<PAGE> 1
Prospectus Supplement
Filed under Rule 424(b)(3)
Registration Number
333 - 14859
PROSPECTUS SUPPLEMENT NO. 3
TO
PROSPECTUS DATED MAY 1, 1997
-----------------------------
[LOGO]
WESTERN WIRELESS CORPORATION
CLASS A COMMON STOCK
(NO PAR VALUE PER SHARE)
10-1/2% SENIOR SUBORDINATED NOTES DUE 2006
10-1/2% SENIOR SUBORDINATED NOTES DUE 2007
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE CLASS A COMMON STOCK, 10-1/2%
SENIOR SUBORDINATED NOTES DUE 2006 OR 10-1/2% SENIOR SUBORDINATED NOTES DUE
2007.
The Class A Common Stock is quoted on the Nasdaq National
Market under the symbol "WWCA."
-----------------------------
EACH OF THE 10-1/2% SENIOR SUBORDINATED NOTES DUE 2006 (THE "2006 NOTES")
AND THE 10-1/2% SENIOR SUBORDINATED NOTES DUE 2007 (THE "2007 NOTES," AND,
TOGETHER WITH THE 2006 NOTES, THE "SENIOR SUBORDINATED NOTES") ARE SENIOR
UNSECURED OBLIGATIONS OF THE COMPANY AND ARE SUBORDINATED IN RIGHT OF PAYMENT TO
THE PRIOR PAYMENT IN FULL OF ALL SENIOR INDEBTEDNESS AND SENIOR IN RIGHT OF
PAYMENT TO ANY CURRENT OR FUTURE SUBORDINATED INDEBTEDNESS OF THE COMPANY. IN
ADDITION, ALL EXISTING AND FUTURE INDEBTEDNESS AND OTHER LIABILITIES OF THE
COMPANY'S SUBSIDIARIES WILL BE EFFECTIVELY SENIOR IN RIGHT OF PAYMENT TO THE
SENIOR SUBORDINATED NOTES. THE 2006 NOTES AND THE 2007 NOTES RANK PARI PASSU
WITH ONE ANOTHER. THE COMPANY HAS NOT ISSUED, AND DOES NOT HAVE ANY FIRM
ARRANGEMENT TO ISSUE, ANY SIGNIFICANT INDEBTEDNESS TO WHICH THE SENIOR
SUBORDINATED NOTES WOULD BE SENIOR. AT JUNE 30, 1997, SENIOR INDEBTEDNESS
AGGREGATED APPROXIMATELY $1,065 MILLION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------------
This Prospectus has been prepared for and is to be used by Goldman, Sachs
& Co. in connection with offers and sales of the shares of Class A Common Stock,
the 10-1/2% Senior Subordinated Notes Due 2006 and the 10-1/2% Senior
Subordinated Notes Due 2007 related to market-making transactions, at prevailing
market prices, related prices or negotiated prices. The Company will not receive
any of the proceeds of such sales. Goldman, Sachs & Co. may act as principal or
agent in such transactions. See "Plan of Distribution."
GOLDMAN, SACHS & CO.
-----------------------------
The date of this Prospectus Supplement is August 13, 1997.
<PAGE> 2
This Prospectus Supplement is intended to be read in conjunction with the
Prospectus dated May 1, 1997 (the "Prospectus"), as supplemented by Prospectus
Supplement No. 1 thereto dated May 9, 1997 ("Prospectus Supplement No. 1") and
Prospectus Supplement No. 2 thereto dated June 19, 1997 ("Prospectus Supplement
No. 2"), with respect to the Class A Common Stock, 10-1/2% Senior Subordinated
Notes Due 2006 and 10-1/2% Senior Subordinated Notes Due 2007. Capitalized terms
used in this Prospectus Supplement and not otherwise defined herein have the
same meanings as in the Prospectus.
On May 9, 1997, the Company filed with the Securities and Exchange
Commission a report on Form 10-Q, a copy of which is attached to Prospectus
Supplement No. 1.
On June 19, 1997, the Company filed with the Securities and Exchange
Commission a report on Form 8-K, a copy of which is attached to Prospectus
Supplement No. 2.
On August 13, 1997, the Company filed with the Securities and Exchange
Commission a report on Form 10-Q, a copy of which is attached hereto and deemed
to be a part hereof.
<PAGE> 3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO
COMMISSION FILE NUMBER 000-28160
WESTERN WIRELESS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1638901
- ------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2001 NW SAMMAMISH ROAD
ISSAQUAH, WASHINGTON 98027
- ------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(425) 313-5200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title Shares Outstanding as of August 1, 1997
- --------------------------------------------------------------------------------
Class A Common Stock, no par value 15,935,421
Class B Common Stock, no par value 54,111,048
Page 1 of 23 sequentially numbered pages
<PAGE> 4
WESTERN WIRELESS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of June 30, 1997, and December 31, 1996..........................3
Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1997 and June 30, 1996..4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997 and June 30, 1996............5
Notes to Consolidated Financial Statements..........................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................11
PART II - OTHER INFORMATION.................................................21
ITEM 1. LEGAL PROCEEDINGS..................................................21
ITEM 2. CHANGES IN SECURITIES..............................................21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................21
ITEM 5. OTHER INFORMATION..................................................22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................22
</TABLE>
2
<PAGE> 5
WESTERN WIRELESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................... $ 16,276 $ 54,885
Accounts receivable, net of allowance for doubtful accounts of
$6,348 and $4,266, respectively .............................................. 35,424 28,958
Inventory ........................................................................... 26,478 26,138
Prepaid expenses and other current assets ........................................... 12,462 14,809
Deposit held by FCC ................................................................. 3,642 25,000
----------- -----------
Total current assets ......................................................... 94,282 149,790
Property and equipment, net of accumulated depreciation
of $160,181 and $107,685, respectively ............................................ 679,200 538,617
Licensing costs and other intangible assets, net of accumulated
amortization of $63,741 and $55,363, respectively ................................. 599,125 540,482
Investments in and advances to unconsolidated affiliates ................................ 49,804 12,655
Other assets ............................................................................ 75 159
----------- -----------
$ 1,422,486 $ 1,241,703
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 15,675 $ 14,122
Accrued liabilities ................................................................. 46,534 36,652
Construction accounts payable ....................................................... 60,265 89,583
Unearned revenue and customer deposits .............................................. 4,714 4,097
----------- -----------
Total current liabilities .................................................... 127,188 144,454
----------- -----------
Long-term debt .......................................................................... 1,065,000 743,000
----------- -----------
Commitments (Note 8)
Shareholders' equity:
Preferred stock, no par value, 50,000,000 shares authorized;
no shares issued and outstanding
Common stock, no par value, 300,000,000 shares authorized; Class A,
15,891,577 and 14,540,691 shares issued and outstanding,
respectively; Class B, 54,143,139 and 55,239,157 shares issued
and outstanding, respectively ................................................ 571,272 569,278
Deferred compensation ............................................................... (1,547) (800)
Deficit ............................................................................. (339,427) (214,229)
----------- -----------
Total shareholders' equity .................................................... 230,298 354,249
----------- -----------
$ 1,422,486 $ 1,241,703
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 6
WESTERN WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Subscriber revenues ...................................... $ 71,003 $ 43,814 $ 127,688 $ 79,151
Roamer revenues .......................................... 8,873 9,114 15,567 15,871
Equipment sales and other revenues ....................... 10,766 5,641 18,947 9,582
---------- ---------- ---------- ----------
Total revenues ...................................... 90,642 58,569 162,202 104,604
---------- ---------- ---------- ----------
Operating expenses:
Cost of service .......................................... 22,286 10,739 42,523 19,554
Cost of equipment sales .................................. 22,442 8,438 35,507 14,792
General and administrative ............................... 25,486 16,139 50,189 28,409
Sales and marketing ...................................... 32,496 18,587 57,021 32,078
Depreciation and amortization ............................ 33,201 17,824 59,622 33,434
---------- ---------- ---------- ----------
Total operating expenses ............................ 135,911 71,727 244,862 128,267
---------- ---------- ---------- ----------
Operating loss ................................................. (45,269) (13,158) (82,660) (23,663)
---------- ---------- ---------- ----------
Other income (expense):
Interest and financing expense ........................... (23,148) (8,880) (40,508) (17,014)
Equity in net loss of unconsolidated affiliates .......... (2,221) (13) (3,308) (53)
Other, net ............................................... 613 455 1,278 560
---------- ---------- ---------- ----------
Total other income (expense) ........................ (24,756) (8,438) (42,538) (16,507)
---------- ---------- ---------- ----------
Net loss ............................................ $(70,025) $(21,596) $(125,198) $ (40,170)
========== ========== ========== ==========
Net loss per common share ...................................... $ (1.00) $ (0.35) $ (1.79) $ (0.66)
========== ========== ========== ==========
Weighted average common shares and common
equivalent shares outstanding ............................ 70,021,000 62,363,000 69,978,000 60,925,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 7
WESTERN WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1996
--------- ----------
Operating activities:
<S> <C> <C>
Net loss............................................................ $(125,198) $ (40,170)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................. 61,680 33,972
Employee equity compensation ................................... 658 725
Equity in net loss of unconsolidated affiliates ................ 3,308 53
Other, net ..................................................... 153 655
Changes in operating assets and liabilities, net of effects from
consolidating acquired interests:
Accounts receivable, net .................................. (6,466) (4,929)
Inventory ................................................. (340) (10,957)
Prepaid expenses and other current assets ................. 2,051 (3,241)
Accounts payable .......................................... 1,553 (539)
Accrued liabilities ....................................... 9,882 3,066
Unearned revenue and customer deposits .................... 617 814
-------- --------
Net cash used in operating activities .......................... (52,102) (20,551)
-------- --------
Investing activities:
Purchase of property and equipment .................................. (222,976) (89,825)
Purchase of wireless licenses and other ............................. (53,412) (77,346)
Acquisition of wireless properties, net of cash acquired ............ (849) (40,102)
Investments in and advances to unconsolidated affiliates ............ (39,608) 2,478
Refund of deposit held by FCC ....................................... 7,749 1,500
-------- --------
Net cash used in investing activities .......................... (309,096) (203,295)
-------- --------
Financing activities:
Proceeds from issuance of common stock, net ......................... 589 234,949
Additions to long-term debt ......................................... 322,000 548,800
Payment of debt .................................................... (465,011)
Deferred financing costs ........................................... (12,735)
-------- --------
Net cash provided by financing activities ...................... 322,589 306,003
-------- --------
Change in cash and cash equivalents ....................................... (38,609) 82,157
Cash and cash equivalents, beginning of period ............................ 54,885 8,572
-------- --------
Cash and cash equivalents, end of period .................................. 16,276 90,729
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 8
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Western Wireless Corporation (the "Company") provides wireless
communications services in the western United States principally through the
ownership and operation of cellular and personal communications services ("PCS")
systems. The Company has acquired seven PCS licenses covering seven Major
Trading Areas ("MTAs"). The Company has initiated service in all seven MTAs,
including the Denver MTA which initiated wireless services on May 1, 1997.
During the first quarter of 1997, the Company was the high bidder on 100
additional PCS licenses in the Federal Communication Commission's ("FCC") D and
E Block auctions, of which 95 have been granted as of June 30, 1997. Cook Inlet
Western Wireless PV/SS PCS, LP ("Cook Inlet PCS") a partnership in which the
Company holds a 49.9% limited partnership interest owns broadband PCS licenses
in 21 Basic Trading Areas ("BTAs") including 7 that were acquired in the FCC F
Block auction during the first quarter of 1997. Cook Inlet PCS initiated
service in one of these in June 1997.
The Company expects to incur significant operating losses and to
generate negative cash flows from operating activities during the next several
years while it expands its PCS systems and builds a PCS customer base.
The accompanying interim consolidated financial statements and the
financial information included herein are unaudited, but reflect all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the financial position, results of operations and cash flows for the periods
presented. All such adjustments are of a normal, recurring nature. Results of
operations for interim periods presented herein are not necessarily indicative
of results of operations for the entire year. For further information, refer to
the Company's annual audited financial statements and footnotes thereto for the
year ended December 31, 1996, contained in the Company's Form 10-K dated March
28, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and cash equivalents:
Cash and cash equivalents generally consist of cash, time deposits,
commercial paper and money market instruments. The Company invests its excess
cash in deposits with major banks and money market securities of investment
grade companies from a variety of industries and, therefore, bears minimal risk.
These investments have original maturity dates which do not exceed three months.
Such investments are stated at cost, which approximates fair market value.
Supplemental cash flow disclosure:
Cash paid for interest (net of amounts capitalized) was $34.2 million
and $19.6 million for the six months ended June 30, 1997 and 1996, respectively.
Non-cash investing and financing activities were as follows (in
thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---------- --------
<S> <C> <C>
Conversion of FCC deposit to wireless license................$ 13,609
Conversion of revolving debt to term debt.................... $200,000
Issuance of common stock in exchange for wireless properties. 7,117
</TABLE>
6
<PAGE> 9
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED):
Licensing costs and other intangible assets and amortization:
Licensing costs primarily represent costs incurred to apply for or
acquire Federal Communication Commission ("FCC") wireless licenses, including
cellular licenses obtained by the Company, principally through acquisitions, and
PCS licenses which were primarily purchased from the FCC. Amortization of these
licenses begins with the commencement of service to customers and is computed
using the straight-line method over 40 years.
Other intangible assets consist primarily of deferred financing
costs. Deferred financing costs are amortized using the effective interest
method over the terms of the respective loans which have terms ranging from 9 to
10 years.
Capitalized interest:
During the three months ended June 30, 1997 and 1996, the Company had
interest expense of $23.1 million and $8.9 million, respectively, net of
capitalized interest in the amount of $1.0 million and $2.4 million,
respectively, pertaining to the build out of its PCS markets. During the six
months ended June 30, 1997 and 1996, the Company had interest expense of $40.5
million and $17.0 million, respectively, net of capitalized interest in the
amount of $4.0 million and $2.4 million, respectively, pertaining to the build
out of its PCS markets.
Recently issued accounting standards:
The Financial Accounting Standards Board ("FASB") has recently issued
Statement No. 128 "Earnings Per Share", Statement No. 129 "Disclosure of
Information about Capital Structure", Statement No. 130 "Reporting Comprehensive
Income", and Statement No. 131 "Disclosures about Segments of an Enterprise and
Related Information". The Company does not expect implementation of these
statements to have a material effect on the Company's financial statements.
Reclassifications:
Certain amounts in prior year's financial statements have been
reclassified to conform to the 1997 presentation.
Financial instruments:
As required under the Credit Facility (as defined in Note 7), the
Company enters into interest rate swap and cap agreements to manage interest
rate exposure pertaining to long-term debt. The Company has only limited
involvement with these financial instruments, and does not use them for trading
purposes. In addition, the Company has historically held derivative financial
instruments to maturity and has never recognized a gain or loss on disposal. It
is the Company's intent to hold existing derivatives to maturity. Interest rate
swaps are accounted for on an accrual basis, the income or expense of which is
included in interest expense. Premiums paid to purchase interest rate cap
agreements are classified as an asset and amortized to interest expense over the
terms of the agreements. These transactions do not subject the Company to risk
of loss because gains and losses on these contracts are offset against losses
and gains on the underlying liabilities. No collateral is held in relation to
the Company's financial instruments.
7
<PAGE> 10
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Land, buildings and improvements......................... $ 11,724 $ 8,433
Wireless communications systems.......................... 630,597 370,628
Furniture and equipment.................................. 69,589 49,351
--------- ---------
711,910 428,412
Less accumulated depreciation............................ (160,181) (107,685)
--------- ---------
551,729 320,727
Construction in progress................................. 127,471 217,890
--------- ---------
$ 679,200 $ 538,617
========= =========
</TABLE>
Depreciation expense was $29.8 million and $12.0 million for the three
months ended June 30, 1997 and 1996, respectively, and $53.0 million and $21.4
million for the six months ended June 30, 1997 and 1996, respectively.
4. LICENSING COSTS AND OTHER INTANGIBLE ASSETS:
Licensing costs and other intangible assets consists of (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Licensing costs.......................................... $ 629,056 $ 562,039
Other intangible assets.................................. 33,810 33,806
--------- ---------
662,866 595,845
Accumulated amortization................................. (63,741) (55,363)
--------- ---------
$ 599,125 $ 540,482
========= =========
</TABLE>
5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES:
During the second quarter of 1997, the Company entered into two joint
ventures. The first was to form Telcell Wireless LLC ("Georgia"). Georgia is a
partner in Magticom Ltd. which owns a cellular license in the Republic of
Georgia. The second joint venture entered into formed Icesco, Ltd. ("Iceland").
Iceland is the parent company to Icelandic Mobile Phone Company which owns a
cellular license in Iceland.
At June 30, 1997 and 1996 the Company's investment in Cook Inlet PCS
was $28.1 million and $8.1 million, respectively. All other investments and
advances to unconsolidated affiliates were $21.7 and $4.6 for the period ended
June 30, 1997 and 1996, respectively.
6. ACCRUED LIABILITIES:
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Accrued payroll and benefits............................. $ 10,317 $ 11,192
Accrued interest expense................................. 14,534 10,265
Accrued taxes, other than income......................... 11,301 5,096
Other.................................................... 10,382 10,099
======== ========
$ 46,534 $ 36,652
======== ========
</TABLE>
8
<PAGE> 11
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
7. LONG-TERM DEBT:
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- -------------
<S> <C> <C>
Credit Facility:
Revolver ........................... $ 165,000
Term Loan .......................... 200,000 $ 200,000
10-1/2% Senior Subordinated Notes Due 2006 200,000 200,000
10-1/2% Senior Subordinated Notes Due 2007 200,000 200,000
NORTEL Facility .......................... 300,000 143,000
---------- ----------
$1,065,000 $ 743,000
========== ==========
</TABLE>
The Company has a $950 million credit facility with a consortium of
lenders (the "Credit Facility"), in the form of a $750 million revolving credit
loan ("the Revolver") and a $200 million term loan (the "Term Loan"). In
addition, a wholly owned subsidiary of the Company has a $300 million credit
facility (the "NORTEL Facility") with Northern Telecom Inc. ("NORTEL"). At
June 30, 1997, the unused portion of the Credit Facility was $585 million and
the NORTEL Facility was fully drawn.
The aggregate amounts of principal maturities of the Company's debt
are as follows (in thousands):
<TABLE>
<S> <C>
Six months ending December 31, 1997. $ 0
Year ending December 31,
1998 ..................................... 0
1999 ..................................... 0
2000 ..................................... 42,300
2001 ..................................... 94,450
Thereafter ............................... 928,250
----------
$1,065,000
==========
</TABLE>
8. COMMITMENTS:
Future minimum payments required under operating leases and
agreements that have initial or remaining noncancellable terms in excess of one
year as of June 30, 1997, are summarized below (in thousands):
<TABLE>
<S> <C>
Six months ending December 31, 1997 $10,553
Year ending December 31,
1998...................................... 19,791
1999...................................... 17,933
2000...................................... 16,468
2001...................................... 11,909
Thereafter................................ 15,399
-------
$92,053
=======
</TABLE>
Aggregate rental expense for all operating leases was approximately
$7.2 million and $2.7 million for the three months ended June 30, 1997 and 1996,
respectively, and $13.6 million and $4.9 million for the six months ended June
30, 1997 and 1996, respectively.
9
<PAGE> 12
WESTERN WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
8. COMMITMENTS - (CONTINUED):
In order to ensure adequate supply and availability of certain
inventory requirements and service needs, the Company has committed to purchase
from various suppliers wireless communications equipment, handsets, and
services. These agreements expire at various dates through December 2005. The
aggregate amount of these commitments total approximately $453.6 million. At
June 30, 1997, the Company has ordered approximately $249.1 million under all of
these agreements, of which approximately $14.0 million is outstanding.
The Company has various other purchase commitments for materials,
supplies and other items incident to the ordinary course of business which are
neither significant individually nor in the aggregate. Such commitments are not
at prices in excess of current market value.
9. SHAREHOLDERS' EQUITY:
During the six months ended June 30, 1997, the Company issued 159,868
shares of its common stock and received $0.6 million of net proceeds as a result
of employee stock options that were exercised.
In January 1997, the Company granted 95,000 shares under its restricted
stock plan. Compensation expense recognized related to these shares was
approximately $0.5 million for the three months ended June 30, 1997, and $0.9
million for the six months ended June 30, 1997.
10. ACQUISITIONS AND DISPOSITIONS:
On April 24, 1997, the Company and Triad Cellular Corporation, Triad
Cellular L.P. and certain of their affiliates (collectively "Triad") entered
into agreements whereby the Company has agreed to acquire from Triad the
cellular business and assets of Triad in the Rural Service Areas ("RSAs")
designated as Texas 1, 2, 4, and 5, Utah 3, 4 and 6, Oklahoma 7 and 8 and
Minnesota 7, 8 and 9, for an aggregate purchase price of (i) approximately $180
million, subject to adjustment, plus (ii) 1,600,000 shares of the Company's
Class A Common Stock, or, if a registration statement covering such shares of
Class A Common Stock is not effective within 90 days after the date of
acquisition of such assets, at the option of Triad, $20.0 million. In addition,
the Company has entered into an agreement with Triad whereby the Company agrees
to acquire from Triad their rights in and to certain PCS D and E Block licenses
with respect to which Triad was the high bidder in the recently conducted FCC
auctions, in Oklahoma City, OK, Enid, OK, Stillwater, OK, Ponca City, OK,
Lubbock, TX, St. George, UT, Worthington, MN and Wilmer-Marshall, MN for an
aggregate purchase price equal to the amounts paid through the closing to the
FCC by Triad for such licenses. Triad's successful bids for such licenses
aggregated approximately $4.8 million. The closing of each of the acquisitions
is conditional upon the satisfaction of certain conditions, including obtaining
all necessary FCC approvals.
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Statements contained in
this Quarterly Report that are not based on historical fact are "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The "Risk Factors" and cautionary statements identify important
factors, among others, that could cause actual results to differ materially from
those in the forward looking statements, where such factors are detailed in the
Company's 1996 prospectuses, as amended, filed with the Securities and Exchange
Commission.
The following is a discussion and analysis of the consolidated
financial condition and results of operations of the Company and should be read
in conjunction with the Company's consolidated financial statements and notes
thereto and other financial information included herein and in the Company's
annual report on Form 10-K for the year ended December 31, 1996. As a result of
PCS operations, the Company's operating results for prior periods may not be
indicative of future performance.
OVERVIEW
The Company provides wireless communications services in the western
United States through the ownership and operation of cellular communications
systems in 75 Rural Service Areas and Metropolitan Statistical Areas. At June
30, 1997, the Company owns broadband personal communications services ("PCS")
licenses in seven Major Trading Areas ("MTAs"), each of which has commenced
commercial operations. During the first quarter of 1997, the Company was the
high bidder on 100 additional PCS licenses in the Federal Communication
Commission's ("FCC") D and E Block auctions, of which 95 have been granted as of
June 30, 1997. During the second quarter of 1997, the Company converted a
portion of the deposits held with the FCC into 20% of the consideration for
these licenses as well as paid cash for the remainder of the purchase price.
Cook Inlet Western Wireless PV/SS PCS, LP ("Cook Inlet PCS"), a partnership in
which the Company holds a 49.9% limited partnership interest owns broadband PCS
licenses in 21 Basic Trading Areas ("BTAs") including 7 that were acquired in
the FCC F Block auction during the first quarter of 1997. The first of these
BTAs commenced commercial operations in June 1997.
The Company's revenues consist primarily of subscriber revenues
(including access charges and usage charges), roamer revenues (fees charged for
providing services to subscribers of other cellular communications systems when
such subscribers, or "roamers," place or receive a phone call within one of the
Company's service areas) and equipment sales. The majority of the Company's
revenues are derived from subscriber revenues. The Company had no revenues from
its paging or PCS systems prior to February 1, 1996 and February 29, 1996,
respectively. Revenues from paging systems are included in other revenue and
accounted for less than 2% of the Company's total revenues in 1996, which is
expected to be the case throughout 1997. The Company expects to continue to sell
cellular and PCS handsets below cost and regards these losses as a cost of
building its subscriber base. As used herein, "service revenues" include
subscriber, roamer and other revenues.
Cost of service consists of the cost of providing wireless service to
subscribers, primarily including costs to access local exchange and long
distance carrier facilities and maintain the Company's wireless network. General
and administrative expenses include the costs associated with billing a
subscriber and the administrative cost associated with maintaining subscribers,
including customer service, accounting and other centralized functions. General
and administrative expenses also include provisions for unbillable fraudulent
roaming charges and subscriber bad debt. Sales and marketing costs include costs
associated with acquiring a subscriber, including direct and indirect sales
commissions, salaries, all costs of sales offices and retail locations,
advertising and promotional expenses. Depreciation and amortization includes
depreciation expense associated with the Company's property and equipment in
service and amortization associated with its wireless licenses for operational
markets. The Company amortizes licensing costs associated with PCS systems once
they become operational.
Certain centralized general and administrative costs, including
customer service, accounting and other centralized functions, benefit all of the
Company's operations. These costs are allocated to those operations in a manner
which reflects management's judgment as to the nature of the activity causing
those costs to be incurred.
11
<PAGE> 14
As used herein, "EBITDA" represents operating loss before depreciation
and amortization. EBITDA is a measure commonly used in the industry and should
not be construed as an alternative to operating income (loss) (as determined in
accordance with Generally Accepted Accounting Principles, "GAAP"), as an
alternative to cash flows from operating activities (as determined in accordance
with GAAP), or as a measure of liquidity. Cellular EBITDA represents EBITDA from
the Company's cellular operations and PCS EBITDA represents EBITDA from the
Company's PCS operations.
The Company expects a continued decline in consolidated EBITDA as it
continues to develop, construct and operate its PCS systems and aggressively
seeks to build its PCS subscriber base. To the extent that the time to complete
the PCS build-out is faster or the costs are greater than expected, operating
losses will increase and consolidated EBITDA may be negative for some periods.
The Company has experienced rapid growth in its revenues and assets during the
periods set forth below, which rates of growth will not necessarily continue
over the next few years. The Company has made and expects to make substantial
capital expenditures in connection with the expansion of its wireless
communications systems. The Company's results of operations for the periods
described herein will not necessarily be indicative of future performance.
In the comparisons that follow, the Company has separately set forth
certain information relating to cellular operations (including paging) and PCS
operations. The Company believes that this is appropriate because its cellular
systems have been operating for a number of years while its first PCS system
commenced operations during the first quarter of 1996.
RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended June 30, 1997,
Compared to the Three Months Ended June 30, 1996
The Company had 389,900 cellular subscribers at June 30, 1997,
representing an increase of 38,700 or 11.0% from March 31, 1997. At June 30,
1996, the Company had 264,200 cellular subscribers representing a net increase
of 25,000 or 10.5% from March 31, 1996. The Company had 74,400 PCS subscribers
at June 30, 1997, representing an increase of 25,400 or 51.8% from March 31,
1997. The Company had 6,400 PCS subscribers at June 30, 1996, an increase of
4,200 or 191% from March 31, 1996.
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------------
1997 1996
------------------- ------------------
CELLULAR PCS CELLULAR PCS
-------- --- -------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Subscriber revenues...... $58,490 $12,513 $43,109 $ 705
Roamer revenues.......... 8,873 9,114
Equipment sales.......... 3,012 6,357 3,304 1,213
Other revenues(1)........ 1,397 1,124
------- ------- ------- ------
Total revenues...... $71,772 $18,870 $56,651 $1,918
======= ======= ======= ======
</TABLE>
----------
(1) Primarily revenue from paging services
Cellular subscriber revenues increased to $58.5 million for the three
months ended June 30, 1997, from $43.1 million for the three months ended June
30, 1996. This $15.4 million or 35.7% increase is primarily due to the growth in
the number of subscribers partially offset by a decrease in the average monthly
cellular subscriber revenue per subscriber. Average monthly cellular subscriber
revenue per subscriber, calculated as the average of the monthly averages,
declined 8.0% to $52.46 for the three months ended June 30, 1997, compared to
$57.04 for the three months ended June 30, 1996. The Company anticipates this
downward trend to continue in 1997. Over the past few years the cellular
industry as a whole has also shown a decline in the average monthly cellular
subscriber revenue per subscriber.
PCS subscriber revenues for the three months ended June 30, 1997, were
$12.5 million, representing operations in six of the Company's PCS MTAs for the
entire three months and the Denver MTA for two months. PCS subscriber revenues
for the three months ended June 30, 1996, were $0.7 million, primarily
representing
12
<PAGE> 15
operations in the Hawaii MTA. Average monthly PCS subscriber
revenue per subscriber was $68.64 for the three months ended June 30, 1997,
compared to $54.65 for the three months ended June 30, 1996. As the Company's
PCS operations only began generating revenue during 1996, the year over year
trend is not necessarily representative of future trends.
Roamer revenues were $8.9 million for the three months ended June 30,
1997, compared to $9.1 million for the three months ended June 30, 1996, a
decrease of $0.2 million or 2.6%. The decline in the Company's roamer revenues
generally reflects the decline in rates charged by carriers between each other
in the industry, offset by increased roaming traffic. Roamer revenues as a
percentage of total cellular revenues declined to 12.4% for the three months
ended June 30, 1997, from 16.1% for the three months ended June 30, 1996. While
the Company expects total roamer minutes to continue to increase, further
declines in the rates charged between carriers will limit roamer revenues in
1997.
Cellular equipment sales, which consist primarily of handset sales,
decreased to $3.0 million for the three months ended June 30, 1997, from $3.3
million for the three months ended June 30, 1996. This $0.3 million or 8.8%
decrease is primarily due to a slight decrease in the average cellular handset
sales price. PCS equipment sales were $6.4 million for the three months ended
June 30, 1997, compared to $1.2 million for the three months ended June 30,
1996. This $5.2 million increase is due to the increase in handsets sold as a
result of commercial operations in six of the Company's PCS MTAs during the
entire second quarter of 1997 compared to only one for the entire second quarter
of 1996. The higher revenue generated from PCS equipment sales as compared to
cellular equipment sales is the result of a higher average selling price for PCS
handsets of approximately $108 and $309 per handset sold for the three months
ended June 30, 1997 and 1996, respectively.
Other revenue, which consists primarily of paging revenues, were $1.4
million for the three months ended June 30, 1997, compared to $1.1 million for
the three months ended June 30, 1996, primarily as a result of subscriber
growth.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------
1997 1996
---------------------------- ---------------------------
CELLULAR PCS CELLULAR PCS
-------- --- -------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cost of service........................... $ 11,406 $ 10,880 $ 9,570 $ 1,169
Cost of equipment sales................... 7,009 15,433 6,115 2,323
General and administrative................ 12,989 12,497 11,633 4,506
Sales and marketing....................... 15,342 17,154 12,813 5,774
Depreciation and amortization............. 16,674 16,527 16,389 1,435
------------ ------------ ------------- ------------
Total operating expenses............. $ 63,420 $ 72,491 $ 56,520 $ 15,207
============ ============ ============= ============
</TABLE>
CELLULAR OPERATING EXPENSES
Cost of service increased to $11.4 million for the three months ended
June 30, 1997, from $9.6 million for the three months ended June 30, 1996. This
increase is primarily attributable to the increased number of subscribers which
resulted in increased costs to access local exchange and long distance carrier
facilities and to maintain the Company's expanding wireless network. While cost
of service increased $1.8 million or 19.2%, it decreased as a percentage of
service revenues to 16.6% for the three months ended June 30, 1997, from 17.9%
for the three months ended June 30, 1996, which is due primarily to efficiencies
gained from the growing subscriber base.
Cost of equipment sales increased to $7.0 million for the three
months ended June 30, 1997, from $6.1 million for the three months ended June
30, 1996. This $0.9 million or 14.6% increase is due primarily to the 31.2%
increase in handsets sold, offset by a decline in the cost of handsets, for the
three months ended June 30, 1997, compared to the three months ended June 30,
1996.
General and administrative costs increased to $13.0 million for the
three months ended June 30, 1997, from $11.6 million for the three months ended
June 30, 1996, an increase of $1.4 million or 11.7%. The
13
<PAGE> 16
Company's general and administrative costs are principally considered to be
variable costs, that is costs that will vary with the level of subscribers. The
increase is primarily attributable to the increase in costs associated with
supporting the increased subscriber base. While the Company has not incurred
material fraud or bad debt expenses to date and continues to develop and invest
in measures to minimize such expenses, there can be no assurance that such
expenses will not increase in the future.
Sales and marketing costs increased to $15.3 million for the three
months ended June 30, 1997, from $12.8 million for the three months ended June
30, 1996, primarily due to net subscriber additions. Sales and marketing costs
per net subscriber added, excluding subscribers added from acquisitions,
decreased to $396 for the three months ended June 30, 1997, from $499 for the
three months ended June 30, 1996. This 20.6% decrease is primarily a result of
reduced advertising and restructuring of sales compensation. Including the
losses on equipment sales, the cost per net subscriber added decreased to $500
for the three months ended June 30, 1997, from $608 for the three months ended
June 30, 1996.
Depreciation expense increased to $14.6 million for the three months
ended June 30, 1997, from $10.6 million for the three months ended June 30,
1996. This increase of $4.0 million or 37.7%, is attributable to the continued
expansion of the Company's cellular systems. Amortization expense decreased to
$2.1 million for the three months ended June 30, 1997, from $5.8 million for the
three months ended June 30, 1996. This $3.7 million or 63.8% decrease is
primarily attributable to the Company prospectively changing its amortization
period for cellular licensing costs from 15 years to 40 years, effective January
1, 1997, to conform more closely with industry practices.
PCS OPERATING EXPENSES
Total PCS operating expenses were $72.5 million for the three months
ended June 30, 1997, compared to $15.2 million for the three months ended June
30, 1996. This 377% increase is due to the fact that there were six PCS systems
operational during the entire second quarter of 1997 while only one PCS system
was operational during the entire second quarter of 1996. A portion of each
individual component of PCS operating expenses were start-up costs incurred
prior to the commencement of operations in each PCS system. Approximately $1.5
million of start-up costs was incurred for the three months ended June 30, 1997,
compared to $6.8 million for the three months ended June 30, 1996. As the
subscriber base continues to grow during 1997, the Company expects total
operating expenses to increase. Accordingly, the PCS operating expenses are not
representative of future operations.
Cost of service expenses and cost of equipment sales represents the
expenses incurred by the operational PCS systems. In addition to the six PCS
MTAs that were operational during the entire second quarter of 1997, Denver was
operational for two months of this quarter. Hawaii was the only operational
market during the entire second quarter of 1996. Accordingly, cost of service
increased to $10.9 million and cost of equipment sales increased to $15.4
million for the three months ended June 30, 1997, from $1.2 million and $2.3
million, respectively, for the three months ended June 30, 1996. General and
administrative costs increased to $12.5 million for the three months ended June
30, 1997, from $4.5 million for the three months ended June 30, 1996, due to the
costs associated with supporting the additional markets in which the Company has
operations. Sales and marketing costs increased to $17.2 million for the three
months ended June 30, 1997, from $5.8 million for the three months ended June
30, 1996, as a result of the increase in net subscriber additions. Depreciation
expense and amortization expense increased to $15.2 million and $1.3 million,
respectively, for the three months ended June 30, 1997, from $1.3 million and
$.1 million, respectively, for the three months ended June 30, 1996. This
increase is due to the increased number of operational systems in 1997 over
1996.
OPERATING INCOME (LOSS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------
1997 1996
---------------- --------------
CELLULAR PCS CELLULAR PCS
-------- --- -------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Income (loss)............. $ 8,352 $(53,621) $ 131 $(13,289)
======== ======== ======= ========
</TABLE>
Although cellular operating income increased to $8.4 million for the
three months ended June 30, 1997 from $.1 million for the three months ended
June 30, 1996, total operating loss increased to $45.3 million for the
14
<PAGE> 17
three months ended June 30, 1997, from $13.2 million for the three months ended
June 30, 1996. This increase is primarily due to the increased operating loss
attributable to PCS of $53.6 million for the three months ended June 30, 1997
from an operating loss of $13.3 million for the three months ended June 30,
1996.
OTHER INCOME (EXPENSE)
Interest and financing expense, net of capitalized interest,
increased to $23.1 million for the three months ended June 30, 1997, from $8.9
million for the three months ended June 30, 1996. The increase of $14.3 million
or 160.7%, is primarily attributable to an increase in long-term debt, which
increased to $1,065 million at June 30, 1997, from $446.5 million at June 30,
1996, incurred primarily to fund the Company's capital expenditures associated
with the build-out of the Company's PCS systems. Interest expense will increase
in 1997 as a result of the increased borrowings the Company has incurred, and
will continue to incur, to fund its expansion. The weighted average interest
rate before the effect of capitalized interest was 9.9% for the three months
ended June 30, 1997, and 9.1% for the three months ended June 30, 1996.
EBITDA
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------
1997 1996
------------------ ----------------
CELLULAR PCS CELLULAR PCS
-------- --- -------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA................... $ 25,026 $ (37,094) $ 16,520 $ (11,854)
========= ========= ========= =========
</TABLE>
EBITDA declined to negative $12.1 million for the three months ended
June 30, 1997, from $4.7 million for the three months ended June 30, 1996,
primarily due to the negative $37.1 million EBITDA attributable to PCS
operations offset by an increase in cellular EBITDA. Cellular EBITDA increased
51.5% to $25.0 million for the three months ended June 30, 1997, from $16.5
million for the three months ended June 30, 1996, primarily as a result of
increased revenues due to the increased subscriber base and the related cost
efficiencies recognized. As a result, cellular operating margin (cellular EBITDA
as a percentage of cellular service revenues) increased to 36.4% for the three
months ended June 30, 1997, from 31.0% for the three months ended June 30, 1996.
Results of Operations for the Six Months Ended June 30, 1997, Compared to the
Six Months Ended June 30, 1996
The Company had 389,900 cellular subscribers at June 30, 1997,
representing an increase of 65,700 or 20.3% from December 31, 1996. At June 30,
1996, the Company had 264,200 cellular subscribers representing a net increase
of 50,000 or 23.9% from December 31, 1995. For the six months ended June 30,
1996, the net number of cellular subscribers added through system acquisitions
was approximately 4,700. The Company had 74,400 PCS subscribers at June 30,
1997, representing an increase of 38,900 or 109.6% from December 31, 1996. At
June 30, 1996 the Company had 6,400 PCS subscribers.
REVENUES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1997 1996
------------------ ----------------
CELLULAR PCS CELLULAR PCS
-------- --- -------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Subscriber revenues......... $ 107,872 $ 19,816 $ 78,297 $ 854
Roamer revenues............. 15,567 15,871
Equipment sales............. 5,917 10,356 5,999 1,633
Other revenues (1).......... 2,674 1,950
--------- -------- -------- -------
Total revenues......... $ 132,030 $ 30,172 $102,117 $ 2,487
========= ======== ======== =======
</TABLE>
----------
(1) Primarily revenue from paging services
15
<PAGE> 18
Cellular subscriber revenues increased to $107.9 million for the six
months ended June 30, 1997, from $78.3 million for the six months ended June 30,
1996. This $29.6 million or 37.8% increase is primarily due to the growth in the
number of subscribers partially offset by a decrease in the average monthly
cellular subscriber revenue per subscriber. Average monthly cellular subscriber
revenue per subscriber, calculated as the average of the monthly averages,
declined 7.2% to $50.69 for the six months ended June 30, 1997, compared to
$54.60 for the six months ended June 30, 1996. The Company anticipates this
downward trend to continue in 1997. Over the past few years the cellular
industry as a whole has also shown a decline in the average monthly cellular
subscriber revenue per subscriber.
PCS subscriber revenues for the six months ended June 30, 1997, were
$19.8 million, representing operations in six of the Companies PCS MTAs for the
entire six months and the Denver MTA for two months. PCS subscriber revenues for
the six months ended June 30, 1996, were $0.9 million, primarily representing
operations in the Hawaii MTA. Average monthly PCS subscriber revenue per
subscriber was $64.44 for the six months ended June 30, 1997, compared to $61.00
for the six months ended June 30, 1996. As the Company's PCS operations only
began generating revenue during 1996, the year over year trend is not
necessarily representative of future trends.
Roamer revenues were $15.6 million for the six months ended June 30,
1997, compared to $15.9 million for the six months ended June 30, 1996, a
decrease of $0.3 million or 1.9%. A decline in the Company's roamer revenues
generally reflects the decline in rates charged by carriers between each other
in the industry, offset by increased roaming traffic. Roamer revenues as a
percentage of total cellular revenues declined to 11.8% for the six months ended
June 30, 1997, from 15.5% for the six months ended June 30, 1996. While the
Company expects total roamer minutes to continue to increase, further declines
in the rates charged between carriers will limit roamer revenues in 1997.
Cellular equipment sales, which consist primarily of handset sales,
decreased to $5.9 million for the six months ended June 30, 1997, from $6.0
million for the six months ended June 30, 1996. This $0.1 million or 1.4%
decrease is primarily due to a slight decrease in the average cellular handset
sales price. PCS equipment sales were $10.4 million for the six months ended
June 30, 1997, compared to $1.6 million for the six months ended June 30, 1996.
This $8.7 million increase is due to the increase in handsets sold as a result
of the commercial operations in six of the Company's PCS MTAs during the entire
six months of 1997. The Company anticipates continued growth in equipment sales
as a result of increases in cellular and PCS subscriber additions. The higher
revenue generated from PCS equipment sales as compared to cellular equipment
sales is the result of a higher average selling price for PCS handsets of
approximately $125 and $226 per handset sold for the six months ended June 30,
1997 and 1996, respectively.
Other revenue, which consists primarily of paging revenues, were $2.7
million for the six months ended June 30, 1997, compared to $2.0 million for the
six months ended June 30, 1996. This increase is primarily due to the additional
month of operations in 1997 as compared to 1996 due to the acquisition of paging
operations in February of 1996.
OPERATING EXPENSES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1997 1996
------------------ ----------------
CELLULAR PCS CELLULAR PCS
-------- --- -------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cost of service..................$ 22,472 $ 20,051 $ 17,977 $ 1,577
Cost of equipment sales.......... 12,952 22,555 11,552 3,240
General and administrative....... 26,576 23,613 20,802 7,607
Sales and marketing.............. 27,397 29,624 23,817 8,261
Depreciation and amortization.... 32,598 27,024 31,549 1,885
=========== =========== =========== ==========
Total operating expenses....$ 121,995 $ 122,867 $ 105,697 $ 22,570
=========== =========== =========== ==========
</TABLE>
16
<PAGE> 19
CELLULAR OPERATING EXPENSES
Cost of service increased to $22.5 million for the six months ended
June 30, 1997, from $18.0 million for the six months ended June 30, 1996. This
increase is primarily attributable to the increased number of subscribers which
resulted in increased costs to access local exchange and long distance carrier
facilities and to maintain the Company's expanding wireless network. While cost
of service increased $4.5 million or 25.0%, it decreased as a percentage of
service revenues to 17.8% for the six months ended June 30, 1997, from 18.7% for
the six months ended June 30, 1996, which is due primarily to efficiencies
gained from the growing subscriber base.
Cost of equipment sales increased to $13.0 million for the six months
ended June 30, 1997, from $11.6 million for the six months ended June 30, 1996.
This $1.4 million or 12.1% increase is due primarily to the 21.5% increase in
handsets sold, offset by a decline in the cost of handsets, for the six months
ended June 30, 1997, compared to the six months ended June 30, 1996.
General and administrative costs increased to $26.6 million for the
six months ended June 30, 1997, from $20.8 million for the six months ended June
30, 1996, an increase of $5.8 million or 27.8%. The Company's general and
administrative costs are principally considered to be variable costs, that is
costs that will vary with the level of subscribers. The increase is primarily
attributable to the increase in costs associated with supporting the increased
subscriber base. While the Company has not incurred material fraud or bad debt
expenses to date and continues to develop and invest in measures to minimize
such expenses, there can be no assurance that such expenses will not increase in
the future.
Sales and marketing costs increased to $27.4 million for the six
months ended June 30, 1997, from $23.8 million for the six months ended June 30,
1996, primarily due to net subscriber additions. Sales and marketing costs per
net subscriber added, excluding subscribers added from acquisitions, decreased
to $417 for the six months ended June 30, 1997, from $476 for the six months
ended June 30, 1996. This 12.4% decrease is primarily a result of reduced
advertising and restructuring of sales compensation. Including the losses on
equipment sales, the cost per net subscriber added decreased to $524 for the six
months ended June 30, 1997, from $587 for the six months ended June, 30 1996.
Depreciation expense increased to $28.6 million for the six months
ended June 30, 1997, from $19.8 million for the six months ended June 30, 1996.
This increase of $8.8 million or 44.4%, is attributable to the continued
expansion of the Company's cellular systems. Amortization expense decreased to
$4.0 million for the six months ended June 30, 1997, from $11.7 million for the
six months ended June 30, 1996. This $7.7 million or 65.8% decrease is primarily
attributable to the Company prospectively changing its amortization period for
cellular licensing costs from 15 years to 40 years, effective January 1, 1997,
to conform more closely with industry practices.
PCS OPERATING EXPENSES
Total PCS operating expenses were $122.9 million for the six months
ended June 30, 1997, compared to $22.6 million for the six months ended June 30,
1996. This 444% increase is due to the fact that there were six PCS systems
operational for the entire six months ended June 30, 1997 while only one PCS
system was operational during a significant portion of the six months ended June
30, 1996. A portion of each individual component of PCS operating expenses were
start-up costs incurred prior to the commencement of operations in each PCS
system. Approximately $3.9 million of start-up costs was incurred for the six
months ended June 30, 1997, compared to $10.6 million for the six months ended
June 30, 1996. As the subscriber base continues to grow during 1997, the Company
expects total operating expenses to increase. Accordingly, the PCS operating
expenses are not representative of future operations.
Cost of service expenses and cost of equipment sales represents the
expenses incurred by the operational PCS systems. In addition to the six PCS
MTAs that were operational during the entire six months ended June 30, 1997,
Denver was operational for two months of this period. Hawaii was the only
operational PCS MTA during the majority of the six months ended June 30, 1996.
Accordingly, cost of service increased to $20.1 million and cost of equipment
sales increased to $22.6 million for the six months ended June 30, 1997, from
$1.6 million and $3.2 million, respectively, for the six months ended June 30,
1996. General and administrative costs increased to $23.6 million for the six
months ended June 30, 1997, from $7.6 million for the six months ended June 30,
1996, due to the costs associated with supporting the additional markets in
which the Company has operations. Sales and marketing costs increased to $29.6
million for the six months ended June 30, 1997, from
17
<PAGE> 20
$8.3 million for the six months ended June 30, 1996, as a result of the increase
in net subscriber additions. Depreciation expense and amortization expense
increased to $24.4 million and $2.6 million, respectively, for the six months
ended June 30, 1997, from $1.6 million and $.3 million, respectively, for the
six months ended June 30, 1996. This increase is due to the increased number of
operational systems in 1997 over 1996.
OPERATING INCOME (LOSS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1997 1996
------------------ ----------------
CELLULAR PCS CELLULAR PCS
-------- --- -------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Income (loss)....... $10,035 $ (92,695) $ (3,580) $ (20,083)
======= ========= ======== =========
</TABLE>
Although cellular operating income increased to $10.0 million for the
six months ended June 30, 1997 from an operating loss of $3.6 million for the
six months ended June 30, 1996, total operating loss increased to $82.7 million
for the six months ended June 30, 1997, from $23.7 million for the six months
ended June 30, 1996. This increase is primarily due to the increased operating
loss attributable to PCS of $92.7 million for the six months ended June 30, 1997
and from an operating loss of $20.1 million for the six months ended June 30,
1996.
OTHER INCOME (EXPENSE)
Interest and financing expense, net of capitalized interest,
increased to $40.5 million for the six months ended June 30, 1997, from $17.0
million for the six months ended June 30, 1996. The increase of $23.5 million or
138.1%, is primarily attributable to an increase in long-term debt, which
increased to $1,065 million at June 30, 1997, from $446.5 million at June 30,
1996, incurred primarily to fund the Company's capital expenditures associated
with the build-out of the Company's PCS systems. Interest expense will increase
in 1997 as a result of the increased borrowings the Company has incurred, and
will continue to incur, to fund its expansion. The weighted average interest
rate before the effect of capitalized interest was 10.1% for the six months
ended June 30, 1997, and 8.5% for the six months ended June 30, 1996.
EBITDA
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1997 1996
------------------ ----------------
CELLULAR PCS CELLULAR PCS
-------- --- -------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA........................$ 42,633 $ (65,671) $ 27,969 $(18,198)
========== ========= ========= ========
</TABLE>
EBITDA declined to negative $23.0 million for the six months ended
June 30, 1997, from $9.8 million for the six months ended June 30, 1996,
primarily due to the negative $65.7 million EBITDA attributable to PCS
operations offset by an increase in cellular EBITDA. Cellular EBITDA increased
52.4% to $42.6 million for the six months ended June 30, 1997, from $28.0
million for the six months ended June 30, 1996, primarily as a result of
increased revenues due to the increased subscriber base and the related cost
efficiencies recognized. As a result, cellular operating margin (cellular EBITDA
as a percentage of cellular service revenues) increased to 33.8% for the six
months ended June 30, 1997, from 29.1% for the six months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a credit facility (the "Credit Facility") with a
consortium of lenders providing for $750 million of revolving credit and a $200
million term loan. A subsidiary of the Company also has a credit facility (the
"NORTEL Facility" and, together with the Credit Facility, the "Senior Secured
Facilities") with Northern Telecom Inc. and a consortium of lenders. The NORTEL
Facility was amended during the second quarter of 1997 to increase the amount of
the facility from $200 million to $300 million. As of June 30, 1997, $365
million and $300 million were outstanding under the Credit Facility and the
NORTEL Facility, respectively. The amount currently available at June 30, 1997,
for borrowing under the Credit Facility was $185 million and the total unused
portion of the Credit Facility was $585 million. Indebtedness under the Credit
Facility and the NORTEL Facility matures on
18
<PAGE> 21
March 31, 2005, and December 31, 2003, respectively, and bears interest at
variable rates. Substantially all the assets of the Company are pledged as
security for such indebtedness.
On April 24, 1997, the Company and Triad Cellular Corporation, Triad
Cellular L.P. and certain of their affiliates (collectively "Triad") entered
into agreements whereby the Company has agreed to acquire from Triad the
cellular business and assets of Triad in the Rural Service Areas ("RSAs")
designated as Texas 1, 2, 4, and 5, Utah 3, 4 and 6, Oklahoma 7 and 8 and
Minnesota 7, 8 and 9, for an aggregate purchase price of (i) approximately $180
million, subject to adjustment, plus (ii) 1,600,000 shares of the Company's
Class A Common Stock, or, if a registration statement covering such shares of
Class A Common Stock is not effective within 90 days after the date of
acquisition of such assets, at the option of Triad, $20.0 million. In addition,
the Company has entered into an agreement with Triad whereby the Company agrees
to acquire from Triad their rights in and to certain PCS D and E Block licenses
with respect to which Triad was the high bidder in the recently conducted FCC
auctions, for an aggregate purchase price equal to the amounts paid through the
closing to the FCC by Triad for such licenses. Triad's successful bids for such
licenses aggregated approximately $4.8 million.
Over the next six months the Company currently anticipates spending
approximately $30.0 million to expand the initial build-out of its PCS MTA
systems and to begin construction of the Seattle and Phoenix/Tucson BTA systems
and approximately $14.6 million for the acquisition of the five remaining D and
E Block PCS licenses for which it was the high bidder in the recently concluded
FCC auction in 1997. The Company will also require approximately $185 million to
complete the acquisition of Triad in the fourth quarter of 1997. In addition,
further funds will be required to finance the continued growth of its cellular
and PCS operations (which may be significant), provide for working capital, and
service debt. The Company will utilize cash on hand and amounts available for
borrowing under the Credit Facility for such purposes. While the Company
believes such sources will be sufficient, to the extent that the build-out of
the PCS systems or other costs associated with the growth of its business are
greater than expected, the Company will need to seek additional financing. The
Company continues to consider additional sources of funding to meet those
potential needs which may include the issuance of additional indebtedness or the
sale of additional equity. There can be no assurance that such funds will be
available to the Company on acceptable or favorable terms.
The Company continues to evaluate acquisition opportunities, joint
ventures and other potential business transactions. Such transactions, if
completed, could require additional funds raised through the issuance of
additional indebtedness or the sale of additional equity. There can be no
assurance that such funds will be available to the Company on acceptable or
favorable terms.
Net cash used in operating activities for the six months ended June
30, 1997, was $52.1 million. Adjustments to the $125.2 million net loss for such
period to reconcile to net cash used in operating activities primarily included
$61.7 million of depreciation and amortization (including the amortization of
deferred financing costs). Other adjustments included changes in operating
assets and liabilities, net of effects from consolidating acquired interests,
consisting primarily of an increase of $9.9 million in accrued liabilities and
$6.5 million in accounts receivable, net, as a result of the increase in total
revenues and $3.3 million increase in equity in net loss of unconsolidated
affiliates as a result of increased activity in the Company's investments in
international ventures as well as its investment in Cook Inlet PCS. Net cash
used in operating activities was $20.6 million for the six months ended June 30,
1996.
Net cash used in investing activities was $309.1 million for the six
months ended June 30, 1997. Investing activities for such period consisted
primarily of purchases of property and equipment of $223.0 million, of which
$194.8 million was attributable to PCS capital expenditures, and purchase of
wireless licenses of $53.4 million as a result of the PCS licenses purchased by
the Company from the FCC's D and E Block auctions. Advances made to affiliates
increased $39.6 million primarily due to a revolving loan agreement with Cook
Inlet PCS and funding of international ventures partially offset by a $7.7
million refund of deposits held by the FCC. Net cash used in investing
activities was $203.3 million for the six months ended June 30, 1996.
Net cash provided by financing activities was $322.6 million for the
six months ended June 30, 1997. Financing activities for such period consisted
primarily of additions to long-term debt, which provided cash of $322.0 million.
Net cash provided by financing activities was $306.0 million for the six months
ended June 30, 1996.
Cook Inlet PCS owns licenses in 21 PCS BTAs, 7 of which were
acquired in the FCC F Block auction in the first quarter of 1997. Cook Inlet PCS
is subject
19
<PAGE> 22
to the FCC's build-out requirements and will require significant additional
amounts to complete the build-out of its PCS systems and to meet the government
debt service requirements on the license purchase prices. The potential sources
of such additional funding include vendor loans, loans or capital contributions
by the partners of the partnership or other third party financing. The Company
funded the operations of the partnership during the six months ended June 30,
1997, and has entered into a loan agreement with the partnership whereby the
Company agreed to provide a revolver/term loan to the partnership at an interest
rate equal to the higher of fifteen percent or the London Interbank Offer Rate
("LIBOR") plus 5%. At June 30, 1997, the Company had advanced funds totaling
$21.6 million to the partnership.
In the ordinary course of business, the Company continuously reviews
potential acquisition opportunities and has entered into various joint
development agreements with respect to international interests. Any such
prospective acquisitions would be financed with the borrowings under the Credit
Facility or additional financing, which may not be on terms favorable to the
Company.
SEASONALITY
The Company, and the wireless communications industry in general,
have historically experienced significant subscriber growth during the fourth
calendar quarter. Accordingly, during such quarter the Company experiences
greater losses on equipment sales and increases in sales and marketing expenses.
The Company has historically experienced its highest usage and revenue per
subscriber during the summer months. The Company expects these trends to
continue.
20
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 29, 1997, Western PCS BTA I Corporation, a wholly-owned
subsidiary of the Company ("Western BTA"), received a civil investigative demand
from the Department of Justice ("DOJ") requiring production of certain documents
and responses to certain interrogatories in connection with the DOJ's
investigation of bid rigging and market allocation for PCS licenses auctioned by
the FCC. Western BTA understands that similar demands were issued to numerous
other participants in the FCC PCS auctions. Western BTA believes that its
conduct throughout the PCS auctions was consistent with all FCC regulations and
applicable laws and intends to cooperate fully with the DOJ's investigative
demand.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders of Western Wireless
Corporation was held on May 21, 1997.
(b) The following directors were elected to serve a one year term:
John W. Stanton, John L. Bunce, Mitchell Cohen, Daniel J. Evans, Jonathan M.
Nelson, and Terence O'Toole.
(c) The following matters were voted upon at the meeting:
1. For the election of directors:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
John W. Stanton 523,386,453 95,680
John L. Bunce 523,386,142 95,991
Mitchell L. Cohen 523,387,142 94,991
Daniel J. Evans 523,457,960 24,173
Jonathan M. Nelson 523,387,732 94,401
Terence M. O'Toole 523,387,742 94,391
</TABLE>
2. Approval of the Company's 1996 Employee Stock Purchase Plan.
For: 521,545,052
Against: 548,079
Withheld: 16,130
Broker Non-votes: 1,376,197
21
<PAGE> 24
3. Approval of the Company's 1997 Executive Restricted Stock
Plan.
For: 521,446,389
Against: 609,727
Withheld: 33,145
Broker Non-votes: 1,376,197
4. Ratification of selection of Arthur Andersen LLP as the
Company's independent public accounts for fiscal year 1997.
For: 522,035,580
Against: 1,441,577
Withheld: 8,301
ITEM 5. OTHER INFORMATION
None.
ITEM 6.
(a) Exhibit Description
------- -----------
10.1 Second Amendment to Amended and Restated Loan
Agreement by and among Western Wireless Corporation,
various financial institutions, and The Toronto-
Dominion Bank, Barclays Bank plc and Morgan Guaranty
Trust Company of New York as Managing Agents dated
May 28, 1997.
27.1 Financial Data Schedule
99.1 Current Report on Form 8-K dated June 19, 1997
(Item 5. Other Events)
(b) Reports on Form 8-K
Date of Report: June 19, 1997
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Western Wireless Corporation
By s:\Donald Guthrie
Donald Guthrie
Chief Financial Officer
Dated: August 13, 1997
