities, including those that may arise through
current or future FCC auctions, the Company may require additional funding to
implement its business strategy. See "Risk Factors -- High Leverage; Debt
Service; Restrictive Covenants" and "Description of Indebtedness."
Net cash used in operating activities was $0.2 million for the three months
ended March 31, 1996. Adjustments to the $18.6 million net loss for such period
to reconcile to net cash used in operating activities consisted primarily of
$15.6 million of depreciation and amortization. Other adjustments included
changes in operating assets and liabilities, net of effects from consolidating
acquired interests, consisting primarily of a decrease of $1.7 million in
accounts receivable primarily as a result of increased collections, an increase
of $4.2 million in inventories primarily as a result of the purchase of PCS
handsets for sale in the Honolulu MTA, an increase of $3.2 million in prepaid
expenses and other current assets primarily as a result of prepaid costs for the
Honolulu MTA and an increase of $8.2 million in accounts payable primarily as a
result of purchases of PCS handsets and other PCS-related expenses. Net cash
used in operating activities was $0.7 million in 1995. Adjustments to the $56.0
million net loss for 1995 to reconcile to net cash used in operating activities
39
<PAGE> 40
consisted primarily of $49.5 million of depreciation and amortization and $6.6
million with respect to the extraordinary loss on early extinguishment of debt.
Other adjustments included changes in operating assets and liabilities, net of
effects from consolidating acquired interests, consisting primarily of an
increase of $5.7 million in accounts receivable primarily as a result of the
increase in the subscriber base, and a $6.4 million increase in accrued
liabilities primarily as a result of accrued payroll and interest. Net cash used
in operating activities was $1.0 million and $0.3 million in 1994 and 1993,
respectively.
Net cash used in investing activities was $78.9 million for the three
months ended March 31, 1996. Investing activities for such period consisted
primarily of cellular capital expenditures, which used cash of $18.5 million,
PCS capital expenditures, which used cash of $20.1 million, and the acquisition
of wireless properties, which used cash of $36.0 million. Net cash used in
investing activities was $293.6 million in 1995, consisting primarily of
cellular capital expenditures, which used cash of $62.6 million, PCS capital
expenditures, which used cash of $16.9 million, the purchase of PCS wireless
licenses, which used cash of $137.8 million, and the acquisition of wireless
properties, which used cash of $60.7 million. Net cash used in investing
activities was $70.2 million and $32.5 million in 1994 and 1993, respectively.
Net cash provided by financing activities was $76.8 million for the three
months ended March 31, 1996. Financing activities for such period consisted
primarily of additions to long-term debt, which provided cash of $75.8 million.
Net cash provided by financing activities was $295.1 million in 1995, consisting
primarily of proceeds from issuance of Common Stock, which provided cash of
$143.1 million, and additions to long-term debt, net of $277.0 million in
repayments and fees, which provided cash of $148.2 million. Net cash provided by
financing activities was $70.8 million and $36.2 million in 1994 and 1993,
respectively.
The Company anticipates that it will expend approximately $51.5 million
during the remainder of 1996 for cellular system and capacity expansion, new
market build-out and centralized infrastructure improvements. In addition, the
development, construction and operation of the Company's PCS systems will
require substantial capital expenditures over the next several years, which the
Company expects will result in significant operating losses in both its PCS and
consolidated operations. The Company currently anticipates that the funds
required to complete the build-out of its seven PCS MTAs prior to December 31,
1998 will total approximately $500 million. The build-out costs include
microwave relocation, site acquisition, transmission and switching equipment.
The build-outs are designed to cover approximately 80% of the population within
the Company's seven PCS MTAs, which satisfies the 10-Year Build-out Requirement.
The Company may be required to make expenditures sooner than anticipated or in
greater amounts than expected based on a number of variables, including
increased subscriber growth, increased losses resulting from equipment sales and
increased construction costs associated with expanding coverage areas. In
addition, delays in network design, site and facility acquisitions, construction
or the purchase and installation of network equipment and other factors may
increase the total cost of such expenditures. See "Risk Factors -- PCS Build-out
and Capital Expenditures."
In January 1996, the Company agreed to acquire from GTE a broadband PCS
license for the Denver MTA for $66 million. The Company has the right, by notice
given at any time prior to the closing date, to pay $33 million of such purchase
price by delivery of a promissory note having a final maturity 18 months from
the closing date and bearing an interest rate based on six month London
InterBank Offered Rate plus 1.5%. In addition, the Company holds a 49.9% limited
partnership interest in Cook Inlet PCS, an entity which was the high bidder for
licenses for 13 BTAs in the C Block auction. As a result of the high bids of
Cook Inlet PCS in the C Block auction, the Company is obligated to fund up to
approximately $4.0 million of the license acquisition costs of Cook Inlet PCS.
Cook Inlet PCS is subject to the Five Year Build-Out Requirement and will
therefore require significant additional amounts to complete the build-out of
its PCS systems. The potential sources of such additional amounts include vendor
loans, loans or capital contributions by the partners of Cook Inlet PCS or other
third party financing. There are no current agreements or plans
40
<PAGE> 41
with respect thereto. See "The Company -- Recent Developments." In the ordinary
course of its business, the Company continuously reviews potential acquisition
opportunities and has entered into various joint development agreements with
respect to international interests. Any such prospective acquisition would be
financed with proceeds from the Offerings, the Debt Offering, borrowings under
the Senior Secured Facilities or additional financings.
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.
41
<PAGE> 42
BUSINESS
INTRODUCTION
Western Wireless provides wireless communications services in the western
United States. The Company owns or has the right to acquire an aggregate of 80
cellular and PCS licenses for a geographic area covering approximately 25.5
million pops and 41% of the continental United States. The Company owns and
operates cellular communications systems in 57 RSAs, including one RSA which it
has the right to acquire, and 16 MSAs with an aggregate population of
approximately 6.0 million persons. In its cellular markets, the Company uses the
CELLULAR ONE brand name and currently serves over 240,000 subscribers.
Through the FCC auction concluded in 1995, the Company acquired broadband
PCS licenses for six MTAs with an aggregate population of approximately 15.1
million persons -- Honolulu, Salt Lake City, Portland, Des Moines/Quad Cities,
El Paso/Albuquerque and Oklahoma City -- for an aggregate purchase price of $144
million. In January 1996, the Company agreed to acquire a broadband PCS license
for the Denver MTA from GTE for a purchase price of $66 million. The Company's
seven PCS licenses cover markets with an aggregate population of approximately
19.5 million persons, including approximately 4.4 million persons covered by the
Denver MTA. In all of its PCS markets, the Company intends to use its
proprietary VoiceStream brand name. In February 1996, the Company's PCS system
in the Honolulu MTA became the first auction-awarded PCS system to commence
commercial operations in the United States.
In addition, the Company is engaged in activities complementary to its
principal wireless communications business. In 1995, the Company began pursuing
licenses for wireless services in markets outside the United States. The Company
has joined partnerships which have made wireless license applications in foreign
countries. The Company is a partner in a partnership that has an interest in a
joint venture which has obtained the GSM cellular license in Latvia. In
addition, since their acquisition in February 1996, the Company has operated
paging systems in eight states and currently serves approximately 24,000
customers. The Company has reached reciprocal development or reseller agreements
for paging services with AT&T Wireless, AirTouch Paging, Paging Network Inc.
("PageNet"), MobileMedia Corporation ("MobileMedia") and others.
Western Wireless Corporation was formed in July 1994 as the result of the
Business Combination among various companies, including MCLP and 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 issued and outstanding shares of
common stock of GCC and the owner of all of the assets of MCLP. The Business
Combination constituted an acquisition of MCLP by GCC for accounting purposes.
As a result, all financial data relating to the Company herein with respect to
periods after the date of the Business Combination reflect the combined
operations of GCC and MCLP and all such data with respect to prior periods
reflect only the operations of GCC, which, for accounting purposes, is
considered Western Wireless Corporation's predecessor. Since the Business
Combination, Western Wireless Corporation has successfully integrated the
management and operations of GCC and MCLP and raised significant equity capital
to acquire PCS licenses in additional territories in the western United States
and thereby extend its coverage area for the provision of wireless
communications services.
THE WIRELESS COMMUNICATIONS INDUSTRY
OVERVIEW
Wireless communications systems use a variety of radio frequencies to
transmit voice and data. Broadly defined, the wireless communications industry
includes one-way radio applications, such as paging or beeper services, and
two-way radio applications, such as cellular telephone, PCS and ESMR networks.
Historically, each application has been licensed and operates in a distinct
radio frequency block.
42
<PAGE> 43
Since its introduction in 1983, cellular service has grown dramatically and
now dominates the wireless communications market. As of December 31, 1995, there
were over 33.8 million cellular subscribers in the United States. The following
chart illustrates the growth in United States cellular subscribers.
U.S. CELLULAR SUBSCRIBERS
<TABLE>
<S> <C> <C> <C> <C>
1984 .5
1985 1
1986 1.5
1987 2
1988 2.5
1989 4.5
1990 6
1991 7.5
1992 12.5
1993 17
1994 25
1995 33.8
</TABLE>
Source: Cellular Telecommunications Industry Association ("CTIA")
The following table sets forth certain domestic cellular industry
statistics derived from the Data Survey Results published semi-annually by CTIA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
CELLULAR INDUSTRY STATISTICS
Total Service Revenues
(in billions).......................... $5.8 $7.8 $10.9 $14.2 $19.0
Ending Cellular Subscribers
(in millions).......................... 7.6 11.0 16.0 24.1 33.8
Subscriber Growth........................ 43.0% 46.0% 45.1% 50.8% 40.0%
Average Monthly Service Revenue per
Subscriber............................. $74.10 $70.13 $67.13 $59.08 $54.90
Average Monthly Subscriber Revenue per
Subscriber............................. $64.96 $61.40 $58.74 $51.48 $47.59
Ending Penetration....................... 3.0% 4.4% 6.2% 9.4% 13.0%
</TABLE>
These statistics represent results for the industry as a whole. Average
Monthly Service Revenue per Subscriber reflects per subscriber revenue including
roaming revenue, and Average Monthly Subscriber Revenue per Subscriber reflects
per subscriber revenue excluding roaming revenue. In general, rural markets,
where the Company concentrates its cellular operations, were licensed later by
the FCC than urban markets and, consequently, have a shorter operating history.
The Company has operated the cellular systems in its markets, on average, for
approximately three years. As a result, while the Company's cellular subscriber
base is growing more rapidly than the industry average, the Company's level of
penetration is lower than the overall industry average.
In the wireless communications industry, there are two principal services
licensed by the FCC for transmitting voice and data signals, "cellular services"
and "personal communications services." 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
43
<PAGE> 44
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), the first portion of which (the "A" and "B"
Blocks) was auctioned by the FCC in late 1994 and 1995. This portion of radio
spectrum is to be used by PCS licensees to provide wireless communications
services. PCS will initially compete directly with existing cellular telephone,
paging and specialized mobile radio services. PCS will also include features
which are not generally offered by cellular providers, such as data
transmissions to and from portable computers, advanced paging services and
facsimile services. The Company believes that PCS providers will be the first
direct wireless competitors to cellular providers and the first to offer mass
market all-digital mobile networks. In addition, PCS providers may be the first
to 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.
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.
44
<PAGE> 45
While PCS and cellular systems utilize similar technologies and hardware,
they operate on different frequencies and may use different technical and
network standards. As a result, as discussed further below, it initially will
not be 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 are expected to 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, CDMA or 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 will be unable to use a GSM handset when traveling in an area not
served by GSM-based PCS operators, unless the subscriber carries a dual-mode
handset that permits the subscriber to use the analog cellular system in that
area. Such dual-mode handsets are not yet commercially available and may be
larger and more expensive than single-mode handsets.
Each of the three principal PCS signaling standards has been adopted by at
least two MTA licensees and offers certain advantages and disadvantages. GSM is
the leading digital wireless technology in the world, with approximately 120
systems operating in 92 countries serving over 13 million subscribers. GSM-based
systems also offer features and services not currently offered by cellular
systems or immediately contemplated by other PCS digital standards, including
the only truly private call transmission. An additional benefit associated with
GSM technology is its use of an open system architecture that will allow
operators to purchase network equipment from a variety of vendors that share
standard interfaces for operation. This open architecture provides significant
flexibility by the operator in vendor cost leveraging, and provisioning of
features, products and services.
The CDMA standard is expected to be the most widely adopted PCS technology
in the United States. Proponents of CDMA claim that CDMA-based systems will
require fewer Cell Sites and offer greater capacity, call quality and hand-off
advantages. CDMA-based PCS systems are expected initially to offer the same
features and services offered by CDMA-based cellular systems. CDMA will
initially use a closed system architecture that will limit PCS operators'
choices of equipment vendors.
The TDMA-based PCS standard is an "up-banded" version of the time
division-based digital cellular standard currently in limited use by cellular
operators in the United States. The TDMA-based PCS standard will initially use a
closed system architecture that will also limit PCS operators' choices of
equipment vendors.
MARKETS AND SYSTEMS
The Company holds or has the rights to acquire FCC licenses to provide
wireless communications services in 80 separate markets. Within such markets,
the Company's PCS pops total approximately 19.5 million and the Company's
cellular pops total approximately 6.0 million. The Company's PCS and cellular
markets are summarized in the following table:
<TABLE>
<CAPTION>
OWNERSHIP THE COMPANY'S
PCS MARKETS(1) POPULATION(2) PERCENTAGE POPS(2)
- ---------------------------------------------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
Portland........................................................ 3,460,182 100 3,460,182
Salt Lake City.................................................. 2,999,636 100 2,999,636
El Paso/Albuquerque............................................. 2,387,710 100 2,387,710
Honolulu........................................................ 1,215,729 100 1,215,729
Des Moines/Quad Cities(3)....................................... 3,067,795 100 3,067,795
Oklahoma City................................................... 1,945,271 100 1,945,271
Denver(4)....................................................... 4,411,211 100 4,411,211
---------- ----------
PCS TOTAL................................................... 19,487,534 19,487,534
========== ==========
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
OWNERSHIP THE COMPANY'S
CELLULAR MARKETS(5) POPULATION(2) PERCENTAGE POPS(2)
- ---------------------------------------------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
California
Mono (CA-6)..................................................... 29,414 100 29,414
---------- ----------
California Total............................................ 29,414 29,414
---------- ----------
Colorado
Pueblo.......................................................... 126,699 100 126,699
Elbert (CO-5)................................................... 27,412 100 27,412
Saguache (CO-7)................................................. 45,783 100 45,783
Kiowa (CO-8).................................................... 44,195 100 44,195
Costilla (CO-9)................................................. 27,322 100 27,322
---------- ----------
Colorado Total.............................................. 271,411 271,411
---------- ----------
Idaho
Idaho (ID-2).................................................... 71,146 100 71,146
---------- ----------
Idaho Total................................................. 71,146 71,146
---------- ----------
Iowa
Sioux City...................................................... 118,475 100 118,475
Monona (IA-8)................................................... 53,834 100 53,834
---------- ----------
Iowa Total.................................................. 172,309 172,309
---------- ----------
Kansas
Jewell (KS-3)(6)................................................ 50,801 100 50,801
Marshall (KS-4)................................................. 143,546 100 143,546
Ellsworth (KS-8)................................................ 128,226 100 128,226
Morris (KS-9)................................................... 56,851 100 56,851
Franklin (KS-10)................................................ 106,245 100 106,245
Reno (KS-14).................................................... 170,241 100 170,241
---------- ----------
Kansas Total................................................ 655,910 655,910
---------- ----------
Minnesota
Kittson (MN-1).................................................. 49,803 100 49,803
Lake of the Woods (MN-2-A1)..................................... 25,465 100 25,465
---------- ----------
Minnesota Total............................................. 75,268 75,268
---------- ----------
Missouri
Bates (MO-9).................................................... 74,562 100 74,562
---------- ----------
Missouri Total.............................................. 74,562 74,562
---------- ----------
Montana
Billings........................................................ 129,956 96 125,031
Great Falls..................................................... 81,964 100 81,964
Lincoln (MT-1).................................................. 147,957 100 147,957
Toole (MT-2).................................................... 38,721 100 38,721
Daniels (MT-4).................................................. 39,463 100 39,463
Mineral (MT-5).................................................. 191,414 100 191,414
Deer Lodge (MT-6)............................................... 64,805 100 64,805
Fergus (MT-7)................................................... 28,746 100 28,746
Beaverhead (MT-8)............................................... 93,272 100 93,272
Carbon (MT-9)................................................... 33,758 100 33,758
Prairie (MT-10)................................................. 20,098 100 20,098
---------- ----------
Montana Total............................................... 870,154 865,229
---------- ----------
Nebraska
Lincoln......................................................... 230,041 100 230,041
Cherry (NE-2)................................................... 30,507 100 30,507
Knox (NE-3)..................................................... 113,417 100 113,417
Grant (NE-4).................................................... 35,202 100 35,202
Keith (NE-6).................................................... 107,775 100 107,775
Hall (NE-7)..................................................... 89,955 100 89,955
Chase (NE-8).................................................... 56,156 100 56,156
Adams (NE-9).................................................... 79,860 100 79,860
Cass (NE-10).................................................... 84,216 100 84,216
---------- ----------
Nebraska Total.............................................. 827,129 827,129
---------- ----------
Nevada
Humboldt (NV-1)................................................. 44,192 100 44,192
Lander (NV-2)................................................... 56,427 100 56,427
Mineral (NV-4).................................................. 29,596 100 29,596
White Pine (NV-5)............................................... 14,682 100 14,682
---------- ----------
Nevada Total................................................ 144,897 144,897
---------- ----------
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
OWNERSHIP THE COMPANY'S
CELLULAR MARKETS(5) POPULATION(2) PERCENTAGE POPS(2)
- ---------------------------------------------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
New Mexico
Lincoln (NM-6).................................................. 238,401 100 238,401
---------- ----------
New Mexico Total............................................ 238,401 238,401
---------- ----------
North Dakota
Bismarck........................................................ 88,606 99 87,968
Fargo........................................................... 164,624 100 164,624
Grand Forks..................................................... 104,665 100 104,665
Divide (ND-1)................................................... 101,607 100 101,607
Bottineau (ND-2)................................................ 58,295 100 58,295
McKenzie (ND-4)................................................. 62,449 100 62,449
Kidder (ND-5)................................................... 48,112 100 48,112
---------- ----------
North Dakota Total.......................................... 628,358 627,720
---------- ----------
South Dakota
Rapid City...................................................... 115,071 100 115,071
Sioux Falls..................................................... 137,655 98 135,232
Harding (SD-1).................................................. 35,904 100 35,904
Corson (SD-2)................................................... 22,089 100 22,089
McPherson (SD-3)................................................ 52,595 100 52,595
Marshall (SD-4)................................................. 65,623 100 65,623
Custer (SD-5)................................................... 24,590 100 24,590
Haakon (SD-6)................................................... 38,432 100 38,432
Sully (SD-7).................................................... 66,118 100 66,118
Kingsbury (SD-8)................................................ 72,547 100 72,547
Harrison (SD-9)................................................. 92,266 100 92,266
---------- ----------
South Dakota Total.......................................... 722,890 720,467
---------- ----------
Texas
Abilene......................................................... 153,207 100 153,207
Lubbock......................................................... 231,851 100 231,851
Midland......................................................... 121,145 92 111,078
Odessa.......................................................... 130,339 93 121,033
San Angelo...................................................... 106,078 100 106,078
Parmer (TX-3)................................................... 148,641 100 148,641
Gaines (TX-8)................................................... 139,672 100 139,672
Hudspeth (TX-12)................................................ 25,316 100 25,316
Reeves (TX-13).................................................. 31,761 100 31,761
Loving (TX-14).................................................. 48,959 100 48,959
---------- ----------
Texas Total................................................. 1,136,969 1,117,596
---------- ----------
Wyoming
Casper.......................................................... 63,120 100 63,120
Sheridan (WY-2)................................................. 75,629 100 75,629
---------- ----------
Wyoming Total............................................... 138,749 138,749
---------- ----------
CELLULAR TOTAL.............................................. 6,057,567 6,030,208
========== ==========
PCS AND CELLULAR TOTAL...................................... 25,545,101 25,517,742
========== ==========
</TABLE>
- ---------------
(1) The FCC has not granted "final" PCS licenses. See "Risk Factors -- Finality
of PCS Auctions" and "The Company -- Recent Developments."
(2) Estimated 1996 populations based on 1995 estimates by Equifax adjusted by
the Company by a growth factor based upon Equifax's growth factors from 1990
to 1995.
(3) "Quad Cities" refers to the cities of Moline and Rock Island, Illinois, and
Bettendorf and Davenport, Iowa.
(4) An acquisition agreement has been executed and initial FCC approval has been
obtained, but closing is subject to FCC approval by final order.
(5) Excludes six markets containing a population of 562,598 in which the Company
operates under an Interim Operating Authority ("IOA") and includes one
market in which the Company operates under an IOA where the Company has
entered into an agreement to acquire the license, subject to FCC approval.
See "-- Products and Services."
(6) Currently operating under IOA. Acquisition agreement has been executed, but
closing is subject to FCC approval.
STRATEGY
The Company believes that its combination of cellular and PCS licenses
creates a unique opportunity in the wireless communications industry. The
Company has focused on the acquisition and operation of cellular communications
systems in RSAs and small MSAs in the western United States, which the Company
believes it has acquired at attractive prices. The Company's recent
47
<PAGE> 48
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 is to commence
operations in the more densely populated areas within its MTAs. The Company
believes that cellular is the optimum technology for rural, less densely
populated areas 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 and, prior to the Business
Combination, MCLP entered markets at a relatively low cost, having purchased
cellular licenses for an average of $45.68 per pop and PCS licenses for an
average of $10.81 per pop.
The Company's operating strategy is to (i) achieve a critical
time-to-market advantage by rapidly constructing and commencing operations of
PCS systems in urban areas within its PCS markets; (ii) continue to expand its
operations through increased subscriber growth and usage; (iii) utilize its
centralized management and back office functions to support the combined needs
of its cellular and PCS subscribers, thereby further improving operating
efficiencies and generating greater economies of scale; and (iv) selectively
acquire cellular and PCS properties primarily in contiguous markets. The Company
is implementing its strategy by aggressively building 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 believes the wireless communications industry will continue to
grow due to enhanced service offerings, the emergence of PCS systems, increased
awareness of the productivity, convenience and security benefits associated with
wireless communications services and anticipated declines in pricing for its
services. The Company believes it is well positioned to take advantage of these
growth opportunities as a result of its existing operations and systems
infrastructure, its wide geographic coverage and the experience and expertise of
its management team.
CELLULAR OPERATIONS
The Company operates rapidly growing high quality cellular systems in 73
RSAs and small MSAs, and generally owns 100% of each of its cellular licenses.
The Company has focused on operating and expanding its cellular business in RSAs
and small MSAs in the States of Texas, Montana, Nebraska, South Dakota, Kansas,
North Dakota, Colorado, New Mexico, Iowa, Wyoming, Nevada, Minnesota, Missouri,
Idaho and California. In these rural and small urban markets, the Company
believes that its cellular systems, which cover large open geographic areas with
relatively few Cell Sites, incorporate the optimum cost efficient technology.
The Company believes, based on its observations and experience, that there
are several inherent attributes of RSAs and small MSAs that make these markets
attractive:
- Less Developed Markets -- Since the rural and small urban markets were
developed later than major markets, cellular penetration is presently
lower and subscriber growth rates are significantly higher than in the
more established markets.
- Subscriber Base -- The small urban and rural market population base
contains a high percentage of business customers with substantial needs
for wireless communications, such as those employed in agriculture,
mining, oil and gas, and populations accustomed to long travel times.
Additionally, the Company's service areas cover over 20,000 highway miles
and the popular destination areas of Yellowstone National Park, Glacier
National Park and Mount Rushmore National Monument, providing attractive
sources of roaming revenues.
- Attractive Physical Characteristics -- The Company's cellular systems
have the ability to cover on average a much larger geographic area per
Cell Site than is possible in urban markets. Although the initial per pop
capital expenditures are higher in rural markets, the incremental cost of
expanding capacity is lower. By carefully managing its Cell Site place-
48
<PAGE> 49
ment, the Company has been able to achieve coverage of over 93% of the
population in its licensed cellular markets.
- Less Intense Competitive Environment -- Although two cellular operators
exist in all markets, the Company's competitor in many of its markets
tends to be smaller and less well capitalized than the large market
operators.
- Less Vulnerable to PCS Competition -- In the future, the Company believes
that PCS will present less competition in small urban and rural markets
than in large urban markets. The MTA licenses, which include multiple
MSAs and the surrounding geographic areas, require the licensees to build
one-third coverage of the population of the MTA within five years of the
initial license grant and two-thirds within ten years. It is likely that
licensees will initially construct in the more densely populated urban
areas, providing service to the surrounding population later, if at all.
In addition, in rural markets, PCS requires more closely located Cell
Sites to broadcast over extended geographic areas and will be less
efficient and more expensive to deploy than cellular service, making it
likely that PCS competitors will delay or avoid entry into such markets.
The Company has experienced rapid growth in subscribers and revenues in its
cellular markets. In addition, monthly subscriber revenue per subscriber in 1995
averaged $57.25 versus a CTIA average of $47.59, reflecting the attractiveness
of the Company's markets and the success of its marketing strategy.
The Company's cellular strategy is to expand its subscriber base through
increased market penetration with an emphasis on retail sales, continue to
introduce competitive wireless service as new technologies and products enter
its cellular markets, continue to provide superior customer service and product
features tailored to its customers' needs at competitive prices and reduce costs
through improved efficiency. See "-- Products and Services" and "-- Marketing,
Sales and Customer Service."
PCS OPERATIONS
The Company has completed initial construction and commenced commercial
operations of its PCS system in the Honolulu MTA and is in the initial
construction phase of its PCS systems in the Portland, Salt Lake City and El
Paso/Albuquerque MTAs. Design and engineering have been initiated in the
Company's remaining PCS markets. The Company presently intends to have commenced
commercial operations in each of its MTAs by the end of the first quarter of
1997. When completed, the Company's PCS systems will cover a substantial
geographic area in the western United States complementary to the Company's
cellular operations. After the initial build-out, the Company expects to extend
its PCS systems based on economic factors, customer demand and FCC licensing
requirements. The Company believes its PCS service offerings will be broader
than those currently offered by cellular systems in the Company's PCS markets.
PCS service offerings will 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 believes that being the first to offer PCS services in a market
will be a key competitive advantage. 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 currently provided by analog or digital cellular operators and
providing superior customer service. In addition, the Company believes it can
become a low-cost provider of PCS services by taking advantage of the existing
business infrastructure established for 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."
49
<PAGE> 50
The Company believes that PCS technology is better suited to urban areas
than rural areas and may have cost advantages relative to cellular technology in
urban areas. PCS Cell Sites operate at a higher frequency and lower power than
cellular Cell Sites and, therefore, typically have a smaller coverage area.
Unlike in rural areas, wireless systems in urban areas require substantial
frequency "reuse" to provide high capacity. The coverage advantage that cellular
frequencies and analog technology enjoy in rural areas is not present in urban
areas because analog cellular technology does not provide efficient frequency
"reuse." As a result, the higher frequency, lower power, digital PCS systems are
therefore likely to provide greater capacity in urban areas. In addition,
individual PCS Cell Sites are less expensive than cellular Cell Sites.
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 five years of proven operability in
Europe and Asia, enhanced features not presently available with other standards
and an open system architecture that will allow the Company to choose from a
variety of equipment options and providers. GSM is the leading digital wireless
standard in the world, with approximately 120 systems serving over 13 million
customers in 92 countries. The Company believes that deployment of GSM
facilitates the Company's first-to-market efforts, thereby achieving a key
element of its strategy. The GSM digital standard also has been chosen by six
other PCS licensees to date. Together, these PCS licensees and Western Wireless
cover PCS markets containing approximately 149.2 million persons, representing
55.7% of the population in the United States.
The Company has entered into roaming agreements or letters of intent with
all of the companies which have chosen to deploy the GSM standard in their PCS
markets in the United States that will provide for roaming by the Company's PCS
subscribers into these carriers' PCS markets, and vice versa, when such systems
are operational. The Company also has reciprocal roaming agreements or letters
of intent with 28 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 "Risk Factors -- Risks Relating to GSM Technical
Standard" and "Business -- System Equipment, Development and Expansion -- PCS."
The FCC has divided the United States and its possessions and territories
into PCS markets made up of 51 MTAs and 493 "Basic Trading Areas" or "BTAs."
There are two MTA Blocks ("A" and "B") which consist of 30 MHz of spectrum and
four BTA Blocks, one of which consists of 30 MHz of spectrum ("C") and three of
which consist of 10 MHz of spectrum ("D," "E" and "F"). Each MTA consists of at
least two BTAs. The FCC has already completed the auction of the A and B Block
licenses. The PCS license auction process also includes auctions for issuance of
broadband BTA licenses, the first of which was for the C Block licenses (the "C
Block auction"). In the C Block auction 30 MHz licenses for the 493 BTAs were
sold. Such C Block licenses were reserved for "entrepreneurs." Generally, an
"entrepreneur" is an applicant that has gross revenues of less than $125 million
in each of the last two years and total assets of less than $500 million at the
time the initial application to participate in the auction was filed. Each
eligible applicant may pay 90% of the purchase price of each license that it
purchases in installments over ten years. The FCC has also established bidding
credits and more favorable installment payment plans for applicants qualifying
as "small businesses." Generally, a small business is an entity that has average
annual gross revenues that are not more than $40 million for the preceding three
years. In addition, there are specific preferences affecting C Block awards
given to indian tribes or Alaska Regional or Village Corporations organized
pursuant to the Alaska Native Claims Settlement Act, or entities controlled by
such tribes or corporations.
The Company has acquired a 49.9% limited partnership interest in Cook Inlet
PCS, an entity controlled by Cook Inlet Region, Inc., an Alaska Native Regional
Corporation. Cook Inlet PCS participated in the C Block auction and also
qualifies for the additional benefits available to a small business.
Participation in Cook Inlet PCS will allow the Company to participate as a
minority owner
50
<PAGE> 51
of, and technical services provider to, the PCS businesses established by Cook
Inlet PCS using licenses purchased by Cook Inlet PCS in such auction. The
Company's obligation is to fund approximately 5% (up to approximately $4.0
million) of the total price of any licenses purchased by Cook Inlet PCS and to
provide technical services to Cook Inlet PCS with respect to constructing and
operating its wireless communications businesses. See "The Company -- Recent
Developments," " -- Governmental Regulation - Licensing of PCS Systems" and
"Certain Transactions."
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. Customers also
may subscribe to a voice messaging system, which allows callers to record
messages for subscribers who are not available to take calls or who have left
the service area. The subscriber can later retrieve the messages from any
telephone, including a cellular handset. 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. A high volume caller might find an option with a higher
monthly access charge and low per-minute charges to be most advantageous. Lower
volume users might choose a different package, featuring a lower access fee and
higher per-minute charges. In addition, in most cases the Company separately
charges for its custom calling features.
The Company provides extended regional and national service to cellular
subscribers in its markets, thereby allowing them to make and receive calls
while in other cellular service areas without dialing special access codes,
through its membership in NACN and other regional networking arrangements. This
service distinguishes the Company's service and call delivery features from
those of some of its competitors. 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. See "-- Governmental
Regulation." NACN connects key areas across North America so that customers can
use their cellular handsets to place and receive calls in these areas as easily
as they do in their home areas. Through NACN, customers receive calls
automatically as they roam in more than 2,200 cities. By dialing subscribers'
cellular numbers, the caller can reach subscribers without knowing their
location or having to dial additional roaming access numbers. In addition,
special services such as call forwarding and call waiting automatically follow
the subscribers as they travel. 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.
In addition to service in its cellular markets, the Company offers cellular
service under Interim Operating Authorities ("IOAs") from the FCC in six markets
containing 562,598 persons which are contiguous to the Company's existing
markets. The holder of an IOA is designated to provide service to a market in
which the FCC has not granted a cellular license due to pending litigation. The
Company currently is seeking to acquire the cellular licenses in three markets
in which it offers cellular services under an IOA. While it is unclear how long
the Company will be able to provide such service under its IOAs, the Company has
been able to provide such service at a low cost and believes that its existing
cellular customers benefit from the additional market coverage.
The Company provides replacement wireless services for rural customers in
sparsely populated areas where the cost of providing wired telephone services is
relatively high. In addition, fixed
51
<PAGE> 52
cellular service can be particularly useful for providing temporary service to
locations that cannot rapidly be wired for service through the landline areas.
Fixed cellular applications are also currently being used to replace existing
landline facilities for remote monitoring of various alarm devices.
PCS
The Company is currently operating a PCS system in the Honolulu MTA and
will offer PCS services in its six other MTAs using the GSM standard. The
Company currently offers in the Honolulu MTA, and will offer in each of its
other MTAs from the inception of commercial operations, several distinct
services and features, including:
- Enhanced Features -- The Company's PCS systems initially will offer
caller identification, call hold, voice mail, numeric paging, as well as
custom calling features such as call waiting, conference calling and call
forwarding.
- Messaging and Wireless Data Transmission -- Digital networks will 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, including short
message or alphanumeric paging service, mobile office applications (e.g.,
facsimile, electronic mail and connecting notebook computers with
computer/data networks), access to stock quote services, transmission of
text, connections of wireless point-of-sale terminals to host computers,
monitoring of alarm systems, automation of meter reading and monitoring
of status and inventory levels of vending machines.
- 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, will allow subscribers to
obtain PCS connectivity automatically, simply by inserting their smart
cards into compatible PCS handsets. With roaming agreements between the
local providers and the Company in place, smart cards could also enable
subscribers to roam wherever GSM is deployed by using their smart cards
with handsets compatible with the system.
- Over-the-Air Activation and Over-the Air Subscriber Profile
Management -- The Company will be able to transmit changes in the
subscriber's feature package, including mobile number assignment and
personal directory numbers, directly to the subscriber's handset. This
eliminates the need to manually program the handset and simplifies the
activation process for both the sales agent and the subscriber.
- Extended Battery Performance -- Digital handsets are capable of entering
into a "sleep" mode when not in use, which will significantly extend the
handset's battery performance. In addition, because the Company's PCS
systems will utilize tightly spaced, low power transmitters, less power
will be required to transmit calls, thereby further extending battery
performance.
The Company currently offers a number of rate plans in Honolulu which vary
the level of the monthly fixed fee for a certain amount of usage and the cost of
incremental usage. The Company's PCS offerings will likely include additional
features beyond those offered by cellular competitors that the Company believes,
when combined with its rate plans, should create significant customer appeal for
its PCS systems.
The Company believes that its subscribers will be able to roam in
substantial portions of the United States, either on other GSM-based PCS systems
operated by current licensees or licensees that acquire PCS licenses in FCC
auctions or by using dual-mode handsets that, when available, also can be used
on existing cellular systems. The Company believes that dual-mode handsets will
52
<PAGE> 53
be commercially available in sufficient quantities in 1997 and has entered into
an agreement with Nokia to acquire dual-mode handsets. The Company's ability to
establish a PCS subscriber base and to compete successfully in the PCS business
with those operators offering greater roaming capabilities may be adversely
affected by the fact that the Company's PCS subscribers will only be able to
roam into regions served by GSM-based PCS systems until dual-mode handsets
permitting them to use the existing cellular systems become available. See "Risk
Factors -- Risks Relating to GSM Technical Standard" and "-- Absence of PCS
Operating History in the United States; Handset Availability."
OTHER PRODUCTS AND SERVICES
Paging. Since the acquisition of its paging business in February 1996, the
Company has provided paging services in Washington, Oregon, Idaho, Montana,
Nebraska, South Dakota, North Dakota and Wyoming, and currently serves
approximately 24,000 customers. The Company markets paging services as a package
with its voice services. Revenues from paging are expected to account for less
than 3% of the Company's total revenues in 1996. The Company has construction
permits from the FCC to expand its paging services in states in which the
Company currently operates and has applications pending before the FCC to expand
its paging services into Nevada. The Company has reached reciprocal development
or reseller agreements for paging services with AT&T Wireless, AirTouch Paging,
PageNet, MobileMedia and others. See "Certain Transactions."
International. In 1995, the Company began pursuing licenses for wireless
services in markets outside the United States. The Company has joined
partnerships which have made wireless license applications. The Company is a
partner in a partnership that has an interest in a joint venture which has
obtained the GSM cellular license in Latvia. Generally, the Company intends to
work with experienced international operators and local companies and
individuals and own a minority interest in the venture. The Company currently
has joint development agreements or letters of intent with an affiliate of
Metromedia International Group Inc. in Eastern Europe, Matrix Telecommunications
Limited in Indonesia and Sun Hung Kai Properties Ltd. and ABC Communications,
Ltd. in Taiwan. The Company may commit capital and other resources to such
ventures from time to time as it deems appropriate and as permitted by the
Senior Secured Facilities. See "Description of Indebtedness."
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 with a well-trained
Company sales force.
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
507 cellular licensees in the 50 states with a combined estimated population of
over 183 million. The national advertising campaign conducted by the Cellular
One Group enhances the Company's advertising exposure at a fraction of the cost
of what could be achieved by the Company alone. The Company also obtains
substantial marketing benefits from the name recognition associated with this
widely used service mark, both with existing subscribers traveling outside the
Company's service areas and with potential new subscribers moving into the
Company's markets. If the name CELLULAR ONE were to suffer diminished marketing
appeal, the Company, in such circumstances or otherwise, may explore development
or
53
<PAGE> 54
acquisition of a new service mark. AT&T Wireless, which has been the single
largest user of the CELLULAR ONE brand name, has reduced its use of the brand
name as a primary service mark. See "Risk Factors -- Intellectual Property and
Branding."
The Company markets its PCS products and services under its proprietary
VoiceStream brand name. The Company commenced offering its PCS products and
services in Honolulu with newspaper, radio and television advertisements. 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 large
communications-intensive corporate and trade accounts, 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 110 local sales offices (which also
serve as retail sales locations) and utilizes a direct sales force of over 700
persons based out of these offices, who are trained to educate new customers on
the features of its products. The Company's training programs provide its sales
employees with an in-depth understanding of the Company's system, products and
services so that they, in turn, can provide extensive information to prospective
customers. 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, including Wal-
Mart, Best Buy and Radio Shack. The Company uses both product discounts and
commissions as a means of compensating its independent sales agents. 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 offers discounts on the price of handsets to its subscribers. The
Company operates 110 local sales offices in the U.S., including 95 under the
CELLULAR ONE brand name, 13 under the Phones-To-Go brand name and two under the
VoiceStream brand name. The Company negotiates volume discounts for the purchase
of handsets. To respond to competition and in accordance with general industry
practice, the Company has historically sold handsets below cost. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CUSTOMER SERVICE
Excellent customer service is an essential 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.
54
<PAGE> 55
The Company implements credit check procedures at the time of sale and
continuously monitors customer churn. The Company believes that it helps manage
its churn rate through an outreach program implemented through 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.
To ensure superior service, the Company engages a third-party marketing
research firm to perform customer satisfaction surveys.
SYSTEM EQUIPMENT, DEVELOPMENT AND EXPANSION
CELLULAR
The Company selects equipment that it believes provides reliable and high
quality performance characteristics. The Company generally employs Cell Site and
switching equipment manufactured by Lucent Technologies Inc. ("Lucent"),
currently an affiliate of AT&T, and NORTEL. The system design incorporates the
use of carefully selected sites to maximize the system coverage in rural areas.
Because it operates clusters of contiguous markets, the Company has designed
systems using higher-power sites. This type of system design requires fewer Cell
Sites and therefore lower capital expenditures, maintenance costs and operating
expenses. In many of its MSAs, the Company employs lower power, lower elevation
sites. In a few densely populated areas, the Company sectorizes and
directionalizes its Cell Sites to provide additional capacity. Most Lucent and
NORTEL Cell Sites operated by the Company have been built to accommodate digital
equipment.
The Company develops or builds out its cellular service areas by adding
channels to existing Cell Sites and by building new Cell Sites for the purpose
of increasing capacity and improving coverage in direct response to actual or
projected subscriber demand. Projections involve a traffic analysis of usage by
existing subscribers and an estimation of the number of additional subscribers
in each such area. The Company has historically met such demand through a
combination of augmenting channel capacity in existing Cell Sites and building
new Cell Sites. The Company's cellular systems cover over 93% of the population
in its markets and its systems are not currently capacity constrained. Cell Site
expansion to increase geographic coverage is expected to enable the Company to
continue to add subscribers, enhance use of its systems by existing subscribers,
increase roamer traffic due to the larger geographic area covered by the
cellular network and further enhance the overall efficiency of the network. The
Company believes that such increased cellular coverage will have a positive
impact on market penetration and subscriber usage.
The Company employs a large staff of technicians who are experienced and
trained in operating cellular systems and who will be trained to handle the PCS
systems. Currently, technicians are responsible for installing system equipment
and performing preventative maintenance and repairs. Standards for preventative
maintenance are determined and reviewed centrally by the engineering operations
staff. All Company systems are designed with built-in redundancy on critical
parts, thereby reducing the risk of service interruptions. Back-up battery
systems, and in some cases generators, exist at all Cell Sites and switching
locations. In addition, sites have fire, power and intrusion alarm systems which
have call-out systems and are monitored centrally. Through the use of
sophisticated monitoring equipment, technicians at the Company's service center
are able to remotely monitor the technical performance of all of the Company's
service areas.
PCS
The Company has selected the GSM standard for use in its PCS markets, and
has entered into supply agreements with NORTEL and Nokia to provide system
equipment and PCS and dual-mode handsets. See "Risk Factors -- Risks Relating to
GSM Technical Standard" and "-- Products and
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Services." The Company's system design incorporates the use of lower power,
lower elevation sites in densely populated areas.
In order for the Company's subscribers to roam into other PCS markets (and
vice versa), at least one PCS licensee in the other market must utilize the same
digital standard. As of the date hereof, six other PCS licensees have announced
that they intend to deploy GSM-based PCS systems, and one such licensee, APC,
has been operating a GSM system in the Washington/ Baltimore MTA since November
1995. Together, these PCS licensees and the Company hold licenses for 25 MTAs,
which cover markets containing approximately 149.2 million persons, representing
approximately 55.7% of the U.S. population. PCS operators in several markets
adjacent to the Company's PCS markets, including California, Minnesota, Nevada
and Missouri, have announced publicly that they intend to use the GSM standard.
PrimeCo and Sprint Spectrum have publicly announced that they intend to deploy
PCS systems based on a CDMA standard. AT&T Wireless and Southwestern Bell have
selected a TDMA standard. It is anticipated that, together, CDMA-based PCS
providers, including competitors in several of the Company's markets, will own
licenses covering approximately 87% of the U.S. population (based on 1990 U.S.
Census Bureau figures used by the FCC for auction purposes) and AT&T Wireless
and Southwestern Bell, with their TDMA standard, own PCS licenses which cover
approximately 45% of the U.S. population (based on 1990 U.S. Census Bureau
figures used by the FCC for auction purposes). In order for the Company's PCS
subscribers to roam in other markets, and vice versa, at least one PCS licensee
in the other market must utilize the GSM standard, or the subscribers must use
dual-mode handsets that would permit the subscriber to use the cellular system
in the other market. See "Risk Factors -- Risks Relating to GSM Technical
Standard."
The successful implementation of the PCS systems will be dependent, to a
significant degree, upon the Company's ability to lease or acquire sites for the
location of its base station equipment. The site selection process will require
the negotiation of lease or acquisition agreements for hundreds of sites for the
entire PCS systems, and will likely require the Company to obtain zoning
variances or other governmental approvals or permits. The Company has leased or
plans to lease over 600 sites in its seven MTAs. A complete engineering analysis
as to the usability of all of these sites has not been conducted. The Company
expects that the site acquisition process will continue throughout the build-out
of the PCS systems. See "Risk Factors -- PCS Build-out and Capital
Expenditures." In addition to site selection, the implementation of the
Company's PCS systems will involve construction, base station and equipment
installation and systems testing and may require that the Company relocate
existing licensees operating fixed microwave systems. See "Risk
Factors -- Relocation of Fixed Microwave Licensees."
The Company believes that its PCS systems will not experience any spectrum
capacity constraints in the foreseeable future and that it will not be necessary
to expand the system's capacity until after the build-out has been completed.
System capacity can be expanded by installing additional transmitters at the
existing sites and by adding additional base stations. Additional capacity
typically will be added in increments that parallel demand and at substantially
less than the proportionate cost of the initial system. The Company believes the
cost of this additional capacity will be highly competitive with the cellular
industry's cost of adding capacity for additional subscribers.
COMPETITION
The competition in the wireless communications industry is intense.
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 large, 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.
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The Company has one cellular competitor in each of its cellular markets
including CommNet, Lincoln Telecommunications Company, Kansas Cellular,
Southwestern Bell and U S WEST, and there will be up to six PCS licensees in
each of its markets. The Company's principal competitors in its PCS business are
PrimeCo, Sprint Spectrum and AT&T Wireless, as well as the two existing cellular
providers in its PCS markets. The Company also competes with paging, dispatch
and conventional mobile telephone companies, resellers and landline telephone
service providers. Potential users of cellular systems may, however, find their
communications needs satisfied by other current and developing technologies.
One- or two-way paging or beeper services that feature voice messaging and data
display as well as tone only service may be adequate for potential subscribers
who do not need to speak to the caller. In the future, cellular service may also
compete more directly with traditional landline telephone service providers. See
"Risk Factors -- Competition."
The Company's PCS business will directly compete in each market with up to
five other PCS providers, including Sprint Spectrum, AT&T Wireless and PrimeCo.
The Company will also compete with existing cellular service providers in its
PCS markets, many of which have been operational for a number of years and have
significantly greater financial and technical resources than those available to
the Company and who may upgrade their systems to provide comparable services in
competition with the Company's PCS systems. These cellular competitors include
AT&T Wireless, U S WEST and U.S. Cellular.
The FCC requires all cellular system operators to provide service to
"resellers." A reseller provides cellular service to customers but does not hold
an FCC cellular license or own cellular facilities. Instead, the reseller buys
blocks of cellular 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 cellular licensee's services and also a
competitor of that licensee. Several small resellers currently operate in
competition with the Company's systems.
The cost to the Company of PCS handsets initially will be higher than its
cost of cellular handsets. In order to compete effectively with sellers of
analog cellular handsets, the Company may have to subsidize the sale of its PCS
handsets to a greater extent than cellular handsets.
In the future, in its cellular and PCS markets the Company expects to face
increased competition from entities providing other communications technologies
and services. While some of these technologies and services are currently
operational, others are being developed or may be developed in the future. See
"Risk Factors -- Competition."
The FCC has licensed SMR dispatch system operators to construct digital
mobile communications systems on existing SMR frequencies, referred to as ESMR,
in many areas throughout the United States, including most of the areas in which
the Company operates. When constructed, ESMR systems could be competitive with
the Company's wireless service. As a result of advances in digital technology,
ESMR operators have begun to design and deploy digital mobile networks that
increase the frequency capacity of ESMR systems to a level that may be
competitive with that of wireless systems. A limited number of ESMR operators
have recently begun offering short messaging, data services and interconnected
voice telephony services on a limited basis. Several ESMR licensees have
recently announced their intention to merge into one company and plan to build
and operate digital mobile networks in most major United States markets.
The FCC has also allocated radio channels to a satellite system in which
transmissions from mobile units to satellites may augment or replace
transmissions to cellular or PCS cell sites. Several companies have announced
plans to design, construct, deploy and operate satellite-based
telecommunications systems worldwide. American Mobile Satellite Corporation has
designed a geosynchronous earth orbit satellite system for communications
services. That satellite has recently begun providing voice services. Several
low earth orbit ("LEO") satellite systems have been proposed that would use
multiple satellites to provide worldwide coverage. The first LEO system is
proposed for service in 1998. In addition, others have applied to the FCC for
licenses to operate satellite
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communications and video transmission systems in the 28 GHz Ka band. The Company
does not currently view such systems as direct competitors.
Continuing technological advances in communications and FCC policies that
encourage the development of new spectrum-based technologies may result in new
technologies that compete with cellular and PCS systems. In addition, the
Omnibus Budget Reconciliation Act of 1993 requires, among other things, the
allocation to commercial use of a portion of 200 MHz of the spectrum currently
reserved for government use. It is possible that some portion of the spectrum
that is reallocated will be used to create new land-mobile services or to expand
existing land-mobile services.
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, as amended from time to time, and the rules,
regulations and policies promulgated by the FCC thereunder (the "Communications
Act").
LICENSING OF CELLULAR COMMUNICATIONS SYSTEMS
A cellular communications system operates under a protected geographic
service area license granted by the FCC for a particular market on one of two
frequency blocks allocated for cellular service. One license for each market was
initially awarded to a company or group that was affiliated with a local
landline telephone carrier in such market and is called the wireline or "B" band
license and the other license is called the non-wireline or "A" band license.
Following notice of completion of construction, a cellular operator obtains
initial operating authority. Cellular authorizations are issued generally for a
10-year term beginning on the date of the grant of the initial construction
permit. Under FCC rules, the authorized service area of a cellular provider in
each of its markets is referred to as the Cellular Geographic Service Area or
CGSA. A cellular licensee has the exclusive right to serve the entire area that
falls within the licensee's MSA or RSA for a period of five years after grant of
the licensee's construction permit. At the end of the five-year period, however,
the licensee's exclusive CGSA rights become limited to the area actually served
by the licensee as of that time, as determined pursuant to a formula adopted by
the FCC. After the five-year period any entity may apply to serve portions of
the MSA or RSA not being served by the licensee. The five-year exclusivity
period has expired for most licensees and parties have filed unserved area
applications, including some in the Company's markets.
Near the conclusion of the 10-year license term, licensees must file
applications for renewal of licenses to obtain authority to renew their license.
The FCC has adopted specific standards to apply to cellular renewals, under
which standard the FCC will award a renewal expectancy to a cellular licensee
that (i) has provided substantial service during its past license term and (ii)
has substantially complied with applicable FCC rules and policies and the
Communications Act. Violations of the Communications Act or the FCC's rules
could result in license revocations, forfeitures or fines.
Cellular radio service providers also must satisfy a variety of FCC
requirements relating to technical and reporting matters. One such requirement
is the coordination of proposed frequency usage with adjacent cellular users,
permittees and licensees in order to avoid electrical interference between
adjacent systems. In addition, the height and power of base station transmitting
facilities and the type of signals they emit must fall within specified
parameters. The FCC has also provided guidelines respecting cellular service
resale practices and the terms under which certain ancillary services may be
provided through cellular facilities.
Cellular and PCS systems are subject to certain FAA regulations respecting
the location, lighting and construction of transmitter towers and antennae and
may be subject to regulation under the National Environmental Policy Act and the
environmental regulations of the FCC. State or local
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zoning and land use regulations also apply to the Company's activities. The
Company uses common carrier point to point microwave facilities to connect Cell
Sites and to link them to the main switching office. These facilities are
separately licensed by the FCC and are subject to regulation as to technical
parameters and service.
The Communications Act preempts state and local regulation of the entry of,
or the rates charged by, any provider of commercial mobile radio service
("CMRS") or any private mobile radio service ("PMRS"), which includes cellular
(and PCS) service. Notwithstanding such preemption, a state may petition the FCC
for authority to regulate the rates for any CMRS, and California, Hawaii and
Wyoming, where the Company provides service, have done so. However, the State of
Wyoming withdrew its petition on its own motion, and the FCC denied the
California and Hawaii petitions, as well as a California petition for
reconsideration.
TRANSFERS AND ASSIGNMENTS OF CELLULAR LICENSES
The Communications Act and FCC rules require the FCC's prior approval of
the assignment or transfer of control of a construction permit or license for a
cellular system. Subject to FCC approval, a license or permit may be transferred
from a nonwireline entity to a wireline entity, or vice versa. Non-controlling
interests in an entity that holds a cellular license or cellular system
generally may be bought or sold without prior FCC approval. Any acquisition or
sale by the Company of cellular interests may also require the prior approval of
the Federal Trade Commission and the Department of Justice, if over a certain
size, as well as any state or local regulatory authorities having competent
jurisdiction.
In addition, the FCC's rules prohibit the alienation of any ownership
interest in an RSA application, or an entity holding such an application, prior
to the grant of a construction permit. For unserved cellular areas, no change of
control may take 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 sale 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.
Under the FCC's rules, there are three separate spectrum aggregation limits
affecting broadband PCS licensees. Under the first rule, a broadband PCS
licensee may own combinations of PCS licenses (e.g., one MTA (30 MHz) and one
BTA (10 MHz)) with total aggregate spectrum coverage of up to 40 MHz in a single
geographic area. The second rule provides that no cellular
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licensee will be allowed to own more than one 10 MHz PCS license (i.e.,
ownership of a 30 MHz PCS license is prohibited) covering territory, ten percent
or more of the population of which is within the CGSAs represented by that
entity's cellular licenses. This cellular/PCS cross-ownership restriction is
currently the subject of further rulemaking proceedings following a successful
court challenge described below. Finally, 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, which upon acquisition of the Denver MTA will
result in the Company exceeding the FCC's current cellular/PCS and 45 MHz CMRS
cross-ownership restrictions described above. The Company has a period of time
after acquisition of the Denver MTA in which to comply with these ownership
restrictions. In the event that these restrictions are imposed, the Company will
be obligated to divest sufficient portions of its PCS markets or its cellular
holdings to come into compliance with the rules. The Company does not believe
such restrictions or any actions the Company is required to take to comply
therewith will have a material adverse effect on the Company.
When mutually exclusive applications (i.e., two or more applications
competing for the same service in the same geographic area) are filed for the
same MTA or BTA, those licenses will be awarded pursuant to auctions. The FCC
has adopted comprehensive rules that outline the bidding process, describe the
bidding application and payment process, establish penalties for certain bid
withdrawals, default or disqualification, establish regulatory safeguards,
reserve two of the six frequency blocks (the C and F Blocks) for "entrepreneurs"
and small businesses and in the case of one of the blocks (the F Block) provide
certain preferences for women and minority-owned and small businesses.
The FCC has already completed the auction of the A and B Block licenses,
and the winning bidders' licenses were granted on June 23, 1995. Although all of
the MTA PCS licenses, including those of the Company, have been awarded by the
FCC, and the licensees are permitted to construct and operate their PCS systems,
the licenses have not been issued by a grant that is "final" because of pending
actions before the FCC challenging the validity of the A and B Block auctions.
These actions fall into two categories: (i) those stemming from the November 9,
1995 decision of the United States Court of Appeals for the Sixth Circuit in
Cincinnati Bell Telephone Company, Inc. v. FCC, 69 F.3d 752, which held that the
FCC's cellular eligibility restriction and the twenty percent bright line
cellular attribution standard were arbitrary and remanded the rules to the FCC
for further proceedings, and (ii) those claiming that the delay in the C Block
broadband PCS auction gave the A and B Block PCS licensees an unfair headstart
over subsequent licensees. The Cincinnati Bell decision raises a possibility
that all of the PCS auctions could be invalidated, including the A and B Blocks.
As to the actions claiming unfair headstart, the FCC recently affirmed the
grants of the A and B Block licenses. The time for filing an appeal or petition
for reconsideration of the FCC's affirmance of the grants ended on May 1, 1996,
and no appeals or petitions for reconsideration have been filed in the
appropriate court or with the FCC. As a result of the challenges, although it
currently appears unlikely, the Company could lose its PCS licenses or have
adverse conditions imposed on them, and in such event the loss resulting from
any adverse conditions or, in the case of license revocation, from its costs and
expenses in bidding for and obtaining the licenses and in beginning the site
acquisition and build-out of its PCS systems could have a material adverse
effect on the Company. See "Risk Factors -- Finality of PCS Auctions."
The auction of C Block licenses commenced on December 18, 1995 and was
completed on May 6, 1996. As described above, on November 9, 1995, the U.S.
Court of Appeals for the Sixth Circuit held that the FCC had not adequately
justified certain FCC rules relating to the eligibility of cellular licensees
and investors to hold, or invest in the holders of, PCS licenses. The court
remanded the rules to the FCC for further consideration consistent with the
court's opinion. On
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March 20, 1996, the FCC released a Notice of Proposed Rule Making to reexamine
the cellular eligibility rules and certain other PCS rules. The Company cannot
predict the outcome of such reconsideration or its impact on the C Block auction
or the PCS licensing and regulatory scheme generally.
All PCS licenses will be granted for a 10-year period, at the end of which
they must be renewed. The FCC has adopted specific standards to apply to PCS
renewals, under which the FCC will award a renewal expectancy to a PCS licensee
that (i) has provided substantial service during its past license term and (ii)
has substantially complied with applicable FCC rules and policies and the
Communications Act. All 30 MHz broadband PCS licensees, including the Company,
must construct facilities that offer coverage to one-third of the population of
their service area within five years of their initial license grants and to
two-thirds of the population within ten years. Licensees that fail to meet the
coverage requirements may be subject to forfeiture of the license. FCC rules
restrict the voluntary assignments or transfers of control of C and F Block
licenses. No assignments or transfers affecting control are permitted during the
first three years of the license term. During the fourth and fifth years, any
proposed assignee or transferee must 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 the proposed assignee or
transferee must hold other licenses for C and F Blocks and, at the time of
receipt of such licenses, have met the same eligibility criteria. Any transfers
or assignments during the entire 10 year initial license term are subject to
unjust enrichment penalties, i.e., forfeiture of any bidding credits and
acceleration of any installment payment plans should the assignee or transferee
not qualify for the same benefits. The FCC has a Notice of Proposed Rule Making
pending in which it is soliciting comment on the lifting of restrictions on
transfer and assignment, but only as to F Block licenses. In the case of the C
and F Blocks, the FCC will conduct random audits to ensure that licensees are in
compliance with the FCC's eligibility rules. Violations of the Communications
Act or the FCC's rules could result in license revocations, forfeitures or
fines.
For a period of up to five years after the grant of a PCS license (subject
to extension), a PCS licensee will be required to share spectrum with existing
licensees that operate certain fixed microwave systems within its license area.
To secure a sufficient amount of unencumbered spectrum to operate its PCS
systems efficiently and with adequate population coverage, the Company will need
to relocate many of these incumbent licensees. In an effort to balance the
competing interests of existing microwave users and newly authorized PCS
licensees, the FCC has adopted a transition plan to relocate such microwave
operators to other spectrum blocks. This transition plan allows most microwave
users to operate in the PCS spectrum for a two-year voluntary negotiation period
and an additional one-year mandatory negotiation period. For public safety
entities dedicating a majority of their system communications for police, fire
or emergency medical services operations, the voluntary negotiation period is
three years, with an additional two-year mandatory negotiation period. 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 Company has already
reached agreements with some of the microwave incumbents affecting the Company's
PCS systems; however, there can be no assurance that the Company will be
successful in reaching timely agreements with the remaining existing microwave
licensees needed to construct and operate its PCS systems or that any such
agreements will be on terms favorable to the Company. See "Risk
Factors -- Relocation of Fixed Microwave Licensees" and "-- Finality of PCS
Auctions."
TRANSFERS AND ASSIGNMENTS OF PCS LICENSES
The Communications Act and FCC rules require the FCC's prior approval of
the assignment or transfer of control of a license for a PCS system. In
addition, the FCC has established transfer disclosure requirements that require
licensees who transfer control of or assign a PCS license within the first three
years of their license term to file associated contracts for sale, option
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agreements, management agreements or other documents disclosing the total
consideration that the licensee would receive in return for the transfer or
assignment of its license. Non-controlling interests in an entity that holds a
PCS license or PCS system generally may be bought or sold without FCC approval.
Any acquisition or sale by the Company of PCS interests may also require the
prior approval of the Federal Trade Commission and the Department of Justice if
over a certain size, as well as state or local regulatory authorities having
competent jurisdiction.
FOREIGN OWNERSHIP
Under existing law, no more than 20% of an FCC licensee's capital stock may
be owned, directly or indirectly, or voted by non-U.S. citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation. Because the Company itself does not hold any FCC license but
instead controls other companies which themselves hold the licenses (which is
the current and intended structure), up to 25% of the Company's capital stock
may be owned or voted by non-U.S. citizens or their representatives, by a
foreign government or its representatives or by a foreign corporation. Alien
ownership above the 25% level may be allowed should the FCC find such higher
levels not inconsistent with the public interest. If foreign ownership of the
Company were to exceed the 25% level, the FCC could revoke the Company's FCC
licenses, although the Company could seek a declaratory ruling from the FCC
allowing the foreign ownership or take other actions to reduce the Company's
foreign ownership percentage in order to avoid the loss of its licenses. The
Company has no knowledge of any present foreign ownership in violation of these
restrictions.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the Telecommunications Act of 1996 (the
"Telecommunications Act") was signed into law, substantially revising the
regulation of communications. The goal of the Telecommunications Act is to
enhance competition and remove barriers to market entry, while deregulating the
communications industry to the greatest extent possible. To this end, local and
long-distance communications providers will, for the first time, be able to
compete in the other's market, and telephone and cable companies will likewise
be able to compete. To facilitate the entry of new carriers into existing
markets, the Telecommunications Act imposes certain interconnection and equal
access requirements on incumbent carriers. Additionally, all communications
carriers providing interstate communications services must contribute to the
federal universal service support mechanisms that the FCC will establish. The
Company cannot predict the outcome of the FCC's rulemaking proceedings to
promulgate regulations to implement the new law or the effect of the new
regulations on cellular service or PCS, and there can be no assurance that such
regulations will not adversely affect the Company's business or financial
condition.
At present, cellular providers, other than the regional Bell operating
companies, have the option of using only one designated long distance carrier.
The Telecommunications Act codifies the policy that CMRS providers will not be
required to provide equal access to long distance carriers. The FCC, however,
may require CMRS carriers to offer unblocked access (i.e., implemented by the
subscriber's use of a carrier identification code or other mechanisms at the
time of placing a call) to the long distance provider of a subscriber's choice.
The FCC has recently terminated its inquiry into the imposition of equal access
requirements on CMRS providers.
INTELLECTUAL PROPERTY
CELLULAR ONE is a service mark registered with the United States Patent and
Trademark Office. The service mark is owned by Cellular One Group, a Delaware
general partnership comprised of Cellular One Marketing, Inc., a subsidiary of
Southwestern Bell Mobile Systems, together with Cellular One Development, Inc.,
a subsidiary of AT&T and Vanguard Cellular Systems, Inc. The Company uses the
CELLULAR ONE service mark to identify and promote its cellular telephone service
pursuant to licensing agreements with Cellular One Group. In 1995, the Company
paid approximately $115,000 and $100,000, respectively, in licensing and
advertising fees under
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these agreements. The licensing agreements require the Company to provide
high-quality cellular telephone service to its customers, and to maintain a
certain minimum overall customer satisfaction rating in surveys commissioned by
Cellular One Group. The licensing agreements that the Company has entered into
are for original five-year terms expiring on various dates. Assuming compliance
by the Company with the provisions of the agreements, each of these agreements
may be renewed at the Company's option for three additional five-year terms.
Western Wireless is a service mark owned by the Company registered with the
United States Patent and Trademark Office. The Company has applications pending
to obtain federal trademark protection of the mark "VoiceStream," and various
derivatives thereof. "Telewaves(R)," 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 March 31, 1996, the Company employed a total of 1,372 people in
the following areas:
<TABLE>
<CAPTION>
NUMBER OF
CATEGORY EMPLOYEES
------------------------------------------------------------------------- ---------
<S> <C>
Sales and marketing...................................................... 791
Engineering.............................................................. 203
General and administration, including customer service................... 378
</TABLE>
PROPERTIES
In addition to the direct and attributable interests in cellular, PCS and
paging licenses and other similar assets discussed in this Prospectus, the
Company leases its principal executive offices (consisting of approximately
61,000 square feet) located in Issaquah, Washington. The Company and its
subsidiaries and affiliates lease and own locations for inventory storage,
microwave, cell site and switching equipment and sales and administrative
offices.
LEGAL PROCEEDINGS
There are no material, pending legal proceedings to which the Company or
any of its subsidiaries or affiliates is a party or of which any of their
property is subject which, if adversely decided, would have a material adverse
effect on the Company. For discussion of certain legal proceedings relating to
FCC license grants, see "Risk Factors -- Governmental Regulation," "-- Finality
of PCS Auctions" and "-- Governmental Regulation."
ORGANIZATION
The Company conducts its operations through a number of direct and indirect
subsidiaries and affiliates. The Company holds its FCC licenses and conducts all
operations through wholly-owned subsidiaries. Five of the Company's MSAs have
minority ownership interests held by non-affiliated third parties. The total
ownership of such minority interest holders in such subsidiaries and affiliates
ranges from less than one percent to approximately eight percent. An indirect
wholly-owned subsidiary of the Company is the 49.9% limited partner of Cook
Inlet PCS. See "Risk Factors -- Holding Company Structure," "-- Governmental
Regulation," "The Company -- Recent Developments" and "Certain Transactions."
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DESCRIPTION OF INDEBTEDNESS
Set forth below is a description of certain terms of the Company's Senior
Secured Facilities and the Senior Subordinated Notes. See also "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
CREDIT FACILITY
The Company has a $950 million Credit Facility with a consortium of
financial institutions. The following summary of the material terms and
provisions of the Credit Facility does not purport to be complete and is subject
to and qualified in its entirety by reference to the Credit Facility, a copy of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Pursuant to the Credit Facility, the lenders have agreed to make loans to
the Company (the "Loans"), on a revolving credit basis, in the aggregate
principal amount not to exceed $750 million outstanding at any time through
December 31, 1999 at which time the then outstanding principal amount of the
Loans converts to a five year term loan. The Company's ability to borrow funds
under the Credit Facility is subject to compliance with certain operating
covenants set forth therein. The principal amount thereof is required to be
amortized in the following percentages during the five year period commencing on
January 1, 2000 and terminating on December 31, 2004: 7%, 13%, 20%, 30% and 30%.
The Credit Facility also includes a $200 million term loan. Such term loan is
required to be amortized in the following amounts during the five year period
beginning April 1, 2000 and terminating on March 31, 2005: $1,000,000,
$1,000,000, $1,000,000, $1,000,000 and $196,000,000. The term loan is subject to
and otherwise governed by the terms and conditions of the Credit Facility.
Revolving credit borrowings under the Credit Facility bear interest, at the
Company's option, at an annual rate of interest equal to either (i) the greater
of (x) the prime rate of The Toronto-Dominion Bank, New York Branch, or (y) the
Federal Funds rate plus 5/8%, (ii) a Eurodollar rate or (iii) a CD rate, in each
instance plus an applicable margin. Such applicable margin ranges from 0.50% to
1.50%, in the case of Loans based on the prime rate or Federal Funds rate, 1.50%
to 2.50%, in the case of Loans based on a Eurodollar rate, and 1.75% to 2.75% in
the case of Loans based on a CD rate, in each case based upon the leverage ratio
of the Company and certain of its subsidiaries. The term loan under the Credit
Facility bears interest at a Eurodollar rate plus 2.75%. The Company has entered
into five long-term interest rate swap and cap agreements with a total notional
amount of $205 million and one short-term interest rate swap with a notional
amount of $185 million. As of March 31, 1996, the weighted average interest rate
under these agreements was approximately 6.3%.
The Credit Facility contains affirmative covenants of the Company,
including, among others, maintenance of its licenses and properties, compliance
with laws, insurance, payment of taxes, payment of other indebtedness, the
entering into of interest rate hedging agreements and delivery of financial and
other information. The Credit Facility requires that the Company and certain of
its subsidiaries comply with certain financial tests and maintain certain
financial ratios. The financial ratio covenants in the Credit Facility include,
among others, a limitation on the incurrence of indebtedness based on the ratio
of the Company's indebtedness to operating cash flow (as defined in the Credit
Facility) and a requirement that the Company's ratio of operating cash flow to
cash interest expense be not less than specified levels. In addition, the
Company is required to make certain repayments of the Credit Facility from
certain asset sales and excess cash flow. The Credit Facility also contains
restrictive covenants which impose restrictions and/or limitations on the
operations and activities of the Company and certain of its subsidiaries,
including, among others, the incurrence of indebtedness, the creation or
incurrence of liens, the sale of assets, investments and acquisitions, mergers,
declaration or payment of dividends on or other payments or distributions to
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<PAGE> 65
shareholders or material transactions with an affiliate on terms less favorable
than those obtainable from a nonaffiliate.
The Credit Facility currently limits total investment by the Company in its
subsidiaries owning PCS licenses to $450 million from and after May 6, 1996,
plus the proceeds of the Offerings, other equity issuances by the Company after
May 6, 1996 and $14.0 million, provided, however, that the Credit Facility also
limits the total investment by the Company in its subsidiaries owning PCS
licenses to $100 million from and after May 6, 1996 plus the proceeds of the
Debt Offering, the Offerings, other equity issuances by the Company after May 6,
1996 and $14.0 million until the PCS licenses are final. See "Risk
Factors -- Finality of PCS Auctions."
The Credit Facility provides for various events of default, including,
without limitation, interest and payment defaults, breach of the Company's
covenants, agreements, representations and warranties under the Credit Facility,
cross defaults to certain other indebtedness, judgments in excess of $1 million
which remain undischarged for a period of 30 days, certain events relating to
bankruptcy or insolvency, revocation of any material FCC license, the failure of
Mr. Stanton, Ms. Gillespie and certain related entities to own in the aggregate
3,100,000 (1,550,000 after December 31, 1996) shares of Common Stock, or Mr.
Stanton ceasing, for any reason, to be the Chairman of the Company's Board of
Directors, unless a successor acceptable to the requisite percentage of lenders
pursuant to the Credit Facility is appointed within 60 days of the date Mr.
Stanton ceases to be Chairman.
The repayment of the Loans is secured by, among other things, the grant of
a security interest in all of the assets of the Company excluding, among other
things, the capital stock and assets of Western PCS II Corporation, a
wholly-owned indirect subsidiary of the Company ("Western PCS II"), that are
pledged to NORTEL pursuant to the NORTEL Facility. Western PCS II currently
holds the Company's PCS licenses for the Honolulu, Salt Lake City and El
Paso/Albuquerque MTAs as well as certain related PCS assets. Western PCS II may
become the holder of the Company's license for the Denver MTA upon consummation
of the purchase thereof. See "Business -- Introduction," "-- Governmental
Regulation - Licensing of PCS Systems" and "-- NORTEL Facility."
NORTEL FACILITY
In connection with the Project and Supply Agreement between Western PCS
Corporation, a wholly owned subsidiary of the Company ("Western PCS"), and
NORTEL, Western PCS II entered into a $200 million NORTEL Facility. The
following summary of the material terms and provisions of the NORTEL Facility
does not purport to be complete and is subject to and qualified in its entirety
by reference to the NORTEL Facility, a copy of which is filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
Pursuant to the NORTEL Facility, NORTEL has agreed to make loans to Western
PCS II (the "NORTEL Loans"), on a revolving credit basis, in an aggregate
principal amount not to exceed $200 million outstanding at any time through June
30, 2000. On such date the then outstanding principal amount of the NORTEL Loans
convert to a three and one-half year term loan with the final payment due on
December 31, 2003. Western PCS II's ability to borrow funds under the NORTEL
Facility is subject to compliance with certain operating covenants set forth
therein. Borrowings under the NORTEL Facility also are limited based on formulas
related to the amount of purchases under the Project and Supply Agreement and
the amount of purchases of PCS equipment from NORTEL or other vendors for use in
Western PCS II's PCS systems. The NORTEL Facility currently limits borrowings to
$76.8 million until the PCS licenses are final. The Company expects to amend the
NORTEL Facility to remove such condition. See "Risk Factors -- Finality of PCS
Auctions."
Borrowings under the NORTEL Facility bear interest, at Western PCS II's
option, at an annual rate of interest equal to either (i) the greater of (x) the
prime rate of The Toronto-Dominion Bank, New York Branch, or (y) the Federal
Funds rate plus 5/8%, plus in either event 1.50%, or (ii) the LIBOR rate plus
2.50%.
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<PAGE> 66
The NORTEL Facility contains affirmative covenants of Western PCS II,
including, among others, maintenance of its licenses and properties, compliance
with laws, insurance, payment of taxes, payment of other indebtedness and
delivery of financial and other information. The NORTEL Facility requires that
Western PCS II comply with certain financial tests and maintain certain
financial ratios. The NORTEL Facility contains, among others, covenants of
Western PCS II relating to minimum gross revenues and the ratio of cash coverage
(as defined in the NORTEL Facility) to operating cash flow (as defined in the
NORTEL Facility). In addition, Western PCS II is required to make certain
repayments of the NORTEL Facility from certain asset sales and excess cash flow.
The NORTEL Facility also contains certain restrictive covenants which impose
restrictions and/or limitations on the operations and activities of Western PCS
II including, among other things, the incurrence of indebtedness, the creation
or incurrence of liens, the sale of assets, investments or acquisitions,
mergers, declaration or payment of dividends on or other payments or
distributions to its stockholder or material transactions with an affiliate on
terms less favorable than those obtainable from a non-affiliate.
The NORTEL Facility provides for various events of default including,
without limitation, interest and payment defaults, breach of Western PCS II's
covenants, agreements, representations and warranties under the NORTEL Facility,
cross defaults to certain other indebtedness, including the Credit Facility,
judgments in excess of $1 million which remain undischarged for a period of 30
days, bankruptcy or similar proceedings, revocation of any material FCC license,
the termination of the Project and Supply Agreement prior to the satisfaction of
certain conditions and the failure of the Company to beneficially own and
control, directly or indirectly, a majority of Western PCS II's capital stock or
shares entitling the Company to elect a majority of Western PCS II's board of
directors.
The repayment of the NORTEL Loans is secured by, among other things, a
pledge of all of the outstanding capital stock and a grant of a security
interest in all of the assets of Western PCS II to NORTEL.
SENIOR SUBORDINATED NOTES
The Company is offering $200 million principal amount of 10 1/2% Senior
Subordinated Notes Due 2006 in the Debt Offering for estimated net proceeds of
$193.1 million. The Senior Subordinated Notes will be issued pursuant to the
Indenture. See "Use of Proceeds."
The Senior Subordinated Notes mature in 2006. Interest on the Senior
Subordinated Notes will accrue and be payable semi-annually. The Senior
Subordinated Notes are callable after 2001 and prior thereto under certain
circumstances. The Credit Facility prohibits the repayment of all or any portion
of the principal amount of the Senior Subordinated Notes prior to the repayment
of all indebtedness under the Credit Facility. See "Description of
Indebtedness -- Credit Facility."
The Indenture relating to the Senior Subordinated Notes contains, among
others, covenants with respect to incurrence of indebtedness, preferred stock of
subsidiaries, restricted payments, distributions and transfers by subsidiaries,
subordinated liens, certain asset dispositions, issuances and sales of capital
stock of wholly-owned subsidiaries, transactions with affiliates and related
persons and mergers, consolidations and certain sales of assets. The
indebtedness covenant limits the incurrence of indebtedness by the Company based
on the Company's ratio of indebtedness to EBITDA; provided, however, that such
limitation does not prohibit, among other exceptions, indebtedness incurred or
committed by the Company for the acquisition, construction or improvement of
assets in the wireless communications business.
The Senior Subordinated Notes are subordinate in right of payment to the
Credit Facility and the NORTEL Facility.
The closing of the Debt Offering is conditioned on the closing of the
Offerings. The closing of the Offerings is not conditioned on the closing of the
Debt Offering.
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<PAGE> 67
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
The names, ages and positions of the executive officers and directors 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. The Company's Board of Directors currently
consists of six directors and one board seat that is vacant. Directors are
elected at the annual meeting of shareholders to serve until they resign or are
removed, or are otherwise disqualified to serve, or until their successors are
elected and qualified. Executive officers of the Company are appointed at the
Board's first meeting after each annual meeting of shareholders. No family
relationships exist among any of the directors or executive officers of the
Company, except for Mr. Stanton and Ms. Gillespie, who are married to each
other. See "-- Board of Directors."
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- --- -------------------------------
<S> <C> <C>
John W. Stanton.................................... 40 Chairman, Director and Chief
Executive Officer
Donald Guthrie..................................... 40 Vice Chairman
Robert R. Stapleton................................ 38 President
Mikal J. Thomsen................................... 40 Chief Operating Officer
Theresa E. Gillespie............................... 43 Chief Financial Officer
Alan R. Bender..................................... 41 Secretary, Senior Vice
President and General Counsel
Cregg B. Baumbaugh................................. 39 Senior Vice President --
Corporate Development
Timothy R. Wong.................................... 40 Vice President -- Engineering
Bradley J. Horwitz................................. 40 Vice President -- International
Nastashia Stoneman Press........................... 35 Principal Accounting Officer
David A. Bayer..................................... 56 Director
John L. Bunce, Jr.................................. 37 Director
Mitchell R. Cohen.................................. 32 Director
Jonathan M. Nelson................................. 39 Director
Terence M. O'Toole................................. 37 Director
</TABLE>
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 each of Interpoint, Inc. and SmarTone
(Hong Kong). In addition, Mr. Stanton is a trustee of Whitman College, a private
college. Mr. Stanton is currently a director of the CTIA. Mr. Stanton is married
to Ms. Gillespie.
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Donald Guthrie has been Vice Chairman of the Company since November 1995.
From 1986 to October 1995, he served as Senior Vice President and Treasurer of
McCaw and, from 1990 to October 1995, he served as Senior Vice
President -- Finance of LIN Broadcasting.
Robert R. Stapleton has been President of the Company since its formation
in July 1994, and President of GCC since November 1992. From August 1989 to
November 1992, he served in various positions with GCC, including Chief
Operating Officer and Vice President of Operations. From 1984 to 1989, Mr.
Stapleton was employed by mobile communications subsidiaries of Pacific Telesis,
Inc., which now are affiliated with AirTouch Communications.
Mikal J. Thomsen has been Chief Operating Officer of the Company since its
formation in July 1994. Mr. Thomsen was a director and Chief Operating Officer
of MCLP and its predecessor from its inception in 1991 until the Company's
formation in July 1994. From 1983 to 1991, Mr. Thomsen held various positions at
McCaw, serving as General Manager of its International Division from 1990 to
1991 and as General Manager of its West Florida Region from 1987 to 1990.
Theresa E. Gillespie has been 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. Ms. Gillespie is married
to Mr. Stanton.
Alan R. Bender has been Secretary, Senior Vice President and General
Counsel of the Company since its formation in July 1994. Mr. Bender joined GCC
in April 1990, as Senior Counsel, and was named Secretary in June 1990, General
Counsel in August 1990 and Vice President in March 1992. From 1988 to 1990, Mr.
Bender was Vice President and Senior Counsel of Equitec Financial Group, Inc., 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.
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.
Nastashia Stoneman Press has been Principal Accounting Officer since
December 1995. Ms. Press was Controller of the Company from its formation in
July 1994 to December 1995, and Controller of MCLP from April 1992 to the
Company's formation in July 1994. From 1989 to 1992, Ms. Press was Controller of
Institutional Communications Company. From 1983 to 1989, she held various
accounting and finance positions at MCI Communications Corporation.
David A. Bayer has been a director of the Company since its formation in
July 1994. Mr. Bayer was a director of GCC from February 1993 to December 1995.
Since November 1991, Mr. Bayer has been the President and owner of dbX
Corporation. Mr. Bayer currently is a director of MobileMedia Corporation
("MobileMedia").
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John L. Bunce, Jr. has been a director of the Company since its formation
in July 1994. Mr. Bunce was a director of GCC from March 1992 to December 1995.
Mr. Bunce is a general partner of Hellman & Friedman, a private investment firm,
having joined Hellman & Friedman as an associate in 1988. Mr. Bunce currently is
a director of MobileMedia.
Mitchell R. Cohen has been a director of the Company since its formation in
July 1994. Mr. Cohen was a director of GCC from March 1992 to December 1995. Mr.
Cohen is a general partner of Hellman & Friedman, having joined Hellman &
Friedman as an associate in July 1989. From 1986 to 1989, Mr. Cohen was employed
by Shearson Lehman Hutton, Inc. Mr. Cohen currently is a director of MobileMedia
and Matrix Telecommunications Limited.
Jonathan M. Nelson has been a director of the Company since its formation
in July 1994. Mr. Nelson is a managing general partner of Providence Ventures,
L.P., the general partner of the general partner of Providence Media Partners
L.P. ("Providence"), a private equity fund. Since 1986, Mr. Nelson has been a
managing director of Narragansett Capital, Inc., a private management company
for three separate equity investment funds. Mr. Nelson is currently a director
of Wellman, Inc., Brooks Fiber Properties Inc. and CellNet Data Systems.
Terence M. O'Toole has been a director of the Company since its formation
in July 1994. Mr. O'Toole joined Goldman, Sachs & Co. ("Goldman Sachs") in 1983
and became a Vice President in April 1988 and a general partner in November
1992. He is currently a director of Insilco Corporation, a diversified
industrial holding company.
GCC filed a voluntary petition for bankruptcy under Chapter 11 of the
United States Bankruptcy Code in October 1991 and, pursuant to a pre-packaged
plan, emerged from bankruptcy in March 1992 under the controlling ownership of
the Hellman & Friedman Entities. Mr. Stapleton and Mr. Bender at the time of the
filing of the voluntary petition were executive officers of GCC, continue to be
executive officers of GCC and now concurrently serve as executive officers of
the Company.
BOARD OF DIRECTORS
Each member of the Board of Directors has been elected pursuant to a
stockholders agreement among certain of the Company's principal shareholders
entered into in connection with the Business Combination (the "Stockholders
Agreement"). Under the terms of the Stockholders Agreement, the current Board of
Directors consists of the Company's Chief Executive Officer (John W. Stanton),
three designees of Hellman & Friedman (John L. Bunce, Jr., Mitchell R. Cohen and
David A. Bayer), one designee of Goldman Sachs (Terence M. O'Toole), one
designee of Providence (Jonathan M. Nelson) and one designee selected by
Providence and Mr. Stanton (which position is currently vacant). The provisions
of the Stockholders Agreement, other than provisions providing for registration
rights, will terminate on the closing of the Offerings. Certain of such
shareholders will be parties to a new Shareholders Agreement relating to the
election of directors. See "Certain Transactions."
The Executive Committee is currently comprised of Messrs. Stanton, Bunce
and O'Toole, and the Compensation Committee is currently comprised of Messrs.
Cohen, Nelson and Bayer. The Audit Committee is currently comprised of Messrs.
Cohen, Nelson and Bayer and is responsible for recommending to the Board of
Directors the engagement of the independent public accountants of the Company
and reviewing with the independent public accountants the scope and results of
the audits, the internal accounting controls of the Company, audit practices and
the professional services furnished by the independent public accountants.
The Washington Business Corporation Act (the "Washington Business Act")
provides that a company may indemnify its directors and officers as to certain
liabilities. The Company's Articles of Incorporation and Bylaws provide for the
indemnification of its directors and officers to the fullest extent permitted by
law, and the Company intends to enter into separate indemnification agreements
with each of its directors and officers to effectuate these provisions, and to
purchase director's and officer's liability insurance. The effect of such
provisions is to indemnify the directors and officers of the Company against all
costs, expenses and liabilities incurred by them in
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connection with any action, suit or proceeding in which they are involved by
reason of their affiliation with the Company, to the fullest extent permitted by
law.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid in 1995 to the
Company's Chief Executive Officer and the Company's five other most highly
compensated executive officers (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
BONUS OPTIONS/SARS COMPENSATION(1)
NAME AND PRINCIPAL POSITION SALARY ($) ($) (#) ($)
- ------------------------------------ ---------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
John W. Stanton..................... $120,000 $180,000 0 $ 4,500
Chairman & Chief Executive Officer
Robert R. Stapleton................. 139,461 100,000 139,500 4,500
President
Mikal J. Thomsen.................... 134,375 65,000 124,000 4,500
Chief Operating Officer
Theresa E. Gillespie................ 119,167 80,000 100,750 4,500
Chief Financial Officer
Alan R. Bender...................... 124,000 72,000 77,500 4,500
Secretary, Senior Vice President
and General Counsel
Cregg B. Baumbaugh.................. 124,000 72,000 77,500 4,500
Senior Vice President -- Corporate
Development
</TABLE>
- ---------------
(1) Company paid matching contributions to the Company's 401(k) Profit Sharing
Plan and Trust.
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended December 31, 1995 to the Named
Executive Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED
------------------------------------------------------------ ANNUAL RATES
NUMBER OF PERCENT OF TOTAL OF STOCK PRICE
SECURITIES OF OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE(1) 5% 10%
- ------------------------ ------------- ---------------- ------------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
John W. Stanton......... 0 0% $ 0 0 $ 0 $ 0
Robert R. Stapleton..... 139,500 10 11.29 7/29/05 992,250 2,504,250
Mikal J. Thomsen........ 124,000 9 11.29 7/29/05 882,000 2,226,000
Theresa E. Gillespie.... 100,750 7 11.29 7/29/05 716,625 1,808,625
Alan R. Bender.......... 77,500 5 11.29 7/29/05 551,250 1,391,250
Cregg B. Baumbaugh...... 77,500 5 11.29 7/29/05 551,250 1,391,250
</TABLE>
- ---------------
(1) These options have terms of ten years from the date of grant, July 29, 1995,
and become exercisable as to 25% of the shares on the first anniversary and
an additional 25% every year thereafter until such options are fully
exercisable, provided that such officer remains continuously employed by the
Company.
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<PAGE> 71
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to expiration of their terms
assuming the specified compounded rates of appreciation on the base price
(5% and 10%) of the Common Stock over the terms of the options. The 5% and
10% numbers are calculated based on rules required by the Securities and
Exchange Commission and do not reflect the Company's estimate of future
stock price growth. Actual gains, if any, on stock option exercises are
dependent on the timing of such exercises and the future performance of the
Common Stock. There can be no assurance that the rates of appreciation
assumed in these columns can be achieved or that the amounts reflected will
be received by the individuals.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to each of the
Named Executive Officers concerning the exercise of stock options and
unexercised stock options held at December 31, 1995.
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
SHARES FISCAL YEAR-END (#) AT FISCAL YEAR-END($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John W. Stanton........ 0 0 0 0 $ 0 $ 0
Robert R. Stapleton.... 0 0 470,168 211,833 8,938,825 2,491,321
Mikal J. Thomsen....... 0 0 36,168 196,333 463,782 2,317,553
Theresa E. Gillespie... 0 0 28,933 158,618 371,008 1,871,436
Alan R. Bender......... 0 0 182,900 120,900 3,420,277 1,425,293
Cregg B. Baumbaugh..... 0 0 181,868 118,833 3,407,051 1,398,788
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Messrs.
Stanton, Stapleton, Thomsen, Bender and Baumbaugh and Ms. Gillespie, pursuant to
which such persons serve as executive officers of the Company. Each agreement
provides that such person's employment by the Company may be terminated by the
Company at any time, with or without cause (as such term is defined in the
agreements). The agreements provide for initial annual base compensation of
$180,000, $150,000, $140,000, $130,000, $130,000 and $130,000, respectively, and
provide each executive officer an opportunity to earn an annual bonus, as
determined by the Board of Directors of the Company, targeted at 100%, 70%, 60%,
60%, 60% and 60%, respectively, of such person's base compensation. Each such
agreement provides that, in the event of an involuntary termination (as defined
therein) for other than cause (1) such executive officer will be entitled to
receive a severance payment in an amount equal to any accrued but unpaid
existing annual targeted incentive bonus through the date of termination, 12
months of such executive's then base compensation, and an amount equal to 12
months of such executive's existing annual targeted incentive bonus, (2) the
Company will, at its expense, make all specified insurance payment benefits on
behalf of such executive officer and his or her dependents for 12 months
following such involuntary termination and (3) with respect to any stock options
previously granted to each executive officer which remain unvested at the time
of involuntary termination, there shall be immediate vesting of that portion of
each such grant of any unvested stock options equal to the product of the total
number of such unvested options under such grant multiplied by a fraction, the
numerator of which is the sum of the number of days from the date on which the
last vesting of options under such grant occurred to and including the date of
termination plus 365, and the denominator of which is the number of days
remaining from the date on which the last vesting of
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<PAGE> 72
options under such grant occurred to and including the date on which the final
vesting under such grant would have occurred absent the termination. Mr.
Stapleton's agreement provides for an immediate vesting of all options upon his
involuntary termination for other than cause. Among other things, an executive
officer's death or permanent disability will be deemed an involuntary
termination for other than cause. In addition, each agreement provides for full
vesting of all stock options granted upon a change of control (as such term is
defined in the stock option agreements with the executive officer) of the
Company.
Each such employment agreement further provides that the Company has
entered or will enter into an indemnification agreement with such executive
officer pursuant to which the Company will agree to indemnify the executive
officer against certain liabilities arising by reason of the executive officer's
affiliation with the Company. Pursuant to the terms of each employment
agreement, each executive officer agrees that during such executive officer's
employment with the Company and for one year following the termination of such
executive officer's employment with the Company for any reason, such executive
officer will not engage in a business which is substantially the same as or
similar to the business of the Company and which competes within the applicable
commercial mobile radio services markets serviced by the Company. Mr. Stanton's
agreement provides that such prohibition shall not preclude Mr. Stanton's
investment in other companies engaged in the wireless communications business or
his ability to serve as a director of other companies engaged in the wireless
communications business, in each case subject to his fiduciary duties as a
director of the Company. See "Risk Factors -- Dependence Upon Key Personnel. "
All key employees of the Company have executed a non-compete agreement
containing provisions substantially similar to those set forth in the employment
agreements described above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board was formed in July 1994.
None of the members was at any time during the fiscal year ended December 31,
1995, or at any other time, an officer or employee of the Company. No member of
the Compensation Committee of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee.
COMPENSATION OF DIRECTORS
Directors of the Company currently receive no compensation for serving on
the Board. Directors are not reimbursed for their out-of-pocket expenses
incurred in connection with attendance at meetings of, and other activities
relating to serving on, the Board of Directors and any committees thereof. The
Board of Directors may consider alternative compensation arrangements for the
directors from time to time.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1996, and as adjusted to
reflect the sale of the Class A Common Stock offered in the Offerings, by (i)
each Selling Shareholder, (ii) each person who is known by the Company to own
beneficially 5% or more of the Common Stock; (iii) each director of the Company;
(iv) each Named Executive Officer of the Company; and (v) all directors and
officers as a group. Unless otherwise indicated, all persons listed have sole
voting power and investment power with respect to such shares, subject to
community property laws, where applicable, and the information contained in the
notes to the table. Prior to the Offerings, there were no shares of Class A
Common Stock outstanding and thus information relating to the number and
percentage of shares beneficially owned prior to the Offerings is based on
shares of Class B Common Stock only. Shares of Class B Common Stock sold by the
Selling Shareholders will convert to Class A Common Stock upon their sale in the
Offerings. Information relating to percentage beneficially owned following the
Offerings is based on shares of Class A Common Stock and Class B Common Stock.
See "Description of Capital Stock."
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
-----------------------------
SHARES SHARES PRIOR TO
BENEFICIALLY SOLD IN THE THE FOLLOWING THE
NAME AND ADDRESS OWNED(1) OFFERINGS OFFERINGS OFFERINGS(2)
- --------------------------------------- ------------ ----------- --------- ---------------
<S> <C> <C> <C> <C>
Hellman & Friedman(3)(6)............... 25,163,997 -- 42.9% 37.2%
One Maritime Plaza, 12th Floor
San Francisco, CA 94111
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
The Goldman Sachs Group, L.P. and
related investors(4)(6).............. 12,099,029 -- 20.6 17.9
85 Broad Street, 19th Floor
New York, New York 10004
John W. Stanton and
Theresa E. Gillespie(5)(6)(7)........ 6,236,423 -- 10.6 9.2
2001 NW Sammamish Road
Issaquah, Washington 98027
Providence Media Partners L.P.(6)...... 3,886,591 -- 6.6 5.7
c/o Providence Ventures, Inc.
900 Fleet Center
50 Kennedy Plaza
Providence, RI 02903
Robert A. Stapleton(7)................. 480,355 -- * *
Mikal J. Thomsen(7)(8)................. 411,141 -- * *
Alan R. Bender(7)...................... 206,417 -- * *
Cregg B. Baumbaugh(7).................. 200,158 -- * *
David A. Bayer(9)...................... 818,159 -- 1.4 1.2
John L. Bunce, Jr.(10)................. 25,163,997 -- 42.9 37.2
Mitchell R. Cohen(10).................. 25,163,997 -- 42.9 37.2
Terence M. O'Toole(11)................. 12,099,029 -- 20.6 17.9
Jonathan M. Nelson(12)................. 3,886,591 -- 6.6 5.7
All directors and executive officers as
a group (13 persons)(7).............. 49,641,575 -- 83.2 72.3
M.L. Media Opportunity Partners
L.P.(13)............................. 1,090,162 1,090,162 1.9 --
Media Communications Partners II
Limited Partnership(14).............. 2,543,957 848,700 4.3 2.5
Media Communications Investors
Limited Partnership(14).............. 120,318 40,138 * *
John C. Rathe Trust.................... 6,200 6,200 * --
</TABLE>
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<PAGE> 74
- ---------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Computed in accordance with Rule 13d-3(d)(1) of the Exchange Act.
(2) Assumes no exercise of the Underwriters' over-allotment options.
(3) Consists of shares held by Hellman & Friedman Capital Partners II, L.P.
("HFCP"), H&F Orchard Partners, L.P. ("HFOP") and H&F International
Partners, L.P. ("HFIP"), which are in turn beneficially owned by their
respective general partners and Warren Hellman, individually and as a
trustee of The Hellman Family Revocable Trust dated December 17, 1984 (the
"Hellman Trust" and with HFCP, HFOP and HFIP, the "Hellman Entities"), and
Tully M. Friedman, individually and as the trustee of The Tully M. Friedman
Revocable Trust UAD January 3, 1980 (the "Friedman Trust" and with Hellman
Entities, the "Hellman & Friedman Entities"). HFCP owns of record
22,727,539 shares of Class B Common Stock, HFOP owns of record 2,033,024
shares of Common Stock and HFIP owns of record 403,434 shares of Class B
Common Stock. HFCP, HFOP and HFIP are California limited partnerships, the
sole general partners of which are entities indirectly controlled by the
Hellman Trust and the Friedman Trust. The principal business of each of
such partnerships is to make strategic investments in a variety of special
situations, including restructurings, recapitalizations and buyouts.
Hellman is a trustee of the Hellman Trust and Friedman is a trustee of the
Friedman Trust. Each of Hellman and Friedman is a citizen of the United
States. Hellman and Friedman, individually and as trustees of the
respective trusts, share voting and investment power with respect to the
shares of Class B Common Stock held by the Hellman & Friedman Entities.
(4) Consists of (i) 11,096,078 shares of Class B Common Stock held of record by
GS Capital Partners, L.P. ("GS Capital"), (ii) 580,813 shares of Class B
Common Stock held of record by Stone Street Fund 1992, L.P. ("Stone
Street"), (iii) 337,163 shares of Class B Common Stock held of record by
Bridge Street Fund 1992, L.P. ("Bridge Street") and (iv) 84,975 shares of
Class B Common stock held of record by The Goldman Sachs Group, L.P. ("GS
Group"). Each of GS Capital, Stone Street and Bridge Street is an
investment limited partnership, the general partner, the managing general
partner or the managing partner of which is an affiliate of GS Group. GS
Group disclaims beneficial ownership of shares held by such investment
partnerships to the extent partnership interests in such partnerships are
held by persons other than GS Group and its affiliates.
(5) Consists of (i) 1,686,069 shares of Class B Common Stock held of record by
PN Cellular, which is 78% owned and controlled by Mr. Stanton and Ms.
Gillespie, (ii) 1,274,520 shares of Class B Common Stock held of record by
Stanton Communications Corporation ("SCC"), which is substantially owned
and controlled by Mr. Stanton and Ms. Gillespie, (iii) 3,087,464 shares of
Class B Common Stock held by Mr. Stanton and Ms. Gillespie, as joint
tenants, and (iv) 159,437 shares of Class B Common Stock held of record by
The Stanton Family Trust. Mr. Stanton and Ms. Gillespie are married and
share voting and investment power with respect to the shares jointly owned
by them, as well as the shares held of record of PN Cellular, SCC and The
Stanton Family Trust.
(6) Parties or affiliates of parties to the Shareholders Agreement, which
provides that the parties thereto will vote their shares of Common Stock in
favor of the election as directors of the Company, the Chief Executive
Officer of the Company, one person designated by Stanton and Providence,
one person designated by Goldman Sachs, two persons designated by the
Hellman & Friedman Entities and one person selected by a majority of such
designated persons, subject to the ownership requirements set forth
therein. See "Certain Transactions."
(7) Includes aggregate exercisable options to purchase Class B Common Stock;
does not include unexercisable options. May include stock jointly or
separately owned with or by spouse.
(8) Mr. Thomsen jointly holds voting and investment power with respect to all
of such shares with Lynn C. Thomsen, his wife, except for shares issued or
issuable upon the exercise of stock options. Includes 172,484 shares of
Class B Common Stock beneficially owned by
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<PAGE> 75
Mr. Thomsen through his ownership of approximately 10.2% of PN Cellular.
Mr. Thomsen does not have voting control over such shares.
(9) All of such shares are owned by Bayer Investment Group. The David A. Bayer
Trust, of which Mr. Bayer is the trustee, is the managing general partner
of Bayer Investment Group. As a result, Mr. Bayer could be deemed to own
beneficially 100% of the shares of Class B Common Stock held by Bayer
Investment Group.
(10) Mr. Bunce and Mr. Cohen may each be deemed to be the owner of the
25,163,997 shares of Class B Common Stock owned by the Hellman & Friedman
Entities as they are general partners of Hellman & Friedman. Each of Mr.
Bunce and Mr. Cohen disclaim beneficial ownership of shares held by the
Hellman & Friedman Entities to the extent interests in such entities are
held by persons other than such individual.
(11) Mr. O'Toole may be deemed to be the owner of the 12,099,029 shares of Class
B Common Stock owned by affiliates of Goldman Sachs, an investment banking
firm of which he is a general partner. Mr. O'Toole disclaims beneficial
ownership of shares held by affiliates of Goldman Sachs to the extent
interests in such entities are held by persons other than Mr. O'Toole.
(12) Mr. Nelson may be deemed to be the owner of the 3,886,591 shares of Class B
Common Stock owned by Providence, as he is a managing general partner of
Providence Ventures, L.P., the general partner of the general partner of
Providence. Mr. Nelson disclaims beneficial ownership of shares held by
Providence to the extent interests in Providence are held by persons other
than Mr. Nelson.
(13) M.L. Media Opportunity Partners is an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch").
(14) Media Communications Partners II Limited Partnership ("Media Partners") and
Media Communications Investors Limited Partnership ("Media Investors") are
Delaware limited partnerships, the general partners of which are entities
controlled by David D. Croll, Richard C. Churchill, Jr., Stephen F. Gormley
and James F. Wade. Messrs. Croll, Churchill, Gormley and Wade each may be
deemed to be the owner of the 1,695,257 and 80,180 shares of Class B Common
Stock owned by Media Partners and Media Investors, respectively, following
the Offerings. Each of Messrs. Croll, Churchill, Gormley and Wade disclaim
beneficial ownership of shares held by Media Partners and Media Investors
to the extent interests in such entities are held by persons other than
such individual.
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<PAGE> 76
CERTAIN TRANSACTIONS
In November 1993, the Hellman & Friedman Entities, Mr. Bayer, Mr. Stanton
and Ms. Gillespie each exercised rights to purchase shares of common stock of
GCC (the "GCC Stock"), which subsequently were exchanged for Class B Common
Stock. See "Principal and Selling Shareholders."
In 1993, prior to the Business Combination, GCC and MCLP exchanged certain
cellular systems owned by each of them.
Western Wireless Corporation was formed in July 1994 as part of the
Business Combination involving GCC, MCLP, Mr. Stanton and Ms. Gillespie and PN
Cellular. Immediately prior to the Business Combination, MCLP owned directly and
indirectly 2.5% of the outstanding shares of GCC Stock and a subsidiary of GCC
owned a 9.7% limited partnership interest in MCLP and 10% of the general partner
of MCLP. Pursuant to the Business Combination, Western Wireless Corporation
acquired approximately 95% of the outstanding shares of GCC Stock from certain
GCC stockholders in exchange for Class B Common Stock (the "GCC Exchange"). Of
the 45,042,681 shares of Class B Common Stock issued in the Business
Combination, 51.9% were issued to GCC stockholders, 46.2% were issued to the
partners of MCLP and 1.9% were issued in connection with interests acquired from
Mr. Stanton and Ms. Gillespie and their affiliates. Simultaneously with the GCC
Exchange, Western Wireless Corporation acquired all of the general and limited
partnership interests of MCLP in exchange for Class B Common Stock. As part of
the Business Combination, Western Wireless Corporation also acquired the
remaining ownership interests in a corporation controlled by Mr. Stanton and Ms.
Gillespie in which MCLP had a minority interest and in other partnerships
controlled by MCLP, Mr. Stanton and Ms. Gillespie in exchange for Class B Common
Stock. As a result of the Business Combination and a series of related
transactions, Western Wireless Corporation holds indirectly all of the assets
formerly held by MCLP, and GCC is a wholly-owned subsidiary of Western Wireless
Corporation.
In connection with the Business Combination, certain holders of GCC Stock
and certain holders of limited partnership interests in MCLP entered into the
Stockholders Agreement. The parties to the Stockholders Agreement beneficially
own approximately 92% of the Company's outstanding Common Stock prior to the
Offerings. The provisions of the Stockholders Agreement, other than the
provisions relating to registration rights, will terminate at the closing of the
Offerings. See "Shares Eligible for Future Sale -- Registration Rights" and
"Management -- Board of Directors."
Concurrently with the execution of the Stockholders Agreement, the Hellman
& Friedman Entities, Mr. Stanton, Ms. Gillespie, PN Cellular, The Stanton Family
Trust and SCC (collectively, the "Stanton Entities"), GS Capital, Stone Street,
Bridge Street and GS Group (collectively, the "Goldman Sachs Entities") and
certain other shareholders entered into a Voting Agreement, which was to be
effective only upon the consummation of an initial public offering. The Voting
Agreement, which was superseded by the Shareholders Agreement, provided
generally that each of the Hellman & Friedman Entities, the Stanton Entities and
the Goldman Sachs Entities would vote their shares of Common Stock for one
member of the Board of Directors designated by each of the others so long as
each of the others beneficially owns at least 7 1/2% of the outstanding shares
of Common Stock of the Company. In connection with the Offerings, the Hellman &
Friedman Entities, the Stanton Entities, the Goldman Sachs Entities and
Providence will enter into the Shareholders Agreement, which will be effective
only upon consummation of the U.S. Offering, will supersede the Voting Agreement
and, with respect to election of directors of the Company, will provide that
each of the Hellman & Friedman Entities, the Stanton Entities, the Goldman Sachs
Entities and Providence shall vote their shares of Common Stock to elect a Board
of Directors which will include (but not necessarily be limited to) the
following six members: (i) the Chief Executive Officer of the Company, (ii) so
long as the Hellman & Friedman Entities beneficially own at least (A) 15% of the
total voting power (as defined in the Shareholders Agreement) of the Company,
two persons designated by the Hellman & Friedman Entities or (B) 7 1/2% of the
total voting power of the
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<PAGE> 77
Company, one person designated by the Hellman & Friedman Entities, (iii) so long
as the Goldman Sachs Entities beneficially own at least 7 1/2% of the total
voting power of the Company, one person designated by Goldman Sachs, (iv) so
long as the Stanton Entities and Providence collectively beneficially own at
least 7 1/2% of the total voting power of the Company, one person designated by
majority vote of the Stanton Entities and Providence (such designee being in
addition to Mr. Stanton if he is then serving on the Board of Directors by
reason of being the Chief Executive Officer of the Company); the Stanton
Entities will agree that so long as Mr. Stanton is serving as Chief Executive
Officer and Providence owns at least 75% of the shares of Common Stock it
beneficially owns at the date of execution of the Shareholders Agreement, the
Stanton Entities shall vote their shares of Common Stock for one member of the
Board of Directors designated by Providence; and (v) one member of the Board of
Directors of the Company selected by a majority of the persons selected as
described above. The Shareholders Agreement will further provide that so long as
the Hellman & Friedman Entities hold shares of Common Stock having voting power
(as defined in the Shareholders Agreement) in excess of 49.9% of the total
voting power, then for so long as the Hellman & Friedman Entities shall hold
shares of Common Stock having voting power in excess of the aforesaid
percentage, it shall abstain from voting that number of shares of Common Stock
which gives it more votes than the aforesaid percentage. Such agreement will
have a term of 10 years. The Goldman Sachs Entities also are limited in their
voting power pursuant to provisions of the Company's Articles of Incorporation.
See "Description of Capital Stock -- Certain Articles of Incorporation, Bylaws
and Statutory Provisions Affecting Shareholders - Regulated Shareholders."
In the second quarter of 1995, in order to finance the acquisition of
broadband MTA PCS licenses through auctions conducted by the FCC, a number of
the Company's current shareholders and their affiliates purchased shares of
non-voting, convertible Series A Preferred Stock (the "PCS Preferred Stock") of
Western PCS, all the outstanding common stock of which was held by the Company,
for a total purchase price of $149,499,980. The PCS Preferred Stock was
exchangeable into shares of Class B Common Stock. The purchasers of the PCS
Preferred Stock were the Hellman & Friedman Entities, Goldman Sachs Entities,
Mr. Stanton and Ms. Gillespie, Providence, Bayer Investment Group and Toronto
Dominion Investments, Inc. To secure their purchase commitments prior to the
purchase, the subscribers agreed to pledge shares of the Company's stock or
provide loans to the Company. Loans aggregating approximately $13,850,000 were
made to the Company by subscribers. At the time of the purchase, the pledged
shares were released and the loans (including accrued interest in the amount of
$226,000) converted to equity in partial satisfaction of the purchase price. On
June 26, 1995, the Company caused the exchange of the PCS Preferred Stock into
Class B Common Stock, leaving Western PCS as a wholly-owned subsidiary of the
Company and resulting in the issuance of 13,241,443 shares of Class B Common
Stock to the purchasers in exchange for the PCS Preferred Stock.
In July 1995, in connection with a private offering by the Company to all
GCC stockholders who were accredited investors to exchange their GCC Stock for
Class B Common Stock, Mr. Stapleton, Mr. Bender and Mr. Baumbaugh exchanged 30,
73 and 56 shares of GCC Stock for 9,300, 22,630 and 17,360 shares of Class B
Common Stock, respectively.
In November 1995, a wholly-owned subsidiary of the Company and Cook Inlet
PV/SS PCS Partners, L.P. (the "General Partner") formed a limited partnership,
Cook Inlet PCS, to participate in the PCS C Block auction. Providence is a
limited partner of the General Partner of Cook Inlet PCS. The General Partner is
not otherwise affiliated with the Company. In connection with the formation of
Cook Inlet PCS, the Company granted to each partner of the General Partner the
right, during a specified period, to exchange its partnership interest in the
General Partner for shares of Class B Common Stock, the number of shares to be
based on the partners' capital contributions to the General Partner. Providence
has the right to exchange its partnership interest in the General Partner for up
to 122,140 shares of Class B Common Stock.
In December 1995, GS Capital Partners Media Holding I, L.P., an affiliate
of Goldman Sachs, terminated and distributed the 3,842,531 shares of Class B
Common Stock registered in its name to
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its partners, GS Capital and GS Capital Partners Media Holding I, Inc., both of
which are affiliates of Goldman Sachs. Following such distribution, GS Capital
Partners Media Holding I, Inc. merged with and into the Company and the shares
of Class B Common Stock owned by GS Capital Partners Media Holding I, Inc. were
canceled and a like number of shares of Class B Common Stock were issued to GS
Capital. GS Capital reimbursed the Company for all of the out-of-pocket expenses
incurred by it in connection with this transaction.
In February 1996, the Company acquired, through mergers intended to be
tax-free reorganizations, Palouse Paging, Inc. ("Palouse") and Sawtooth Paging,
Inc. ("Sawtooth"), paging system operators that provide services in some markets
in which the Company operates its cellular systems. Prior to the acquisitions,
Mr. Stanton and Ms. Gillespie had a significant ownership interest in each of
Palouse and Sawtooth. The acquisitions, each of which was approved by the
Company's Board of Directors in September 1995, contemplated a per share value
of the Common Stock of $11.29 for purposes of the exchange. The value of each of
Palouse and Sawtooth was determined by the disinterested directors of the
Company's Board of Directors. Mr. Stanton and Ms. Gillespie together had
independent legal representation in connection with the acquisitions and Mr.
Stanton did not participate in either the Board of Directors' decision as to
whether to complete the transaction or its determination of the value to be
assigned to the interests acquired. Prior to the acquisition of Palouse, Mr.
Stanton and Ms. Gillespie jointly owned approximately 99% of the issued and
outstanding shares of common stock of Palouse. In consideration for the
acquisition, the shares of stock of Palouse were exchanged for 515,561 shares of
Class B Common Stock. In connection with the acquisition, Palouse repaid Mr.
Stanton and Ms. Gillespie loans in the amount of $355,000. Prior to the
acquisition of Sawtooth, Mr. Stanton and Ms. Gillespie, the Company and another
individual, who now is an employee of the Company, owned approximately 47%, 47%
and 6%, respectively, of the issued and outstanding shares of common stock of
Sawtooth. In consideration for the acquisition of Sawtooth, the issued and
outstanding shares of common stock of Sawtooth owned by Mr. Stanton and Ms.
Gillespie and the other individual shareholder were exchanged for 79,748 shares
of Class B Common Stock. In connection with the acquisition, Sawtooth repaid Mr.
Stanton and Ms. Gillespie loans in the amount of $288,000.
Pursuant to an agreement reached in September 1995, Donald Guthrie, the
Company's Vice Chairman, purchased 88,567 shares of Class B Common Stock in
February 1996 for $999,950, which represents a per share price of $11.29 and he
was granted options to purchase 85,250 shares of Class B Common Stock at an
exercise price of $1.13 per share.
The Company and International have entered into an agreement (the "Horwitz
Agreement") with Bradley J. Horwitz, a Vice President of the Company and
President of International, pursuant to which Horwitz acquired 10% of the
outstanding capital stock of International for $100,000. The Company owns the
balance of the outstanding capital stock of International. Under the terms of
the Horwitz Agreement, under certain circumstances (including, among others, a
change of control of the Company and a sale of substantially all of the assets
of International) or after December 31, 1996, the Company shall have the right,
and/or Mr. Horwitz shall have the right to cause the Company, to exchange shares
of Class A Common Stock for all the shares of International capital stock owned
by Mr. Horwitz. The number of shares of Class A Common Stock to be delivered to
Mr. Horwitz is calculated in accordance with formulas (which formulas differ
depending upon the circumstances causing the exchange and which number depends
upon, among other things, the fair market value of the shares of International
stock at the time of the exchange) and would equal 8,860 shares of Class A
Common Stock based on the value of International stock on the date hereof. In
addition, if the Company proposes to sell its shares of International capital
stock, under certain circumstances as described in the Horwitz Agreement, the
Company can require Mr. Horwitz to sell, or must obtain for Mr. Horwitz the
right to sell, his shares of International capital stock at the same per share
price and on the same terms as the proposed sale by the Company.
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An affiliate of Goldman Sachs is a member of the syndicate of lenders
pursuant to the Credit Facility and has committed to lend to the Company up to
the aggregate principal amount of $36.5 million.
Under Schedule E to the By-Laws of the National Association of Securities
Dealers, Inc. (the "NASD"), the Company may be deemed to be an affiliate of
Goldman Sachs. The Offerings and the Debt Offering are being conducted in
accordance with Schedule E, which provides that, among other things, when an
NASD member participates in the underwriting of an affiliate's equity or debt
securities, the initial public offering price can be no higher, or the yield to
maturity can be no lower, as applicable, than that recommended by a "qualified
independent underwriter" meeting certain standards. In accordance with this
requirement, Donaldson, Lufkin & Jenrette Securities Corporation has served in
such roles and has recommended a price and a minimum yield to maturity in
compliance with the requirements of Schedule E. Donaldson, Lufkin & Jenrette
Securities Corporation will receive compensation from the Company in the
aggregate amount of $10,000 for serving in such roles. In connection with the
Offerings, Donaldson, Lufkin & Jenrette Securities Corporation in its role as
qualified independent underwriter has performed due diligence investigations and
reviewed and participated in the preparation of this Prospectus and the
Registration Statement of which this Prospectus is a part. See "Underwriting."
The Company believes that the foregoing transactions were on terms as fair
to the Company as those which would have been available in arm's-length
negotiations. The Senior Secured Facilities and the Washington Business Act (as
hereinafter defined) contain, and the Indenture will contain, provisions which
limit the terms on which the Company may enter into transactions with its
affiliates.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 300,000,000 shares
of Class A Common Stock and Class B Common Stock, no par value, and 50,000,000
shares of preferred stock, no par value (the "Preferred Stock"). As of March 31,
1996, there were 58,731,111 shares of Class B Common Stock and no shares of
Class A Common Stock issued and outstanding and the Company had 148 holders of
record of its Class B Common Stock.
COMMON STOCK
The Company has two classes of authorized Common Stock, Class A Common
Stock, which is being offered in the Offerings, and Class B Common Stock. Other
than with respect to voting rights, the Class A and Class B have identical
rights. The Class A Common Stock has one vote per share and the Class B Common
Stock has ten votes per share. Shares of Class B Common Stock generally convert
automatically into shares of Class A Common Stock on a share-for-share basis
immediately upon any transfer of the Class B Common Stock other than a transfer
from an original holder of Class B Common Stock to certain affiliates of such
holder.
Holders of Common Stock have no cumulative voting rights and no preemptive,
subscription or sinking fund rights. Subject to preferences that may be
applicable to any then outstanding Preferred Stock, holders of Common Stock will
be entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In the
event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock will be entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference to any then outstanding
Preferred Stock.
The Company's Articles of Incorporation permit the redemption of the
Company's Common Stock from shareholders where necessary to protect the
Company's regulatory licenses. See "Business -- Governmental Regulation."
PREFERRED STOCK
Pursuant to its Articles of Incorporation, the Company is authorized to
issue 50,000,000 shares of Preferred Stock, which may be issued from time to
time in one or more classes or series or both upon authorization by the
Company's Board of Directors. The Board of Directors, without further approval
of the shareholders, is authorized to fix the dividend rights and terms,
conversion rights, voting rights, redemption rights and terms, liquidation
preferences and any other rights, preferences, privileges and restrictions
applicable to each class or series of Preferred Stock. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of the holders of Common Stock and, under certain circumstances, make it
more difficult for a third party to gain control of the Company, discourage bids
for the Company's Common Stock at a premium or otherwise adversely affect the
market price of the Class A Common Stock.
The Company has no current plans to issue any Preferred Stock.
CERTAIN ARTICLES OF INCORPORATION, BYLAWS AND STATUTORY PROVISIONS AFFECTING
SHAREHOLDERS
SPECIAL MEETINGS OF SHAREHOLDERS; SHAREHOLDER ACTION BY WRITTEN CONSENT
The Company's Bylaws provide that any action required or permitted to be
taken by the Company's shareholders may be effected at a duly called annual or
special meeting of shareholders or by unanimous consent in writing.
Additionally, the Articles of Incorporation and Bylaws provide that special
meetings of the shareholders of the Company may be called only by a majority of
the Board of Directors or an authorized committee thereof.
80
<PAGE> 81
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS
The Company's Bylaws provide that shareholders seeking to bring business
before or to nominate directors at any meeting of shareholders must provide
timely notice thereof in writing. To be timely, a shareholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
Company not less than (i) with respect to an annual meeting, 120 calendar days
in advance of the one-year anniversary of the date that the Company's proxy
statement was released to shareholders in connection with the previous year's
annual meeting, except that if no annual meeting was held in the previous year
or if the date of the annual meeting has been changed by more than 30 calendar
days from the date contemplated at the time of the previous year's proxy
statement, such notice must be received by the Company a reasonable time before
the Company's proxy statement is to be released and (ii) with respect to a
special meeting of shareholders, a reasonable time before the Company's proxy
statement is to be released. The Bylaws also specify certain requirements for a
shareholder's notice to be in proper written form. These provisions may preclude
some shareholders from bringing matters before the shareholders or from making
nominations for directors.
DIRECTOR AND OFFICER INDEMNIFICATION
The Washington Business Act provides that a Washington corporation may
include provisions in its articles of incorporation relieving each of its
directors of monetary liability arising out of his or her conduct as a director
for breach of his or her fiduciary duty except liability for (i) acts or
omissions of a director that involve intentional misconduct or a knowing
violation of law, (ii) conduct in violation of Section 23B.08.310 of the
Washington Business Act (which section relates to unlawful distributions) or
(iii) any transaction from which a director personally received a benefit in
money, property or services to which the director was not legally entitled. The
Company's Articles of Incorporation include such provisions.
The Company's Articles of Incorporation and Bylaws provide that the Company
shall, to the fullest extent permitted by the Washington Business Act, as
amended from time to time, indemnify and advance expenses to each of its
currently acting and former directors and officers, and may so indemnify and
advance expenses to each of its current and former employees and agents. The
Company believes the foregoing provisions are necessary to attract and retain
qualified persons as directors and officers. Prior to the consummation of the
Offerings, the Company intends to enter into separate indemnification agreements
with each of its directors and executive officers in order to effectuate such
provisions, which agreements will supersede prior indemnification agreements
entered into by the Company with each of its directors and executive officers.
REGULATED SHAREHOLDERS
The Articles of Incorporation contain provisions that would effectively
preclude each of Goldman Sachs and its affiliates and Merrill Lynch and its
affiliates from voting that number of shares of Common Stock which results in
either such shareholder or its affiliates having the right to vote more than
24.9% of the Company's total voting power.
PROVISIONS AFFECTING ACQUISITIONS AND BUSINESS COMBINATIONS
The Washington Business Act, Section 23B.19 of the Revised Code of
Washington, prohibits a "target corporation," with certain exceptions, from
engaging in certain "significant business transactions" (such as a merger or
sale of assets) with an "acquiring person" who acquires more than 10% of the
voting securities of the target corporation for a period of five years after
such acquisition, unless the transaction is approved by a majority of the
members of the target corporation's board of directors prior to the date of the
transaction or unless the aggregate amount of the cash and the market value of
non-cash consideration received by holders of outstanding shares of any class or
series of stock of the target corporation is equal to certain minimum amounts.
81
<PAGE> 82
The Company's Articles of Incorporation provide that it will be subject to such
prohibitions and shall remain subject to such prohibitions even if they are ever
repealed. Such prohibitions do not apply to any shareholders who beneficially
own ten percent or more of the Company's outstanding voting securities prior to
the Offerings.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar for its Class A Common Stock is
Chemical Mellon Shareholder Services, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have outstanding
56,745,911 shares of Class B Common Stock and 11,000,000 shares of Class A
Common Stock (12,650,000 shares if the Underwriters' over-allotment options are
exercised in full). An aggregate of 5,851,238 shares of Class B Common Stock
have been reserved for issuance under the Company's stock option plan and
options to purchase 3,664,878 of such shares of Class B Common Stock are
currently outstanding and 2,186,360 shares of Class A Common Stock are reserved
for issuance pursuant to future option grants. In addition, up to 327,882 shares
of Class B Common Stock are reserved for issuance upon the exercise of exchange
rights exercisable no sooner than 2001 issued to the Company's partners in Cook
Inlet PCS and 8,860 shares of Class A Common Stock (based on the fair market
value of the stock of International on the date hereof) are issuable under the
Horwitz Agreement. See "Certain Transactions."
The shares of Class A Common Stock sold in the Offerings will be freely
tradeable without restriction or further registration under the Securities Act,
except for any shares purchased by an "affiliate" (as that term is defined under
the Securities Act) of the Company, which will be subject to the resale
limitations of Rule 144 promulgated under the Securities Act. All of such shares
of Class A Common Stock are "restricted securities" within the meaning of Rule
144 (the "Restricted Shares") and may not be publicly sold unless registered
under the Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144.
In general, under Rule 144, as currently in effect, if two years have
elapsed since the later of the date of acquisition of Restricted Shares from the
Company or any affiliate of the Company, the acquirer or subsequent holder
(including an affiliate) is entitled to sell, within any three-month period,
that number of shares that does not exceed the greater of 1% of the then
outstanding shares of Class A Common Stock (approximately 110,000 shares
immediately after the Offerings) or the average weekly trading volume of the
shares of Class A Common Stock on all exchanges and/or reported through the
automated quotation system of a registered securities association during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission (the "Commission"). Sales under Rule 144
are also subject to certain restrictions relating to manner of sale, notice
requirements and the availability of current public information about the
Company. If three years have elapsed since the later of the date of acquisition
of Restricted Shares from the Company or from any affiliate of the Company, and
the acquirer or subsequent holder thereof is deemed not to have been an
affiliate of the Company at any time during the 90 days preceding a sale, such
person would be entitled to sell such shares in the public market under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements. As defined in Rule 144,
an "affiliate" of an issuer is a person that directly, or indirectly through the
use of one or more intermediaries, controls, or is controlled by, or is under
common control with, such issuer. In general, under Rule 701 as currently in
effect, persons who purchase shares upon exercise of options that were granted
pursuant to Rule 701 are entitled to sell such shares in reliance on Rule 144
without regard to the holding period, public information, volume limitations or
notice provisions of Rule 144, if such persons are not affiliates of the
Company, and without regard to the holding period requirements of Rule 144, if
such persons are affiliates of the Company. Restricted Shares properly sold in
reliance on Rule 144 are
82
<PAGE> 83
thereafter freely tradeable without restrictions or registration under the
Securities Act, unless thereafter held by an affiliate of the Company.
The Company, the Selling Shareholders, the Company's officers and directors
and certain other shareholders of the Company have agreed that, during the
period beginning from the date of this Prospectus and continuing to and
including the date 180 days after the date of this Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of any securities of the
Company that are substantially similar to the shares of Common Stock or which
are convertible or exchangeable into securities which are substantially similar
to the shares of Common Stock, without the prior written consent of the
representatives of the U.S. Underwriters, except for the shares of Common Stock
offered in connection with the concurrent U.S. and International Offerings and
certain gift transactions.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors between May 20, 1988, the effective
date of Rule 701, and the date the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Commission has
indicated that Rule 701 will apply to typical stock options granted by an issuer
before it becomes subject to the reporting requirements of the Exchange Act
(including options granted before May 20, 1988, if made in accordance with the
Rule had it been in effect), along with the shares acquired upon exercise of
such options beginning May 20, 1988 (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are Restricted Shares
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this Prospectus, such securities may be sold (i) by persons
other than affiliates, subject only to the manner of sale provisions of Rule 144
and (ii) by affiliates under Rule 144 without compliance with its two-year
minimum holding period requirements.
The Company intends to file a registration statement under the Securities
Act covering 5,851,238 shares of Common Stock issued or issuable under the
Company's stock option plan. Such registration statement is expected to be filed
90 days after the date of this Prospectus and will automatically become
effective upon filing. Accordingly, shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to affiliates,
be available for sale in the open market, except to the extent that such shares
are subject to vesting restrictions with the Company or the contractual
restrictions described above.
REGISTRATION RIGHTS
Pursuant to the terms of the Stockholders Agreement, certain holders of the
Company's Common Stock have registration rights in defined circumstances and
such rights generally include, subject to certain restrictions, underwriter
cutbacks and pro rata inclusion provisions, the right to participate in both
demand registrations (i.e., those that are required by certain of the
shareholders pursuant to contract) and "piggyback" rights (i.e., the right to
join in any registrations undertaken by the Company). The provisions of the
Stockholders Agreement, other than provisions providing for registration rights,
will terminate at the closing of the Offerings. The Horwitz Agreement contains
"piggyback" rights for shares of Class A Common Stock issuable by the Company
thereunder. See "Certain Transactions."
83
<PAGE> 84
VALIDITY OF CLASS A COMMON STOCK
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company and the Selling Shareholders by Preston Gates &
Ellis, Seattle, Washington. G. Scott Greenburg, a partner of the firm,
beneficially owns 8,857 shares of Class B Common Stock. The validity of the
shares of Class A Common Stock offered hereby will be passed upon for the
Underwriters by Sullivan & Cromwell, Los Angeles, California. Sullivan &
Cromwell has represented and continues to represent Goldman Sachs in connection
with its investment in the Company.
EXPERTS
The audited consolidated financial statements and schedule of Western
Wireless Corporation and the audited consolidated financial statements of MCLP
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C., a Registration
Statement on Form S-1 under the Act, with respect to the shares of Class A
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
For further information with respect to the Company and the Class A Common
Stock, reference is made to the Registration Statement, including the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract, agreement or any other document referred to herein are
not necessarily complete; with respect to each such contract, agreement or
document filed as an exhibit to the Registration Statement, reference is made to
such exhibit for a more complete description of the matters involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549 and copies of it or any part thereof may be
obtained from such office, upon payment of the fees prescribed by the
Commission.
84
<PAGE> 85
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WESTERN WIRELESS CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................. F-2
Consolidated Balance Sheets as of March 31, 1996, and December 31, 1995 and 1994..... F-3
Consolidated Statements of Operations for the quarters ended March 31, 1996 and 1995
and the years ended December 31, 1995, 1994 and 1993............................... F-4
Consolidated Statements of Shareholders' Equity for the quarter ended March 31, 1996
and the years ended December 31, 1995, 1994 and 1993............................... F-5
Consolidated Statements of Cash Flows for the quarters ended March 31, 1996 and 1995
and the years ended December 31, 1995, 1994 and 1993............................... F-6
Notes to Consolidated Financial Statements........................................... F-7
Schedule II -- Valuation and Qualifying Accounts..................................... F-26
MARKETS CELLULAR LIMITED PARTNERSHIP CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants............................................. F-27
Consolidated Balance Sheets as of June 30, 1994, and December 31, 1993 and 1992...... F-28
Consolidated Statements of Operations for the six months ended June 30, 1994 and
1993, the year ended December 31, 1993, and the period from October 6, 1992
(inception) to December 31, 1992................................................... F-29
Consolidated Statements of Partners' Capital for the six months ended June 30, 1994,
the year ended December 31, 1993, and the period from October 6, 1992 (inception)
to December 31, 1992............................................................... F-30
Consolidated Statements of Cash Flows for the six months ended June 30, 1994 and
1993, the year ended December 31, 1993, and the period from October 6, 1992
(inception) to December 31, 1992................................................... F-31
Notes to Consolidated Financial Statements........................................... F-32
</TABLE>
F-1
<PAGE> 86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Western Wireless Corporation:
We have audited the accompanying consolidated balance sheets of Western Wireless
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Western Wireless
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington,
March 15, 1996
F-2
<PAGE> 87
WESTERN WIRELESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
MARCH 31, --------- ---------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 6,204 $ 8,572 $ 7,787
Accounts receivable, net of allowance for doubtful
accounts of $2,405, $2,800 and $1,772,
respectively........................................ 16,908 18,074 11,635
Inventory.............................................. 9,803 5,361 4,978
Prepaid expenses and other current assets.............. 7,282 4,001 2,369
Deposit held by FCC.................................... 1,500 1,500 10,000
----------- --------- ---------
Total current assets........................... 41,697 37,508 36,769
Property and equipment, net of accumulated depreciation
of $62,802, $53,423 and $25,098, respectively.......... 231,488 193,692 120,648
Licensing costs and other intangible assets, net of
accumulated amortization of $34,836, $28,364 and
$11,701, respectively.................................. 455,371 417,971 211,309
Investments in unconsolidated affiliates................. 7,688 8,388 587
Other assets............................................. 1,202 1,469 881
----------- --------- ---------
$ 737,446 $ 659,028 $ 370,194
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 16,522 $ 7,568 $ 7,840
Accrued liabilities.................................... 16,311 16,659 11,440
Construction accounts payable.......................... 31,530 28,408 5,102
Unearned revenue and customer deposits................. 4,340 3,301 3,891
Loans from shareholders................................ 10,000
Current portion of long-term debt...................... 941
----------- --------- ---------
Total current liabilities...................... 68,703 55,936 39,214
----------- --------- ---------
Long-term debt, net of current portion................... 438,480 362,487 200,587
----------- --------- ---------
Commitments and contingent liabilities (Notes 9 and 17)
Minority interests in equity of consolidated
subsidiary............................................. 3,376
---------
Shareholders' equity:
Common stock, $.001 par value, and paid-in capital;
300,000,000 shares authorized; 58,731,111
(unaudited), 58,047,235 and 42,983,360 issued and
outstanding, respectively........................... 334,675 324,729 155,187
Deferred compensation.................................. (1,714)
Deficit................................................ (102,698) (84,124) (28,170)
----------- --------- ---------
Total shareholders' equity..................... 230,263 240,605 127,017
----------- --------- ---------
$ 737,446 $ 659,028 $ 370,194
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 88
WESTERN WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
QUARTER ENDED ---------- ---------- ----------
MARCH 31,
-------------------------
1996 1995
----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Subscriber revenues............... $ 35,337 $ 18,967 $ 105,430 $ 38,838 $ 11,105
Roamer revenues................... 6,757 4,802 29,660 16,746 7,285
Equipment sales and
other revenue................... 3,941 2,315 11,465 7,524 2,344
----------- ----------- -----------
Total revenues............. 46,035 26,084 146,555 63,108 20,734
----------- ----------- -----------
Operating expenses:
Cost of service................... 8,815 5,786 27,686 13,303 4,310
Cost of equipment sales........... 6,354 3,870 20,705 11,446 3,533
General and administrative........ 12,270 6,254 31,253 15,226 6,253
Sales and marketing............... 13,491 7,164 41,390 18,553 6,101
Depreciation and amortization..... 15,610 10,776 49,456 25,670 5,399
Provision for restructuring
costs........................... 2,478
----------- ----------- -----------
Total operating expenses... 56,540 33,850 170,490 86,676 25,596
----------- ----------- -----------
Operating loss...................... (10,505) (7,766) (23,935) (23,568) (4,862)
----------- ----------- -----------
Other income (expense):
Interest and financing expense.... (8,134) (5,027) (25,428) (10,659) (2,242)
Gain (loss) on dispositions,
net............................. (573) 6,202 10,102
Other, net........................ 65 330 627 2,065 331
----------- ----------- -----------
Total other income
(expense)................ (8,069) (4,697) (25,374) (2,392) 8,191
----------- ----------- -----------
Income (loss) before extraordinary
item.............................. (18,574) (12,463) (49,309) (25,960) 3,329
Extraordinary loss on early
extinguishment of debt............ (6,645)
----------- ----------- -----------
Net income (loss).......... $ (18,574) $ (12,463) $ (55,954) $ (25,960) $ 3,329
=========== =========== ===========
Income (loss) per common share
before extraordinary item......... $ (0.31) $ (0.24) $ (0.87) $ (0.59) $ 0.10
Per common share effect of
extraordinary item................ (0.12)
----------- ----------- -----------
Net income (loss) per common share.. $ (0.31) $ (0.24) $ (0.99) $ (0.59) $ 0.10
=========== =========== ===========
Weighted average common shares and
common equivalent shares
outstanding....................... 59,486,512 52,363,838 56,469,990 43,949,101 32,253,303
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 89
WESTERN WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------- TOTAL
PAR VALUE AND DEFERRED SHAREHOLDERS'
SHARES PAID-IN CAPITAL COMPENSATION DEFICIT EQUITY
---------- --------------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992........ 21,658,612 $ 70,318 $ (457) $ (5,539) $ 64,322
Shares issued:
For cash, net of costs....... 4,217,761 17,008 17,008
In exchange for long-term
notes payable plus accrued
interest................... 277,512 1,058 1,058
Deferred compensation........... 172 172
Net income...................... 3,329 3,329
---------- ------- -------- ---------- --------
Balance, December 31, 1993........ 26,153,885 88,384 (285) (2,210) 85,889
Business Combination:
Shares issued:
To acquire MCLP............ 18,160,643 70,918 70,918
To acquire interests in
subsidiaries............ 39,761 160 160
GCC shares held by minority
interests.................. (1,370,929) (4,275) (4,275)
Deferred compensation........... 285 285
Net loss........................ (25,960) (25,960)
---------- ------- -------- ---------- --------
Balance, December 31, 1994........ 42,983,360 155,187 (28,170) 127,017
Shares issued:
For cash, net of costs....... 12,665,905 143,002 143,002
In exchange for shareholder
loans plus accrued
interest................... 1,245,998 14,068 14,068
For minority interests in
GCC, net................... 896,210 9,944 9,944
In exchange for wireless
assets..................... 217,000 2,450 2,450
Upon exercise of stock
options.................... 38,762 78 78
Net loss........................ (55,954) (55,954)
---------- ------- -------- ---------- --------
Balance, December 31, 1995........ 58,047,235 324,729 (84,124) 240,605
Shares issued (unaudited):
For cash, net of costs....... 88,567 1,000 1,000
In exchange for wireless
assets..................... 595,309 7,117 7,117
Deferred compensation
(unaudited).................. 1,829 (1,714) 115
Net loss (unaudited)............ (18,574) (18,574)
---------- ------- -------- ---------- --------
Balance, March 31, 1996
(unaudited)..................... 58,731,111 $ 334,675 $ (1,714) $(102,698) $ 230,263
========== ======= ======== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 90
WESTERN WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED DECEMBER 31,
MARCH 31, ---------------------------------
------------------------- 1995 1994 1993
1995 --------- --------- ---------
-----------
1996 (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).................................. $ (18,574) $ (12,463) $ (55,954) $ (25,960) $ 3,329
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization.................. 15,610 10,776 49,456 25,670 5,399
Amortization of deferred interest.............. 1,465
Extraordinary loss on early extinguishment of
debt........................................ 6,645
(Gain) loss on dispositions, net............... 573 (6,202) (10,102)
Employee equity compensation................... 115 285 172
Other, net..................................... 248 (65) 527 163
Changes in operating assets and liabilities,
net of effects from consolidating acquired
interests:
Accounts receivable, net.................. 1,741 (926) (5,748) (2,249) (2,303)
Inventory................................. (4,158) 565 (239) (3,454) (150)
Prepaid expenses and other current
assets.................................. (3,190) (113) (1,284) 4,843 111
Accounts payable.......................... 8,171 (3,788) (272) (1,465) 354
Accrued liabilities....................... (735) 1,743 6,421 5,082 1,110
Unearned revenue and customer deposits.... 553 642 (870) 2,299 360
--------- --------- --------
Net cash used in operating activities.......... (219) (3,629) (745) (988) (255)
--------- --------- --------
Investing activities:
Purchase of property and equipment................. (38,587) (11,178) (79,464) (47,423) (25,113)
Purchase of wireless licenses and other............ (4,233) (19,907) (137,805)
Acquisition of wireless properties, net of cash
acquired......................................... (36,045) (16,078) (60,700) (30,566) (25,661)
Proceeds from disposition of assets, net........... 10,163 19,739
Investments in unconsolidated affiliates........... (84) (70) (8,268) (2,364) (1,500)
Purchase of subsidiary stock, including fees....... (1,325) (5,842)
Deposit held by FCC................................ (1,500)
--------- --------- --------
Net cash used in investing activities.......... (78,949) (48,558) (293,579) (70,190) (32,535)
--------- --------- --------
Financing activities:
Proceeds from issuance of common stock, net........ 1,000 143,080 17,008
Additions to long-term debt........................ 75,800 46,000 438,000 214,729 20,726
Payment of debt.................................... (475) (277,015) (135,264) (981)
Deferred financing costs........................... (470) (12,798) (8,688) (541)
Loans from shareholders............................ 3,842 3,842
--------- --------- --------
Net cash provided by financing activities...... 76,800 48,897 295,109 70,777 36,212
--------- --------- --------
Increase (decrease) in cash and cash equivalents..... (2,368) (3,290) 785...... (401) 3,422
Cash and cash equivalents, beginning of period....... 8,572 7,787 7,787 8,188 4,766
--------- --------- --------
Cash and cash equivalents, end of period............. $ 6,204 $ 4,497 $ 8,572 $ 7,787 $ 8,188
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 91
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
Western Wireless Corporation (the "Company") is a wireless communications
company that owns and operates wireless communications systems in the western
United States. In 1995, the Company acquired six personal communications
services ("PCS") licenses in an auction administered by the Federal
Communications Commission ("FCC"). The Company plans to initiate wireless
services in these licensed areas by 1997.
The Company was formed in July 1994 in a business combination (the
"Business Combination") among several companies, principally MARKETS Cellular
Limited Partnership ("MCLP") and General Cellular Corporation ("GCC"). The
Business Combination has been accounted for as a purchase with GCC deemed to be
the acquiring company. As a result, the financial results after the date of the
Business Combination reflect the consolidated operations of GCC and MCLP; all
financial results prior to such date reflect only the consolidated operations of
GCC, which is considered the Company's predecessor for accounting purposes. The
Company had previously reported this transaction as a pooling of interests. The
impact of restating the transaction as a purchase was to increase licensing
costs.
The Company expects to incur significant operating losses and to generate
negative cash flows from operating activities during the next several years
while it develops and constructs its PCS systems and builds a PCS customer base.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries and its affiliate investments in which the Company
has a greater than 50% interest. All affiliate investments in which the Company
has between a 20% and 50% interest are accounted for using the equity method.
All significant intercompany accounts and transactions have been eliminated.
Markets operated under an Interim Operating Authority ("IOA") are not material
to the Company's operations. All IOA revenues and expenses are included within
the appropriate line items of the Company's Consolidated Statements of
Operations.
Unaudited interim financial statements:
The interim consolidated financial information contained herein is
unaudited but, reflect all adjustments which are, in the opinion of management,
necessary to a fair presentation of the financial position, results of
operations and cash flows for the periods presented. All such adjustments are of
a normal, recurring nature. Results of operations for interim periods presented
herein are not necessarily indicative of results of operations for the entire
year.
Cash and cash equivalents:
Cash and cash equivalents consist of cash on hand, deposits in banks and
highly liquid investments purchased with an original maturity of less than three
months. The carrying value of cash and cash equivalents reported in the balance
sheets approximates fair market value.
Revenue recognition:
Service revenues based on customer usage are recognized at the time the
service is provided. Access and special feature service revenues are recognized
when earned. Sales of equipment, primarily handsets, are recognized when the
goods are delivered.
F-7
<PAGE> 92
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED):
Inventory:
Inventory consists primarily of handsets and accessories. Inventory is
stated at the lower of cost or market, determined on a first-in, first-out
basis.
Property and equipment and depreciation:
Property and equipment are stated at cost. Depreciation commences once the
assets have been placed in service and is computed using the straight-line
method over the estimated useful lives of the assets which primarily range from
three to ten years.
Licensing costs and other intangible assets and amortization:
Licensing costs primarily represent costs incurred to apply for or acquire
FCC wireless licenses, including cellular licenses obtained by the Company
principally through acquisitions, and PCS licenses which were auctioned by the
FCC during 1995. Amortization of cellular licenses is computed using the
straight-line method over 15 years.
The Company's PCS licenses represent qualified assets pursuant to Statement
of Financial Accounting Standards 34; interest capitalizable to date has not
been material. Amortization of PCS licenses begins with the commencement of
service to customers and is computed using the straight-line method over 40
years. At December 31, 1995, operations had not commenced in any of the
Company's PCS markets.
In February 1996, the Company initiated commercial operations in its
Honolulu, Hawaii PCS market.
Other intangible assets consist primarily of deferred financing costs.
Deferred financing costs are amortized using the effective interest rate method
over the terms of the respective loans.
Income taxes:
The Company accounts for deferred taxes using the asset and liability
method.
Net income (loss) per common share:
Net income (loss) per common share is calculated using the weighted average
number of shares of outstanding common stock and common stock equivalents during
the period. As required by Securities and Exchange Commission (the "Commission")
regulations, common shares issued by the Company in the year preceding the
filing of an initial public offering have been included in the calculation of
shares used in determining the net income (loss) per share as if they had been
outstanding for all periods presented, the effect of which is anti-dilutive for
1995 and 1994.
Interest rate swap and cap agreements:
As required under the Credit Facility (as defined in Note 6), the Company
enters into interest rate swap and cap agreements to manage interest rate
exposure pertaining to long-term debt. Interest rate swap agreements are
accounted for on an accrual basis. Amounts to be paid or received under interest
rate swap agreements are included as a component of interest expense in the
periods in which they accrue. Premiums paid for purchased interest rate cap
agreements are amortized to interest expense over the terms of the agreements.
Unamortized premiums are accounted for as assets in the consolidated balance
sheets. Amounts received under the interest rate cap agreements, if any, are
accounted for on an accrual basis and recognized as a reduction to interest
expense.
F-8
<PAGE> 93
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED):
Supplemental cash flow disclosure:
Cash paid for interest was $21.7 million, $10.9 million and $0.2 million
for the years ended December 31, 1995, 1994 and 1993, respectively.
Cash paid for interest was $7.9 million (unaudited) and $4.5 million
(unaudited) for the quarters ended March 31, 1996 and 1995, respectively.
Non-cash investing and financing activities were as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED DECEMBER 31,
-------------- ----------------------------
MARCH 31, 1996 1995 1994 1993
-------------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Conversion of FCC deposit to wireless
license................................ $10,000
Issuance of common stock in exchange for
wireless assets........................ $7,117 2,450
Exchange of shareholder loans and accrued
interest for common stock.............. 14,068
Shareholder loans to fund FCC deposit.... $10,000
Notes payable plus accrued interest
converted into common stock............ $1,058
</TABLE>
The Business Combination described in Notes 1 and 12 was also a non-cash
transaction involving the issuance of 18,160,643 shares of the Company's common
stock to acquire the assets and liabilities of MCLP and 39,761 shares of the
Company's common stock for interests in subsidiaries. During 1995, the Company
issued 896,210 shares of its common stock in exchange for minority interests in
GCC.
Concentration of credit risk:
The Company's customers are dispersed throughout rural areas of the western
United States. No single customer accounted for a significant amount of the
Company's sales, and there were no significant accounts receivable from a single
customer. The Company reviews the credit histories of potential customers prior
to extending credit and maintains allowances for potential credit losses. The
Company maintains cash and cash equivalents in high credit quality financial
institutions. The Company believes that its risk from concentration of credit is
limited.
Estimates used in preparation of financial statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Recently issued accounting standards:
The Financial Accounting Standards Board has recently issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This statement requires that long-lived assets and
certain identifiable intangible assets be reviewed to determine whether the
carrying amount is recoverable based on estimated future cash flows expected
from the use of the assets and cash to be received upon disposal of the assets.
The Financial Accounting Standards Board has also recently issued Statement No.
123 "Accounting for
F-9
<PAGE> 94
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED):
Stock-Based Compensation." This statement affects the valuation and disclosure
of stock-based transactions with employees. The Company plans to use the pro
forma disclosure alternative. The Company does not anticipate any material
impact on the financial position, results of operations or cash flows of the
Company upon adoption of these standards in 1996.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 ---------------------
----------- 1995 1994
(UNAUDITED) -------- --------
<S> <C> <C> <C>
Land, buildings and improvements................ $ 4,277 $ 2,879 $ 2,328
Wireless communications systems................. 201,802 165,825 124,165
Furniture and equipment......................... 21,209 16,273 7,391
-------- -------- --------
227,288 184,977 133,884
Less accumulated depreciation................... (62,802) (53,423) (25,098)
-------- -------- --------
164,486 131,554 108,786
Construction in progress........................ 67,002 62,138 11,862
-------- --------
$ 231,488 $193,692 $120,648
======== ======== ========
</TABLE>
Depreciation expense was $30.2 million, $17.0 million and $4.1 million for
the years ended December 31, 1995, 1994 and 1993, respectively.
Depreciation expense was $9.4 million (unaudited) and $6.5 million
(unaudited) for the quarters ended March 31, 1996 and 1995, respectively.
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES:
At December 31, 1995, the Company's investments in unconsolidated
affiliates consisted of an interest in Sawtooth Paging, Inc. ("Sawtooth") and an
interest in Cook Inlet Western Wireless PV/SS PCS, L.P. ("Cook Inlet PCS").
The Company had approximately a 47% and 45% ownership interest in Sawtooth
as of December 31, 1995 and 1994, respectively. Sawtooth is also owned 47% by
certain officers, one of whom is also a director, of the Company. Subsequent to
year end, the Company purchased the remaining unowned portion of Sawtooth. (See
Note 17).
In November 1995, a wholly owned subsidiary of the Company entered into an
agreement to form Cook Inlet PCS in order to participate in the FCC's C Block
auction of PCS licenses. Cook Inlet PCS intends to bid on, acquire, own, develop
and operate systems for any PCS licenses acquired during the C Block auction.
The continued existence of Cook Inlet PCS is contingent upon the successful
acquisition of at least one C Block license during the auction currently
underway. The Company has a 49.9% ownership interest in Cook Inlet PCS. At
December 31, 1995, the Company's investment in Cook Inlet PCS was approximately
$7.6 million.
The assets, liabilities and results of operations of Sawtooth and Cook
Inlet PCS are not material to the Company.
F-10
<PAGE> 95
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED LIABILITIES:
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Accrued payroll and benefits................................. $ 5,551 $ 3,913
Accrued sales and property taxes............................. 3,236 1,613
Accrued interest expense..................................... 4,471 1,697
Other........................................................ 3,401 4,217
------- -------
$ 16,659 $ 11,440
======= =======
</TABLE>
6. LONG-TERM DEBT:
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
MARCH 31, -------- --------
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
Credit Facility (a)......................... $402,000 $347,000 $197,000
NORTEL Facility (b)......................... 33,800 13,000
Other(c).................................... 2,680 2,487 4,528
-------- --------
438,480 362,487 201,528
Less current portion........................ 941
-------- --------
$438,480 $362,487 $200,587
======== ========
</TABLE>
(a) Credit Facility
On June 30, 1995, the Company entered into a credit facility with a group
of lenders (the "Credit Facility"). Pursuant to the Credit Facility, the banks
have agreed to make loans to the Company, on a revolving credit basis, in an
aggregate principal amount not to exceed $750 million during the period ending
December 30, 1998. On December 31, 1998, the loans convert to term loans payable
over five years.
Under the Credit Facility, interest is payable at the applicable margin in
excess of the prevailing Base Rate, Eurodollar or CD rate. The rate is selected
at the Company's option. The applicable margin is determined quarterly based on
the leverage ratio of the Company, excluding certain of its subsidiaries.
Interest is fixed for a period ranging from one month to one year, depending on
the type of loan, although if the Company selects the Base Rate option, the
interest rate will fluctuate during the period as the Base Rate fluctuates. At
December 31, 1995, all loans under the Credit Facility had been borrowed using
the Eurodollar rate option. The weighted average interest rate, including the
appropriate applicable margin, at December 31, 1995 was 7.41%. The Credit
Facility also provides for an annual fee of 0.5% of the unused commitment,
payable quarterly.
The weighted average interest rate, including applicable margin, at March
31, 1996 was 7.13% (unaudited).
The Credit Facility contains affirmative covenants, including among others,
maintenance of its licenses and properties, compliance with laws, insurance,
payment of taxes, payment of other indebtedness and delivery of financial and
other information. The Credit Facility requires that the Company, excluding
certain of its subsidiaries, comply with financial tests and maintain certain
F-11
<PAGE> 96
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT -- (CONTINUED):
financial ratios, including among others, maximum leverage, debt service and
fixed charges. As of March 31, 1996 and December 31, 1995, the unused portion of
the commitment under the Credit Facility was $348 million (unaudited) and $403
million, respectively.
The Credit Facility also contains certain restrictive covenants which
impose limitations on the operations and activities of the Company and certain
of its subsidiaries, including the incurrence of other indebtedness, the
creation of liens, the sale of assets, investments and acquisitions and payment
of dividends. The Credit Facility currently limits total investments by the
Company in its subsidiaries owning PCS licenses to $450 million and further
limits the total investment by the Company to $100 million (both of which are
exclusive of license acquisition costs of approximately $144 million and
exclusive of the proceeds of the NORTEL Facility (defined below)) in its PCS
subsidiaries until the PCS licenses granted by the FCC are final and
unappealable.
The repayment of the Credit Facility is secured by, among other things, the
grant of a security interest in substantially all of the assets of the Company,
excluding, among other items, the capital stock and assets of the subsidiary
that is party to the NORTEL Facility.
Upon execution of the Credit Facility, the Company repaid all of its
outstanding indebtedness under its then existing revolving/term loan agreement
(the "Previous Agreement"). Pursuant to the Previous Agreement, the lenders
thereunder agreed to make loans to the Company on a revolving credit basis in an
aggregate principal amount not to exceed $325 million. The Previous Agreement
was collateralized by substantially all of the assets of the Company. The
weighted average interest rate on the outstanding principal under the Previous
Agreement at December 31, 1994 was 8.21%.
The Company incurred an extraordinary loss of approximately $6.6 million in
connection with the early repayment of the outstanding indebtedness under the
Previous Agreement during 1995. The loss primarily consisted of the write-off of
the related financing costs which had been deferred and only partially
amortized.
(b) NORTEL Facility
Effective June 30, 1995, a wholly owned subsidiary of the Company entered
into a $200 million credit facility (the "NORTEL Facility") with Northern
Telecom Inc. ("NORTEL") which expires on December 31, 2003. The NORTEL Facility
bears interest at the subsidiary's option at either the higher of the prime rate
or the Federal Funds Rate, plus 0.625%, plus in either case a margin of 1.5%, or
the London Interbank Offered Rate ("LIBOR") plus a margin of 2.5%. The NORTEL
Facility includes quarterly financial covenants which contain provisions
regarding the maintenance of operating cash flow ratios beginning September 30,
2000, total debt and minimum revenue levels and a minimum cash coverage ratio.
The NORTEL Facility also contains certain restrictive covenants which impose
limitations on the operations and activities of the subsidiary, including limits
on new indebtedness, sale of existing assets, permitted investments and business
acquisitions and payment of cash dividends by the subsidiary. The NORTEL
Facility also provides for interest only payments through September 30, 2000,
and includes mandatory prepayment clauses contingent upon specific operating
results. The NORTEL Facility is collateralized by substantially all of the
subsidiary's assets and the stock of such subsidiary.
Commencing September 30, 2000, and at the end of each calendar quarter
thereafter, the subsidiary is required to make payments on the principal amount
outstanding under the NORTEL Facility in increasing quarterly installments.
F-12
<PAGE> 97
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT -- (CONTINUED):
As of December 31, 1995, the unused portion of the commitment under the
NORTEL Facility was $187 million. Outstanding borrowings at December 31, 1995,
were drawn under the LIBOR rate option with a weighted average interest rate of
8.43%.
As of March 31, 1996, the unused portion of the commitment under the NORTEL
Facility was $166.2 million (unaudited). Outstanding borrowings at March 31,
1996 were drawn under the LIBOR rate option with a weighted average interest
rate of 8.00% (unaudited).
(c) Other
At December 31, 1995 and 1994, the Company had other debt of approximately
$2.5 million and $4.5 million, respectively.
The Company expects to amend the Credit Facility in May 1996 to allow,
among other things, an increase of $200 million to the Credit Facility by the
inclusion of a term loan in such amount and to amend the existing repayment
terms and financial covenants. The March 31, 1996 debt maturities reflected
below have been shown as if the proposed amendment is in effect.
The aggregate amounts of principal maturities of the Company's debt are as
follows (in thousands):
<TABLE>
<CAPTION>
TWELVE MONTH PERIODS ENDING
--------------------------------
DECEMBER 31,
MARCH 31, -------------
----------
(UNAUDITED)
<S> <C> <C>
1996..................................... $ 0 $ 0
1997..................................... 0 0
1998..................................... 2,564 2,487
1999..................................... 46 24,290
2000..................................... 7,084 46,410
Thereafter............................... 428,786 289,300
-------- --------
$ 438,480 $ 362,487
======== ========
</TABLE>
7. FINANCIAL INSTRUMENTS:
The Company uses various financial instruments as part of its overall
strategy to manage the Company's exposure to market risks associated with
interest rate fluctuations. The Company has only limited involvement with these
financial instruments, and does not use them for trading purposes. Interest rate
swaps allow the Company to raise long-term borrowings at variable rates and swap
them into fixed rates for shorter durations. This enables the Company to
separate interest rate management from debt funding decisions. Interest rate cap
agreements are used to reduce the potential impact of increases in interest
rates on borrowings based upon variable interest rates. These transactions do
not subject the Company to risk of loss because gains and losses on these
contracts are offset against losses and gains on the underlying liabilities. No
collateral is held in relation to the Company's financial instruments.
At December 31, 1995, the Company had entered into interest rate caps and
swaps with a total notional amount of $375 million, of which $185 million was of
a short-term duration. The remaining $190 million had initial terms ranging from
three to 3 1/2 years and effectively converted $190 million of variable rate
debt to fixed rate. The weighted average interest rate under these agreements
was approximately 6.75% at December 31, 1995. Total net expense incurred during
the year ended December 31, 1995 for the Company's interest rate caps and swaps
was approximately $0.5 million. The amount of unrealized loss attributable to
changing interest rates at December 31, 1995 was immaterial.
F-13
<PAGE> 98
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FINANCIAL INSTRUMENTS -- (CONTINUED):
At December 31, 1994, the Company had interest rate protection in the form
of interest rate caps covering $105 million of the outstanding balance under the
Previous Agreement. Total net expense incurred during the year ended December
31, 1994 for the Company's interest rate caps and swaps was approximately $0.3
million. The amount of unrealized loss attributable to changing interest rates
at December 31, 1994 was immaterial.
At March 31, 1996, the Company had interest rate swap and cap agreements
with a total notional amount of $390 million (unaudited), of which $205 million
(unaudited) is of a long-term nature. Total net expense incurred for the quarter
ended March 31, 1996 was approximately $0.2 million (unaudited).
8. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
The Company's carrying value of financial instruments approximated fair
value. The estimated fair value of the Company's financial instruments has been
determined using available market information and appropriate valuation
methodologies. The fair value of derivative positions were determined by
obtaining market quotes.
9. COMMITMENTS AND CONTINGENT LIABILITIES:
Commitments:
The Company leases various facilities, cell site locations, rights-of-way
and equipment under operating lease agreements. The leases expire at various
dates through the year 2036. Some leases have options to renew for additional
periods up to 30 years. Certain leases require the Company to pay property
taxes, insurance and normal maintenance costs. Significantly all of the
Company's leases have fixed minimum lease payments. The Company has no
significant capital lease liabilities.
Future minimum payments required under operating leases and agreements that
have initial or remaining noncancellable terms in excess of one year at December
31, 1995, are summarized below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------------------------------------------------
<S> <C>
1996......................................................... $ 5,429
1997......................................................... 4,914
1998......................................................... 4,261
1999......................................................... 3,388
2000......................................................... 2,604
Thereafter................................................... 5,828
-------
$26,424
=======
</TABLE>
Subsequent to year end, the Company has entered into new operating leases
resulting in additional future minimum payments not reflected above of
approximately $1 million per year through 2001.
Aggregate rental expense for all operating leases was approximately $4.8
million, $2.2 million and $0.9 million for the years ended December 31, 1995,
1994 and 1993, respectively.
In order to ensure adequate supply of certain inventory requirements, the
Company has committed to purchase from a supplier a minimum number of PCS and
dual-mode handsets totaling approximately $43.7 million prior to October 1999.
No orders had been placed as of December 31,
F-14
<PAGE> 99
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENT LIABILITIES -- (CONTINUED):
1995. At March 31, 1996 the Company, under this agreement, had purchased $3.2
million (unaudited) and had outstanding purchase orders totaling $15.8 million
(unaudited).
In December 1995, a wholly owned subsidiary of the Company entered into an
agreement with this supplier to purchase a minimum of $50 million of wireless
communications equipment and services for the Company's PCS systems prior to
December 31, 1998. The Company has an option to extend the purchase commitment
period to four years by increasing the minimum purchase commitment to $100
million. In exchange for meeting minimum purchase milestones, the Company will
receive volume discounts in the form of credit memos from the supplier which may
be used at the Company's option against either the most recent payment owed to
the supplier or future purchases. The purchase agreement is valid through
December 2005. At December 31, 1995, the Company had outstanding purchase orders
totaling approximately $16 million under the agreement. At March 31, 1996 the
Company, under this agreement, had purchased $4.1 million (unaudited) and had
outstanding purchase orders totaling $10.4 million (unaudited).
In connection with the NORTEL Facility, a wholly owned subsidiary of the
Company entered into an agreement with NORTEL to purchase $200 million of PCS
network equipment and related services. At December 31, 1995, under this
agreement, the Company had purchased approximately $22.5 million and had
outstanding purchase orders totaling approximately $3.2 million. The agreement
expires June 30, 2000. At March 31, 1996, the Company had purchased
approximately $26.0 million (unaudited) and had outstanding purchase orders
totaling approximately $10.1 million (unaudited).
The Company has various other purchase commitments for materials, supplies
and other items incident to the ordinary course of business. In the aggregate,
such commitments are not at prices in excess of current market value.
Contingent liabilities:
The Company is involved in various lawsuits arising in the normal course of
business, none of which is expected to have a material adverse effect on the
Company's financial position, cash flows, liquidity or results of operations.
In the ordinary course of business, the Company is subject to extensive and
changing federal, state and local laws and regulations with regard to
environmental matters. To date the Company has not identified any potential
liabilities pertaining to environmental cleanup on properties owned or operated
by the Company.
F-15
<PAGE> 100
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
Significant components of deferred income tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ 37,666 $ 20,494
Other temporary differences................................ 5,589 3,834
-------- --------
Total deferred tax assets.................................... 43,255 24,328
Valuation allowance.......................................... (34,083) (18,261)
-------- --------
9,172 6,067
Deferred tax liabilities:
Property and wireless licenses basis differences........... (9,172) (6,067)
-------- --------
$ 0 $ 0
======== ========
</TABLE>
For tax purposes, the Company had available at December 31, 1995, net
operating loss carryforwards for regular tax purposes of approximately $94
million which will expire in 2002 through 2010. The Company may be limited in
its ability to use these carryforwards in any one year due to ownership changes
that preceded the Business Combination. The change in the valuation allowance
was an increase of $15.8 million in 1995 and decreases of $4.7 million and $0.3
million in 1994 and 1993, respectively.
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realization of
the net deferred tax assets. Such factors include recurring operating losses
resulting primarily from the development of the Company's PCS business and
expected increased competition from new entrants into the Company's existing
markets. Accordingly, a valuation allowance has been provided for the net
deferred tax assets of the Company.
The difference between the statutory tax rate of approximately 40% (35%
federal and 5% state net of federal benefits) and the tax benefit of zero
recorded by the Company is primarily due to the Company's full valuation
allowance against its net deferred tax assets.
11. SHAREHOLDERS' EQUITY:
(a) Business Combination
On July 29, 1994, certain shareholders in GCC, holding approximately 95% of
the then outstanding stock of GCC, and holders of all MCLP partnership interests
exchanged their ownership interests for common stock of the Company in the
Business Combination. The participating GCC shareholders exchanged 23,384,345
shares of GCC common stock in a one-for-one exchange for common stock in the
Company. Under the terms of the Business Combination, the MCLP partnership
interests received 18,160,643 shares of common stock in the Company, net of
661,609 shares of GCC stock owned by MCLP. GCC directly and indirectly owned
MCLP partnership interests of approximately 9.9% which were converted into
2,059,352 shares of common stock of the Company. These shares are excluded from
those outstanding for each of the periods presented. GCC's investment in MCLP
had been recorded at a cost of $8.3 million. The fair value of common
F-16
<PAGE> 101
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SHAREHOLDERS' EQUITY -- (CONTINUED):
stock of the Company issued to acquire the non-GCC partnership interests in MCLP
was $70.9 million.
The Company recorded a provision for restructuring costs in 1994 of
approximately $2.5 million, primarily related to the elimination of duplicative
headquarters and other facilities and employee relocation costs.
(b) GCC Minority Interest
During 1995 and 1994, subsequent to the Business Combination, the Company
completed two cash redemptions of the remaining shares (the "Redemptions") of
GCC's common stock. In addition, as part of the 1995 Redemption, the Company
issued 896,210 shares of the Company's common stock for GCC common stock in a
one-for-one exchange.
These redemptions eliminated all minority interest positions in the equity
of GCC. The cost in excess of the carrying amounts of the minority interests
acquired increased licensing costs and other intangible assets by approximately
$11 million and $1 million for the years ended December 31, 1995 and 1994,
respectively.
(c) Stock Option Plan
On September 20, 1994, the Board of Directors of the Company established
the 1994 Management Incentive Stock Option Plan (the "Plan") which became
effective November 17, 1994. The Plan was amended by the Board of Directors on
September 15, 1995, and approved as adopted and amended by the shareholders of
the Company on November 16, 1995. The Plan, as amended, provides for the
issuance of up to 5,890,000 shares of common stock as either Nonstatutory Stock
Options or as Incentive Stock Options. The terms and conditions of options
granted under the Plan, including all vesting provisions, are at the discretion
of the Administrator of the Plan. The Plan provided for the conversion to stock
options of the Company for the stock options issued under a plan previously
created by GCC and for the conversion of unvested rights to ownership in MCLP by
its B Unit holders, as well as new options granted by the Company in the normal
course of business subsequent to the Business Combination.
As of July 29, 1994, GCC had granted options to purchase 1,061,251 shares
of GCC stock at an average of approximately $2.98 per share; 545,629 of such
options were fully vested as of that date. The Business Combination
automatically accelerated the vesting of the remaining options under the terms
of the GCC Option Plan. All such options were converted into options to purchase
common stock of the Company.
F-17
<PAGE> 102
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SHAREHOLDERS' EQUITY -- (CONTINUED):
Options granted, exercised and canceled under the above Plans are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
QUARTER ENDED ------------- ------------ ------------
-------------
MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding, beginning
of period............. 3,538,408 2,181,514 760,272 504,814
Options granted......... 137,320 1,453,125 1,112,900 263,500
Options issued for
conversion of unvested
MCLP B units.......... 322,013
Options exercised....... (38,762)
Options canceled........ (10,850 ) (57,469) (13,671) (8,042)
------------- ------------- -------------
Outstanding, end of
period................ 3,664,878 3,538,408 2,181,514 760,272
============= ============= =============
Price of options:
Granted during period... $1.13-$12.90 $11.29-$12.90 $1.10-$ 9.68 $ 4.03
Exercised during
period................ N/A $ 1.61-$ 4.03 N/A N/A
Canceled during period.. $9.68-$12.90 $ 1.10-$ 9.68 $1.61-$ 3.23 $1.61-$ 4.03
Options exercisable..... 1,636,356 1,582,012 1,383,264 232,944
Options available for
future grant 2,186,360 2,312,830 3,708,486 5,129,728
Exercise price of
outstanding options... $1.10-$12.90 $ 1.10-$12.90 $1.10-$ 9.68 $1.61-$ 4.03
</TABLE>
(d) Stock Issuances
In November 1995, the Board of Directors approved an increase in the number
of authorized shares of the Company's common stock from 25 million to 300
million.
During 1995, a wholly owned subsidiary issued 4,300,001 shares of Series A
Preferred Stock to certain existing shareholders of the Company at $35.00 per
share for aggregate proceeds of approximately $150 million, which was comprised
of approximately $14 million of converted debt to shareholders and approximately
$136 million in cash. The preferred stock in the subsidiary was converted into
common stock of the Company on a one for 3.1 basis. Additionally, the Company
sold 581,901 shares of common stock at $11.29 per share for cash during 1995 to
existing shareholders.
In November 1993, the Company completed a rights offering to existing
shareholders, pursuant to which shareholders subscribed for 3,875,273 shares of
common stock at $4.03 per share, for aggregate cash proceeds of approximately
$14.5 million and $1.1 million through the conversion of outstanding notes
payable and accrued interest to shareholders of the Company, less offering
expenses.
In February 1993, the Company sold 620,000 shares of common stock for
aggregate proceeds of $2.5 million.
Subsequent to December 31, 1995, the Company sold 88,567 shares of its
common stock to an officer of the Company at $11.29 per share for aggregate
proceeds of approximately $1.0 million.
F-18
<PAGE> 103
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. ACQUISITION OF MARKETS CELLULAR LIMITED PARTNERSHIP:
On July 29, 1994, the Company acquired MCLP in the Business Combination in
exchange for 18,160,643 shares of common stock of the Company. The Business
Combination was accounted for using the purchase method.
The purchase price of MCLP was determined as follows (in thousands):
<TABLE>
<S> <C>
Fair value of shares issued to non-GCC interests....................... $ 70,918
GCC's investments in MCLP.............................................. 8,250
MCLP's long-term debt assumed.......................................... 59,590
Transaction fees and other............................................. 1,310
--------
$140,068
=========
The purchase price was allocated as follows (in thousands):
Cash acquired.......................................................... $ 11,726
Working capital and tangible assets acquired........................... 37,346
Licenses and other intangible assets................................... 90,996
--------
$140,068
=========
</TABLE>
The following unaudited pro forma information presents the results of
operations of the Company as if the Business Combination occurred on January 1,
1993. These results include certain adjustments to conform with the Company's
accounting policies, increased amortization expense and the elimination of the
provision for nonrecurring restructuring costs related to the Business
Combination. These results are not necessarily indicative of the results that
actually would have
F-19
<PAGE> 104
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. ACQUISITION OF MARKETS CELLULAR LIMITED PARTNERSHIP -- (CONTINUED)
been attained if the Business Combination had been in effect at the beginning of
1993 or which may be attained in the future (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1993
-----------
1994 (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Subscriber revenues.............................................. $ 47,410 $ 17,310
Roamer revenues.................................................. 19,985 11,345
Equipment sales.................................................. 9,207 4,109
-------- --------
Total revenues........................................... 76,602 32,764
-------- --------
Operating expenses:
Cost of service.................................................. 15,961 7,692
Cost of equipment sales.......................................... 13,758 5,862
General and administrative....................................... 18,600 10,712
Sales and marketing.............................................. 23,099 11,398
Depreciation and amortization.................................... 33,389 13,102
-------- --------
Total operating expenses................................. 104,807 48,766
-------- --------
Operating loss..................................................... (28,205) (16,002)
Other income (expense):
Interest and financing expense................................... (13,113) (5,202)
Gain on dispositions, net........................................ 6,202 6,357
Other income (expense)........................................... 657 (120)
-------- --------
Net loss................................................. $ (34,459) $ (14,967)
======== ========
Net loss per common share.......................................... $ (0.66) $ (0.30)
======== ========
</TABLE>
F-20
<PAGE> 105
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER ACQUISITIONS AND DISPOSITIONS:
Acquisitions:
The following table summarizes the cellular market acquisitions of the
Company for each of the three years ended December 31 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
MARKET
Kansas 14 RSA............................. April
South Dakota 3 RSA........................ May
Kansas 8 RSA.............................. May
South Dakota 1 RSA(a)..................... December
Nevada 5 RSA.............................. January
South Dakota 8 RSA........................ April
Nebraska 3 RSA............................ August
Kansas 4, 9 and 10 and Missouri 9 RSAs.... November
Minnesota 3 RSA........................... December
Sioux Falls, SD MSA....................... May
South Dakota 7 RSA........................ July
Odessa, TX MSA and New Mexico 6 RSA....... October
Nebraska 9 and 10 RSAs.................... November
Purchase price including cash and
liabilities assumed:
Cash paid................................. $38,600 $40,800 $16,200
--------- --------- ---------
--------- --------- ---------
Liabilities assumed....................... $ 500 $ 2,500 $25,500
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ---------------
(a) 217,000 shares of common stock were issued at $11.29 per share as part of
the South Dakota 1 acquisition.
With the exception of the South Dakota 1, South Dakota 8 and the Nebraska 9
and 10 RSA acquisitions which were stock purchases, the above transactions were
asset purchases. All of these transactions were accounted for using the purchase
method. Approximately 95% of the total purchase price of each acquisition has
been allocated to licensing costs. Acquisitions of additional minority interests
in owned markets are not reflected above. The results of operations of the
properties acquired are included in the Consolidated Statement of Operations
from the date of acquisition.
In September 1993, the Company entered into an agreement to operate the
cellular system in the Abilene, TX MSA market. Pursuant to that agreement, the
Company funded the build-out of the system and operated the system throughout
the remainder of 1993 and 1994. In February 1994, the Company agreed to buy the
system subject to approval from the FCC. The transfer of the license was
approved by the FCC in November 1994, at which time the Company was obligated to
pay $16.1 million. This amount was paid in January 1995.
Exchanges:
In July 1995, a subsidiary of the Company exchanged its cellular assets in
the Minnesota 5 RSA market, Minnesota 3 RSA market, a portion of the Minnesota 2
RSA market (Beltrami County), its majority interest in the Alton, IL MSA market,
minority interests in the Wausau and Eau Claire, WI
F-21
<PAGE> 106
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER ACQUISITIONS AND DISPOSITIONS -- (CONTINUED):
MSA markets and $3.0 million in cash for the cellular assets and license for the
Lubbock, TX MSA market. There was no gain or loss recognized on the transaction.
In November 1994, the Company exchanged the assets in Hood River Cellular
Telephone Company, a subsidiary of the Company, which included the cellular
licenses of the Oregon 2 and Washington 7 RSA markets, in return for the assets
and license in the Pueblo, CO MSA market and approximately $2.4 million in cash.
There was no gain or loss recognized on the transaction.
In July 1994, a subsidiary of the Company exchanged its Chico, CA MSA
market for the Texas 3 and Texas 8 RSA markets. As part of the same agreement, a
subsidiary of the Company obtained the Sioux City, IA MSA market and
approximately $4.5 million in cash. As a result of the transaction, a gain of
approximately $2.9 million was recognized.
In September 1993, the Company exchanged its majority interest in the
Alexandria, LA MSA market, together with the Company's minority interest in the
Lake Charles, LA MSA market and approximately $7.2 million in cash, for the
majority interest and certain minority interests in the Lincoln, NE MSA market.
There was no gain or loss recognized on the transaction.
In March 1993, pursuant to an agreement between the Company and MCLP, the
Company exchanged its Wyoming 2, Montana 4 and Montana 7 RSA markets along with
certain minority interests and cash in the amount of $1.3 million for the Rapid
City, SD MSA market and the South Dakota 5 and South Dakota 6 RSA markets.
Dispositions:
In April 1994, the assets of Lawton Cellular License Corporation, a
subsidiary of the Company, were sold including the cellular license for the
Lawton, OK MSA market for approximately $7.3 million in cash and marketable
securities. As a result of the transaction, the Company recorded a gain of
approximately $3.3 million.
In April 1993, the Company sold its Texas 4 market for approximately $0.5
million in cash, recording a gain of approximately $0.1 million. In addition,
the assets of Potomac Valley Cellular Partnership, the cellular licensee for the
Cumberland, MD/WV wireline MSA market, were sold for cash and marketable
securities. As a result of the transaction, the Company recorded a gain of
approximately $2.1 million.
In March 1993, the Company sold its majority interest in the Burlington, NC
MSA market and certain other minority interests for approximately $10.1 million
in cash. As a result of the transaction, the Company recorded a gain of
approximately $5.5 million.
During 1993, the Company sold certain of its minority interests in various
markets. As a result of these transactions, the Company recorded a gain of
approximately $2.4 million.
The following table reflects the operating results of the above
transactions since the effective date of the transactions. Pro forma unaudited
consolidated operating results of the Company and the above transactions
(including the acquisition of MCLP which is discussed in Note 12) for the
F-22
<PAGE> 107
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER ACQUISITIONS AND DISPOSITIONS -- (CONTINUED):
years ended December 31, 1995 and 1994, assuming the acquisitions and
dispositions, had been made as of January 1, 1994, are summarized below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Revenues..................................................... $149,547 $ 89,945
======== ========
Loss before extraordinary item............................... $(49,840) $(44,043)
Extraordinary loss........................................... (6,645)
-------- --------
Net loss................................................ $(56,485) $(44,043)
======== ========
Loss per common share before extraordinary item.............. $ (0.88) $ (1.00)
Per common share effect of extraordinary item................ (0.12)
-------- --------
Net loss per common share............................... $ (1.00) $ (1.00)
======== ========
</TABLE>
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional depreciation and amortization
expense resulting from allocating a portion of the purchase price to fixed and
wireless assets, and increased interest expense. They do not purport to be
indicative of the results of operations which actually would have resulted had
the combinations been in effect on January 1, 1994 or of future results of
operations of the consolidated entities.
14. EMPLOYEE BENEFIT PLANS:
The Company has an employee savings plan (the "Savings Plan") that
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. After one year of full-time employment (1,000 hours), an employee
is eligible to participate in the Savings Plan. Under the Savings Plan,
participating employees may defer a portion of their pretax earnings, up to the
Internal Revenue Service annual contribution limit. The Company matches 50% of
each employee's contribution up to 6% of their total compensation. The Company's
contributions are fully vested upon the completion of three years of service.
The Company's contributions were approximately $0.4 million, $0.1 million and
$0.1 million for the years ended December 31, 1995, 1994 and 1993, respectively.
F-23
<PAGE> 108
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED):
Selected quarterly consolidated financial information for the years ended
December 31, 1995 and 1994 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
LOSS
BEFORE
LOSS BEFORE EXTRAORDINARY NET LOSS
TOTAL OPERATING EXTRAORDINARY ITEM PER PER COMMON
QUARTER ENDED(1) REVENUES LOSS ITEM NET LOSS COMMON SHARE SHARE
- ----------------------- -------- --------- ------------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1994......... $ 6,989 $ (5,441) $ (6,613) $ (6,613) $(0.20) $(0.20)
June 30, 1994.......... 9,135 (2,493) (488) (488) (0.01) (0.01)
September 30, 1994..... 23,289 (5,645) (5,938) (5,938) (0.11) (0.11)
December 31, 1994...... 23,695 (9,989) (12,921) (12,921) (0.25) (0.25)
------- ------- ------- -------
Total 1994... $ 63,108 $ (23,568) $ (25,960) $(25,960)
======= ======= ======= =======
March 31, 1995......... $ 26,084 $ (7,766) $ (12,463) $(12,463) $(0.24) $(0.24)
June 30, 1995.......... 34,613 (4,023) (10,145) (16,790) (0.19) (0.31)
September 30, 1995..... 42,120 (3,749) (11,135) (11,135) (0.19) (0.19)
December 31, 1995...... 43,738 (8,397) (15,566) (15,566) (0.25) (0.25)
------- ------- ------- -------
Total 1995... $146,555 $ (23,935) $ (49,309) $(55,954)
======= ======= ======= =======
</TABLE>
- ---------------
(1) Acquisitions and dispositions referenced in Notes 12 and 13 will affect the
comparability of the information presented from period to period.
16. RELATED PARTY TRANSACTIONS:
Cook Inlet Western Wireless PV/SS PCS, L.P.:
In 1995, a wholly owned subsidiary of the Company formed a limited
partnership with Cook Inlet PV/SS PCS Partners, L.P. (the "General Partner"). A
6.7% shareholder of the Company is also a limited partner of the General
Partner.
Shareholder loans:
During 1994 and 1995, certain shareholders entered into bridge loan
agreements with a wholly owned subsidiary of the Company. During 1995, the
bridge loans, together with accrued interest thereon, were exchanged for shares
of the Company's common stock.
During 1995, certain officers, one of whom is a director, of the Company
who are also shareholders of Palouse and Sawtooth provided Palouse and Sawtooth
with short-term financing which was repaid by the Company subsequent to year end
as a result of the merger discussed in Note 17 below.
17. SUBSEQUENT EVENTS AND PENDING TRANSACTIONS:
The Company's common stock will be split into 3.1 shares of common stock
for each share of the then-existing common stock. The Company's consolidated
financial statements and footnotes have been retroactively restated to reflect
the stock split for all periods presented.
On December 29, 1995, the shareholders of the Company, Palouse and Sawtooth
approved the merger of Palouse and Sawtooth into wholly owned subsidiaries of
the Company. Subsequent to year end, shareholders of Palouse and Sawtooth
exchanged their shares for 515,561 and 79,748 shares of the Company's common
stock, respectively. Certain shareholders of Palouse and
F-24
<PAGE> 109
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENTS AND PENDING TRANSACTIONS -- (CONTINUED):
Sawtooth were also officers and shareholders of the Company. The holder of the
controlling interests in Palouse and Sawtooth did not hold a controlling
interest in the Company. The Company accounted for the transaction as a stock
purchase. In addition, the Company paid approximately $3.1 million and $0.3
million of outstanding debt of Palouse and Sawtooth, respectively.
Subsequent to December 31, 1995, the Company recorded deferred compensation
of approximately $1.8 million upon the issuance of 85,250 options to purchase
shares of common stock to an officer of the Company at an exercise price of
$1.13 per share.
On January 16, 1996, the Company entered into an agreement to purchase a
Denver MTA license for $66 million. The agreement permits the Company to pay up
to $33 million of the purchase price by delivery of a promissory note with a
final maturity 18 months after the closing date. This transaction is anticipated
to close in the second quarter of 1996.
On October 20, 1995, the Company entered into an agreement to purchase the
assets of the wireless communications system of the Fargo, ND MSA and the North
Dakota 3 RSA IOA for cash of approximately $31.5 million. This transaction was
completed on January 23, 1996.
The Company has entered into an agreement to purchase the Kansas 3 RSA
market for approximately $4.1 million. The transaction is anticipated to close
in the second quarter of 1996.
18. REINCORPORATION AND COMMISSION REGISTRATION STATEMENT:
The Company intends to effect a recapitalization pursuant to which the
Company will be authorized to issue 300 million shares into two classes of
common stock, Class A Common Stock and Class B Common Stock, each without par
value, and 50 million shares of preferred stock. Subsequently, the Company
intends to effect a reincorporation merger pursuant to which it will merge with
and into a wholly owned Washington subsidiary.
In March 1996, the Company filed registration statements with the
Commission relating to offerings of the Company's Class A Common Stock, no par
value, and Senior Subordinated Notes. An affiliate of the Company is expected to
act as an underwriter in the offerings.
F-25
<PAGE> 110
WESTERN WIRELESS CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) (2) PERIOD
- ----------------------------------------- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995............. $ 1,772 $ 4,558 $ 892 $ (4,422) $ 2,800
====== ====== ==== ======= ======
Year ended December 31, 1994............. $ 476 $ 1,885 $ 638 $ (1,227) $ 1,772
====== ====== ==== ======= ======
Year ended December 31, 1993............. $ 298 $ 546 $ 286 $ (654) $ 476
====== ====== ==== ======= ======
</TABLE>
- ---------------
(1) Represents market acquisitions and dispositions and late fees.
(2) Write-offs, net of bad debt recovery.
F-26
<PAGE> 111
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO MARKETS CELLULAR LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheets of MARKETS
Cellular Limited Partnership (a Delaware limited partnership) and subsidiary
companies as of June 30, 1994, December 31, 1993 and 1992, and the related
consolidated statements of operations, partners' capital and cash flows for the
six months ended June 30, 1994, the year ended December 31, 1993, and the period
from October 6, 1992 (inception) to December 31, 1992. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MARKETS Cellular Limited
Partnership and subsidiary companies as of June 30, 1994, December 31, 1993 and
1992, and the results of their operations and their cash flows for the six
months ended June 30, 1994, the year ended December 31, 1993, and the period
from October 6, 1992 (inception) to December 31, 1992, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington,
March 15, 1996
F-27
<PAGE> 112
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, DECEMBER 31, 31,
1994 1993 1992
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 11,726,000 $ 1,390,000 $ 3,026,000
Accounts receivable, net of allowance for
doubtful accounts of $436,000, $397,000
and $84,000, respectively................ 4,162,000 2,574,000 522,000
Inventory................................... 839,000 413,000 83,000
Prepaid expenses and other current assets... 1,035,000 1,783,000 206,000
------------ ------------ -----------
Total current assets................ 17,762,000 6,160,000 3,837,000
Property and equipment, net of accumulated
depreciation of $7,737,000, $4,335,000 and
$280,000, respectively...................... 40,887,000 35,212,000 12,088,000
Licensing costs and other intangible assets,
net of accumulated amortization of
$5,731,000, $3,664,000 and $275,000,
respectively................................ 56,537,000 57,189,000 25,493,000
Investments in unconsolidated affiliates...... 3,445,000 3,367,000 2,079,000
Cellular properties pending disposition,
net......................................... 10,884,000
Other assets.................................. 1,200,000 1,023,000 1,512,000
------------ ------------ -----------
$119,831,000 $102,951,000 $55,893,000
============ ============ ===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable............................ $ 4,923,000 $ 1,855,000 $ 464,000
Accrued liabilities......................... 3,545,000 1,573,000 733,000
Accounts payable, affiliates................ 1,618,000
Construction accounts payable............... 865,000 1,196,000 1,553,000
Unearned revenue and customer deposits...... 1,368,000 804,000 65,000
Current portion of long-term debt........... 593,000 239,000 3,146,000
------------ ------------ -----------
Total current liabilities........... 11,294,000 5,667,000 7,579,000
Long-term debt, including deferred interest,
net of current portion...................... 58,997,000 57,584,000 5,051,000
Commitments (Note 5)
Minority interests in equity of consolidated
subsidiaries................................ 76,000 56,000 15,000
Partners' capital............................. 49,464,000 39,644,000 43,248,000
------------ ------------ -----------
$119,831,000 $102,951,000 $55,893,000
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 113
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------- OCTOBER 6, 1992
JUNE 30, YEAR ENDED (INCEPTION) TO
1994 DECEMBER 31, 1993 DECEMBER 31, 1992
------------ JUNE 30, ----------------- -----------------
1993
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Subscriber revenues............... $ 8,260,000 $ 1,718,000 $ 6,205,000 $ 249,000
Roamer revenues................... 3,101,000 831,000 4,060,000 412,000
Equipment sales................... 1,682,000 934,000 1,765,000 69,000
------------ ------------ ------------ ------------
Total revenues............. 13,043,000 3,483,000 12,030,000 730,000
------------ ------------ ------------ ------------
Operating expenses:
Cost of service................... 2,658,000 1,076,000 3,382,000 384,000
Cost of equipment sales........... 2,312,000 1,150,000 2,329,000 69,000
General and administrative........ 4,833,000 1,270,000 4,459,000 687,000
Sales and marketing............... 4,546,000 1,640,000 5,297,000 290,000
Depreciation and amortization..... 6,024,000 3,040,000 7,701,000 555,000
------------ ------------ ------------ ------------
Total operating expenses... 20,373,000 8,176,000 23,168,000 1,985,000
------------ ------------ ------------ ------------
Operating loss...................... (7,330,000) (4,693,000) (11,138,000) (1,255,000)
------------ ------------ ------------ ------------
Other income (expense):
Interest and financing expense.... (2,454,000) (734,000) (2,960,000) (156,000)
Loss on disposition of cellular
equipment....................... (3,704,000) (3,745,000)
Other, net........................ (1,751,000) (608,000) (451,000) 91,000
------------ ------------ ------------ ------------
Total other income
(expense)................ (4,205,000) (5,046,000) (7,156,000) (65,000)
------------ ------------ ------------ ------------
Net loss................... $(11,535,000) $ (9,739,000) $ (18,294,000) $ (1,320,000)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 114
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
LIMITED PARTNERS
GENERAL ----------------------
PARTNER UNITS AMOUNTS TOTAL
--------- ----- ------------ ------------
<S> <C> <C> <C> <C>
Partners' cash contributions.......... $ 750,000 1,236 $ 30,738,000 $ 31,488,000
Partners' property contributions...... 532 13,292,000 13,292,000
Offering and syndication costs........ (212,000) (212,000)
Net loss.............................. (19,000) (1,301,000) (1,320,000)
--------- ----- ------------ ------------
Balance at December 31, 1992.......... 731,000 1,768 42,517,000 43,248,000
Partners' cash contributions........ 567 14,690,000 14,690,000
Net loss............................ (261,000) (18,033,000) (18,294,000)
--------- ----- ------------ ------------
Balance at December 31, 1993.......... 470,000 2,335 39,174,000 39,644,000
Partners' cash contributions........ 35,000 772 19,220,000 19,255,000
Conversion of note and accrued
interest to equity............... 298,000 298,000
Class B unit awards recorded as
compensation expense............. 1,459,000 1,459,000
Partnership interests granted in
payment of fee................... 343,000 343,000
Net loss............................ (134,000) (11,401,000) (11,535,000)
--------- ----- ------------ ------------
Balance at June 30, 1994.............. $ 371,000 3,107 $ 49,093,000 $ 49,464,000
========= ===== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 115
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------- OCTOBER 6, 1992
JUNE 30, YEAR ENDED (INCEPTION) TO
1994 JUNE 30, DECEMBER 31, 1993 DECEMBER 31, 1992
------------ 1993 ----------------- -----------------
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net loss..................................... $(11,535,000) $ (9,739,000) $ (18,294,000) $ (1,320,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization............ 6,024,000 3,040,000 7,701,000 555,000
Deferred interest and financing costs.... 2,425,000 646,000 2,142,000 11,000
Class B unit awards...................... 1,459,000
Partnership interests granted in payment
of fee................................ 343,000
Loss on disposition of cellular
equipment............................. 3,704,000 3,745,000
Minority interests in net loss of
consolidated subsidiaries............. 72,000 (3,000) (12,000) (76,000)
Changes in operating assets and
liabilities, net of effects from
consolidating acquired interests:
Accounts receivable, net............ (1,588,000) (1,101,000) (1,888,000) 33,000
Other current assets................ (989,000) (888,000) (1,591,000) (32,000)
Current liabilities................. 4,485,000 2,047,000 2,263,000 836,000
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities............................... 696,000 (2,294,000) (5,934,000) 7,000
------------ ------------ ------------ ------------
Investing activities:
Acquisition of cellular properties, net of
cash acquired.............................. (1,359,000) (10,208,000) (10,208,000) (24,840,000)
Investments in unconsolidated affiliates..... (150,000) (1,288,000) (266,000)
Purchase of property and equipment........... (7,576,000) (18,342,000) (27,657,000) (1,679,000)
Proceeds from disposition of assets, net..... 1,307,000 2,514,000
Additions to licensing costs and other
assets..................................... (986,000) (1,923,000) (2,491,000) (1,614,000)
------------ ------------ ------------ ------------
Net cash used in investing activities...... (10,071,000) (29,166,000) (39,130,000) (28,399,000)
------------ ------------ ------------ ------------
Financing activities:
Partner cash contributions, net of
syndication costs.......................... 19,255,000 7,320,000 14,690,000 31,276,000
Additions to long-term debt.................. 635,000 29,828,000 36,532,000 250,000
Payment of debt.............................. (179,000) (4,981,000) (5,630,000)
Purchase of interest rate caps............... (546,000)
Repayment of accounts payable, affiliates.... (1,618,000) (1,618,000) (108,000)
------------ ------------ ------------ ------------
Net cash provided by financing
activities............................... 19,711,000 30,549,000 43,428,000 31,418,000
------------ ------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents.................................. 10,336,000 (911,000) (1,636,000) 3,026,000
Cash and cash equivalents, beginning of
period....................................... 1,390,000 3,026,000 3,026,000 0
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period....... $ 11,726,000 $ 2,115,000 $ 1,390,000 $ 3,026,000
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 116
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PARTNERSHIP ORGANIZATION AND OPERATIONS:
General:
MARKETS Cellular Limited Partnership ("MCLP" or the "Partnership") was a
Delaware limited partnership with PN Cellular Limited Partnership as the General
Partner ("GP"). The Partnership was formed on October 6, 1992. On July 29, 1994,
the Partnership was combined with General Cellular Corporation ("GCC") in a
business combination (the "Business Combination"), which was accounted for as a
purchase of the Partnership by GCC. Concurrent with the Business Combination,
Western Wireless Corporation (the "Company") became the successor entity. These
consolidated financial statements reflect the operations of MCLP through June
30, 1994. The results of operations of MCLP from July 1, 1994, to July 29, 1994,
are not significant.
The Partnership was principally engaged in the ownership and operation of
cellular communications systems. Cellular licenses are awarded by the Federal
Communications Commission ("FCC") in either Metropolitan Statistical Areas
("MSAs") or Rural Service Areas ("RSAs"). The Partnership had operations in the
states of Colorado, Idaho, Minnesota, Montana, North Dakota, Oregon, Washington
and Wyoming.
Organization:
The Partnership was comprised of Class A limited partners ("Class A LPs"),
Class B limited partners ("Class B LPs") and the General Partner. At December
31, 1992, a total of 3,004 Class A units were subscribed by Class A LPs at a
cost of $25,000 per unit. The Partnership Agreement authorized the sale of an
additional 103 units which were subscribed in 1993 at a cost per unit of
$25,000, plus an additional $5,000 per unit for the right to purchase the Class
A units. The $5,000 per unit was payable at the subscription date. The Class A
LPs (other than Class A LPs contributing cellular assets in exchange for Class A
units) were required to purchase at least one-half of their subscribed units
upon becoming Class A LPs.
The GP had the discretion to issue up to 2,320 Class B units in the
Partnership during the term of the Partnership to employees and persons who
performed services on behalf of the Partnership. The Class B units had no cash
purchase price. At June 30, 1994, 1,933 Class B units had been issued, of which
548 Class B units had vested and 1,385 Class B units had not yet vested. In
connection with the Business Combination, the 548 vested Class B units converted
into shares of the Company common stock; the 1,385 unvested Class B units became
automatically vested and were converted to fully vested options to purchase
shares of the Company common stock. Compensation expense of $1,459,000 was
recognized related to these units vesting.
Allocation of profits, losses and distributions:
Profits and losses of the Partnership were generally allocated as follows:
(1) To the GP and Class A LPs in proportion to their capital contributions
and the Preferred Return of 10% per annum on their capital
contributions,
(2) Next, to the Class B LPs 3.093% of the aggregate amount of the
Preferred Return of the GP and Class A LPs,
(3) Next, of the remaining amounts to be allocated -- 84% to the Class A
LPs, 3% to the Class B LPs and 13% to the GP.
F-32
<PAGE> 117
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of the
Partnership, its wholly owned subsidiaries and its affiliate investments in
which the Partnership has a greater than 50% interest. All affiliate investments
in which the Partnership has between a 20% and 50% interest are accounted for
using the equity method. All significant intercompany accounts and transactions
have been eliminated.
Unaudited interim financial statements:
The interim consolidated financial information contained herein is
unaudited but, in the opinion of management, includes all adjustments which are
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented. Results of operations for
interim periods presented herein are not necessarily indicative of results of
operations for the entire year.
Cash and cash equivalents:
Cash and cash equivalents consist of cash on hand, deposits in banks and
highly liquid investments purchased with an original maturity of less than three
months. The carrying value of cash and cash equivalents reported in the balance
sheets approximates fair market value.
Revenue recognition:
Service revenues based on customer usage are recognized at the time the
service is provided. Access and special feature service revenues are recognized
when earned. Sales of equipment, primarily handsets, are recognized when the
goods are delivered.
Inventory:
Inventory consists primarily of handsets and accessories. Inventory is
stated at the lower of cost or market, determined on a first-in, first-out
basis.
Property and equipment and depreciation:
Property and equipment were stated at cost. Depreciation was computed using
the straight-line method over the estimated useful lives of the assets which
ranged from three to ten years.
Licensing costs and other intangible assets and amortization:
Licensing costs primarily represented costs incurred to develop or acquire
cellular licenses. Amortization began with the commencement of service to
customers and was computed using the straight-line method over 15 years.
Intangible assets primarily included deferred financing costs and organization
costs, which included legal and other direct costs of certain acquisitions.
Using the effective interest rate method, deferred financing costs were
amortized over the life of the loan and organization costs were amortized over
five years.
Investments in unconsolidated affiliates:
Investments in unconsolidated affiliates reflected MCLP's investment in
Stanton Communications, Inc. ("SCI") and Sawtooth Paging, Inc. ("Sawtooth").
These investments were stated at cost and adjusted for the Partnership's share
of undistributed earnings and losses. The excess of
F-33
<PAGE> 118
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
the Partnership's investment in SCI over the underlying book value of the net
assets was amortized using the straight-line method over 40 years. The assets,
liabilities and results of operations of SCI and Sawtooth were not material to
MCLP. Sawtooth was also owned 45% by managing partners of the Partnership.
Cellular properties pending disposition, net:
At December 31, 1992, the Partnership had agreements to trade certain
cellular assets for other cellular assets, pending approval for the transfers of
licenses. Accordingly, the assets of the cellular systems to be traded, net of
any related liabilities, and the results of operations related to those assets
were classified separately in the accompanying consolidated balance sheets and
statements of operations. For the period from October 6, 1992 to December 31,
1992, and the year ended December 31, 1993, the results of operations related to
these assets were not material. At December 31, 1993, the Partnership had
consummated the trades.
Other assets:
Included in other assets on the Consolidated Balance Sheets are assets, net
of liabilities, attributable to markets in which MCLP had an Interim Operating
Authority ("IOA") issued by the FCC. MCLP had IOAs which were granted by the FCC
in January 1993 for Wyoming 4 and North Dakota 3. In February 1994, the FCC
granted MCLP IOAs for Idaho 3 and Montana 3. MCLP management believes that
amounts capitalized relating to IOAs are realizable either through operations,
sale to the permanent licensee or ultimate acquisition of the license.
During 1992, MCLP managed certain cellular properties prior to ownership.
Included in other assets were advances to those properties still under
management agreements at December 31, 1992. Costs incurred by the Partnership
for managed properties prior to ownership were reflected as other income
(expense) in the 1992 Consolidated Statement of Operations.
Offering and syndication costs:
Costs incurred directly relating to the offering of the Class A LP units
were treated as a reduction of the capital contributed by the Limited Partners.
Federal income taxes:
The Partnership was not subject to federal income taxes since all taxable
income or loss accrued to the individual partners. No provision was made in the
statements of operations for federal income taxes.
Since the Partnership had losses since inception, there would have been no
tax benefit recorded had the Partnership been a taxable entity.
Other:
Accrued liabilities included $867,000 and $628,000 of accrued employee
expenses at June 30, 1994, and December 31, 1993, respectively. Other current
assets at December 31, 1993, included $1,237,000 of cellular communications
equipment credits.
F-34
<PAGE> 119
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Concentration of credit risk:
The Partnership's customers were dispersed throughout rural areas of the
western United States. No single customer accounted for a significant amount of
the Partnership's revenues, and there were no significant accounts receivable
from a single customer. The Partnership reviewed the credit histories of
potential customers prior to extending credit and maintains allowances for
potential credit losses. The Partnership maintained cash and cash equivalents in
high credit quality financial institutions. The Partnership believed that its
risk from concentration of credit was limited.
Interest rate swap and cap agreements:
As required by the loan agreement with AT&T Credit Corporation, the
Partnership entered into interest rate cap agreements to manage interest rate
exposure pertaining to long-term debt. Premiums paid for purchased interest rate
cap agreements were amortized to interest expense over the terms of the
agreements. Unamortized premiums were accounted for as assets in the
Consolidated Balance Sheets. Amounts received under the interest rate cap
agreements, if any, were accounted for on an accrual basis and recognized as a
reduction to interest expense.
Supplemental cash flow disclosures:
Non-cash investing and financing activities were as follows:
<TABLE>
<CAPTION>
OCTOBER 6, 1992
SIX MONTHS YEAR ENDED (INCEPTION) TO
ENDED JUNE 30, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
------------------- ----------------- -----------------
<S> <C> <C> <C>
Issuance of partnership units in
exchange for property................. $13,292,000
Acquisition of cellular market in
exchange for debt assumed............. $ 1,680,000
Conversion of note and accrued interest
to partners' capital.................. $ 298,000
</TABLE>
Estimates used in preparation of financial statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
F-35
<PAGE> 120
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at June 30, 1994 and
December 31, 1993 and 1992:
<TABLE>
<CAPTION>
DECEMBER DECEMBER
JUNE 30, 31, 31,
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Cellular property and equipment..... $38,698,000 $34,829,000 $ 9,902,000
Office equipment and improvements... 1,725,000 1,211,000 561,000
Automotive equipment................ 461,000 346,000 129,000
----------- ----------- -----------
40,884,000 36,386,000 10,592,000
Less accumulated depreciation....... (7,737,000) (4,335,000) (280,000)
----------- ----------- -----------
33,147,000 32,051,000 10,312,000
Construction in progress............ 7,740,000 3,161,000 1,776,000
----------- ----------- -----------
$40,887,000 $35,212,000 $12,088,000
=========== =========== ===========
</TABLE>
Depreciation expense was $2.1 million and $1.7 million (unaudited) for the
six months ended June 30, 1994 and 1993, respectively, and $4.3 million and $0.3
million for the year ended December 31, 1993 and the period from October 6, 1992
(inception) to December 31, 1992, respectively.
F-36
<PAGE> 121
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT:
Long-term debt at June 30, 1994 and December 31, 1993 and 1992 consisted of
the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Loan agreement with AT&T Credit Corporation;
interest payable at 90 day commercial paper rate
plus 4.5%, including deferred interest of
$3,869,000 (9.02% total interest rate at June 30,
1994) and $1,975,000 at June 30, 1994 and December
31, 1993,
respectively...................................... $ 47,733,000 $ 45,208,000
Purchase money and working capital notes payable to
AT&T Credit Corporation; interest payable
quarterly at 9.5% per annum. Notes refinanced in
1993.............................................. $ 460,000
Purchase money and working capital notes payable to
vendors; interest payable at the prime rate plus
2%. Notes repaid in 1993.......................... 4,770,000
Purchase money and working capital notes payable to
vendor; interest payable monthly at the Morgan
Guaranty Base Rate plus 2% (9.25% total interest
rate at June 30, 1994); all of the assets and
license of Oregon 2 RSA and partnership interest
in Hood River Cellular Telephone Company were
pledged as collateral; due 1994 to 1998........... 2,511,000 2,523,000 1,956,000
Purchase money and working capital note payable to
vendor; interest payable monthly at the Chase
Manhattan Bank's prime rate plus 2% (9.25% total
interest rate at June 30, 1994); all of the assets
and license of Minnesota 5 RSA and partnership
interest in KETS Partnership were pledged as
collateral; due April 30, 1997.................... 3,500,000 3,500,000
Subordinated seller and other notes with interest
rates ranging from 7% to 10%, maturing to 2002.... 5,846,000 6,592,000 1,011,000
----------- ----------- ----------
59,590,000 57,823,000 8,197,000
Less current portion................................ 593,000 239,000 3,146,000
----------- ----------- ----------
$ 58,997,000 $ 57,584,000 $ 5,051,000
=========== =========== ==========
</TABLE>
These loans were substantially refinanced with borrowings of the Company
concurrent with the Business Combination in July 1994.
The aggregate amounts of principal maturities of long-term debt as of June
30, 1994 prior to the refinancing which occurred concurrent with the Business
Combination were as follows:
<TABLE>
<CAPTION>
TWELVE MONTH PERIODS
ENDING JUNE 30,
--------------------
<S> <C>
1995..................................... $ 593,000
1996..................................... 2,788,000
1997..................................... 13,330,000
1998..................................... 9,973,000
1999..................................... 10,054,000
Thereafter............................... 22,852,000
--------------------
$ 59,590,000
=================
</TABLE>
F-37
<PAGE> 122
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT: -- (CONTINUED)
Total interest paid in cash amounted to $437,000 and $88,000 (unaudited)
for the six months ended June 30, 1994 and 1993, respectively, and $739,000 and
$57,000 for the year ended December 31, 1993 and the period from October 6, 1992
to December 31, 1992, respectively.
5. COMMITMENTS:
Operating leases:
The Partnership had operating leases principally for facilities, cell
sites, and office space and other operating agreements with remaining terms of
between one and fourteen years. Some leases had options for additional periods.
Certain leases provided for payment by the lessee of taxes, maintenance and
insurance.
Future minimum payments required under operating leases and agreements that
had initial or remaining noncancellable terms in excess of one year at June 30,
1994, are summarized below:
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
Remainder of 1994............................... $ 351,000
1995............................................ 639,000
1996............................................ 398,000
1997............................................ 341,000
1998............................................ 195,000
Thereafter...................................... 177,000
----------
$2,101,000
==========
</TABLE>
Total rent expense amounted to $421,000 and $264,000 (unaudited) for the
six months ended June 30, 1994 and 1993, respectively, and $591,000 and $59,000
for the year ended December 31, 1993, and the period from October 6, 1992 to
December 31, 1992, respectively.
F-38
<PAGE> 123
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACQUISITIONS:
The following table summarizes the cellular market acquisitions of the
Partnership for the six months ended June 30, 1994, the year ended December 31,
1993, and the period from October 6, 1992 (inception) to December 31, 1992.
<TABLE>
<CAPTION>
SIX MONTHS OCTOBER 6, 1992
ENDED JUNE YEAR ENDED (INCEPTION) TO
30, DECEMBER 31, DECEMBER 31,
1994 1993 1992
---------- ------------ ---------------
<S> <C> <C> <C>
Asset Purchases:
Grand Forks, ND MSA................................ October
North Dakota 2 RSA................................. October
CIS-2 (Bismarck, ND MSA -- 75.2% and
Montana 2 RSA)................................... November
Colorado 8 RSA..................................... November
Montana 10 RSA..................................... November
CIS-1 (Rapid City, SD MSA, Montana 8 RSA,
and South Dakota 6 RSA).......................... December
CIS-3 (South Dakota 5 RSA)......................... December
Montana 1 RSA...................................... December
Montana 6 RSA...................................... December
Montana 9 RSA...................................... December
North Dakota 1 RSA................................. January
North Dakota 4 RSA................................. January
North Dakota 5 RSA................................. February
GCC Trade (Montana 4 RSA,
Montana 7 RSA and Wyoming 2 RSA)................. March
Minnesota 1 and 2 RSAs............................. May
Minnesota 5 RSA.................................... May
Montana 5 RSA -- (99%)............................. June
Colorado 5 RSA..................................... September
Washington 7 RSA................................... June
Stock Purchases:
CIS-2 (Great Falls, MT MSA -- 54.8%)............... November
CIS-1 (Billings, MT MSA -- 63.5%).................. December
</TABLE>
Purchase price including cash paid and liabilities assumed at closing are
as follows:
<TABLE>
<S> <C> <C> <C>
Cash paid at closing............................. $1,359,000 $11,208,000 $23,867,000
Liabilities assumed.............................. 16,717,000 5,823,000
---------- ----------- -----------
$1,359,000 $27,925,000 $29,690,000
========== =========== ===========
</TABLE>
All of the acquisitions were accounted for using the purchase method. The
results of operations from the properties acquired are included in the
consolidated statements of operations from the date of acquisition. Results of
operations prior to the date of acquisition were not significant in relation to
the Partnership's results of operations.
F-39
<PAGE> 124
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACQUISITIONS: -- (CONTINUED)
During the six months ended June 30, 1994, the Partnership purchased
minority interests in the Billings, MT MSA and Great Falls, MT MSA from minority
partners for a total cash purchase price of $250,000.
During 1993, the Partnership purchased minority interests in the Bismarck,
ND MSA, Billings, MT MSA and Great Falls, MT MSA from minority partners for a
total cash purchase price of $437,000.
The September 1993 acquisition of Colorado 5 was a non-cash transaction as
the $1.7 million purchase price was directly applied to the loan agreement with
AT&T Credit Corporation.
During 1992, the Partnership purchased a number of cellular systems and
assets from subsidiaries of Cellular Information Systems, Inc. ("CIS"). Those
purchases occurred in November and December 1992 and are aggregated for the
purposes of this disclosure.
In December 1992, the Partnership purchased an additional 47.8% of Hood
River Cellular Telephone Company (Oregon 2 RSA) in exchange for 50 Class A LP
units and $8,000 in cash paid to the Partnership.
7. RELATED PARTY TRANSACTIONS:
General Cellular Corporation:
John W. Stanton was Chief Executive Officer of both MCLP and GCC. GCC owned
a 9.9% interest in PN Cellular Limited Partnership (MCLP's general partner) and
had subscribed for 300 limited partnership units in MCLP. MCLP owned 40% of SCI
which owned approximately 4.7% of the stock of GCC. During 1993, MCLP purchased
a direct interest in GCC representing approximately a 0.65% ownership interest.
MCLP exchanged the Rapid City, SD MSA market and the South Dakota 5 and
South Dakota 6 RSA markets that it acquired from CIS for GCC's Wyoming 2,
Montana 4 and Montana 7 RSA markets, GCC's minority interests in the Billings
and Great Falls, MT MSA markets and a cash payment of approximately $1,300,000.
No gain or loss was recorded on the transaction.
In 1993, MCLP sold certain decommissioned cellular equipment to GCC for a
cash price of $976,000.
McCaw Cellular Communications, Inc. ("McCaw"):
Mr. Stanton was a director of McCaw, now known as AT&T Wireless Services,
Inc., until May 1994. During 1992 and 1993, the Partnership and its predecessors
entered into a series of agreements with McCaw to purchase services in six of
MCLP's markets utilizing McCaw facilities located in Oregon, Idaho and Colorado.
Services provided included leasing switch capacity, roamer coordination and
billing. The majority of the agreements had a five-year term with options to
renew. The total amounts paid by the Partnership and its predecessors for
services rendered by McCaw during the six months ended June 30, 1994, the year
ended December 31, 1993 and the period from October 6, 1992, to December 31,
1992, were approximately $200,000, $524,000 and $262,000, respectively.
F-40
<PAGE> 125
MARKETS CELLULAR LIMITED PARTNERSHIP AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS: -- (CONTINUED)
Reimbursement to Mr. Stanton/Ms. Gillespie:
During 1992, Mr. Stanton and Theresa Gillespie advanced funds to the
Partnership and its predecessors. Pursuant to the Partnership Agreement, MCLP
agreed to repay Mr. Stanton and Ms. Gillespie $3,412,000. As of December 31,
1992, Mr. Stanton and Ms. Gillespie were still owed $1,618,000. During 1992,
interest was accrued, but not paid, at the rate of 5.5%. In January 1993, the
$1,618,000 was repaid, plus accrued interest in the amount of $27,000.
GS Capital Partners, L.P. ("GS Capital"):
GS Capital was the largest limited partner in MCLP. Pursuant to the
Partnership Agreement, GS Capital loaned the Partnership $250,000 at an interest
rate of 10%. The principal and accrued interest was payable on December 31,
2002. At June 30, 1994, and December 31, 1993 and 1992, approximately $48,000,
$32,000 and $6,000, respectively, in interest had accrued on the loan. This note
was converted to equity in connection with the Business Combination.
The Goldman Sachs Group, L.P.:
In connection with the Business Combination, the Partnership granted
partnership interests to The Goldman Sachs Group, L.P. valued at $343,000 in
payment of a fee for advisory services.
Interest Rate Cap Transactions:
During 1993, the Partnership purchased interest rate protection through
interest rate cap transactions. These purchases were made from two affiliates of
MCLP partners. One purchase was executed with Goldman, Sachs & Co. pursuant to
which Goldman, Sachs & Co. was paid $126,000. The other transactions were with
Toronto Dominion Bank at a total cost of $420,000. The cost of the interest rate
caps is recorded as a prepaid expense and amortized over the term of the
contract, generally four to five years.
F-41
<PAGE> 126
PLAN OF DISTRIBUTION
This Prospectus may be used by Goldman Sachs in connection with offers and
sales of the shares of Class A Common Stock related to market making
transactions effected from time to time after the commencement of the Offerings.
Goldman Sachs may act as principal or agent in such transactions, including as
agent for the counterparty when acting as principal or agent for both
counterparties, and may receive compensation in the form of discounts and
commissions, including from both counterparties when they act as agent for both.
Such sales will be made at prevailing market prices at the time of sale, at
prices related thereto or at negotiated prices.
For a description of certain relationships between Goldman Sachs and their
affiliates and the Company, see "Management," "Certain Transactions" and
"Principal and Selling Shareholders."
The Company has been advised by Goldman Sachs that, subject to applicable
laws and regulations, Goldman Sachs currently intend to make a market in the
shares of Class A Common Stock following completion of the Offerings. However,
they are not obligated to do so and any market-making may be discontinued at any
time without notice. In addition, such market-making activity will be subject to
the limits imposed by the Securities Act and the Securities Exchange Act of
1934. There can be no assurance that an active trading market will develop or be
sustained. See "Risk Factors -- No Prior Market; Possible Volatility of Stock
Price."
Goldman Sachs may not confirm sales to any accounts over which they
exercise discretionary authority without the prior specific written approval by
the customer.
The Class A Common Stock is quoted on the Nasdaq National Market under the
symbol "WWCA."
Settlement for the Class A Common Stock will be made in immediately
available funds, and all secondary trading will settle in immediately available
funds.
The Company has agreed to indemnify Goldman Sachs against certain
liabilities, including liabilities under the Act.
U-1
<PAGE> 127
(ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS)
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 12
The Company................................ 23
Use of Proceeds............................ 24
Dividend Policy............................ 24
Dilution................................... 25
Capitalization............................. 26
Selected Consolidated Financial Data....... 27
Management's Discussion and
Analysis of Financial Condition and
Results of Operations.................... 29
Business................................... 42
Description of Indebtedness................ 64
Management................................. 67
Principal and Selling Shareholders......... 73
Certain Transactions....................... 76
Description of Capital Stock............... 80
Shares Eligible for Future Sale............ 82
Validity of Class A Common Stock........... 84
Experts.................................... 84
Additional Information..................... 84
Index to Consolidated Financial
Statements............................... F-1
Plan of Distribution....................... U-1
</TABLE>
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11,000,000 SHARES
WESTERN WIRELESS CORPORATION
CLASS A COMMON STOCK
(NO PAR VALUE PER SHARE)
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LOGO
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GOLDMAN, SACHS & CO.
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