<PAGE>
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-57187
PROSPECTUS SUPPLEMENT
(To Prospectus Dated July 22, 1998)
[LOGO]
26,000,000 PREMIUM INCOME EXCHANGEABLE SECURITIES(SM) (PIES(SM))
OF
MEDIAONE GROUP, INC.
6 1/4% EXCHANGEABLE NOTES DUE AUGUST 15, 2001
SUBJECT TO EXCHANGE INTO SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF
AIRTOUCH COMMUNICATIONS, INC.
[LOGO]
--------------------------
The principal amount of each of the 6 1/4% Exchangeable Notes (each, a
"PIES") of MediaOne Group, Inc. ("MediaOne Group") being offered hereby will be
$58.125 (the last sale price of the common stock, par value $.01 per share (the
"AirTouch Common Stock"), of AirTouch Communications, Inc. ("AirTouch") on July
30, 1998 as reported on the New York Stock Exchange Composite Tape) (the
"Initial Price"). The PIES will mature on August 15, 2001 (such date and any
permitted extensions thereof, "Stated Maturity") except as otherwise provided
herein. Interest on the PIES will accrue at a rate of 6 1/4% of the principal
amount per annum until Maturity (as defined below) and is payable quarterly in
arrears on each February 15, May 15, August 15 and November 15, beginning
November 15, 1998 and at Maturity.
(COVER CONTINUED ON NEXT PAGE)
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS.
------------------------
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 SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCCEDS TO
PRICE TO DISCOUNT AND MEDIAONE
PUBLIC(1) COMMISSIONS(2) GROUP(1)(3)
<S> <C> <C> <C>
Per PIES........................................... $58.125 $1.590 $56.535
Total(4)........................................... $1,511,250,000 $41,340,000 $1,469,910,000
</TABLE>
(1) Plus accrued interest, if any, from the issue date.
(2) MediaOne Group and AirTouch have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Plan of Distribution."
(3) Before deducting estimated expenses of $668,500 payable by MediaOne Group.
(4) MediaOne Group has granted to the Underwriters a 30-day option to purchase
an additional 3,900,000 PIES on the same terms and conditions as set forth
above solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public, Underwriting Discount and Commissions,
and Proceeds to MediaOne Group will be $1,737,937,500, $47,541,000, and
$1,690,396,500, respectively. See "Plan of Distribution."
--------------------------
The PIES offered by this Prospectus Supplement are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of the PIES will
be made through The Depository Trust Company, New York, New York, on or about
August 5, 1998.
--------------------------
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
GOLDMAN, SACHS & CO.
July 30, 1998
"Premium Income Exchangeable Securities(SM)" and "PIES(SM)" are service marks
owned by Lehman Brothers Inc.
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
At Maturity the principal amount of each PIES will be mandatorily exchanged
by MediaOne Group into a number of shares of AirTouch Common Stock (or, at
MediaOne Group's option under the circumstances described herein, the cash
equivalent for all or part thereof and/or such other consideration as permitted
or required by the terms of the PIES) at the Exchange Rate (as defined herein).
MediaOne Group, at its option, may extend the Stated Maturity of the PIES for up
to six months, and, if such extension exceeds three months, will pay additional
interest, all as further described herein.
Attached to this Prospectus Supplement for convenience of reference is a
separate prospectus of AirTouch relating to the shares of AirTouch Common Stock
that may be received by holders of PIES at Maturity. AIRTOUCH IS NOT AN
AFFILIATE OF MEDIAONE GROUP. AIRTOUCH WILL NOT RECEIVE ANY OF THE PROCEEDS FROM
THE SALE OF THE PIES AND WILL HAVE NO OBLIGATIONS WITH RESPECT TO THE PIES.
AirTouch Common Stock is listed for trading on the New York Stock Exchange
("NYSE") under the symbol "ATI."
Application has been made to list the PIES on the NYSE under the symbol
"UMX." Prior to the offering made hereby, there has not been a public market for
the PIES.
--------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PIES AND THE
AIRTOUCH COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF AIRTOUCH
COMMON STOCK PRIOR TO THE PRICING OF THE OFFERING FOR THE PURPOSE OF MAINTAINING
THE PRICE OF THE PIES AND THE AIRTOUCH COMMON STOCK, THE PURCHASE OF PIES
FOLLOWING THE PRICING OF THE OFFERING TO COVER A SHORT POSITION IN THE PIES AND
THE PURCHASE OF AIRTOUCH COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING FOR
THE PURPOSE OF MAINTAINING THE PRICE OF THE PIES AND THE AIRTOUCH COMMON STOCK
AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"PLAN OF DISTRIBUTION."
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"[Map of AirTouch Communications, Inc. Worldwide Markets]"
<PAGE>
SUMMARY OF THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 26,000,000 PIES consisting of 6 1/4% Exchangeable Notes
of MediaOne Group.
Offering Price.................... $58.125 per PIES (the last sale price of the AirTouch
Common Stock on July 30, 1998).
Interest.......................... 6 1/4% per annum, payable quarterly in arrears on each
February 15, May 15, August 15 and November 15,
beginning November 15, 1998 and at Maturity.
Stated Maturity................... The PIES will mature on August 15, 2001, subject to
extension as described herein.
Mandatory Exchange................ At Maturity the principal amount of each PIES will be
mandatorily exchanged by MediaOne Group into a number
of shares of AirTouch Common Stock (or, at MediaOne
Group's option under the circumstances described
herein, the cash equivalent for all or part thereof
and/or such other consideration as permitted or
required by the terms of the PIES) at the Exchange
Rate. The "Exchange Rate" is equal to, subject to
certain adjustments: (a) if the Maturity Price is
greater than or equal to $71.75 per share of AirTouch
Common Stock (the "Threshold Appreciation Price"),
0.8101 shares of AirTouch Common Stock per PIES; (b) if
the Maturity Price is less than the Threshold
Appreciation Price but is greater than the Initial
Price, a fraction of one share of AirTouch Common Stock
per PIES equal to the quotient of (i) the Initial Price
divided by (ii) the Maturity Price; and (c) if the
Maturity Price is less than or equal to the Initial
Price, one share of AirTouch Common Stock per PIES. See
"Description of the PIES--Dilution Adjustments;
Adjustment Events." The value of the AirTouch Common
Stock to be received by holders of the PIES (or the
cash equivalent for all or part thereof and/or other
consideration) at Maturity may be less than the
principal amount thereof. Holders of PIES will realize
no equity appreciation if the Maturity Price is less
than the Threshold Appreciation Price, and will realize
only 81.01% of the appreciation above the Threshold
Appreciation Price. The "Maturity Price" (other than in
the case of a post-extension termination of the PIES
(as described under the caption "Description of the
PIES-- Extensions and Post-Extension Termination"))
means the average Closing Price (as defined herein) per
share of AirTouch Common Stock on the 20 Trading Days
(as defined herein) immediately prior to Maturity, as
further described herein. "Maturity" means the date on
which the principal of the PIES becomes due and payable
as therein provided, whether at the Stated Maturity
(whether as initially stated or as extended) or by
declaration of acceleration, post-extension termination
or otherwise.
</TABLE>
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<TABLE>
<S> <C>
Extension of Stated Maturity...... MediaOne Group, at its option, may extend the Stated
Maturity of the PIES for up to two extension periods of
three months each (subject to post-extension
termination as described below), provided that if two
such extension periods are utilized, additional
interest at a rate of 0.5% per annum will accrue on the
PIES during the second of such periods. MediaOne Group,
at its option, may also cause all but not less than all
of the PIES to be terminated and repaid at any time
within an extension period under the circumstances
described herein. See "Description of the
PIES--Extensions and Post-Extension Termination."
Defeasance........................ The PIES are subject to defeasance on the terms
described herein. See "Description of the
PIES--Defeasance."
Listing........................... The AirTouch Common Stock is listed for trading on the
"NYSE" under the symbol "ATI." Application has been
made to list the PIES on the NYSE under the symbol
"UMX."
Use of Proceeds................... The net proceeds to be received by MediaOne Group from
sales of the PIES will be used by MediaOne Group and
its affiliates to reduce short-term indebtedness and
for general corporate purposes. See "Use of Proceeds."
</TABLE>
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<PAGE>
RISK FACTORS
Before investing in the PIES, prospective investors should consider
carefully all the information set forth or incorporated by reference in this
Prospectus Supplement including the considerations set forth below.
RISK FACTORS RELATING TO PIES
As described in more detail below, the trading price of the PIES may vary
considerably prior to Maturity due to, among other things, fluctuations in the
market price of AirTouch Common Stock and other events that are difficult to
predict and beyond MediaOne Group's control.
COMPARISON TO OTHER DEBT SECURITIES; RELATIONSHIP TO AIRTOUCH COMMON
STOCK. The terms of the PIES differ from those of ordinary debt securities in
that the value of the AirTouch Common Stock (or cash equivalent for all or part
thereof and/or other consideration) that a holder of the PIES will receive upon
mandatory exchange of the principal amount thereof at Maturity (the "Amount
Receivable at Maturity") is not fixed, but is based on the market price of the
AirTouch Common Stock (and of such other consideration) as specified in the
Exchange Rate (as defined under "Description of the PIES"). There can be no
assurance that the Amount Receivable at Maturity will be equal to or greater
than the principal amount of the PIES. For example, if the Maturity Price of the
AirTouch Common Stock is less than the Initial Price, the Amount Receivable at
Maturity will generally be less than the principal amount paid for the PIES, in
which case an investment in PIES would result in a loss. If AirTouch were to
become insolvent or bankrupt, the PIES could result in a total loss. Holders of
the PIES, therefore, bear the full risk of a decline in the value of the
AirTouch Common Stock during the term of the PIES.
Dividends are not currently paid on the AirTouch Common Stock. Accordingly,
the yield on the PIES is higher than the current dividend yield on the AirTouch
Common Stock. However, there is no assurance that the yield on the PIES will be
higher than the dividend yield on the AirTouch Common Stock over the term of the
PIES.
In addition, the opportunity for equity appreciation afforded by an
investment in the PIES is less than the opportunity for equity appreciation
afforded by an investment in AirTouch Common Stock because the Amount Receivable
at Maturity will only exceed the principal amount of such PIES if the Maturity
Price exceeds the Threshold Appreciation Price (as defined under "Description of
the PIES"), which represents an appreciation of 23.44% of the Initial Price.
Moreover, holders of the PIES will only be entitled to receive upon exchange at
Maturity 81.01% of any appreciation of the value of AirTouch Common Stock in
excess of the Threshold Appreciation Price. See "Description of the PIES" for an
illustration of the Amount Receivable at Maturity that a PIES holder will
receive at various Maturity Prices. Because the market price of the AirTouch
Common Stock is subject to market fluctuations, the Amount Receivable at
Maturity may be more or less than the principal amount of the PIES. In addition,
because the Maturity Price is generally determined based on a 20-Trading-Day
average, the value of a share of AirTouch Common Stock distributed at Maturity
may be less than the Maturity Price used to determine the Amount Receivable at
Maturity.
The market price of the PIES at any time will be affected primarily by
changes in the price of AirTouch Common Stock. It is impossible to predict
whether the price of AirTouch Common Stock will rise or fall. Trading prices of
AirTouch Common Stock will be influenced by AirTouch's operational results and
by complex and interrelated political, economic, financial and other factors
that can affect the capital markets generally, the stock exchange on which
AirTouch Common Stock is traded and the market segment of which AirTouch is a
part. See the prospectus relating to AirTouch and to AirTouch Common Stock
attached hereto. Trading prices of AirTouch Common Stock also may be influenced
if AirTouch, MediaOne Group or a principal stockholder of AirTouch hereafter
issues securities with terms similar to those of the PIES or otherwise transfers
shares of AirTouch Common Stock. As of the date hereof, a wholly owned
subsidiary of MediaOne Group held an aggregate of 59,313,621 shares of AirTouch
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Common Stock, 26,000,000 shares of which (29,900,000 shares if the Underwriters'
over-allotment option is exercised in full) MediaOne Group may deliver to
holders of the PIES at Maturity.
IMPACT OF THE PIES ON THE MARKET FOR AIRTOUCH COMMON STOCK. Any market that
develops for the PIES is likely to influence and be influenced by the market for
AirTouch Common Stock. For example, the price of the AirTouch Common Stock could
become more volatile and could be depressed by investors' anticipation of the
potential distribution into the market of substantial additional amounts of
AirTouch Common Stock at the maturity of the PIES, by possible sales of the
AirTouch Common Stock by investors who view the PIES as a more attractive means
of equity participation in AirTouch and by hedging or arbitrage trading activity
that may develop involving the PIES and the AirTouch Common Stock.
POTENTIAL FUTURE ISSUANCES OF AIRTOUCH COMMON STOCK. As of July 15, 1998,
AirTouch had outstanding 17,252,923 shares of its 6.00% Class B Preferred Stock,
Series 1996 (the "Class B Preferred Stock") that mature on August 16, 1999, or
earlier upon the occurrence of specified mergers or asset dispositions by
AirTouch. At maturity, the Class B Preferred Stock will be mandatorily
exchangeable by AirTouch into up to 17,252,923 shares of AirTouch Common Stock.
Based on the market price of the AirTouch Common Stock on July 15, 1998,
13,905,856 shares would be mandatorily exchanged. Prior to maturity, each share
is convertible at the option of the holder at any time into 0.806 shares of
AirTouch Common Stock. As of July 15, 1998, AirTouch had outstanding 11,080,082
shares of its 4.25% Class C Convertible Preferred Stock, Series 1996 (the "Class
C Preferred Stock"). Each share of Class C Preferred Stock is convertible at the
option of the holder at any time into 1.379 shares of AirTouch Common Stock,
subject to certain adjustments. After August 16, 1999, the Class C Preferred
Stock will be redeemable by AirTouch in exchange for shares of AirTouch Common
Stock at any time if certain trading conditions exist, and after August 16,
2000, at any time regardless of then existing trading conditions. Based on the
market price of the AirTouch Common Stock on July 15, 1998, 15,279,433 shares
would be issuable upon redemption. The price of AirTouch Common Stock could
become more volatile and could be depressed by investors' anticipation of the
potential distribution into the market of substantial additional amounts of
AirTouch Common Stock at maturity or conversion of the foregoing securities.
POTENTIAL DILUTION OF AIRTOUCH COMMON STOCK; STOCKHOLDER RIGHTS. The Amount
Receivable at Maturity is subject to adjustment for certain events arising from
stock splits and combinations, stock dividends and certain other actions of
AirTouch that modify its capital structure. See "Description of the
PIES--Dilution Adjustments; Adjustment Events." Such Amount Receivable at
Maturity may not be adjusted for other events, such as offerings of AirTouch
Common Stock (or securities convertible into AirTouch Common Stock) for cash or
in connection with acquisitions or distributions of AirTouch Common Stock upon
the maturity or conversion of instruments described in "--Potential Future
Issuances of AirTouch Common Stock" above, that may adversely affect the price
of AirTouch Common Stock, and, because of the relationship of such Amount
Receivable at Maturity to the price of AirTouch Common Stock, such other events
may adversely affect the trading price of the PIES. There can be no assurance
that AirTouch or MediaOne Group, a principal stockholder of AirTouch, will not
make offerings of AirTouch Common Stock (or securities convertible into AirTouch
Common Stock) or take such other action in the future or as to the amount of
such offerings, if any.
In addition, until such time, if any, as MediaOne Group shall deliver shares
of AirTouch Common Stock to holders of the PIES at Maturity thereof, holders of
the PIES will not be entitled to any rights with respect to AirTouch Common
Stock (including, without limitation, voting rights, rights to respond to tender
offers and the rights to receive any dividends or other distributions in respect
thereof). Nevertheless, dividends paid in excess of a specified level will
result in a cash payment in an amount calculated as described herein to holders
of the PIES at Maturity.
NO AFFILIATION BETWEEN MEDIAONE GROUP AND AIRTOUCH. A wholly owned
subsidiary of MediaOne Group currently owns for its own account approximately
10.3% (59,313,621 shares) of the outstanding AirTouch Common Stock.
Notwithstanding such ownership, except for certain contractual arrangements
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described herein, MediaOne Group is not affiliated with AirTouch and does not
have the right to designate any members of the Board of Directors of AirTouch or
to otherwise influence the management or operations of AirTouch.
AirTouch has no obligations with respect to the PIES or the Amount
Receivable at Maturity, including any obligation to take the needs of MediaOne
Group or of holders of the PIES into consideration for any reason. AirTouch will
not receive any of the proceeds of the offering of the PIES made hereby and is
not responsible for, and has not participated in, the determination of the time
of, prices for or quantities of PIES to be issued or the determination or
calculation of the Amount Receivable at Maturity. AirTouch is not involved with
the administration or trading of the PIES.
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET. It is not possible to predict
how the PIES will trade in the secondary market or whether such market will be
liquid or illiquid. There is currently no secondary market for the PIES. The
Underwriters currently intend, but are not obligated, to make a market in the
PIES, and any such market-making may be discontinued at any time in the sole
discretion of the Underwriters without notice. There can be no assurance that a
secondary market will develop or, if a secondary market does develop, that it
will provide the holders of the PIES with liquidity or that it will continue for
the life of the PIES.
MediaOne Group has made application to list the PIES on the NYSE. Assuming
the acceptance of such application, there can be no assurance that the PIES will
not later be delisted or that trading in the PIES on the NYSE will not be
suspended. In the event of a delisting or suspension of trading on such
exchange, MediaOne Group will apply for listing of the PIES on another national
securities exchange or for quotation on another trading market. If the PIES are
not listed or traded on any securities exchange or trading market, or if trading
of the PIES is suspended, pricing information for the PIES may be more difficult
to obtain, and the price and liquidity of the PIES may be adversely affected.
RISK FACTORS RELATING TO AIRTOUCH. Investors in the PIES should carefully
consider the information in the prospectus of AirTouch attached hereto,
including the information contained therein under "Risk Factors."
UNCERTAINTY OF FEDERAL INCOME TAX CONSEQUENCES. No statutory, judicial or
administrative authority directly addresses the characterization of the PIES or
instruments similar to the PIES for U.S. federal income tax purposes. As a
result, significant aspects of the U.S. federal income tax consequences of an
investment in the PIES are not certain. No ruling is being requested from the
Internal Revenue Service with respect to the PIES and no assurance can be given
that the Internal Revenue Service will agree with the conclusions expressed
under "United States Federal Income Tax Consequences."
RANKING OF PIES. The PIES will be unsecured obligations of MediaOne Group
ranking pari passu in right of payment with all other unsecured and
unsubordinated obligations of MediaOne Group. Nevertheless, MediaOne Group is a
holding company that conducts its operations through subsidiaries, and
therefore, the obligations of MediaOne Group under the PIES will be structurally
subordinated to all of the indebtedness of MediaOne Group's subsidiaries. As of
March 31, 1998, MediaOne Group's consolidated subsidiaries had outstanding
approximately $5.0 billion of indebtedness after giving effect to the use of the
estimated proceeds from this offering as described in "Use of Proceeds," the
discontinuance of the businesses of New U S WEST, the consummation of the
AirTouch Transaction and the refinancing of the indebtedness of Old U S WEST,
and excluding MediaOne's obligated mandatorily redeemable preferred securities
of subsidiary trusts holding solely Company-guaranteed debentures, each as
described in "Recent Developments" and "Capitalization."
The indebtedness of these subsidiaries includes all of the indebtedness of
MediaOne Group of Delaware, Inc. (formerly Continental Cablevision, Inc.),
MediaOne Group's principal domestic operating subsidiary ("MediaOne Delaware"),
which, as of March 31, 1998, had outstanding approximately $2.7 billion of
indebtedness.
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RISK FACTORS RELATING TO MEDIAONE GROUP
OPERATING LOSSES. For the year ended December 31, 1997 and the three months
ended March 31, 1998, on a pro forma basis after giving effect to the
discontinuance of the operations of the businesses of New U S WEST and the
AirTouch Transaction (as defined herein), MediaOne Group would have had
operating losses from continuing operations of $320 million and $86 million,
respectively. See "Summary Financial Data." These losses result from the
significant amount of amortization of intangible assets recognized in connection
with the acquisition of Continental Cablevision, Inc. and from depreciation
associated with capital expenditures required to upgrade MediaOne Group's
networks. There can be no assurance that MediaOne Group will realize positive
operating income from continuing operations in the foreseeable future.
REGULATION. The businesses of MediaOne Group are subject to a high degree
of regulation at the federal, state and local levels, as well as in various
foreign countries in connection with certain overseas business activities. These
regulations can in certain circumstances impose significant limitations on
operations. In addition, these regulations are constantly evolving and may
change significantly over time. There can be no assurance the future regulatory
changes will not have a material adverse effect on MediaOne Group.
COMPETITION. MediaOne Group's businesses operate in an increasingly
competitive environment. MediaOne Group's cable television systems compete with
other providers of video programming. The cable television services offered by
MediaOne Group face competition from other communications and entertainment
media, including broadcast television, video tape rentals and live sporting
events. In addition, with the passage of the Telecommunications Act of 1996,
additional competitors are entering into MediaOne Group's markets, including
local exchange carriers with greater financial resources than MediaOne Group who
offer video programming services similar to those offered by MediaOne Group. As
MediaOne Group begins to offer additional services over its networks, including
local exchange and data services, MediaOne Group will face additional
competition from other providers of such services, including from local exchange
carriers, interexchange carriers and internet service providers. MediaOne
Group's international businesses also typically face significant competition in
their markets. The broadband communications industry is continually subject to
rapid and significant changes in technology. There can be no assurance that the
introduction of any new technology will not result in the entry of additional
competitors into MediaOne Group's markets, which could reduce MediaOne Group's
market share.
RISKS ASSOCIATED WITH INTERNATIONAL INVESTMENTS. MediaOne Group has made
and intends to continue to consider making, investments in companies located
outside of the United States. Such investments are subject to risks and
uncertainties relating to international investments which may include taxation,
nationalization, inflation, currency fluctuations, increased regulation and
approval requirements and governmental regulation limiting returns to foreign
investors. In recent months, investments in Asia have been subject to an
unusually high level of risk, owing to uncertainty from economic and political
conditions.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE. Some of the information
presented in or in connection with this Prospectus Supplement constitutes
"forwarding-looking statements." Although MediaOne Group believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) greater than
anticipated competition from new entrants into the cable and international
wireless communications markets; (ii) changes in demand for MediaOne Group's
products and services; (iii) regulatory changes affecting the cable and
telecommunications industries; (iv) changes in economic conditions in the
various markets served by MediaOne Group's operations that could adversely
affect the level of demand for cable, international wireless or other services
offered by MediaOne Group; (v) greater than anticipated competitive activity
requiring new pricing for services; (vi) higher than anticipated start-
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up costs associated with new business opportunities; (vii) higher than
anticipated employee levels, capital expenditures and operating expenses (such
as costs associated with the year 2000 remediation); (viii) consumer acceptance
of broadband services, including telephony and data services, and international
wireless services; (ix) increases in fraudulent activity with respect to
broadband and wireless services; and (x) delays in the development of
anticipated technologies, or the failure of such technologies to perform
according to expectations.
MEDIAONE GROUP, INC.
MediaOne Group is a diversified global media and broadband communications
company. MediaOne Group has operations and investments in two principal areas:
(i) domestic broadband communications and (ii) international broadband and
wireless communications. MediaOne Group is the third largest cable television
system operator in the United States with large clusters in Atlanta, Georgia,
Eastern Massachusetts, Southern California, Southern Florida, Detroit, Michigan
and Minneapolis/St. Paul, Minnesota. As of March 31, 1998, MediaOne Group's
domestic cable television systems passed approximately 8.4 million homes and
provided services to approximately 4.9 million basic cable subscribers. MediaOne
Group also owns a 25.51% priority capital and residual equity interest in Time
Warner Entertainment Company, L.P., a provider of cable programming, filmed
entertainment and broadband communications services and the second largest cable
television system operator in the United States. Outside of the United States,
MediaOne Group owns interests in various providers of broadband and wireless
communications services in markets in continental Europe, the United Kingdom and
Asia, including a 26.8% interest in Telewest Communications plc, the second
largest provider of combined cable and telecommunications services in the United
Kingdom, and a 50% interest in One 2 One, a provider of personal communications
services in the United Kingdom.
RECENT DEVELOPMENTS
THE SEPARATION
Prior to June 12, 1998, MediaOne Group was known as "U S WEST, Inc." ("Old U
S WEST"). On June 12, 1998, Old U S WEST consummated a transaction in which it
separated its businesses into two independent companies (the "Separation").
Until the Separation, Old U S WEST conducted its businesses through two groups:
the U S WEST Communications Group (the "Communications Group") and the U S WEST
Media Group (the "Media Group"). In connection with the Separation, Old U S WEST
contributed the businesses of the Communications Group and the domestic
directories business of the Media Group, known as "Dex," to a wholly owned
subsidiary of Old U S WEST (such subsidiary is referred to as "New U S WEST"),
and distributed all of the common stock of New U S WEST to Old U S WEST's
stockholders. Upon consummation of the Separation, New U S WEST was renamed "U S
WEST, Inc." and Old U S WEST was renamed "MediaOne Group, Inc." and has
continued to conduct the business of the Media Group other than Dex.
THE AIRTOUCH TRANSACTION
On April 6, 1998, MediaOne Group sold its domestic wireless business to
AirTouch (the "AirTouch Transaction"). Pursuant to the AirTouch Transaction,
MediaOne Group received from AirTouch (i) 59,446,902 shares of AirTouch Common
Stock, 133,281 of which were subsequently delivered to AirTouch in settlement of
certain post-closing adjustments, and (ii) 825,000 shares of 5.143% Class D
Cumulative Preferred Stock, Series 1998, par value $.01 per share, and 825,000
shares of 5.143% Class E Cumulative Preferred Stock, Series 1998, par value $.01
per share, of AirTouch (collectively, the "AirTouch Preferred Stock") having an
aggregate liquidation preference of $1.65 billion. In addition, AirTouch assumed
$1.35 billion of indebtedness of MediaOne Group's domestic wireless business.
Prior to the consummation of the AirTouch Transaction, MediaOne Group and
AirTouch were parties to a multi-phased joint venture pursuant to which the
parties had agreed to combine their domestic wireless businesses. The AirTouch
Transaction was consummated in lieu of such joint venture.
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AIRTOUCH COMMUNICATIONS, INC.
AirTouch is the largest wireless telecommunication services company in the
world based on the 31.5 million total wireless customers served by the company
and its ventures as of June 30, 1998. Based on its ownership shares of its
global ventures, AirTouch had approximately 15.1 million proportionate customers
as of June 30, 1998. Through its operations in the United States, Europe, Asia
and North Africa, AirTouch provides a full range of wireless telecommunication
services, including cellular, personal communications services and paging, and
in the future will also provide global satellite communications. AirTouch's
principal objective is to be the premier provider of wireless telecommunication
services worldwide. To achieve its objective, AirTouch focuses on profitable
growth of its existing operations; pursues new wireless licenses in selected
countries and increases in ownership interests in existing markets; and pursues
other value-creating opportunities around the world.
RELATIONSHIP BETWEEN MEDIAONE GROUP AND AIRTOUCH
A wholly owned subsidiary of MediaOne Group currently owns for its own
account approximately 10.3% (59,313,621 shares) of the outstanding AirTouch
Common Stock. In addition, a wholly owned subsidiary of MediaOne Group currently
owns for its own account the AirTouch Preferred Stock. The AirTouch Preferred
Stock is not convertible into AirTouch Common Stock. MediaOne Group acquired
such shares of AirTouch Common Stock and AirTouch Preferred Stock in connection
with the AirTouch Transaction. See "Recent Developments--The AirTouch
Transaction."
In connection with the AirTouch Transaction, MediaOne Group and AirTouch
entered into the Amended and Restated Investment Agreement, dated as of April 6,
1998 (the "Investment Agreement"). Pursuant to the Investment Agreement,
MediaOne Group has agreed that MediaOne Group and its affiliates will vote all
of the shares of AirTouch Common Stock held by them in favor of the individuals
nominated by AirTouch for election to the Board of Directors of AirTouch and on
all other matters in the same proportion as all other holders of the AirTouch
Common Stock. Notwithstanding the foregoing, if, in connection with a transfer
by MediaOne Group of AirTouch Common Stock, counsel to MediaOne Group or to
AirTouch informs MediaOne Group and AirTouch in writing that, as a result of the
foregoing voting agreement, such counsel is unable to deliver an opinion that
MediaOne Group is not an "affiliate" of AirTouch within the meaning of Rule 144
under the Securities Act, then MediaOne Group has agreed that MediaOne Group and
its affiliates will vote all of the shares of AirTouch Common Stock held by them
in respect of all matters in the same proportion as all other holders of the
AirTouch Common Stock. In addition, pursuant to the Investment Agreement,
AirTouch has granted to MediaOne Group certain registration rights and MediaOne
Group has agreed not to purchase additional shares of AirTouch Common Stock and
is subject to certain limited transfer restrictions with respect to the shares
of AirTouch Common Stock it owns. Pursuant to the Investment Agreement, in
connection with the offering of the PIES, AirTouch has agreed to indemnify
MediaOne Group against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
Notwithstanding the ownership by MediaOne Group of approximately 10.3% of
the AirTouch Common Stock, except for the contractual arrangements described
above, MediaOne Group has no role in the management or operational decisions of
AirTouch. MediaOne Group does not have the right to designate any members of the
Board of Directors of AirTouch or to otherwise influence the management or
operations of AirTouch, and assumes no responsibility for the accuracy or
completeness of the information contained in the prospectus of AirTouch attached
hereto. MediaOne Group does not believe that it is an "affiliate" of AirTouch
within the meaning of the Securities Act. See "Risk Factors--Risk Factors
Relating to PIES--No Affiliation Between MediaOne Group and AirTouch."
S-10
<PAGE>
CAPITALIZATION
The following table sets forth, at March 31, 1998, (i) the unaudited
historical consolidated capitalization of MediaOne Group, restated to give
effect to the discontinuance of the businesses of New U S WEST, (ii) the
unaudited pro forma condensed combined capitalization of MediaOne Group, which
gives effect to the discontinuance of the businesses of New U S WEST, the
distribution of New U S WEST to Old U S WEST's shareholders pursuant to the
Separation, the refinancing by New U S WEST of $3.9 billion of indebtedness of
Old U S WEST, transfers of certain assets and liabilities to New U S WEST and
allocations of certain costs and expenses in connection with the Separation and
the AirTouch Transaction, as if such transactions had been consummated as of
March 31, 1998, (iii) adjustments to the unaudited pro forma condensed combined
capitalization of MediaOne Group necessary to give effect to (x) the actual
costs and results of the refinancing of indebtedness by MediaOne Group in
connection with the Separation and (y) the sale of the PIES and the application
of the net proceeds thereof as described under "Use of Proceeds," and (iv) the
adjusted condensed combined capitalization of MediaOne Group, which represents
the unaudited pro forma condensed combined capitalization of MediaOne Group,
adjusted for the transactions described in the preceding clause (iii). The
unaudited pro forma capitalization and the adjusted capitalization are presented
for information purposes only and are not necessarily indicative of the future
capitalization of MediaOne Group. The table should be read in conjunction with
MediaOne Group's historical and pro forma financial statements and the notes
thereto included in the documents incorporated by reference herein, including
MediaOne Group's Current Report on Form 8-K, dated June 18, 1998. See
"Incorporation of Certain Documents by Reference" in the accompanying Prospectus
of MediaOne Group.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
(UNAUDITED)
RESTATED
HISTORICAL PRO FORMA ADJUSTMENTS AS ADJUSTED
----------- ----------- ------------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Short-term debt............................................... $ 958 $ 1,009 211(a) 239
519(b)
(1,500)(c)
Long-term debt
Notes, debentures and other................................. 8,247 3,285 (16)(a) 3,269
PIES........................................................ 1,500(c) 1,500
----------- ----------- ------------- -----------
Total long-term debt...................................... 8,247 3,285 1,484 4,769
----------- ----------- ------------- -----------
Mandatorily redeemable preferred securities................... 100 100 100
Company obligated mandatorily redeemable preferred securities
of subsidiary trusts holding solely Company-guaranteed
debentures ("Preferred Securities")......................... 1,080 1,080 (1,017)(b) 561
498(b)
Total equity.................................................. 11,352 12,713 7(a) 12,720
----------- ----------- ------------- -----------
Total capitalization.......................................... $ 21,737 $ 18,187 $ 202 $ 18,389
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
</TABLE>
- ------------------------
(a) Represents adjustments to reflect the actual allocation of debt between
short-term debt and long-term debt upon refinancing of indebtedness in
connection with the Separation (the "Refinancing"), and adjustments for
actual debt refinancing costs. MediaOne Group retained excess funds related
to the Refinancing of approximately $200 million as cash on hand.
(b) Amounts reflect adjustments for the cash paid and securities issued in the
tender and exchange offer amounts of Preferred Securities pursuant to the
Refinancing. The cash tender of Preferred Securities was financed with
commercial paper debt.
(c) Adjustment reflects the issuance of PIES and the use of the debt proceeds to
repay commercial paper debt.
S-11
<PAGE>
SUMMARY FINANCIAL DATA
The summary historical financial information of MediaOne Group set forth
below should be read in conjunction with the restated consolidated financial
statements of MediaOne Group included in MediaOne Group's Current Report on Form
8-K, dated June 18, 1998. See "Incorporation of Certain Documents by Reference"
in the accompanying Prospectus of MediaOne Group. The summary historical
financial information at and for each of the five years ended December 31, 1997
have been derived from the restated consolidated financial statements of
MediaOne Group which have been audited by Arthur Andersen LLP (for 1997 and
1996) and by Coopers & Lybrand L.L.P. (for all other years). The summary
historical financial information of MediaOne Group for the three months ended
March 31, 1997 and 1998 have been prepared on the same basis as MediaOne Group's
audited restated consolidated financial statements and, in the opinion of
management, contain all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for these periods. The summary pro forma financial
information of MediaOne Group set forth below at and for the year ended December
31, 1997 and the three months ended March 31, 1998 gives effect to the
discontinuance of the businesses of New U S WEST, the distribution of New U S
WEST to Old U S WEST's shareholders pursuant to the Separation, the refinancing
by New U S WEST of $3.9 billion of indebtedness of Old U S WEST, transfers of
certain assets and liabilities to New U S WEST and allocations of certain costs
and expenses in connection with the Separation and the AirTouch Transaction, as
if such transactions had been consummated at the beginning of each of such
periods. The summary pro forma financial information should be read in
conjunction with MediaOne Group's pro forma financial statements included in Old
U S WEST's Current Report on Form 8-K, dated May 15, 1998 and in Old U S WEST's
Proxy Statement on Schedule 14A filed with the Commission on April 20, 1998. See
"Incorporation of Certain Documents by Reference" in the accompanying Prospectus
of MediaOne Group.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED)
-------------------- YEAR ENDED DECEMBER 31,
----------------------------------------------------- PRO FORMA(2)
THREE YEAR ENDED
MONTHS DECEMBER
ENDED 31,
MARCH 31, ----------
----------
(UNAUDITED)
1998 1997 1997 1996 1995 1994 1993 1998 1997
--------- --------- --------- --------- --------- --------- --------- ---------- ----------
DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and other
revenues(1)........... $972 $920 $3,847 $1,837 $1,330 $925 $612 $633 $2,419
Income (loss) from
continuing
operations(3)......... (222) (190) (827) (357) (102) 23 (139) (175) (617)
Income from discontinued
operations(3)......... 434 420 1,524 1,535 1,423 1,403 (2,667) 25,589 --
Net income (loss)(4).... 212 230 697 1,178 1,317 1,426 (2,806) 25,136 (617)
Total assets............ 26,895 27,585 26,783 27,727 11,847 10,331 7,923 24,252 24,314
Total debt(5)........... 9,205 10,009 8,963 8,806 2,073 1,791 1,471 4,294 4,039
Mandatorily redeemable
preferred stock and
Preferred
Securities(6)......... 1,180 1,131 1,180 1,131 651 51 -- 1,180 1,180
Shareowners' equity..... 11,352 11,485 11,324 11,549 7,948 7,382 5,861 12,713 12,770
Percentage of debt to
total capital(5)...... 42.3% 44.2% 41.8% 41.0% 19.4% 19.4% 20.1%
Capital
expenditures(5)....... $345 $320 $1,502 $643 $370 $308 $185
Employees 16,359 17,943 16,351 17,809 6,495 6,259 4,631
</TABLE>
- ------------------------------
(1) 1997 and 1996 sales and other revenues include other $2,070 and $252,
respectively, related to the acquisition by MediaOne Group of Continental
Cablevision Inc. (the "Continental Acquisition"), which was consummated on
November 15, 1996.
(2) MediaOne Group has accounted for the Separation as a discontinuance of the
businesses comprising New U S WEST. See "Recent Developments--The
Separation." The unaudited pro forma financial information gives effect to
the Separation and the AirTouch Transaction as if the transactions occurred
as of January 1, 1998 and 1997, respectively, for the summary statement of
operations information and as of March 31, 1998 and December 31, 1997,
respectively, for the summary balance sheet information.
S-12
<PAGE>
(3) Income from continuing operations for the three month period ended March 31,
1998 includes a net gain of $10 on the sale of a domestic investment. Income
from continuing operations for the three month period ended March 31, 1997
includes a net gain of $31 on the sale of MediaOne Group's interest in a
wireless venture in France. 1997 income from continuing operations includes
net gains of $249 on the sales of domestic and international investments,
and net losses of $356 related to the Continental Acquisition. 1996 income
from continuing operations includes net losses of $71 related to the
Continental Acquisition and a charge of $19 from the sale of MediaOne
Group's cable television interests in Norway, Sweden and Hungary. 1995
income from continuing operations includes a gain of $95 from the merger of
Telewest Communications plc with SBC CableComms (UK), and costs of $9
associated with Old U S WEST's implementation of a targeted stock capital
structure. 1994 income from continuing operations includes a gain of $105 on
the partial sale of MediaOne Group's joint venture interest in Telewest, and
a gain of $41 on the sale of MediaOne Group's paging operations. 1993 income
from continuing operations was reduced by a restructuring charge of $45.
(4) 1995 net income was reduced by an extraordinary item of $4 for the early
extinguishment of debt. 1993 net income includes a charge of $120 for
MediaOne Group's decision to discontinue the operations of its capital
assets segment. Discontinued operations of the capital assets segment also
provided net income of $38 during 1993.
(5) Debt at March 31, 1998, and December 31, 1997 and 1996 includes debt related
to the Continental Acquisition. Capital expenditures, debt and the
percentage of debt to total capital excludes the capital assets segment,
which has been discontinued and is held for sale, and the discontinued
operations of New U S WEST, which have been discontinued effective June 12,
1998. Percentage of debt to total capital includes the Preferred Securities
and mandatorily redeemable preferred stock as a component of total capital.
(6) Includes Preferred Securities of $1,080 at March 31, 1998 and 1997, and
December 31, 1997 and 1996, and $600 at December 31, 1995, and preferred
stock subject to mandatory redemption of $100 at March 31, 1998 and December
31, 1997, and $51 at March 31, 1997, and December 31, 1996, 1995 and 1994.
S-13
<PAGE>
PRICE RANGE AND DIVIDEND HISTORY
OF AIRTOUCH COMMON STOCK
AirTouch Common Stock has been traded on the NYSE under the symbol "ATI"
since April 6, 1994. The following table sets forth the high and low sales
prices for the AirTouch Common Stock for the calendar quarters indicated as
reported on the NYSE consolidated transaction system.
<TABLE>
<CAPTION>
SALES PRICES
--------------------------
HIGH LOW
------------ ------------
<S> <C> <C>
1996
First Quarter........................................................... $ 335/8 $ 255/8
Second Quarter.......................................................... 331/8 275/8
Third Quarter........................................................... 295/8 25
Fourth Quarter.......................................................... 283/8 247/8
1997
First Quarter........................................................... $ 291/2 $ 227/8
Second Quarter.......................................................... 291/4 22
Third Quarter........................................................... 381/8 2615/16
Fourth Quarter.......................................................... 42 33
1998
First Quarter........................................................... $ 507/8 $ 405/16
Second Quarter.......................................................... 5815/16 461/4
Third Quarter (through July 30, 1998)................................... 655/8 573/16
</TABLE>
On July 30, 1998, the last reported sale price of the AirTouch Common Stock
on the NYSE Composite Tape was $58 1/8 per share. As of June 30, 1998, there
were 532,342 holders of record of AirTouch Common Stock and 573,537,166 shares
of AirTouch Common Stock outstanding.
AirTouch has never paid dividends on the AirTouch Common Stock. For a
description of AirTouch's dividend policy, see "Price Range of Common Stock and
Dividends" in the prospectus of AirTouch attached hereto.
MediaOne Group makes no representation as to the amount of dividends, if
any, that AirTouch will pay in the future. In general, holders of the PIES will
not be entitled to receive dividends that may be payable on the AirTouch Common
Stock until such time as MediaOne Group, if it so elects, delivers AirTouch
Common Stock at Maturity of the PIES, and then only with respect to dividends
having a record date on or after the date of delivery of such AirTouch Common
Stock. Nevertheless, dividends paid in excess of a specified level will result
in a cash payment in an amount calculated as described herein to holders of the
PIES at Maturity. See "Description of the PIES."
USE OF PROCEEDS
The net proceeds of this offering after deducting estimated expenses will be
approximately $1,469,241,500. The net proceeds to be received by MediaOne Group
from sales of the PIES will be used by MediaOne Group and its affiliates to
reduce short-term indebtedness and for general corporate purposes. As of July
17, 1998, the short-term indebtedness being repaid with the net proceeds of the
sale of the PIES had a weighted average interest rate of approximately 5.85% and
had been outstanding for a weighted average of approximately 34 days.
S-14
<PAGE>
DESCRIPTION OF THE PIES
The following description of the particular terms of the PIES supplements,
and to the extent inconsistent therewith replaces, the description of the
general terms and provisions of Debt Securities set forth in the Prospectus, to
which description reference is hereby made.
GENERAL
The PIES are a series of Debt Securities (as defined in the Prospectus), to
be issued under an indenture dated as of November 13, 1995, as supplemented by
the Third Supplemental Indenture, dated as of July 30, 1998 (the indenture dated
as of November 13, 1995, as supplemented from time to time, the "Indenture"),
between MediaOne Group and The First National Bank of Chicago, as Trustee (the
"Trustee").
The PIES will be unsecured and will rank on a parity with all other
unsecured and unsubordinated indebtedness of MediaOne Group. However, since
MediaOne Group is a holding company that conducts its operations through its
subsidiaries, the obligations of MediaOne Group under the PIES will be
structurally subordinated to all of the indebtedness of MediaOne Group's
subsidiaries. See "Risk Factors--Risk Factors Relating to the PIES--Ranking of
the PIES."
The aggregate number of PIES to be issued will be 26,000,000 plus such
additional number of PIES as may be issued pursuant to the over-allotment option
granted by MediaOne Group to the Underwriters (see "Plan of Distribution"). The
PIES will mature on August 15, 2001, unless extended or, following an event of
default described in the Prospectus, accelerated. In the future MediaOne Group
may issue additional Debt Securities or other securities with terms similar to
those of the PIES.
Each PIES, which will be issued with a principal amount of $58.125, will
bear interest at an annual rate of 6 1/4% of the principal amount per annum (or
$3.633 per annum) from August 5, 1998, or from the most recent Interest Payment
Date (as defined below) to which interest has been paid or provided for until
the principal amount thereof is exchanged or paid at Maturity pursuant to the
terms of the PIES. Interest on the PIES will be payable quarterly in arrears on
each February 15, May 15, August 15 and November 15, commencing November 15,
1998 (each, an "Interest Payment Date") and at Maturity, to the persons in whose
names the PIES are registered at the close of business on the last day of the
calendar month immediately preceding such Interest Payment Date, provided that
interest payable at Maturity shall be payable to the person to whom the
principal is payable. Interest on the PIES will be computed on the basis of a
360-day year of twelve 30-day months. If an Interest Payment Date falls on a day
that is not a Business Day (as defined below), the interest payment to be made
on such Interest Payment Date will be made on the next succeeding Business Day
with the same force and effect as if made on such Interest Payment Date, and no
additional interest will accrue as a result of such delayed payment.
MANDATORY EXCHANGE; CASH DELIVERY OPTION
At Maturity the principal amount of each PIES will be mandatorily exchanged
by MediaOne Group into a number of shares of AirTouch Common Stock at the
Exchange Rate (as defined below) or, at MediaOne Group's option, with respect to
all or a portion of such shares, the equivalent amount in cash as described
below. The "Exchange Rate" is equal to, (a) if the Maturity Price (as defined
below) per share of AirTouch Common Stock is greater than or equal to $71.75 per
share of AirTouch Common Stock (the "Threshold Appreciation Price"), 0.8101
shares of AirTouch Common Stock per PIES, (b) if the Maturity Price is less than
the Threshold Appreciation Price but is greater than the Initial Price, a
fraction of one share of AirTouch Common Stock per PIES equal to the quotient of
(i) the Initial Price divided by (ii) the Maturity Price and (c) if the Maturity
Price is less than or equal to the Initial Price, one share of AirTouch Common
Stock per PIES. ACCORDINGLY THE VALUE OF THE AIRTOUCH COMMON STOCK TO BE
RECEIVED BY HOLDERS OF THE PIES (OR, AS DISCUSSED BELOW, THE CASH EQUIVALENT FOR
ALL OR PART THEREOF AND/OR OTHER CONSIDERATION TO BE
S-15
<PAGE>
RECEIVED IN LIEU OF SUCH SHARES) AT MATURITY MAY BE LESS THAN THE PRINCIPAL
AMOUNT OF SUCH PIES. The numbers of shares of AirTouch Common Stock per PIES
specified in clauses (a), (b) and (c) above of the Exchange Rate definition are
hereinafter referred to as the "Share Components." Any shares of AirTouch Common
Stock delivered by MediaOne Group to the holders of the PIES that are not
affiliated with AirTouch shall be free of any transfer restrictions and the
holders of the PIES will be responsible for the payment of any and all brokerage
costs upon the subsequent sale of such shares. No fractional shares of AirTouch
Common Stock will be issued at Maturity as provided under "--Fractional Shares"
below. Although it is MediaOne Group's current intention to deliver shares of
AirTouch Common Stock at Maturity, MediaOne Group may at its option deliver cash
in lieu of delivering all or a portion (such portion to be selected by MediaOne
Group in its discretion) of the shares of AirTouch Common Stock otherwise
deliverable at Maturity (the "Cash Delivery Option"). The amount of cash
deliverable in respect of each PIES shall be equal to the product of the number
of shares of AirTouch Common Stock otherwise deliverable in respect of such PIES
on the date of Maturity multiplied by the Maturity Price. An election to
exercise the Cash Delivery Option with respect to less than all of the shares of
AirTouch Common Stock otherwise deliverable at Maturity shall not in any way
limit MediaOne Group's obligation to deliver the remaining shares of AirTouch
Common Stock otherwise deliverable at Maturity. On or prior to the twenty-first
Business Day prior to Stated Maturity, MediaOne Group will notify The Depository
Trust Company and the Trustee and publish a notice in a daily newspaper of
national circulation stating whether the principal amount of each PIES will be
exchanged for shares of AirTouch Common Stock, cash or a combination thereof
and, if a combination of cash and shares, the relative proportions thereof.
Notwithstanding the foregoing, (i) in the case of certain dilution events, the
Exchange Rate will be subject to adjustment and (ii) in the case of certain
reorganization events, the consideration received by holders of PIES at Maturity
will be cash or other property. See "--Dilution Adjustments; Adjustment Events"
below.
The "Maturity Price" (other than in the case of a post-extension termination
of the PIES as described in "--Extensions and Post-Extension Termination" below)
is defined as the average Closing Price per share of AirTouch Common Stock on
the 20 Trading Days immediately prior to (but not including) the date of
Maturity; provided, however, that if there are not 20 Trading Days for the
AirTouch Common Stock following the 60th calendar day immediately prior to, but
not including, the date of maturity, "Maturity Price" shall be defined as the
market value per share of AirTouch Common Stock as of Maturity as determined by
a nationally recognized investment banking firm retained for such purpose by
MediaOne Group. The "Closing Price" of any security on any date of determination
means the closing sale price (or, if no closing price is reported, the last
reported sale price) of such security (regular way) on the NYSE on such date or,
if such security is not listed for trading on the NYSE on any such date, as
reported in the composite transactions for the principal United States
securities exchange on which such security is so listed, or if such security is
not so listed on a United States national or regional securities exchange, as
reported by the NASDAQ National Market, or if such security is not so reported,
the last quoted bid price for such security in the over-the-counter market as
reported by the National Quotation Bureau or similar organization. For purposes
of determining the Maturity Price, the Closing Price of any security on any day
prior to any "ex-dividend" date occurring during the relevant 20 Trading Day
period for any dividend paid or to be paid with respect to such security shall
be reduced by the amount of such dividend. A "Trading Day" is defined as a day
on which the security the Closing Price of which is being determined (A) is not
suspended from trading on any national or regional securities exchange or
association or over-the-counter market at the close of business and (B) has
traded at least once on the national or regional securities exchange or
association or over-the-counter market that is the primary market for the
trading of such security. "Business Day" means any day that is not a Saturday, a
Sunday or a day on which the NYSE, banking institutions or trust companies in
The City of New York are authorized or obligated by law or executive order to
close.
For illustrative purposes only, the following chart shows the number of
shares of AirTouch Common Stock or the amount of cash that a holder of PIES
would receive for each PIES at various Maturity Prices.
S-16
<PAGE>
The table assumes that there will be no adjustments to the Exchange Rate
described under "--Dilution Adjustments; Adjustment Events" below and that any
exercise of the Cash Delivery Option will be with respect to all of the shares
of AirTouch Common Stock otherwise deliverable. There can be no assurance that
the Maturity Price will be within the range set forth below. Given the Initial
Price of $58.125 per PIES and the Threshold Appreciation Price of $71.75, a PIES
holder would receive at Maturity the following number of shares of AirTouch
Common Stock or amount of cash (if MediaOne Group exercises the all Cash
Delivery Option in full) per PIES:
<TABLE>
<CAPTION>
PRICE OF NUMBER OF SHARES OF
AIRTOUCH AIRTOUCH
COMMON STOCK COMMON STOCK AMOUNT OF
AT MATURITY PER PIES CASH PER PIES
- -------------- --------------------- --------------
<S> <C> <C>
$ 55.000 1.0000 $ 55.000
58.125 1.0000 58.125
65.000 0.8942 58.125
71.750 0.8101 58.125
75.000 0.8101 60.758
</TABLE>
Interest on the PIES will be payable, and delivery of AirTouch Common Stock
(or with respect to all or a portion of such shares, its cash equivalent as
described above and/or such other consideration as permitted or required herein)
in exchange for the PIES at Maturity will be made upon surrender of such PIES,
at the office or agency of MediaOne Group maintained for such purposes;
provided, however, that payment of interest may be made at the option of
MediaOne Group by check mailed to the persons in whose names the PIES are
registered at the close of business on the last day of the calendar month
immediately preceding the relevant Interest Payment Date. See "--Book-Entry
System." Initially such office will be the principal corporate trust office of
The First National Bank of Chicago, One First National Plaza, Suite 6126,
Chicago, Illinois 60670.
The PIES will be transferable at any time or from time to time at the
aforementioned office. No service charge will be made to the holder for any such
transfer except for any tax or governmental charge incidental thereto.
The Indenture does not contain any restriction on the ability of MediaOne
Group to sell, pledge or convey all or any portion of the AirTouch Common Stock
held by it or its subsidiaries, and no such shares of AirTouch Common Stock will
be pledged or otherwise held in escrow for use at Maturity of the PIES (other
than as described under the caption "--Defeasance" below). Consequently, in the
event of a bankruptcy, insolvency or liquidation of MediaOne Group or its
subsidiaries, the AirTouch Common Stock, if any, owned by MediaOne Group or its
subsidiaries will be subject to the claims of the creditors of MediaOne Group or
its subsidiaries, respectively. In addition, as described herein, MediaOne Group
will have the option, exercisable in its sole discretion, to satisfy its
obligations pursuant to the mandatory exchange for the principal amount of each
PIES at Maturity by delivering to holders of the PIES either the number of
shares of AirTouch Common Stock specified above or cash in an amount equal to
the product of such number of shares multiplied by the Maturity Price, or a
combination thereof. In the event of such a sale, pledge or conveyance a holder
of the PIES may be more likely to receive cash in lieu of AirTouch Common Stock.
As a result, there can be no assurance that MediaOne Group will elect or will be
permitted at Maturity to deliver AirTouch Common Stock or, if it so elects and
is permitted, that it will use all or any portion of its current holdings of
AirTouch Common Stock to make such delivery. Consequently, holders of the PIES
will not be entitled to any rights with respect to AirTouch Common Stock
(including, without limitation, voting rights and rights to receive any
dividends or other distributions in respect thereof (other than, in certain
cases described under "--Dilution Adjustments; Adjustment Events," for
adjustments to the Exchange Rate)) until such time, if any, as MediaOne Group
shall have delivered shares of AirTouch Common Stock to holders of the PIES at
Maturity thereof.
S-17
<PAGE>
EXTENSIONS AND POST-EXTENSION TERMINATION
The PIES will mature on August 15, 2001 (such date, as the same may be
extended pursuant to this paragraph, the "Stated Maturity"), except that
MediaOne Group at its option may elect to extend such maturity to November 15,
2001 and may further elect to extend the maturity of the PIES to February 15,
2002 (each, an "extension period"), subject, in either case, to post-extension
termination as described in the following paragraph. MediaOne Group may exercise
this election by giving notice not less than 21 nor more than 60 Business Days
prior to the then-current Stated Maturity of such extension and of the new
Stated Maturity date. Interest at the rate set forth on the cover page of this
Prospectus Supplement will continue to accrue in arrears during any extension
period until Maturity (including by post-extension termination) and, in the
event that MediaOne exercises its option to extend the maturity of the PIES to
February 15, 2002, additional interest will accrue in arrears, commencing
November 15, 2001 until Maturity (including by post-extension termination), at a
rate per annum equal to 0.5% of the principal amount of the PIES. Such
additional interest shall be payable in the same manner, at the same time and to
the same holders as other interest payments required to be made under the PIES.
MediaOne Group may elect to cause all but not less than all of the PIES
(other than PIES subject to purchase in a Refinancing Offer) to be terminated
and repaid at any time within an extension period upon completion of a
Refinancing Offer ("post-extension termination"). MediaOne Group may exercise
this election by (i) providing to the Trustee an officer's certificate to the
effect that MediaOne Group is engaged in good faith efforts to launch and
consummate a Refinancing Offer, (ii) giving notice to the holders of the PIES
not less than 21 and not more than 30 Business Days prior to the anticipated
settlement date of such Refinancing Offer (a) of MediaOne Group's intention to
launch and consummate a Refinancing Offer and of such anticipated settlement
date and (b) that, pursuant to the terms described herein, the PIES will be
terminated and repurchased by MediaOne Group on the anticipated settlement date
of the Refinancing Offer and (iii) simultaneously with such notice, giving
notice to The Depository Trust Company and the Trustee and publishing a notice
in a daily newspaper of national circulation stating whether the principal
amount of each PIES will be exchanged for shares of AirTouch Common Stock, cash
or a combination thereof and, if a combination of cash and shares, the relative
proportions thereof. The termination and purchase date for the PIES shall be the
anticipated settlement date indicated in the notice described in clause (b)
above, except that if MediaOne Group postpones the settlement date for the
Refinancing Offer and gives two Business Days' prior notice by press release to
holders of such postponement, the termination and purchase date shall be such
postponed date on which the Refinancing Offer actually settles. Notwithstanding
the foregoing, if MediaOne Group terminates or abandons a Refinancing Offer and
gives notice thereof by press release to holders, any election made to terminate
the PIES will be deemed rescinded and thereafter the PIES will mature on the
then existing date of Stated Maturity, subject to post-extension termination on
the terms described herein.
"Refinancing Offer" means a refinancing, reoffering or retirement of all or
part of the PIES effected not earlier than August 15, 2001 by means of a
completed public offer or offers (which may include one or more exchange offers)
by or on behalf of MediaOne Group. In the case of a post-extension termination
in connection with a Refinancing Offer, "Maturity Price" is defined as the
Closing Price per share on the Trading Day immediately preceding the date that
such Refinancing Offer is priced (the "Pricing Date") or, if such Refinancing
Offer is priced after 4:00 p.m., New York time, on the Pricing Date, the Closing
Price per share on the Pricing Date, except that if there is not a Trading Day
immediately preceding the Pricing Date or (where pricing occurs after 4:00 p.m.,
New York time, on the Pricing Date) if the Pricing Date is not a Trading Day,
"Maturity Price" means the market value per share of AirTouch Common Stock as of
Maturity as determined by a nationally recognized independent investment banking
firm retained by MediaOne Group.
DILUTION ADJUSTMENTS; ADJUSTMENT EVENTS
The Exchange Rate is subject to adjustment if AirTouch shall:
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(i) pay a stock dividend or make a distribution, in either case, with
respect to AirTouch Common Stock in shares of such stock;
(ii) subdivide or split its outstanding shares of AirTouch Common Stock;
(iii) combine its outstanding shares of AirTouch Common Stock into a smaller
number of shares;
(iv) issue by reclassification (other than a reclassification pursuant to
clause (ii), (iii), (iv) or (v) of the definition of Adjustment Event
below) of its shares of AirTouch Common Stock any other shares of
common stock of AirTouch (other than shares of a class of common stock
of AirTouch that is intended to reflect separately less than all of the
businesses of AirTouch and its subsidiaries); or
(v) issue rights or warrants (other than rights to purchase AirTouch Common
Stock pursuant to a plan for the reinvestment of dividends or interest)
to all holders of AirTouch Common Stock entitling them to subscribe for
or purchase shares of AirTouch Common Stock at a price per share less
than the Market Price (as defined below) of the AirTouch Common Stock on
the Business Day next following the record date for the determination of
holders of AirTouch Common Stock entitled to receive such rights or
warrants.
In the case of the events referred to in clauses (i), (ii), (iii) and (iv)
above, the Exchange Rate shall be adjusted by adjusting each of the Share
Components of the Exchange Rate in effect immediately prior to such event so
that the holders will be entitled to receive at Maturity, with respect to each
PIES, the number of shares of AirTouch Common Stock (or, in the case of a
reclassification referred to in clause (iv) above, the number of shares of other
shares of common stock of AirTouch issued pursuant thereto) which it would have
owned or been entitled to receive immediately following such event had Maturity
occurred immediately prior to such event or any record date with respect
thereto. For purposes of making dilution adjustments described herein, dividends
will be deemed to be paid as of the record date for such dividend.
In the case of the event referred to in clause (v) above, the Exchange Rate
shall be adjusted pursuant to the following formula:
<TABLE>
<S> <C> <C> <C> <C> <C>
OS + AS
ER = SC X
--------------
OS + ( AS X EP )
M
</TABLE>
Where ER the adjusted Exchange Rate;
=
SC the Share Component of the Exchange Rate in effect on the
= record date for the issuance of the rights or warrants referred
to in clause (v) above;
OS the number of shares of AirTouch Common Stock outstanding on
= the record date for the issuance of such rights or warrants;
AS the number of additional shares of AirTouch Common Stock
= offered for subscription or purchase pursuant to such rights or
warrants;
EP the exercise price of such rights or warrants; and
=
M = the Market Price (as defined below) of the AirTouch Common
Stock on the Business Day next following the record date for
determination of holders of AirTouch Common Stock entitled to
received such rights or warrants.
To the extent that such rights or warrants expire prior to Maturity of the
PIES and shares of AirTouch Common Stock are not delivered pursuant to such
rights or warrants prior to such expiration, the Exchange Rate shall be
readjusted to the Exchange Rate which would then be in effect had such
adjustments for the issuance of such rights or warrants been made upon the basis
of delivery of only the number of shares of AirTouch Common Stock actually
delivered pursuant to such rights or warrants.
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"Market Price" means, as of any date of determination, the average Closing
Price per share of AirTouch Common Stock on the five Trading Days immediately
prior to (but not including) the date of determination; provided, however, that
if there are not five Trading Days for the AirTouch Common Stock occurring later
than the 60th calendar day immediately prior to, but not including, such date,
the Market Price shall be determined as the market value per share of AirTouch
Common Stock as of such date as determined by a nationally recognized investment
banking firm retained for such purpose by MediaOne Group. For purposes of
determining the Market Price, the Closing Price of any security on any day prior
to any "ex-dividend" date occurring during such five Trading Day period for any
dividend paid or to be paid with respect to such security shall be reduced by
the amount of such dividend.
All adjustments to the Exchange Rate will be calculated to the nearest
1/10,000th of a share of AirTouch Common Stock (or, if there is not a nearest
1/10,000th of a share, to the next higher 1/10,000th of a share). No adjustment
in the Exchange Rate shall be required unless such adjustment would require an
increase or decrease of at least one percent therein; provided, however that any
adjustments which by reason of the foregoing are not required to be made shall
be carried forward and taken into account in any subsequent adjustment.
If an adjustment is made to the Exchange Rate pursuant to clauses (i), (ii),
(iii), (iv) or (v) in the first paragraph under the caption "--Dilution
Adjustments; Adjustment Events," an adjustment will also be made to the Maturity
Price as such term is used to determine which of the clauses (a), (b) or (c) of
the Exchange Rate definition will apply at maturity and for purposes of
calculating the Maturity Price in subclause (b) (ii) of the definition of
Exchange Rate. The required adjustment to the Maturity Price shall be made at
Maturity by multiplying the Maturity Price by the cumulative number or fraction
determined pursuant to the Exchange Rate adjustment procedure described by the
preceding formula above. In the case of the reclassification of any shares of
AirTouch Common Stock into any shares of common stock of AirTouch other than the
AirTouch Common Stock, such common stock shall be deemed shares of AirTouch
Common Stock for all purposes. Each such adjustment to the Exchange Rate and the
Maturity Price shall be made successively.
In the event of:
(i) any dividend or distribution by AirTouch to all holders of AirTouch
Common Stock of evidences of its indebtedness or other assets (excluding
(1) any dividends or distributions referred to in clause (i) of the
first paragraph under the caption "--Dilution Adjustments; Adjustment
Events," (2) any common stock referred to in clause (iv) of such
paragraph issued pursuant to a reclassification referred to in such
clause and (3) any Ordinary Cash Dividends (as defined below)) or any
issuance by AirTouch to all holders of AirTouch Common Stock of rights
or warrants to subscribe for or purchase any of its securities (other
than rights or warrants referred to in clause (v) of the first paragraph
under such caption);
(ii) any consolidation or merger of AirTouch with or into another entity
(other than a merger or consolidation in which AirTouch is the
continuing corporation and in which the AirTouch Common Stock
outstanding immediately prior to the merger or consolidation is not
exchanged for cash, securities or other property of AirTouch or another
corporation);
(iii) any sale, transfer, lease or conveyance to another corporation of the
property of AirTouch as an entirety or substantially as an entirety;
(iv) any statutory exchange of securities of AirTouch with another
corporation (other than in connection with a merger or acquisition); or
(v) any liquidation, dissolution or winding up of AirTouch (any such event,
an "Adjustment Event"),
MediaOne Group will be obligated to deliver at Maturity, in lieu of or (in the
case of an Adjustment Event described in clause (i) above) in addition to,
shares of AirTouch Common Stock as described above, cash in
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an amount equal to (A) if the Maturity Price is greater than or equal to the
Threshold Appreciation Price, 0.8101 multiplied by the Transaction Value (as
defined below), (B) if the Maturity Price is less than the Threshold
Appreciation Price but is greater than the Initial Price, the product of (x) the
Initial Price divided by the Maturity Price multiplied by (y) the Transaction
Value and (C) if the Maturity Price is less than or equal to the Initial Price,
the Transaction Value. Following an Adjustment Event, the Maturity Price, as
such term is used in this paragraph and throughout the definition of Exchange
Rate, shall be deemed to equal (A) if shares of AirTouch Common Stock are
outstanding at Maturity, the Maturity Price of the AirTouch Common Stock, as
adjusted pursuant to the method set forth in the preceding paragraph plus the
Transaction Value or (B) if shares of AirTouch Common Stock are not outstanding
at Maturity, the Transaction Value.
Notwithstanding the foregoing, with respect to any securities received in an
Adjustment Event that
(A) are (i) listed on a United States national securities exchange, (ii)
reported on a United States national securities system subject to last
sale reporting, (iii) traded in the over-the-counter market and reported
on the National Quotation Bureau or similar organization or (iv) for
which bid and ask prices are available from at least three nationally
recognized investment banking firms; and
(B) are either (x) perpetual equity securities or (y) non-perpetual equity
or debt securities with a stated maturity after the stated maturity of
the PIES ("Reported Securities"),
MediaOne Group may, at its option, in lieu of delivering cash in respect of all
or a percentage (selected by MediaOne Group) of such Reported Securities
received in an Adjustment Event, deliver a number of such Reported Securities
with a value equal to all cash amounts that would otherwise be deliverable in
respect of all or such percentage of Reported Securities received in such
Adjustment Event, as determined in accordance with clause (ii) of the definition
of Transaction Value; PROVIDED, HOWEVER, that (i) if such option is exercised,
in respect of less than all cash amounts that would otherwise be deliverable in
respect of Reported Securities received in an Adjustment Event MediaOne Group
shall deliver all cash amounts as to which such option has not been exercised
and (ii) MediaOne Group may not exercise such option if such Reported Securities
have not yet been delivered to the holders entitled thereto following such
Adjustment Event or any record date with respect thereto. If MediaOne Group
delivers any Reported Securities, each holder of a PIES will be responsible for
the payment of any and all brokerage and other transaction costs upon the sale
of such Reported Securities. If, following any Adjustment Event, any Reported
Security ceases to qualify as a Reported Security, then (x) MediaOne Group shall
not deliver such Reported Security but instead shall deliver an equivalent
amount of cash and (y) notwithstanding clause (ii) of the definition of
Transaction Value, the Transaction Value of such Reported Security shall mean
the fair market value of such Reported Security on the date such security ceases
to qualify as a Reported Security, as determined by a nationally recognized
investment banking firm retained for this purpose by MediaOne Group.
The amount of cash and/or the kind and number of securities into which the
PIES shall be exchangeable after an Adjustment Event shall be subject to
adjustment following the date of such Adjustment Event in the same manner and
upon the occurrence of the same type of events as described under this caption
"--Dilution Adjustments; Adjustment Events" with respect to AirTouch Common
Stock and AirTouch.
For purposes of the foregoing, the term "Ordinary Cash Dividend" means, with
respect to any consecutive 365-day period, any dividend with respect to AirTouch
Common Stock paid in cash to the extent that the amount of such dividend,
together with the aggregate amount of all other dividends on the AirTouch Common
Stock paid in cash during such 365-day period, does not exceed on a per share
basis 10% of the average of the Closing Prices of the AirTouch Common Stock over
such 365-day period.
The term "Transaction Value" means:
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(i) for any cash received in any Adjustment Event, the amount of cash
received per share of AirTouch Common Stock;
(ii) for any Reported Securities received in any Adjustment Event, an amount
equal to (x) the average Closing Price per security of such Reported
Securities on the 20 Trading Days immediately prior to (but not
including) Maturity multiplied by (y) the number of such Reported
Securities (as adjusted pursuant to the second preceding paragraph)
received per share of AirTouch Common Stock; and
(iii) for any property received in any Adjustment Event other than cash or
such Reported Securities, an amount equal to the fair market value of
the property received per share of AirTouch Common Stock on the date
such property is received, as determined by a nationally recognized
investment banking firm retained for this purpose by MediaOne Group;
provided, however, that in the case of clause (ii), (x) with respect to
securities that are Reported Securities by virtue of only clause (iv) of the
definition of Reported Securities above, Transaction Value with respect to any
such Reported Security means the average of the mid-point of the last bid and
ask prices for such Reported Security as of Maturity from each of at least three
nationally recognized investment banking firms retained for such purpose by
MediaOne Group multiplied by the number of such Reported Securities (as adjusted
pursuant to the method set forth in the second preceding paragraph) received per
share of AirTouch Common Stock and (y) with respect to all other Reported
Securities, if there are not 20 Trading Days for any particular Reported
Security occurring after the 60th calendar day immediately prior to, but not
including, the date of Maturity, Transaction Value with respect to such Reported
Security means the market value per security of such Reported Security as of
Maturity as determined by a nationally recognized investment banking firm
retained for such purpose by MediaOne Group multiplied by the number of such
Reported Securities (as adjusted pursuant to the method set forth in the second
preceding paragraph) received per share of AirTouch Common Stock. For purposes
of calculating the Transaction Value, any cash, Reported Securities or other
property receivable in an Adjustment Event shall be deemed to have been received
immediately prior to the close of business on the record date for such
Adjustment Event or, if there is no record date for such Adjustment Event,
immediately prior to the close of business on the effective date of such
Adjustment Event.
No dilution adjustments will be made for events, other than those described
above, such as offerings of AirTouch Common Stock (other than through the
issuance of rights or warrants described above) for cash or in connection with
acquisitions.
MediaOne Group is required, within ten Business Days following the
occurrence of an event that requires an adjustment to the Exchange Rate or the
occurrence of an Adjustment Event (or, in either case, if MediaOne Group is not
aware of such occurrence, as soon as practicable after becoming so aware), to
provide written notice to the Trustee and to each holder of PIES of the
occurrence of such event including a statement in reasonable detail setting
forth the method by which the adjustment to the Exchange Rate or change in the
consideration to be received by holders of PIES following the Adjustment Event
was determined and setting forth the revised Exchange Rate or consideration, as
the case may be. In respect of any adjustment to the Maturity Price, such notice
will only disclose the factor by which the Maturity Price is to be multiplied in
order to determine which clause of the Exchange Rate definition will apply at
Maturity.
FRACTIONAL SHARES
No fractional shares of AirTouch Common Stock will be issued if MediaOne
Group exchanges the PIES for shares of AirTouch Common Stock and/or Reported
Securities. If more than one PIES shall be surrendered for exchange at one time
by the same holder, the number of full shares of AirTouch Common Stock or
Reported Securities which shall be delivered upon exchange, in whole or in part,
as the case may be, shall be computed on the basis of the aggregate number of
PIES so surrendered at maturity. In lieu of
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any fractional share otherwise issuable in respect of all PIES of any holder
which are exchanged at Maturity, such holder shall be entitled to receive an
amount in cash equal to the value of such fractional share at the Maturity
Price.
DEFEASANCE
MediaOne Group may terminate its obligations under the Indenture with
respect to the PIES (other than the Continuing Obligations (as defined below))
including those described under the caption "Description of Debt
Securities--Merger" in the accompanying Prospectus of MediaOne Group, on the
91st day after the applicable conditions set forth below have been satisfied:
(1) MediaOne Group has irrevocably deposited in trust with the Trustee, with
respect to each PIES (i) the maximum number of shares of AirTouch Common
Stock and of any Reported Securities, in either case, that could (based on
the Exchange Rate at the time of deposit and assuming no exercise of the
Cash Delivery Option and full exercise of the option to deliver Reported
Securities in lieu of cash in respect of such securities received in an
Adjustment Event) be deliverable at Maturity with respect to such PIES and
(ii) U.S. Government Obligations (as defined in the Indenture), cash or a
combination thereof, in any case, sufficient, in the opinion of a
nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee at or prior to the
time of such deposit, to pay not later than one day before due (a) all
interest on such PIES to Stated Maturity and (b) the maximum cash amount
with respect to such PIES that could be deliverable at Maturity with
respect to any cash or property other than Reported Securities received in
an Adjustment Event;
(2) No Default or Event of Default with respect to the Indenture or the PIES
shall have occurred and be continuing on the date of such deposit or shall
occur as a result of such deposit and such deposit will not result in a
breach or violation of, or constitute a default under, any other instrument
to which MediaOne Group is a party or by which it is bound, as evidenced to
the Trustee in an Officers' Certificate delivered to the Trustee
concurrently with such deposit;
(3) MediaOne Group has delivered to the Trustee an Opinion of Counsel in form
satisfactory to the Trustee to the effect that Holders will not recognize
income, gain or loss for Federal income tax purposes as a result of
MediaOne Group's exercise of its option described under this caption
"--Defeasance" and will be subject to Federal income tax on the same amount
and in the same manner and at the same time as would have been the case if
such option had not been exercised;
(4) MediaOne Group has paid or duly provided for payment of all amounts then
due to the Trustee pursuant to the terms of the Indenture;
(5) MediaOne Group has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating, as applicable, that all conditions
precedent provided for in the relevant Indenture relating to the discharge
of MediaOne Group's obligations to comply with certain covenants have been
complied with; and
(6) MediaOne Group has delivered to the Trustee an Opinion of Counsel to the
effect that after the passage of 90 days after the deposit, the trust funds
deposited pursuant to clause (1) above will not be subject to the effect of
any applicable Federal or State bankruptcy, insolvency or similar law.
"Continuing Obligations" means the obligation to exchange principal and pay
interest with respect to the PIES, to deposit cash and securities from time to
time with the Trustee pursuant to the provisions described under the caption
"--Defeasance", to provide any notices required with respect to any Cash
Delivery Option, to maintain a registrar and paying agencies, to register the
transfer and exchange of PIES, to hold moneys for payment in trust, to replace
stolen, lost or mutilated PIES certificates, to maintain and, if necessary,
replace, the Trustee and to indemnify the Trustee.
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<PAGE>
If any event requiring a dilution adjustment under the PIES shall occur or
if any Adjustment Event shall occur, in either case, following an initial
deposit pursuant to clause (1) of the preceding paragraph, then MediaOne Group
shall make an additional deposit with the Trustee (or the Trustee shall remit) a
number of shares of AirTouch Common Stock, Reported Securities, U.S. Government
Obligations and cash so that the Trustee will hold the number of such securities
and amount of cash that it would be entitled to hold if such initial deposit
(and any permitted substitutions described below) were made immediately
following such event.
Unless MediaOne Group is in default under the Indenture, it may, at its
option, substitute for the shares of AirTouch Common Stock or Reported
Securities deposited pursuant to clause (1) of the second preceding paragraph
above U.S. Government Obligations having an aggregate market value at the time
of substitution and at daily mark-to-market valuations thereafter of not less
than 125% (except as provided below) of the product of the Closing Price per
share of AirTouch Common Stock or security of Reported Securities, respectively,
on the day immediately preceding the time of each valuation multiplied by the
number of shares of AirTouch Common Stock or Reported Securities, respectively,
for which such obligations are being substituted. MediaOne Group may, at its
option substitute U.S. Government Obligations for shares of AirTouch Common
Stock or for Reported Securities pledged after any dilution adjustment or
Adjustment Event in the same manner described above for such securities pledged
pursuant to clause (1) of the third preceding paragraph. Prior to any
substitution made pursuant to this paragraph, the Company shall deliver to the
Trustee a legal opinion of a nationally recognized counsel to the effect that
the deposit of U.S. Government Obligations having an aggregate market value of
125% of the amount specified above is sufficient to avoid a violation of any
applicable federal margin regulation. If the Company delivers an opinion to the
foregoing effect but with respect to a greater percentage, then all references
in this paragraph to 125% shall be deemed to be references to such greater
amount, as in the opinion of such counsel, shall be required to avoid any such
violation.
Except in the case of U.S. Government Obligations pledged in respect of a
cash amount that could be deliverable at Maturity, the Trustee will promptly pay
over to MediaOne Group any dividends, interest, principal or other payments
received by the Trustee in respect of any securities and deposit with it, unless
MediaOne Group is in default on its obligations under the PIES, or unless the
payment of such amount to MediaOne Group would cause the cash and securities on
deposit with the Trustee to become insufficient under the provisions of the
Indenture described under this caption "--Defeasance."
Notwithstanding anything to the contrary under this caption "--Defeasance,"
MediaOne Group shall not substitute U.S. Government Obligations and shall not
replace AirTouch Common Stock or Reported Securities within the 21 Business Days
preceding Stated Maturity. If at Maturity the number of shares of AirTouch
Common Stock (or, after an Adjustment Event, Reported Securities) on deposit
with the Trustee is insufficient to meet the obligations (based on the actual
Maturity Price and the assumption that the Cash Delivery Option is not
exercised) under any PIES to deliver such securities, the Trustee will
distribute to the holders pro rata all of such securities held by it and, as to
the remaining obligation to deliver such securities, shall deliver the cash
equivalent that MediaOne Group would have been allowed to deliver thereunder, in
the form of cash generated from the liquidation of U.S. Government Obligations
then pledged by such MediaOne Group.
Unless the Trustee holds, as of the 21st Business Day preceding Stated
Maturity, sufficient shares of AirTouch Common Stock with which to settle the
PIES in their entirety, MediaOne Group will notify the Depository Trust Company
and the Trustee and publish a notice in a daily newspaper of national
circulation stating the proportions of securities and cash that will be
delivered at Maturity. The Trustee shall promptly remit to MediaOne Group any
excess cash or securities on deposit after all amounts owing in respect of the
PIES at Maturity have been paid in full.
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<PAGE>
EVENTS OF DEFAULT
In addition to the Events of Default described in the accompanying
Prospectus of MediaOne Group, the following shall constitute an Event of
Default: MediaOne Group's failure at any time after terminating certain of its
obligations under the Indenture, as described under the caption "--Defeasance,"
to deposit with the Trustee from time to time cash and securities in the amounts
and, in the case of securities, of the type required by the provisions described
under such caption within two Business Days of receipt of notice of such failure
by the Trustee or MediaOne Group.
BOOK-ENTRY SYSTEM
It is expected that the PIES will be issued in the form of one or more
global securities (the "Global Securities") deposited with The Depository Trust
Company (the "Depositary") and registered in the name of a nominee of the
Depositary.
The Depositary has advised MediaOne Group and the Underwriters as follows:
The Depositary is a limited-purpose trust company organized under the laws of
the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Exchange Act. The
Depositary was created to hold securities of persons who have accounts with the
Depositary ("participants") and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of certificates. Such participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the Depositary's book-entry system also is
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Upon the issuance of a Global Security, the Depositary or its nominee will
credit the respective PIES represented by such Global Security to the accounts
of participants. The accounts to be credited shall be designated by the
Underwriters. Ownership of beneficial interests in the Global Securities will be
limited to participants or persons that may hold interests through participants.
Ownership of beneficial interests by participants in such Global Securities will
be shown on, and the transfer of those ownership interests will be effected only
through, records maintained by the Depositary or its nominee for such Global
Securities. Ownership of beneficial interests in such Global Securities by
persons that hold through participants will be shown on, and the transfer of
that ownership interest within such participant will be effected only through,
records maintained by such participant. The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the PIES. Except
as set forth below, owners of beneficial interests in such Global Securities
will not be entitled to have the PIES registered in their names, will not
receive or be entitled to receive physical delivery of the PIES in definitive
form and will not be considered the owners or holders thereof.
Payment of principal of and any interest on the PIES registered in the name
of or held by the Depositary or its nominee will be made to the Depositary or
its nominee, as the case may be, as the registered owner or the holder of the
Global Security. None of MediaOne Group, the Trustee, any Paying Agent or any
securities registrar for the PIES will have any responsibility or liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests in a Global Security or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
MediaOne Group expects that the Depositary, upon receipt of any payment of
principal or interest in respect of a permanent Global Security, will credit
immediately participants' accounts with payments in
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amounts proportionate to their respective beneficial interests in the principal
amount of such Global Security as shown on the records of the Depositary.
MediaOne Group also expects that payments by participants to owners of
beneficial interests in such Global Security held through such participants will
be governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form or registered
in "street name," and will be the responsibility of such participants.
A Global Security may not be transferred except as a whole by the Depositary
to a nominee or a successor of the Depositary. If the Depositary is at any time
unwilling or unable to continue as depositary and a successor depositary is not
appointed by MediaOne Group within ninety days, MediaOne Group will issue PIES
in definitive registered form in exchange for the Global Security representing
such PIES. In addition, MediaOne Group may at any time and in its sole
discretion determine not to have any PIES represented by, one or more Global
Securities and, in such event will issue PIES in definitive form in exchange for
all of the Global Securities representing the PIES. Further, if MediaOne Group
so specifies with respect to the PIES, an owner of a beneficial interest in a
Global Security representing PIES may, on terms acceptable to MediaOne Group and
the Depositary for such Global Security, receive PIES in definitive form. In any
such instance, an owner of a beneficial interest in a Global Security will be
entitled to physical delivery in definitive form of PIES represented by such
Global Security equal in number to that represented by such beneficial interest
and to have such PIES registered in its name.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon the advice of MediaOne Group's
counsel, Weil, Gotshal & Manges LLP as to certain of the material U.S. federal
income tax consequences that may be relevant to a beneficial owner of a PIES
that is (i) a citizen or resident of the United States, (ii) a corporation
created or organized under the laws of the United States or any political
subdivision thereof or therein, (iii) the estate, the income of which is subject
to U.S. federal income tax regardless of the source or (iv) a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust (a "U.S. holder"). The summary
does not purport to be a comprehensive description of all of the tax
consequences that may be relevant to a decision to purchase PIES by any
particular investor, including tax consequences that arise from rules of general
application to all taxpayers or to certain classes of taxpayers or that are
generally assumed to be known by investors. All references to "holders"
(including U.S. holders) are to beneficial owners of the PIES. This summary is
based on U.S. federal income tax laws, regulations, rulings and decisions in
effect as of the date of this Prospectus Supplement, all of which are subject to
change at any time (possibly with retroactive effect). As the law is technical
and complex, the discussion below necessarily represents only a general summary.
This summary addresses the U.S. federal income tax consequences to holders
who are initial holders of the PIES and who will hold the PIES and, if
applicable, AirTouch Common Stock as capital assets. This summary does not
address all aspects of U.S. federal income taxation that may be relevant to a
particular holder in light of its individual investment circumstances or to
certain types of holders subject to special treatment under the U.S. federal
income tax laws, such as dealers in securities or foreign currency, traders in
securities or commodities electing to mark to market, financial institutions,
insurance companies, tax-exempt organizations and taxpayers holding the PIES as
part of a "straddle", "hedge", "conversion transaction", "synthetic security",
or other integrated investment. Moreover, the effect of any applicable state,
local or foreign tax laws is not discussed.
No statutory, judicial or administrative authority directly addresses the
characterization of the PIES or instruments similar to the PIES for U.S. federal
income tax purposes. As a result, significant aspects of the U.S. federal income
tax consequences of an investment in the PIES are not certain. No ruling is
being requested from the Internal Revenue Service (the "IRS") with respect to
the PIES and no assurance can
S-26
<PAGE>
be given that the IRS will agree with the conclusions expressed herein.
ACCORDINGLY, A PROSPECTIVE INVESTOR (INCLUDING A TAX-EXEMPT INVESTOR) IN THE
PIES SHOULD CONSULT ITS TAX ADVISOR IN DETERMINING THE TAX CONSEQUENCES OF AN
INVESTMENT IN THE PIES, INCLUDING THE APPLICATION OF STATE, LOCAL OR OTHER TAX
LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
Pursuant to the terms of the Indenture, MediaOne Group and every holder of a
PIES will be obligated (in the absence of an administrative determination or
judicial ruling to the contrary) to characterize a PIES for all tax purposes as
a forward purchase contract to purchase AirTouch Common Stock at Maturity
(including as a result of acceleration or otherwise), under the terms of which
contract (a) at the time of issuance of the PIES the holder deposits irrevocably
with MediaOne Group a fixed amount of cash equal to the purchase price of the
PIES to assure the fulfillment of the holder's purchase obligation described in
clause (c) below, which deposit will unconditionally and irrevocably be applied
at Maturity to satisfy such obligation, (b) until Maturity MediaOne Group will
be obligated to pay interest on such deposit at a rate equal to the stated rate
of interest on the PIES as compensation to the holder for MediaOne Group's use
of such cash deposit during the term of the PIES, and (c) at Maturity such cash
deposit unconditionally and irrevocably will be applied by MediaOne Group in
full satisfaction of the holder's obligation under the forward purchase
contract, and MediaOne Group will deliver to the holder the number of shares of
AirTouch Common Stock that the holder is entitled to receive at that time
pursuant to the terms of the PIES (subject to MediaOne Group's right to deliver
cash in lieu of the AirTouch Common Stock). Prospective investors should note
that cash proceeds of this offering will not be segregated by MediaOne Group
during the term of the PIES, but instead will be commingled with MediaOne
Group's other assets and applied in a manner consistent with the "Use of
Proceeds" discussion above. Consistent with the above characterization, (i)
amounts paid to MediaOne Group in respect of the original issue of a PIES will
be treated as allocable in their entirety to the amount of the cash deposit
attributable to such PIES, and (ii) amounts denominated as interest that are
payable with respect to the PIES will be characterized as interest payable on
the amount of such deposit, includible annually in the income of a U.S. holder
as interest income in accordance with such holder's method of accounting.
Special additional interest payable in respect of the PIES in the event that
MediaOne Group exercises its second option to extend the maturity of the PIES
will be includible in income during the second extension period in accordance
with the taxpayer's method of accounting as described in the prior sentence.
Under the above characterization of the PIES, a holder's tax basis in a PIES
generally will equal the holder's cost for that PIES. Upon the sale or other
taxable disposition of a PIES (including pursuant to an exchange of new PIES for
old PIES), a U.S. holder generally will recognize gain or loss equal to the
difference between the amount realized on the sale or other taxable disposition
and the U.S. holder's tax basis in the PIES. Such gain or loss generally will be
long-term capital gain or loss if the U.S. holder has held the PIES for more
than one year at the time of disposition. Under recently enacted legislation,
long-term capital gains recognized by an individual holder generally are subject
to a maximum rate of 20 percent in respect of property held for more than one
year, effective for amounts properly taken into account on or after January 1,
1998.
Under the above characterization of the PIES, if MediaOne Group delivers
AirTouch Common Stock at Maturity, a U.S. holder will recognize no gain or loss
on the purchase of the AirTouch Common Stock against application of the monies
received by MediaOne Group in respect of the PIES. A U.S. holder will have a tax
basis in such stock equal to the U.S. holder's tax basis in the PIES (less the
portion of the tax basis of the PIES allocable to cash or Reported Securities
received, as described below). A U.S. holder will recognize gain or loss (which
will be short-term capital gain or loss) with respect to cash received in lieu
of fractional shares, in an amount equal to the difference between the cash
received and the portion of the basis of the PIES allocable to fractional shares
(based on the relative number of fractional shares and full shares delivered to
the holder). If at Maturity MediaOne Group pays the PIES in cash in full, a U.S.
holder will recognize capital gain or loss equal to any difference between the
amount of cash received from
S-27
<PAGE>
MediaOne Group and the U.S. holder's tax basis in the PIES at that time. Such
gain or loss generally will be long-term capital gain or loss if the U.S. holder
has held the PIES for more than one year at Maturity. If cash, Reported
Securities or a combination of cash and Reported Securities is delivered
pursuant to the PIES, a holder of the PIES will have taxable gain or loss upon
receipt equal to the difference between the amount of cash received, including
cash received in lieu of fractional Reported Securities, and its basis in the
PRO RATA portion of the PIES allocable to any shares of AirTouch Common Stock
for which such cash or fractional Reported Securities were received. Any gain or
loss will be capital gain or loss, and if the holder has held the PIES for more
than one year, such gain or loss will be long-term capital gain or loss. A
holder's basis in any Reported Securities received will be equal to its basis in
the PRO RATA portion of the PIES less the portion of such basis allocable to any
shares of AirTouch Common Stock for which cash or fractional Reported Securities
were received and to any shares of AirTouch Common Stock received.
Due to the absence of authority as to the proper characterization of the
PIES, no assurance can be given that the IRS will accept, or that a court will
uphold, the characterization and tax treatment described above. In particular,
the IRS could seek to analyze the tax consequences of owning a PIES under
Treasury regulations promulgated in June 1996 governing contingent payment debt
instruments (the "Contingent Payment Regulations"). The Contingent Payment
Regulations are complex, but very generally apply the original issue discount
rules of the Internal Revenue Code to a contingent payment debt instrument by
requiring that original issue discount be accrued every year at a "comparable
yield" for the issuer of the instrument, determined at the time of issuance of
the obligation. In addition, the Contingent Payment Regulations require that a
projected payment schedule, which results in such a "comparable yield", be
determined, and that adjustments to income accruals be made to account for
differences between actual payments and projected amounts. To the extent that
the comparable yield as so determined exceeds the interest actually paid on a
contingent debt instrument, the owner of that instrument will recognize ordinary
interest income in excess of the cash the owner receives. In addition, any gain
realized on the sale, exchange or redemption of a contingent payment debt
instrument will be treated as ordinary income. Any loss realized on such sale,
exchange or redemption will be treated as an ordinary loss to the extent the
holder's original issue discount inclusions with respect to the obligation
exceed prior reversals of such inclusions required by the adjustment mechanism
described above. Any loss realized in excess of such amount generally will be
treated as a capital loss.
The Company believes that the Contingent Payment Regulations do not apply to
the PIES, because those Regulations apply only to debt instruments that provide
for contingent payments. The PIES are payable by the delivery of AirTouch Common
Stock (unless MediaOne Group exercises its option to deliver cash at Maturity)
and provide economic returns that are indexed to the performance of AirTouch
Common Stock. The PIES therefore offer no assurance that a holder's investment
will be returned to the holder at Maturity. Accordingly, MediaOne Group believes
that the PIES properly are characterized for U.S. federal income tax purposes,
not as debt instruments, but as forward purchase contracts in respect of which
holders have deposited a fixed amount of cash with MediaOne Group, on which
interest is payable at a fixed rate. If, however, the IRS were successfully to
maintain that the Contingent Payment Regulations applied to the PIES, then,
among other matters, (i) gain realized by a holder on the sale or other taxable
disposition of a PIES (including as a result of payments made at Maturity)
generally would be characterized as ordinary income, rather than as short- or
long-term capital gain (depending on whether the PIES had been held for more
than one year at the time of such disposition), and (ii) a U.S. holder would
recognize ordinary income, or ordinary or capital loss (as the case may be,
under the rules summarized above) on the receipt of AirTouch Common Stock,
rather than capital gain or loss upon the ultimate sale of such stock.
Even if the Contingent Payment Regulations do not apply to the PIES, it is
possible that the IRS could seek to characterize the PIES in a manner that
results in tax consequences to initial holders of the PIES different from those
reflected in the Indenture and described above. Under alternative
characterizations of
S-28
<PAGE>
the PIES, it is possible, for example, that a PIES could be treated as including
a forward contract and one or more options.
A bill pending in Congress (H.R. 3170) would treat some or all of the net
long-term capital gain arising from "constructive ownership" transactions
involving certain derivative financial instruments as short-term capital gain,
and would impose an interest charge on such short-term capital gain. The
proposed legislation would be effective with respect to gain recognized after
the date the legislation is enacted into law, without regard to when the
constructive ownership transaction was entered into. If enacted in its current
form, the legislation would not apply to the PIES transaction (and, even if the
legislation in its current form were extended to cover the PIES transaction,
would have no material effect on the PIES transaction). It is not possible to
predict whether legislation addressing constructive ownership transactions will
be enacted, or what form any such legislation might take (including with respect
to effective dates).
NON-U.S. HOLDERS
In the case of a holder of the PIES that is a non-resident alien individual
or foreign corporation (a "non-U.S. holder"), payments made with respect to the
PIES, including payments of principal, should not be subject to U.S. withholding
tax; PROVIDED that such holder complies with applicable certification
requirements (including in general the furnishing of Internal Revenue Service
Forms W-8 and 1001, or successor forms thereto). Gain upon the sale, exchange,
redemption or repayment of a PIES realized by a non-U.S. holder will generally
not be subject to U.S. federal income tax unless (i) such gain is effectively
connected with a U.S. trade or business of such non-U.S. holder, (ii) subject to
certain exceptions, the non-U.S. holder is an individual who holds the PIES as a
capital asset and is present in the United States for 183 days or more in the
taxable year of the disposition and meets certain other requirements or (iii)
the non-U.S. holder is subject to tax pursuant to the provisions of U.S. tax law
applicable to certain U.S. expatriates (including certain former citizens and
residents of the United States).
BACKUP WITHHOLDING AND INFORMATION REPORTING
A holder of the PIES may be subject to information reporting and to backup
withholding at a rate of 31 percent of certain amounts paid to the holder unless
such holder provides proof of an applicable exemption or a correct taxpayer
identification number, and otherwise complies with applicable requirements of
the backup withholding rules. Any amounts withheld under the backup withholding
rules are not an additional tax and may be refunded or credited against a U.S.
holder's U.S. federal income tax liability, provided the required information is
furnished to the IRS.
S-29
<PAGE>
PLAN OF DISTRIBUTION
Lehman Brothers Inc., Morgan Stanley & Co. Incorporated and Goldman, Sachs &
Co., as underwriters of the offering (the "Underwriters"), have severally
agreed, subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") among MediaOne Group, AirTouch and the Underwriters,
the form of which is filed as an exhibit to the Registration Statement of which
this Prospectus Supplement is a part, to purchase from MediaOne Group, and
MediaOne Group has agreed to sell to the Underwriters, the aggregate number of
PIES set forth opposite their names below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF PIES
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Lehman Brothers Inc.......................................................... 11,336,000
Morgan Stanley & Co. Incorporated............................................ 5,720,000
Goldman, Sachs & Co.......................................................... 5,720,000
BT Alex. Brown............................................................... 260,000
CIBC Oppenheimer Corp........................................................ 260,000
A.G. Edwards & Sons, Inc..................................................... 260,000
Everen Securities, Inc....................................................... 260,000
PaineWebber Incorporated..................................................... 260,000
Prudential Securities Incorporated........................................... 260,000
Advest, Inc.................................................................. 104,000
Robert W. Baird & Co. Incorporated........................................... 104,000
Dain Rauscher Wessels........................................................ 104,000
A Division of Dain Rauscher Incorporated
D.A. Davidson & Co. Incorporated............................................. 104,000
Fahnestock & Co. Inc......................................................... 104,000
Edward D. Jones & Co., L.P................................................... 104,000
Legg Mason Wood Walker, Incorporated......................................... 104,000
McDonald & Company Securities, Inc........................................... 104,000
Piper Jaffray Inc............................................................ 104,000
Ragen MacKenzie Incorporated................................................. 104,000
Raymond James & Associates, Inc.............................................. 104,000
Muriel Siebert & Co., Inc.................................................... 104,000
Stifel, Nicolaus & Company, Incorporated..................................... 104,000
Sutro & Co. Incorporated..................................................... 104,000
Tucker Anthony Incorporated.................................................. 104,000
Wheat First Securities, Inc.................................................. 104,000
---------------
Total.................................................................... 26,000,000
---------------
---------------
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase PIES is subject to certain conditions, and that, if any of the
foregoing PIES are purchased by the Underwriters pursuant to the Underwriting
Agreement, all the PIES agreed to be purchased by the Underwriters must be so
purchased.
MediaOne Group has been advised by the Underwriters that the Underwriters
propose to offer the PIES directly to the public at the public offering price
set forth on the cover page of this Prospectus Supplement and to certain
selected dealers at such initial public offering price less a selling concession
not in excess of $0.96 per PIES. The Underwriters may allow and such dealers may
reallow, a concession not in excess of $0.10 per PIES to certain brokers and
dealers. After the initial public offering, the public offering price, the
concession to selected dealers and the reallowance may be changed by the
Underwriters.
MediaOne Group and AirTouch have agreed not to offer for sale, sell or
contract to sell, or otherwise dispose of, or announce the offering of, or file
or cause the filing of any registration statement under the
S-30
<PAGE>
Securities Act with respect to, without the prior written consent of Lehman
Brothers Inc., any shares of AirTouch Common Stock or any securities convertible
into or exchangeable for, or warrants to acquire, shares of AirTouch Common
Stock for a period of 90 days following the date of this Prospectus Supplement;
provided, however, that such restriction shall not effect the ability of (i)
MediaOne Group or AirTouch to take any such actions in connection with the
offering of the PIES made hereby or (ii) AirTouch to take any such actions in
connection with any employee stock option plan, stock ownership plan or dividend
reinvestment plan of AirTouch in effect at the date of this Prospectus
Supplement.
MediaOne Group has granted to the Underwriters an option to purchase up to
an additional 3,900,000 PIES at the price to public less the aggregate
underwriting discount, solely to cover over-allotments, if any. Such option may
be exercised at any time up to 30 days after the date of this Prospectus
Supplement. To the extent that this option is exercised, each Underwriter will
be committed, subject to certain conditions, to purchase the same proportion of
PIES as the number of PIES to be purchased and offered by such Underwriter in
the above table bears to the total number of initial PIES to be purchased by the
Underwriters.
MediaOne Group and AirTouch have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act, and
to contribute to payments that the Underwriters may be required to make in
respect thereof.
Until the distribution of the PIES is completed, rules of the Securities and
Exchange Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase PIES and AirTouch Common Stock. As
an exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the PIES and AirTouch Common Stock.
Such transactions may consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the PIES and AirTouch Common Stock.
If the Underwriters create a short position in the PIES in connection with
the offering, (i.e., if they sell more PIES than are set forth on the cover page
of this Prospectus Supplement), the Underwriters may reduce that short position
by purchasing PIES in the open market. The Underwriters also may elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.
The Underwriters also may impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase PIES in the open market to
reduce the Underwriters' short position or to stabilize the price of the PIES,
they may reclaim the amount of the selling concession from the selling group
members who sold those PIES as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might otherwise be in the absence of such purchases. The imposition of a
penalty bid might have an effect on the price of a security to the extent that
it were to discourage resales of the security by purchasers in the offering.
In the ordinary course of their business, including without limitation in
connection with their market making activities, the Underwriters and their
affiliates may effect transactions for their own account or for the account of
their customers, and hold long or short positions, in PIES and AirTouch Common
Stock. In addition, in connection with the offering of the PIES, the
Underwriters or their affiliates may enter into one or more hedging transactions
with respect to the AirTouch Common Stock. In connection with such hedging or
market-making activities or with respect to proprietary or other trading
activities by the Underwriters and their affiliates, the Underwriters or their
affiliates may enter into transactions in the AirTouch Common Stock which may
affect the market price, liquidity or value of the PIES and which could be
deemed to be adverse to the interests of the holders of the PIES.
Lehman Brothers Inc., Morgan Stanley & Co. Incorporated and their respective
affiliates have from time to time performed various investment banking and
financial advisory services for AirTouch and its affiliates, for which customary
compensation has been received.
S-31
<PAGE>
LEGAL MATTERS
The validity of the PIES will be passed upon for MediaOne Group by Weil,
Gotshal & Manges LLP and for the Underwriters by Cleary, Gottlieb, Steen &
Hamilton.
ADDITIONAL INFORMATION
MediaOne Group has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement under the Securities Act with
respect to the PIES offered hereby. Further information concerning the PIES and
MediaOne Group may be found in the Registration Statement, of which this
Prospectus Supplement constitutes a part. The Registration Statement may be
inspected without charge at the Commission's office in Washington, D.C., and
copies of all or any part thereof may be obtained from such office after payment
of the fees prescribed by the Commission. Such Registration Statement is also
available on the Commission's website (http://www.sec.gov).
S-32
<PAGE>
[LOGO]
PROSPECTUS
$1,800,000,000
MEDIAONE GROUP, INC.
DEBT SECURITIES
----------------
MediaOne Group, Inc., a Delaware corporation ("MediaOne Group"), from time
to time may offer its notes, debentures, or other debt securities (the "Debt
Securities"). The Debt Securities offered pursuant to this Prospectus may be
issued in one or more series and will be limited to $1,800,000,000 aggregate
public offering price.
Certain specific terms of the particular series of Debt Securities will be
set forth in a supplement to this Prospectus (the "Prospectus Supplement") which
will be delivered together with this Prospectus, including, where applicable,
the specific designation, aggregate principal amount, denomination, maturity,
premium, if any, the rate (which may be fixed or variable), time and method of
calculating payment of interest, if any, the place or places where principal of,
premium, if any, and interest, if any, on such Debt Securities will be payable,
optional or mandatory redemption and sinking fund provisions, if any,
conversion, exercise or exchange provisions, if any, and any other specific
terms in respect of the offering and sale of the Debt Securities.
The Debt Securities may be offered and sold through one or more
underwriters, directly by MediaOne Group, or through dealers or agents. The
names of any underwriters, dealers or agents involved in the distribution of the
Debt Securities in respect of which this Prospectus is being delivered, and any
applicable discounts, commissions or allowances, will be set forth in the
applicable Prospectus Supplement. See "Plan of Distribution" for possible
indemnification arrangements for any underwriters, dealers or agents. Unless
otherwise provided in the Prospectus Supplement relating thereto, the Debt
Securities will not be listed on any securities exchange.
------------------------
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.
<PAGE>
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
------------------------
The date of this Prospectus is July 22, 1998.
<PAGE>
No dealer, salesperson or any other individual has been authorized by
MediaOne Group to give any information or to make any representation other than
those contained or incorporated by reference in this Prospectus or any
accompanying Prospectus Supplement and, if given or made, such information or
representation must not be relied upon as having been authorized. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in such jurisdiction.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of MediaOne Group since the date hereof.
------------------------
Prior to June 12, 1998, MediaOne Group was known as "U S WEST, Inc." ("Old U
S WEST"). On June 12, 1998, Old U S WEST consummated a transaction in which it
separated its businesses into two independent companies (the "Separation"). In
the Separation, Old U S WEST distributed to its stockholders all of the capital
stock of a subsidiary holding the businesses of the U S WEST Communications
Group and the domestic directories business of the U S WEST Media Group known as
"Dex". Following the Separation, Old U S WEST was renamed "MediaOne Group, Inc."
and has continued as an independent company conducting all of the businesses of
the U S WEST Media Group other than Dex. Unless the context otherwise requires,
references herein and in the documents incorporated herein to MediaOne Group
shall refer to the businesses of the U S WEST Media Group other than Dex prior
to the Separation and to MediaOne Group after the Separation.
------------------------
AVAILABLE INFORMATION
MediaOne Group is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements, and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements, and other information concerning MediaOne Group can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New
York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission, including MediaOne Group. MediaOne Group's Common Stock is listed
and traded on the New York Stock Exchange (the "NYSE") and the Pacific Stock
Exchange (the "PSE") and such material is available for inspection at the
offices of the NYSE, 20 Broad Street, New York, New York 10005 and at the
offices of PSE, 115 Sansome Street, 2nd Floor, San Francisco, California 94104.
MediaOne Group has filed with the Commission a registration statement on
Form S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") relating to the Debt Securities under the Securities
Act of 1933, as amended (the "Securities Act"). This Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement, which is available for inspection and copying as set
forth above. Statements contained in this Prospectus or a Prospectus Supplement
as to the contents of any contract or other document which is filed as an
exhibit to the Registration Statement are not necessarily complete, and each
such statement is qualified in its entirety by reference to the full text of
such contract or document.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by MediaOne Group with the
Commission and are incorporated herein by reference: (i) Annual Report on Form
10-K for the year ended December 31, 1997, as amended by Form 10-K/A filed April
13, 1998, (ii) Current Reports on Form 8-K dated January 29, 1998, February 17,
1998, March 25, 1998 (as amended by Form 8-K/A filed April 13, 1998), April 17,
1998, May 5, 1998, May 15, 1998, June 18, 1998 and June 24, 1998, (iii) Proxy
Statement on Schedule 14A filed with the Commission on April 20, 1998, and (iv)
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. All reports
filed on or prior to June 12, 1998 were filed by Old U S WEST.
All documents filed by MediaOne Group pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Securities shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date any such document is filed.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in a Prospectus Supplement (or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein or therein) modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
MediaOne Group will provide without charge to each person to whom a
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the documents which are incorporated by reference herein, other
than exhibits to such documents (unless such exhibits are specifically
incorporated by reference into such documents). Requests should be directed to
Investor Relations, MediaOne Group, Inc., 188 Inverness Drive West, Englewood,
Colorado 80112 (telephone number (303) 858-3696).
------------------------
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
Some of the information presented herein or incorporated herein by reference
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although MediaOne Group believes that
its expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) greater than
anticipated competition from new entrants into the cable and wireless
commmunications markets; (ii) changes in demand for MediaOne Group's products
and services; (iii) regulatory changes affecting the cable and
telecommunications industries; (iv) a change in economic conditions in the
various markets served by MediaOne Group's operations, including international
markets, that could adversely affect the level of demand for cable, wireless or
other services offered by MediaOne Group; (v) greater than anticipated
competitive activity requiring new pricing for services; (vi) higher than
anticipated start-up costs associated with new business opportunities; (vii)
higher than anticipated employee levels, capital expenditures and operating
expenses (such as costs associated with the year 2000 remediation); (viii)
consumer acceptance of broadband services, including telephony and data
services, and wireless services; (ix) increases in fraudulent activity with
respect to broadband and wireless services; and (x) delays in the development of
anticipated technologies, or the failure of such technologies to perform
according to expectations.
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MEDIAONE GROUP, INC.
MediaOne Group is a diversified global media and broadband communications
company. MediaOne Group has operations and investments in two principal areas:
(i) domestic broadband communications and (ii) international broadband and
wireless communications. MediaOne Group is the third largest cable television
system operator in the United States with large clusters in Atlanta, Georgia,
Eastern Massachusetts, Southern California, Southern Florida, Detroit, Michigan
and Minneapolis/St. Paul, Minnesota. As of March 31, 1998, MediaOne Group's
domestic cable television systems passed approximately 8.4 million homes and
provided services to approximately 4.9 million basic cable subscribers. MediaOne
Group also owns a 25.51% priority capital and residual equity interest in Time
Warner Entertainment Company, L.P. ("TWE"), a provider of cable programming,
filmed entertainment and broadband communications services and the second
largest cable television system operator in the United States. Outside of the
United States, MediaOne Group owns interests in various providers of broadband
and wireless communications services in markets in continental Europe, the
United Kingdom and Asia, including a 26.8% interest in Telewest communications
plc, the second largest provider of combined cable and telecommunications
services in the United Kingdom, and a 50% interest in One 2 One, a provider of
personal communications services in the United Kingdom.
MediaOne Group has its principal executive offices at 188 Inverness Drive
West, Englewood, Colorado 80112 (Telephone number (303) 858-3000).
THE SEPARATION
On June 12, 1998, the Separation was consummated and Old U S WEST was
separated into two independent companies. Until the Separation, Old U S WEST
conducted its businesses through two groups, the U S WEST Communications Group
(the "Communications Group") and the U S WEST Media Group (the "Media Group").
In connection with the Separation, Old U S WEST contributed the business of the
Communications Group and Dex--the domestic directories business of the Media
Group-- to USW-C, Inc., a wholly-owned subsidiary of Old U S WEST ("New U S
WEST"), and distributed all of the common stock of New U S WEST to Old U S
WEST's stockholders. Upon consummation of the Separation, New U S WEST was
renamed "U S WEST, Inc." and Old U S WEST was renamed "MediaOne Group, Inc." and
has continued to conduct the businesses of the Media Group other than Dex.
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USE OF PROCEEDS
MediaOne Group will apply the net proceeds from the sale of the Debt
Securities to its general funds to be used for general corporate purposes and/or
loans to its affiliates, which in turn will use the funds for general corporate
purposes, including working capital, acquisitions, the refinancing of short-term
and long-term borrowings and other business opportunities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
MediaOne Group based on the historical results of MediaOne Group, which have
been restated to reflect the dispositon of New U S WEST in the Separation for
the periods indicated. For the purpose of calculating this ratio, earnings
consist of income from continuing operations before income taxes and fixed
charges. Fixed charges include interest on indebtedness and the portion of
rentals representative of the interest factor.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
- ----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
-- 1.73 -- -- -- -- --
</TABLE>
Earnings for the year ended December 31, 1993, 1995, 1996 and 1997 were
insufficient to cover fixed charges by $217 million, $61 million, $407 million
and $553 million, respectively, and for the three months ended March 31, 1997
and 1998 by $169 million and $263 million, respectively.
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions of
the Debt Securities to which any Prospectus Supplement may relate. The
particular terms and provisions of the series of Debt Securities offered by a
Prospectus Supplement, and the extent to which such general terms and provisions
described below may apply thereto, will be described in the Prospectus
Supplement relating to such series of Debt Securities.
The Debt Securities are to be issued under an Indenture (the "Indenture"),
dated as of November 13, 1995, between MediaOne Group and The First National
Bank of Chicago, as Trustee (the "Trustee"). The following summaries of certain
provisions of the Debt Securities and the Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all provisions of the Debt Securities and the Indenture, including the
definitions therein of certain terms. Wherever particular sections or defined
terms of the Indenture are referred to, it is intended that such sections or
defined terms shall be incorporated herein by reference.
GENERAL
The Indenture does not limit the aggregate principal amount of Debt
Securities that can be issued thereunder and debt securities may be issued
thereunder up to the aggregate principal amount which may be authorized from
time to time by, or pursuant to a resolution of, MediaOne Group's Board of
Directors or by a supplemental indenture. Reference is made to the Prospectus
Supplement for the following terms of the particular series of Debt Securities
being offered hereby: (i) the title of the Debt Securities of the series; (ii)
any limit upon the aggregate principal amount of the Debt Securities of the
series; (iii) the date or dates on which the principal of the Debt Securities of
the series will mature; (iv) the rate or rates (or manner of calculations
thereof), if any, at which the Debt Securities of the series will bear interest,
the date or dates from which any such interest will accrue and on which such
interest will be payable, and, with respect to Debt Securities of the series in
registered form, the record date for the interest payable on any interest
payment date; (v) the place or places where the principal of and interest, if
any, on the Debt Securities of the series will be payable; (vi) any redemption
or sinking fund provisions; (vii) if other than the entire principal amount
thereof, the portion of the principal amount of Debt Securities of the series
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which will be payable upon declaration of acceleration of the maturity thereof;
(viii) whether the Debt Securities of the series will be issuable in registered
or bearer form or both, any restrictions applicable to the offer, sale or
delivery of Debt Securities in bearer form ("bearer Debt Securities"), and
whether, and the terms upon which, bearer Debt Securities will be exchangeable
for Debt Securities in registered form ("registered Debt Securities") and vice
versa; (ix) whether and under what circumstances MediaOne Group will pay
additional amounts on the Debt Securities of the series held by a person who is
not a U.S. person (as defined below) in respect of taxes or similar charges
withheld or deducted and, if so, whether MediaOne Group will have the option to
redeem such Debt Securities rather than pay such additional amounts; (x) whether
the Debt Securities will be denominated or provide for payment in United States
dollars or a foreign currency or units of two or more such foreign currencies;
(xi) whether the Debt Securities of the series will be convertible into or
exchangeable or exercisable for shares of a class of capital stock of MediaOne
Group or any other corporation and the terms and conditions relating thereto;
and (xii) any additional provisions or other special terms not inconsistent with
the provisions of the Indenture, including any terms which may be required by or
advisable under United States laws or regulations or advisable in connection
with the marketing of Debt Securities of such series. (Sections 2.01 and 2.02.)
To the extent not described herein, principal, premium, if any, and interest
will be payable, and the Debt Securities of a particular series will be
transferable, in the manner described in the Prospectus Supplement relating to
such series.
Each series of Debt Securities will constitute unsecured and unsubordinated
indebtedness of MediaOne Group and will rank on a parity with MediaOne Group's
other unsecured and unsubordinated indebtedness. However, since MediaOne Group
is a holding company, the right of MediaOne Group and, hence, the right of
creditors of MediaOne Group (including the holders of the Debt Securities) to
participate in any distribution of the assets of any subsidiaries of MediaOne
Group, whether upon liquidation, reorganization, or otherwise, is subject to
prior claims of creditors of the subsidiary, except to the extent that claims of
MediaOne Group itself as a creditor of a subsidiary may be recognized. As of
March 31, 1998, MediaOne Group's subsidiaries had outstanding approximately $9.6
billion of indebtedness which included $2.7 billion of MediaOne of Delaware,
Inc. ("MediaOne Delaware") indebtedness and $400 million of the capital assets
segment indebtedness. Certain other current and future unsecured and
unsubordinated indebtedness of MediaOne Group has or will be guaranteed by
MediaOne Delaware (formerly Continental Cablevision, Inc.), MediaOne Group's
principal domestic operating subsidiary. The Debt Securities will not be
guaranteed by MediaOne Delaware. As a result, the Debt Securities will be
effectively subordinated to such other unsecured and unsubordinated indebtedness
of MediaOne Group to the extent of such guarantee.
Debt Securities of any series may be issued as registered Debt Securities or
bearer Debt Securities or both as specified in the terms of the series. Unless
otherwise indicated in the Prospectus Supplement, Debt Securities will be issued
in denominations of $1,000 and integral multiples thereof, and bearer Debt
Securities will not be offered, sold, resold or delivered to U.S. persons in
connection with their original issuance. For purposes of this Prospectus, "U.S.
person" means a citizen, national or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States, or any political subdivision thereof, or an estate or
trust which is subject to United States federal income taxation regardless of
its source of income.
To the extent set forth in the Prospectus Supplement, except in special
circumstances set forth in the Indenture, interest on bearer Debt Securities
will be payable only against presentation and surrender of the coupons for the
interest installments evidenced thereby as they mature at a paying agency of
MediaOne Group located outside of the United States and its possessions.
(Section 2.05(c).) MediaOne Group will maintain such an agency for a period of
two years after the principal of such bearer Debt Securities has become due and
payable. During any period thereafter for which it is necessary in order to
conform to United States tax law or regulations, MediaOne Group will maintain a
paying agent outside the United States and its possessions to which the bearer
Debt Securities may be presented for payment and will provide the necessary
funds therefor to such paying agent upon reasonable notice. (Section 2.04.)
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<PAGE>
The general provisions of the Indenture do not afford holders of the Debt
Securities protection in the event of a highly-leveraged transaction,
reorganization, merger or similar transaction involving MediaOne Group that may
adversely affect holders of the Debt Securities.
Bearer Debt Securities and the coupons related thereto will be transferable
by delivery. (Section 2.08(e).)
If appropriate, federal income tax consequences applicable to a series of
Debt Securities will be described in the Prospectus Supplement relating thereto.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in the form of one or more
fully registered global securities (each a "Global Security") that will be
deposited with, or on behalf of, a depositary (the "Depositary") identified in
the Prospectus Supplement relating to such series. Unless and until it is
exchanged for Debt Securities in definitive registered form, a Global Security
may not be transferred except as a whole by the Depositary for such Global
Security to a nominee of such Depositary or by a nominee of such Depositary to
such Depositary or another nominee of such Depositary or by such Depositary or
any such nominee to a successor of such Depositary or a nominee of such
successor.
The specific terms of the depositary arrangements with respect to a series
of Debt Securities will be described in the Prospectus Supplement relating to
such series. MediaOne Group anticipates that the following provisions will apply
to all depositary arrangements.
Upon the issuance of a Global Security, the Depositary for such Global
Security will credit the accounts held with it with the respective principal
amounts of the Debt Securities represented by such Global Security. Such
accounts shall be designated by the underwriters or agents with respect to such
Debt Securities or by MediaOne Group if such Debt Securities are offered and
sold directly by MediaOne Group. Ownership of beneficial interests in a Global
Security will be limited to persons that have accounts with the Depositary for
such Global Security ("participants") or persons that may hold interests through
participants. Ownership of beneficial interests in such Global Security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by the Depositary for such Global Security or on the records
of participants. The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Security.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
Indenture governing such Debt Securities. Except as provided below, owners of
beneficial interests in a Global Security will not be entitled to have Debt
Securities of the series represented by such Global Security registered in their
names, will not receive or be entitled to receive physical delivery of Debt
Securities of such series in definitive form and will not be considered the
owners or holders thereof under the Indenture governing such Debt Securities.
Principal, premium, if any, and interest payments on Debt Securities
registered in the name of a Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner of the
Global Security representing such Debt Securities. Neither MediaOne Group, the
Trustee for such Debt Securities, any Paying Agent nor the Security Registrar
for such Debt Securities will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Security for such Debt Securities or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
MediaOne Group expects that the Depositary for a series of Debt Securities
issued in the form of a Global Security, upon receipt of any payment of
principal, premium or interest, will credit immediately participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of the Global Security for such Debt Securities as shown
on the records of such
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<PAGE>
Depositary. MediaOne Group also expects that payments by participants to owners
of beneficial interests in such Global Security held through such participants
will be governed by standing instructions and customary practices, as is now the
case with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of such
participants.
If a Depositary for a series of Debt Securities is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
MediaOne Group within 90 days, MediaOne Group will issue Debt Securities of such
series in definitive form in exchange for the Global Security representing such
series of Debt Securities. In addition, MediaOne Group may at any time and in
its sole discretion determine not to have the Debt Securities of a series
represented by a Global Security and, in such event, will issue Debt Securities
of such series in definitive form in exchange for the Global Security
representing such series of Debt Securities. In either instance, an owner of a
beneficial interest in a Global Security will be entitled to have Debt
Securities of the series represented by such Global Security equal in principal
amount to such beneficial interest registered in its name and will be entitled
to physical delivery of such Debt Securities in definitive form. Debt Securities
of such series so issued in definitive form will be issued in denominations of
$1,000 and integral multiples thereof and will be issued in registered form
only, without coupons.
EXCHANGE OF SECURITIES
To the extent permitted by the terms of a series of Debt Securities
authorized to be issued in registered form and bearer form, bearer Debt
Securities may be exchanged for an equal aggregate principal amount of
registered Debt Securities of the same series and date of maturity in such
authorized denominations as may be requested upon surrender of the bearer Debt
Securities with all unpaid coupons relating thereto, at an agency of MediaOne
Group maintained for such purpose and upon fulfillment of all other requirements
of such agent. (Section 2.08(b).) As of the date of this Prospectus, United
States Treasury regulations do not permit exchanges of registered Debt
Securities for bearer Debt Securities and, unless such regulations are modified,
the terms of a series of Debt Securities will not permit registered Debt
Securities to be exchanged for bearer Debt Securities.
AMENDMENT AND WAIVER
Subject to certain exceptions, the Indenture may be amended or supplemented
by MediaOne Group and the Trustee with the consent of the holders of a majority
in principal amount of the outstanding Debt Securities of each series affected
by the amendment or supplement (with each series voting as a class), or
compliance with any provision may be waived with the consent of the holders of a
majority in principal amount of the outstanding Debt Securities of each series
affected by such waiver (with each series voting as a class). However, without
the consent of each Debt Securityholder affected, an amendment or waiver may not
(i) reduce the amount of Debt Securities whose holders must consent to an
amendment or waiver; (ii) change the rate of or change the time for payment of
interest on any Debt Security; (iii) change the principal of or change the fixed
maturity of any Debt Security; (iv) change the terms of any Debt Securities so
as to adversely affect the terms on which such Debt Securities are convertible
into, or exchangeable or exercisable for, shares of a class of capital stock of
MediaOne Group or any other corporation; (v) waive a default in the payment of
the principal of or interest on any Debt Security; (vi) make any Debt Security
payable in money other than that stated in the Debt Security; or (vii) impair
the right to institute suit for the enforcement of any payment on or with
respect to any Debt Security. (Section 9.02.) The Indenture may be amended or
supplemented without the consent of any Debt Securityholder (i) to cure any
ambiguity, defect or inconsistency in the Indenture, or the Debt Securities of
any series; (ii) to provide for the assumption of all the obligations of
MediaOne Group under the Debt Securities, any coupons related thereto and the
Indenture by any corporation in connection with a merger, consolidation,
transfer or lease of MediaOne Group's property and assets substantially as an
entirety, as provided for in the Indenture; (iii) to provide for uncertificated
Debt Securities in addition to or in place of certificated Debt Securities; (iv)
to make any change that does not adversely affect the rights of any Debt
Securityholder; (v) to provide for the issuance of and establish the form and
terms and conditions of a series of Debt Securities endorsed
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<PAGE>
thereon or to establish the form of any certifications required to be furnished
pursuant to the terms of the Indenture or any series of Debt Securities; or (vi)
to add to the rights of Debt Securityholders. (Section 9.01.)
MERGER
MediaOne Group may consolidate with or merge into, or transfer or lease its
property and assets substantially as an entirety to, another entity if the
successor entity is a corporation and assumes all the obligations of MediaOne
Group under the Debt Securities and any coupons related thereto and the
Indenture and if, after giving effect to such transaction, a Default or Event of
Default would not occur or be continuing. Thereafter, all such obligations of
MediaOne Group shall terminate. (Sections 5.01 and 5.02.)
DEFEASANCE
MediaOne Group may terminate all of its obligations (other than for certain
obligations to register the transfer or exchange of Debt Securities, maintain
paying agencies and hold monies for payment in trust) under the Debt Securities
and the Indenture with respect to the Debt Securities of any series or any
installment of principal and premium, if any, or interest on the Debt Securities
of that series if MediaOne Group irrevocably deposits in trust with the Trustee
money or U.S. Government Obligations sufficient to pay, when due, principal,
premium, if any, and interest on the Debt Securities of that series to maturity
or redemption or such installment of principal and premium, if any, or interest,
as the case may be, and if all other conditions set forth in the Debt Securities
of that series are met. MediaOne Group shall designate the installment or
installments of principal or interest to be so satisfied. With respect to the
principal amount of the Debt Securities of any series, if the Debt Securities of
that series are convertible or exchangeable or exercisable for shares of capital
stock of MediaOne Group or any other corporation, in lieu of depositing money or
U.S. Government Obligations in an amount sufficient to satisfy the principal
amount of the Debt Securities of that series, MediaOne Group may deposit with
the applicable Trustee such amount of capital stock for which the Debt
Securities of that series are convertible or exchangeable or exercisable.
"U.S. Government Obligations" means (i) direct obligations of the United
States of America for the payment of which the full faith and credit of the
United States of America is pledged; or (ii) obligations of a person controlled
or supervised by and acting as an agency or instrumentality of the United States
of America, the full and timely payment of which is unconditionally guaranteed
as a full faith and credit obligation by the United States of America.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default"
with respect to a series of Debt Securities: (i) default in the payment of
interest on any Debt Security of such series for 90 days; (ii) default in the
payment of the principal of any Debt Security of such series; (iii) failure by
MediaOne Group for 90 days after notice to it to comply with any of its other
agreements in the Debt Securities of such series, in the Indenture or in any
supplemental indenture; and (iv) certain events of bankruptcy or insolvency of
MediaOne Group. (Section 6.01.) If an Event of Default occurs with respect to
the Debt Securities of any series and is continuing, the Trustee or the holders
of at least 25% in principal amount of all of the outstanding Debt Securities of
that series may declare the principal (or, if the Debt Securities of that series
are original issue discount Debt Securities, such portion of the principal
amount as may be specified in the terms of that series) of all the Debt
Securities of that series to be due and payable. Upon such declaration, such
principal (or, in the case of original issue discount Debt Securities, such
specified amount) shall be due and payable immediately. (Section 6.02.)
Securityholders may not enforce the Indenture or the Debt Securities except
as provided in the Indenture. The Trustee may require indemnity satisfactory to
it before it enforces the Indenture or the Debt Securities. (Section 7.01.)
Subject to certain limitations, holders of a majority in principal amount of
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the Debt Securities of each series affected (with each series voting as a class)
may direct the Trustee in its exercise of any trust power. (Section 6.05.) The
Trustee may withhold from holders of Debt Securities notice of any continuing
default (except a default in payment of principal or interest) if it determines
that withholding notice is in their interests. (Section 7.05.)
CONCERNING THE TRUSTEE
MediaOne Group and certain of its affiliates maintain banking relationships
in the ordinary course of business with the Trustee. In addition, the Trustee
and certain of its affiliates serve as trustee, authenticating agent or paying
agent with respect to certain debt securities of MediaOne Group and its
affiliates.
PLAN OF DISTRIBUTION
DISTRIBUTION OF SECURITIES
MediaOne Group may offer and sell the Debt Securities (i) to or through
underwriting syndicates represented by managing underwriters, (ii) to or through
underwriters without a syndicate, (iii) through dealers, (iv) through agents or
(v) through a combination of any such methods of sale. The Prospectus Supplement
with respect to each series of Debt Securities will set forth the terms of the
offering, including the name or names of any underwriters, dealers or agents,
the purchase price and the net proceeds to MediaOne Group from such sale, any
underwriting discounts, agency fees and other items constituting underwriters'
or agents' compensation, the initial public offering price and any discounts or
concessions allowed, re-allowed or paid to dealers.
If any underwriters are involved in the offer and sale, the Debt Securities
will be acquired by the underwriters and may be resold by them from time to time
in one or more transactions, including negotiated transactions, at a fixed
public offering price or at varying prices determined at the time of sale.
Unless otherwise set forth in the accompanying Prospectus Supplement, the
obligations of the underwriters to purchase the Debt Securities will be subject
to certain conditions precedent and the underwriters will be obligated to
purchase all the Securities described in such Prospectus Supplement if any are
purchased. Any initial public offering price and any discounts or concessions
allowed or re-allowed or paid to dealers may be changed from time to time.
The Debt Securities may be offered and sold by MediaOne Group directly or
through an agent or agents designated by MediaOne Group from time to time.
Unless otherwise indicated in the applicable Prospectus Supplement, any such
agent or agents will be acting on a best efforts basis for the period of its or
their appointment. Any agent participating in the distribution of the Debt
Securities may be deemed to be an "underwriter," as that term is defined in the
Securities Act, of the Securities so offered and sold. The Securities also may
be sold to dealers, at the applicable price to the public set forth in the
applicable Prospectus Supplement relating to a particular series of the
Securities, who later resell to investors. Such dealers may be deemed to be
"underwriters" within the meaning of the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered
into with MediaOne Group, to indemnification by MediaOne Group against certain
liabilities, including liabilities under the Securities Act.
The place and time of delivery for the Debt Securities in respect of which
this Prospectus is delivered will be set forth in the accompanying Prospectus
Supplement, if appropriate.
DELAYED DELIVERY ARRANGEMENTS
If so indicated in the Prospectus Supplement, MediaOne Group will authorize
dealers or other persons acting as MediaOne Group's agents to solicit offers by
certain institutions to purchase Debt Securities from MediaOne Group pursuant to
contracts providing for payment and delivery on a future date. Institutions with
which such contracts may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and others, but in all cases such institutions must be approved by
MediaOne Group. The obligations of any purchaser
10
<PAGE>
under any such contract will not be subject to any conditions except that (a)
the purchaser of the Debt Securities shall not at the time of delivery be
prohibited from purchasing such securities under the laws of the jurisdiction to
which such purchaser is subject and (b) if the Debt Securities are also being
sold to underwriters, MediaOne Group shall have sold to such underwriters the
Debt Securities not sold for delayed delivery. The dealers and such other
persons will not have any responsibility in respect of the validity or
performance of such contracts.
LEGAL OPINIONS
The validity of the Debt Securities will be passed upon by Stephen E. Brilz,
Corporate Counsel of MediaOne Group.
EXPERTS
The consolidated financial statements and the consolidated financial
statement schedule included in Old U S WEST's Annual Report on Form 10-K as of
and for the years ended December 31, 1997 and 1996, as amended by Form 10-K/A
filed April 13, 1998, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated herein by reference in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
The consolidated financial statements and the consolidated financial
statement schedule of MediaOne Group as of and for the years ended December 31,
1997 and 1996 included in the Current Report on Form 8-K of MediaOne Group,
dated June 18, 1998, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated herein by reference in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
The consolidated financial statements and consolidated financial statement
schedule of Old U S WEST for the year ended December 31, 1995, included in Old U
S WEST's Annual Report on Form 10-K for the year ended December 31, 1997, as
amended by Form 10-K/A filed April 13, 1998, and the restated consolidated
financial statements and restated consolidated financial statement schedule of
MediaOne Group included in MediaOne Group's Current Report on Form 8-K, dated
June 18, 1998, are incorporated herein by reference in reliance on the reports
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
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[LOGO]
26,000,000 SHARES
AIRTOUCH COMMUNICATIONS, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------------
This Prospectus relates to up to 26 million shares of common stock, par
value $.01 per share (the "Common Stock"), of AirTouch Communications, Inc. (the
"Company" or "AirTouch"), which may be delivered by MediaOne Group, Inc.
("MediaOne Group"), at its option, pursuant to the terms of MediaOne Group's
Premium Income Equity Securities ("PIES"). This Prospectus accompanies a
prospectus of MediaOne Group (the "PIES Prospectus") relating to the sale of
PIES (the "PIES Offering"). The PIES Prospectus does not constitute a part of
this Prospectus nor is it incorporated by reference herein.
MediaOne Group has granted to the Underwriters of the PIES a 30-day option
to purchase up to an additional 3.9 million PIES, which may be exchanged at
their maturity for up to an additional 3.9 million shares of Common Stock. Such
option has been granted solely to cover over-allotments, if any. THE COMPANY IS
NOT AN AFFILIATE OF MEDIAONE GROUP, WILL NOT RECEIVE ANY OF THE PROCEEDS FROM
THE SALE OF THE PIES AND WILL HAVE NO OBLIGATION WITH RESPECT TO THE PIES.
The Common Stock is traded on the New York Stock Exchange (the "NYSE") under
the symbol "ATI." On July 30, 1998, the last reported sale price of Common Stock
on the NYSE Composite Tape was $58 1/8 per share. See "Price Range of Common
Stock."
Other than (i) the sale of shares of Common Stock by MediaOne Group to the
Company and (ii) options granted and Common Stock issued pursuant to the
Company's existing benefit and stock option plans, the Company, MediaOne Group
and its wholly-owned subsidiaries have agreed not to issue, sell, agree to sell
or otherwise dispose of, without the prior written consent of Lehman Brothers,
any shares of Common Stock or any securities convertible into, exercisable for
or exchangeable for Common Stock for a period of 90 days after the date of this
Prospectus. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 13 HEREIN FOR CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------------
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.
---------------------
"Premium Income Exchangeable Securities-SM-" and "PIES-SM-" are service marks
owned by Lehman Brothers Inc.
Prospectus dated July 30, 1998
<PAGE>
CERTAIN DEFINITIONS
Unless the context otherwise requires, references to "AirTouch" or the
"Company" include AirTouch Communications, Inc. and entities over which it has
or shares operational control, and references to "MediaOne Group" include
MediaOne Group, Inc. (formerly U S WEST Media Group, Inc.) and entities over
which it has or shares operational control.
CELLULAR AND PCS. When used in this Prospectus, "cellular service" refers
to wireless service operating at the 800 MHz band in the United States and South
Korea and at the 900 MHz band in Europe, and "broadband personal communication
service" or "PCS" refers to wireless service operating at the 1900 MHz band in
the United States and South Korea and at the 1800 MHz band in Europe. The
Company considers the functionality of both services to be similar despite the
different bands at which they operate.
POPS. POPs means the population of a licensed market (based on population
estimates for such market) multiplied by the Company's ownership interest in a
licensee operating in such market as of the date specified and includes networks
under construction and markets of certain cost-based investments not included in
proportionate financial results.
PROPORTIONATE ACCOUNTING. The Company uses United States generally accepted
accounting principles ("GAAP") and includes supplemental information prepared
using proportionate accounting to present certain financial information.
Proportionate financial and operating information is not required by GAAP and is
not intended to replace the consolidated financial statements prepared in
accordance with GAAP and incorporated by reference herein. Because significant
assets of the Company are not consolidated and because of the substantial effect
of certain entities on the year-to-year comparability of the Company's
consolidated financial results, the Company believes that proportionate
financial and operating data facilitate the understanding and assessment of its
consolidated financial statements.
Under GAAP, the Company consolidates the entities in which it has a direct
controlling interest and uses the equity method to account for entities over
which the Company has significant influence but does not have a direct
controlling interest. In contrast, proportionate accounting reflects the
Company's relative ownership interests in operating revenues and expenses for
both its consolidated and equity method entities. For example, United States
cellular proportionate results present the Company's share--its percentage
ownership--for all significant United States cellular operations, including
those corporations and partnerships where the Company does not own more than
50%. Similarly, total proportionate operating cash flow represents the Company's
ownership interests in the respective entities' operating cash flows. As such,
proportionate operating cash flow does not represent cash available to the
Company.
Net income is the same under GAAP and proportionate presentations.
PROPORTIONATE OPERATING CASH FLOW means proportionate operating income plus
proportionate depreciation and proportionate amortization.
PRO FORMA INFORMATION. On April 6, 1998, the Company acquired the United
States cellular business of MediaOne Group and its 25% interest in PrimeCo
Personal Communications, L.P. Except as set forth under "Pro Forma Condensed
Combined Financial Statements," the pro forma information presented in this
Prospectus reflects the impacts of that acquisition as if it had been effected
at the beginning of each period presented, after giving effect to the purchase
method of accounting and other merger-related adjustments. Pro forma information
should be read in conjunction with the Pro Forma Condensed Combined Financial
Statements and explanatory notes included herein.
------------------------
THE COMPANY HAS BEEN ADVISED THAT, IN CONNECTION WITH THE OFFERING BY
MEDIAONE GROUP OF THE PIES, THE UNDERWRITERS OF THE PIES AND CERTAIN OTHER
PERSONS PARTICIPATING IN THE PIES OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PIES AND THE COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON STOCK PRIOR TO THE
PRICING OF THE PIES OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE
PIES AND THE COMMON STOCK, THE PURCHASE OF PIES FOLLOWING THE PRICING OF THE
PIES OFFERING TO COVER A SHORT POSITION IN THE PIES AND THE PURCHASE OF COMMON
STOCK FOLLOWING THE PRICING OF THE PIES OFFERING FOR THE PURPOSE OF MAINTAINING
THE PRICE OF THE PIES AND THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
concerning AirTouch Communications, Inc. can be inspected and copied at the
public reference facilities maintained by the Commission at its offices at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as
well as the Regional Offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained at prescribed rates from the Public Reference Section of the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, such reports, proxy statements and other
information may be accessed electronically at the Commission's site on the World
Wide Web at http://www.sec.gov. Such reports, proxy statements and other
information can also be inspected at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005 and at the offices of the
Pacific Exchange, 301 Pine Street, San Francisco, California 94104.
------------------------
The shares of Common Stock which may be delivered by MediaOne Group pursuant
to the terms of the PIES were included in the Registration Statement of the
Company filed under Form S-3 (Reg. No. 333-56645), of which this Prospectus is a
part, with the Commission on June 11, 1998 at the time such registration
statement became effective.
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company pursuant to
the Exchange Act are incorporated herein by reference:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997;
(b) the Company's Current Report on Form 8-K dated January 29, 1998;
(c) the Company's Current Report on Form 8-K dated April 6, 1998, as amended on
April 23, 1998;
(d) the Company's Current Report on Form 8-K dated April 27, 1998;
(e) the Company's Current Report on Form 8-K dated April 29, 1998;
(f) the Company's Current Report on Form 8-K dated April 29, 1998 (filed as of
May 1, 1998);
(g) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998;
(h) the Company's Current Report on Form 8-K dated May 28, 1998; and
(i) the Company's Current Report on Form 8-K dated May 29, 1998.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the effective date of the
Registration Statement shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, and who makes a written or oral request, a
copy of any and all of the information that has been incorporated by reference
in this Prospectus or any Prospectus Supplement, excluding exhibits. Requests
should be directed to: Investor Relations, AirTouch Communications, Inc., One
California Street, San Francisco, California 94111, telephone number: (415)
658-2000.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION SET FORTH ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS.
THE COMPANY
AirTouch Communications, Inc. ("AirTouch" or the "Company") is the largest
wireless telecommunication services company in the world based on the 31.5
million total wireless customers served by the Company and its ventures as of
June 30, 1998. Through its operations in the United States, Europe, Asia and
North Africa, the Company provides a full range of wireless telecommunication
services, including cellular, PCS and paging, and in the future will provide
global satellite communication services.
The cellular and PCS licenses of the Company and its ventures cover more
than 719 million people around the world in 13 countries on four continents.
Based on its ownership percentages, the Company's cellular and PCS interests
represented approximately 233.8 million POPs and, together with paging
customers, 15.1 million proportionate customers as of June 30, 1998.
Worldwide Wireless Presence as of June 30, 1998
<TABLE>
<CAPTION>
TOTAL VENTURES(1) PROPORTIONATE
-------------------------- ----------------------
POPULATION(2) CUSTOMERS POPS CUSTOMERS
------------- ----------- --------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Cellular & PCS.................. 146.9 8.9 95.2 7.6
Europe............................... 269.3 13.1 67.7 3.6
Asia................................. 248.5 6.1 54.5 0.6
Egypt(3)............................. 54.5 n/a 16.4 n/a
Paging(4)............................ n/a 3.4 n/a 3.3
----- --- --------- ---
Total................................ 719.2 31.5 233.8 15.1
</TABLE>
- ------------------------
(1) Includes total population and all customers served by the ventures in which
AirTouch has an ownership interest.
(2) As of December 31, 1997. Population estimates for Europe, Asia and Egypt are
from INTERNATIONAL CELLULAR, May 29, 1998, published by Kagan World Media,
Ltd. U.S. population estimates are from .
(3) License issued on May 5, 1998. The Company anticipates launch of service in
the second half of 1999.
(4) Includes customers of Canadian, Spanish and Portuguese paging ventures.
The Company has experienced significant growth in the number of cellular,
PCS and paging customers that it serves as a result of growing worldwide demand
for wireless services and acquisitions and new license awards that have more
than doubled the Company's worldwide presence from 75 million POPs in 1993 to
233 million POPs today. From 1993 to 1997, the Company's proportionate
subscribers increased at a compounded annual growth rate of 44% to 10.7 million
and its proportionate operating cash flow increased at a compounded annual
growth rate of 49% to $1.7 billion. Total proportionate customers reached 15.1
million as of June 30, 1998, and proportionate operating cash flow on a proforma
basis including the effect of the Merger was $1.4 billion for the six month
period ended June 30, 1998. Although recent increases in competition in most of
the Company's markets will likely slow the rate of customer and operating cash
flow growth in future years, the Company believes that its proven ability to
carry out its business strategy will continue to make it an effective and
efficient competitor.
The Company's operations are divided into three principal businesses: U.S.
Cellular and PCS, International Cellular, and Paging:
- U.S. CELLULAR AND PCS. The Company is the largest provider of cellular and
PCS services in the United States based on the 8.9 million total customers
served by the Company and its ventures as of June 30, 1998. The Company
and its ventures provide cellular service in 22 of the 30 largest
metropolitan statistical areas in the United States. The Company provides
cellular service directly
4
<PAGE>
in certain markets and through joint ventures in others and provides PCS
through PrimeCo Personal Communications, L.P. ("PrimeCo"), in which it
owns a 50% interest. On a proportionate basis, the Company's United States
cellular and PCS business had 7.6 million customers as of June 30, 1998, a
28% increase over pro forma customers for the prior year, and $827 million
in pro forma proportionate operating cash flow for the first six months of
1998, a 12% increase over the prior year's pro forma proportionate
operating cash flow.
- INTERNATIONAL CELLULAR. Outside the United States, the Company owns
interests in 16 cellular ventures in 12 countries on three continents,
including Europe, Asia and Africa. The Company's international operations
represented 4.2 million proportionate international customers as of June
30, 1998, an 86% increase over the prior year, and proportionate operating
cash flow of $533 million for the first six months of 1998, a 78% increase
over the prior year.
- PAGING. The Company had approximately 3.3 million paging units in service
worldwide as of June 30, 1998. With approximately 3.2 million of such
units in service in the United States, the Company is one of the largest
providers of paging services in the United States and the only large
paging company in the United States to have achieved and maintained
positive net income and free cash flow. The Company's United States paging
business experienced a 7.9% increase in units in service over June 30,
1997, with operating cash flow for the first six months of 1998 of $60
million, a 13% increase over the same period of the prior year.
The Company also has a 5.7% interest in Globalstar, L.P. ("Globalstar"), a
satellite communications company that expects to begin commercial service in the
third quarter of 1999. The Company has the exclusive right to provide Globalstar
service in the United States and, through a partnership with Loral Space &
Communications Corporation Ltd. ("Loral"), in Canada and Mexico.
BUSINESS STRATEGY
The Company's principal objective is to be the premier provider of wireless
telecommunication services worldwide. The Company believes that the following
elements of its business strategy will enable it to meet that objective:
FOCUS ON WIRELESS. By concentrating on wireless telecommunication services,
the Company has invested its capital in a proven industry that is expected to
grow dramatically on a worldwide basis. The Company believes that the knowledge
and experience developed by its senior management team through extensive
involvement in the industry since its inception in 1983 give it an advantage as
an operator and in identifying and pursuing new value-creating wireless
opportunities.
GLOBAL PRESENCE. With investments in the United States, Europe, Asia and
North Africa, the Company has a diverse global presence that limits its risks
from negative market conditions in any one region. In addition, the
international markets in which the Company has investments are relatively less
penetrated--14% on average--providing even greater growth potential than in the
United States, where penetration is 23%. Its global reach also enables the
Company to identify emerging trends and share best practices across its many
ventures.
SCALE ADVANTAGES. The Company and its ventures served a total of 31.5
million customers as of June 30, 1998. The scale of the Company's operations has
contributed to cost savings and operational efficiencies that generate
competitive advantages. The Company is able to reduce its costs per customer by
spreading expenses over a large subscriber base and by consolidating headquarter
services and certain shared operational functions. In addition, by purchasing
infrastructure and handsets jointly with its partners, the Company has been able
to obtain favorable pricing from manufacturers.
5
<PAGE>
CORE COMPETENCIES. As competition increases worldwide, AirTouch's
advantages lie in the execution of the basic components of its business:
- World class customer care--The Company's focus on providing customers with
world class customer care gives AirTouch a competitive advantage in
subscriber retention. Through proactive outreach efforts, AirTouch has
been able to keep its churn (customers leaving the system) from increasing
despite growing competition.
- Extensive distribution channels--As an early entrant into the wireless
market AirTouch has developed extensive direct and indirect distribution
channels to sell its services in its U.S. and international markets. The
Company's strategy is to increase the proportion of its sales made through
direct channels, where the Company is better able to control and reduce
selling costs.
- Quality products and services--The Company offers competitive products and
pricing plans. Its combined analog and digital network and the
availability of dual-mode handsets provide the advantage of extensive
coverage and nationwide roaming capabilities. The Company offers analog
and digital products that appeal to different market segments.
- Network expertise--With operations throughout the world, the Company has
engineered cellular networks using every major wireless technology,
including different digital standards as well as analog. AirTouch built
the world's first commercial GSM network, which commenced service in
Germany in 1992, and was a pioneer in the development of CDMA-digital
technology. The Company has also developed many patented tools for
detecting and preventing cellular fraud and for enhancing analog capacity.
- Profitable growth--The Company focuses on profitably attracting new
subscribers and retaining existing customers. Its cost containment and
efficiencies of scale have helped it to reduce cash costs per customer
faster than declines in the average revenue per customer, resulting in
record 1997 total Company proportionate operating cash flow margins of
35%.
EFFICIENT MANAGEMENT STRUCTURE. In the United States, the Company's
decentralized management structure makes AirTouch an agile competitor in an
increasingly competitive industry. Decision-making is kept close to customers
and separate profit and loss responsibility is given to local management.
Although the Company generally has minority interests in its international
ventures, it plays an active role, with board representation and the right to
appoint key management positions and participate in key business decisions.
STRICT FINANCIAL INVESTMENT CRITERIA. The Company's strong financial
performance and investment grade credit ratings are due in part to its financial
discipline and structured approach to new opportunities and ventures. Each
potential investment is measured against a strict set of financial criteria to
determine whether the investment offers an opportunity for value creation.
RECENT DEVELOPMENTS
On April 6, 1998, the Company and MediaOne Group, Inc. ("MediaOne Group")
completed the merger of MediaOne Group's U.S. cellular and PCS interests into
the Company (the "Merger"). In the Merger, the Company acquired U S WEST
NewVector Group, Inc. ("NewVector"), which held MediaOne Group's U.S. cellular
business, and MediaOne Group's 25% interest in PrimeCo. As a result of the
Merger, the Company added 2.5 million proportionate U.S. wireless customers and
35 million proportionate POPs.
The total value of the Merger was approximately $5.9 billion. The Company
issued approximately 59.4 million shares of Common Stock valued at $2.9 billion
based on the April 3, 1998 closing price of $49 per share and $1.65 billion of
preferred stock and assumed $1.35 billion of debt.
6
<PAGE>
The Company expects earnings per share dilution from the Merger to reach
$0.40 per share in 1999 and to decline thereafter. This dilution represents the
net amount of amortization of acquisition intangibles, incremental interest
expense, preferred dividends and common shares issued, as partially offset by
incremental earnings. The Company plans to pursue cost savings to partially
mitigate this dilution, there being no assurance that such plans will be
successful.
RECENT FINANCIAL RESULTS
On July 22, 1998, the Company announced its earnings for the second quarter
of 1998, which ended on June 30, 1998. Consolidated revenues for the quarter
were $1.3 billion, with net income of $147 million and diluted earnings per
share of $0.25.
The strength in the Company's financial and operating performance has been
driven by increased demand for wireless services, continued growth in the
Company's U.S. cellular wireless operations, significant growth in the Company's
international operations, and the Company's continued efforts to control costs.
In order to better compare year-over-year growth, results in this discussion
have been presented on a pro forma basis as if the acquisition of MediaOne
Group's U.S. wireless interests occurred on January 1, 1997.
ON A GAAP BASIS
Comparing the first six months of 1998 to the same period in 1997, the
Company's total operating revenues grew 10% to $2.7 billion, and operating
income grew 13% to $556 million. Net income applicable to common stockholders
was $262 million, up 176% over the first six months in 1997.
ON A PROPORTIONATE BASIS
The Company's proportionate service and other revenues were $3.5 billion in
the first six months of 1998, a 20% increase over the same period in 1997.
Proportionate operating cash flow was $1.4 billion, a 31% increase over the
first six months of 1997. During the first six months of 1998 the Company's
total proportionate customers increased by 1.6 million to 15.1 million, an
increase of 35% from proportionate customers as of June 30, 1997.
THE OFFERING OF THE PIES
The PIES are being offered by MediaOne Group pursuant to the PIES
Prospectus. Pursuant to the terms of the PIES, MediaOne Group may deliver shares
of Common Stock to the holders of the PIES at the maturity thereof. This
Prospectus relates to the delivery by MediaOne Group pursuant to the PIES of up
to 26 million shares of Common Stock, plus up to an additional 3.9 million
shares of Common Stock with respect to the PIES that are subject to an option
granted by MediaOne Group to the Underwriters in the PIES Offering solely to
cover over-allotments. For a description of the relationship between MediaOne
Group and the Company see "Selling Stockholder."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered carefully by prospective investors.
7
<PAGE>
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth selected historical data for the Company on a
GAAP basis. Except for capital expenditures and capital calls, which are
unaudited, the data for each of the five years ended December 31, 1997 were
derived from the Company's audited financial statements. The data for the three
months ended March 31, 1998 and March 31, 1997 were derived from the unaudited
quarterly financial statements. The following information should be read in
conjunction with the audited consolidated financial statements, including the
accompanying notes, of the Company which are included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 and in its Quarterly
Report on Form 10-Q for the period ended March 31, 1998, each incorporated
herein by reference.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
-------------------- ------------------------------------------------
1998 1997 1997(a) 1996(a) 1995 1994(b)
--------- --------- ----------- ----------- --------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenues.............................. $ 958 $ 836 $ 3,594 $ 2,252 $ 1,619 $ 1,247
Operating income................................ $ 234 $ 208 $ 706 $ 281 $ 113 $ 73
Equity in net income of unconsolidated wireless
systems....................................... $ 77 $ 8 $ 200 $ 133 $ 152 $ 110
Interest:
Expense....................................... $ (19) $ (26) $ (90) $ (52) $ (13) $ (10)
Income........................................ $ 6 $ 5 $ 18 $ 14 $ 35 $ 55
Income from operations(c)....................... $ 167 $ 77 $ 448 $ 199 $ 132 $ 98
Preferred dividends............................. $ 14 $ 13 $ 54 $ 20 $ -- $ --
Net income applicable to common stockholders.... $ 153 $ 64 $ 394 $ 179 $ 132 $ 98
Per share data:
Income from operations(c)
Basic and diluted........................... $ 0.33 $ 0.15 $ 0.89 $ 0.40 $ 0.27 $ 0.20
Net income applicable to common stockholders
Basic and diluted........................... $ 0.30 $ 0.13 $ 0.78 $ 0.36 $ 0.27 $ 0.20
<CAPTION>
MARCH 31 DECEMBER 31
-------------------- ------------------------------------------------
1998 1997 1997(a) 1996(a) 1995 1994(b)
--------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Investments in unconsolidated wireless
systems....................................... $ 2,382 $ 1,888 $ 2,068 $ 1,992 $ 3,076 $ 1,698
Intangible assets, net.......................... $ 3,279 $ 3,358 $ 3,297 $ 3,409 $ 606 $ 471
Total assets.................................... $ 9,401 $ 8,486 $ 8,970 $ 8,524 $ 5,648 $ 4,488
Long-term debt, including current portion....... $ 1,534 $ 1,622 $ 1,419 $ 1,669 $ 906 $ 130
Total stockholders' equity...................... $ 5,918 $ 5,114 $ 5,529 $ 5,062 $ 3,751 $ 3,459
OTHER DATA
Working capital (deficit)....................... $ 30 $ ( 44) $ ( 254) $ ( 120) $ 19 $ 736
Capital expenditures and capital calls,
excluding acquisitions(d)..................... $ 265 $ 164 $ 1,023 $ 890 $ 1,015 $ 494
<CAPTION>
1993(b)
-----------
<S> <C>
INCOME STATEMENT DATA
Operating revenues.............................. $ 1,058
Operating income................................ $ 129
Equity in net income of unconsolidated wireless
systems....................................... $ 32
Interest:
Expense....................................... $ (22)
Income........................................ $ 12
Income from operations(c)....................... $ 41
Preferred dividends............................. $ --
Net income applicable to common stockholders.... $ 35
Per share data:
Income from operations(c)
Basic and diluted........................... $ 0.09
Net income applicable to common stockholders
Basic and diluted........................... $ 0.08
1993(b)
-----------
<S> <C>
BALANCE SHEET DATA
Investments in unconsolidated wireless
systems....................................... $ 1,155
Intangible assets, net.......................... $ 413
Total assets.................................... $ 4,077
Long-term debt, including current portion....... $ 79
Total stockholders' equity...................... $ 3,337
OTHER DATA
Working capital (deficit)....................... $ 1,347
Capital expenditures and capital calls,
excluding acquisitions(d)..................... $ 304
</TABLE>
- ------------------------------
(a) In December 1996, the Company obtained a controlling interest in Telecel.
The Company consolidated Telecel's Balance Sheet as of December 31, 1996 and
began consolidating Telecel's results of operations on January 1, 1997. In
August 1996, the Company completed its acquisition of Cellular
Communications, Inc. See Note F, "Partnerships and Acquisitions," to the
Consolidated Financial Statements in the Company's Annual Report for further
information.
(b) Prior to April 1, 1994, the Company was an 86.1% owned subsidiary of Pacific
Telesis Group ("Telesis"). On April 1, 1994, the Company was spun off from
Telesis. Prior to December 3, 1993, the Company was 100% owned by Telesis.
(c) Income before preferred dividends (1997 and 1996) and cumulative effect of
accounting changes (1993).
(d) For the three months ended March 31 and year ended December 31.
8
<PAGE>
SUMMARY HISTORICAL PROPORTIONATE DATA
The following tables are not required by GAAP and are not intended to
replace the Company's Consolidated Financial Statements prepared in accordance
with GAAP. They are presented to provide supplemental data and have not been
audited. Because significant assets of the Company are not consolidated and
because of the substantial effect of the formation of certain entities on the
year-to-year comparability of the Company's consolidated financial results, the
Company believes that proportionate financial and operating data facilitate the
understanding and assessment of its Consolidated Financial Statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL COMPANY FINANCIAL DATA
Service and other revenues...................... $ 1,355 $ 1,113 $ 4,907 $ 3,925 $ 2,679 $ 1,799 $ 1,228
Operating expenses before depreciation and
amortization expenses (1)..................... 808 700 3,171 2,801 1,976 1,293 876
--------- --------- --------- --------- --------- --------- ---------
Operating cash flow (2)......................... 547 413 1,736 1,124 703 506 352
Depreciation and amortization expenses.......... 216 188 789 603 406 334 254
--------- --------- --------- --------- --------- --------- ---------
Operating income................................ $ 331 $ 225 $ 947 $ 521 $ 297 $ 172 $ 98
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income applicable to common stockholders.... $ 153 $ 64 $ 394 $ 179 $ 132 $ 98 $ 35
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
TOTAL COMPANY OPERATING AND FINANCIAL DATA
(CUSTOMERS AND POPS IN THOUSANDS)
Cellular and PCS POPS......................... 180,759 178,367 180,032 178,317 164,908 99,508 75,290
Total customers............................... 11,498 8,447 10,724 8,032 5,533 3,595 2,475
Cellular and PCS customers.................... 8,270 5,487 7,536 5,146 3,059 1,948 1,206
Net cellular and PCS adds (3)................. 655 341 2,336 1,625 974 713 409
Operating cash flow margin (4)................ 40.4% 37.1% 35.4% 28.6% 26.2% 28.1% 28.7%
FINANCIAL AND OPERATING DATA BY BUSINESS
(CUSTOMERS AND POPS IN THOUSANDS)
U.S. Cellular Operations
POPS.......................................... 44,092 43,364 43,364 43,364 37,739 35,390 34,889
Customers..................................... 4,560 3,550 4,309 3,403 2,262 1,560 1,046
Net adds (3).................................. 171 147 906 770 591 514 286
Operating cash flow........................... $ 297 $ 272 $ 1,056 $ 821 $ 605 $ 479 $ 380
Operating cash flow margin (4)................ 47.8% 48.4% 44.7% 41.4% 39.7% 41.3% 42.6%
International Operations
POPS.......................................... 122,438 120,774 122,439 120,724 112,869 64,118 40,401
Customers..................................... 3,589 1,910 3,135 1,734 797 388 160
Net adds (3).................................. 455 176 1,347 846 383 199 123
Operating cash flow........................... $ 256 $ 149 $ 729 $ 321 $ 124 $ 30 $ (30)
Operating cash flow margin (4)................ 40.9% 31.7% 33.4% 19.6% 13.5% 6.9% (17.1)%
U.S. PCS Operations (5)
POPS.......................................... 14,229 14,229 14,229 14,229 14,300 -- --
Customers..................................... 121 27 92 9 -- -- --
Net adds (3).................................. 29 18 83 9 -- -- --
U.S. Paging Operations
Paging units in service....................... 3,140 2,923 3,101 2,850 2,338 1,525 1,167
Net adds (3).................................. 38 73 246 512 463 358 324
Operating cash flow........................... $ 30 $ 25 $ 108 $ 88 $ 75 $ 67 $ 50
Operating cash flow margin (4)................ 33.7% 31.6% 32.7% 29.6% 33.2% 35.4% 33.6%
</TABLE>
- ------------------------------
(1) Includes net losses on equipment sold to acquire and retain customers.
(2) Operating cash flow is defined as operating income plus depreciation and
amortization and is not the same as cash flow from operating activities in
the Company's Consolidated Statements of Cash Flows. Proportionate operating
cash flow represents the Company's ownership interests in the respective
entities' operating cash flows. As such, proportionate operating cash flow
does not represent cash available to the Company.
(3) New customers during the period, net of disconnects and excluding the impact
of acquisitions.
(4) Operating cash flow margin is calculated by dividing "Operating cash flow"
by "Service and other revenues" or in the case of U.S. Paging Operations,
dividing "Operating cash flow" by "Net operating revenues."
(5) PCS data relates to PrimeCo Personal Communications, L.P., a U.S. PCS
business in which the Company had a 25% interest immediately prior to the
Merger.
9
<PAGE>
RECENT FINANCIAL DEVELOPMENTS ON A GAAP BASIS
On July 22, 1998, the Company announced its earnings for the second quarter
of fiscal 1998 which ended June 30, 1998. The following tables set forth
selected unaudited Income Statement and Balance Sheet data for the periods and
as of the dates indicated for the Company.
The following unaudited pro forma Income Statement data reflect the Merger
as if it had been effective as of the beginning of each period presented, and
after giving effect to the purchase method of accounting and other
merger-related adjustments. Changes to these adjustments are expected as
valuations and appraisals of the acquired assets and liabilities are completed.
However, based on the preliminary results of the appraisal of assets and
liabilities acquired, such changes are not expected to be material. These
selected pro forma data are intended for informational purposes only and are not
necessarily indicative of the future results of operations of the combined
Company or the results of operations of the combined Company that would have
actually occurred.
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
-------------------- -------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30 JUNE 30 DECEMBER 31,
-------------------- -------------------- ---------------
1998 1997 1998 1997 1997
--------- --------- --------- --------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenues............................................... $ 2,306 $ 1,737 $ 2,667 $ 2,432 $ 5,022
Operating income................................................. $ 520 $ 407 $ 556 $ 493 $ 843
Equity in net income (loss) of unconsolidated wireless systems... $ 162 $ 63 $ 126 $ (2) $ 81
Minority interests in net (income) loss of consolidated wireless
systems........................................................ $ (87) $ (71) $ (97) $ (92) $ (161)
Miscellaneous income (expenses).................................. $ (53) $ (43) $ (67) $ (80) $ (156)
Income before preferred dividends................................ $ 347 $ 196 $ 332 $ 164 $ 365
Preferred dividends.............................................. $ 47 $ 26 $ 70 $ 69 $ 139
Net income applicable to common stockholders..................... $ 300 $ 170 $ 262 $ 95 $ 226
Per share data:
Income before preferred dividends
Basic........................................................ $ 0.64 $ 0.39 $ 0.58 $ 0.29 $ 0.65
Diluted...................................................... $ 0.63 $ 0.39 $ 0.57 $ 0.29 $ 0.64
Net income applicable to common stockholders
Basic........................................................ $ 0.56 $ 0.34 $ 0.46 $ 0.17 $ 0.40
Diluted...................................................... $ 0.55 $ 0.34 $ 0.45 $ 0.17 $ 0.40
<CAPTION>
JUNE 30
--------------------
1998 1997
--------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Investments in unconsolidated wireless systems................... $ 3,303 $ 1,925 -- -- --
Intangible assets, net........................................... $ 8,921 $ 3,328 -- -- --
Total assets..................................................... $ 17,228 $ 8,523 -- -- --
Long-term debt, including current portion........................ $ 3,007 $ 1,566 -- -- --
Total stockholders' equity....................................... $ 9,023 $ 5,239 -- -- --
OTHER DATA
Working capital (deficit)........................................ $ (151) $ (15) -- -- --
Capital expenditures and capital calls, excluding
acquisitions(a)................................................ $ 588 $ 431 $ 720 $ 648 $ 1,491
</TABLE>
- ------------------------------
(a) For the six months ended June 30 and year ended December 31.
10
<PAGE>
RECENT FINANCIAL DEVELOPMENTS ON A PROPORTIONATE BASIS
On July 22, 1998, the Company announced its earnings for the second quarter
of fiscal 1998 which ended June 30, 1998. The following tables set forth
selected unaudited proportionate financial and operating data for the periods
and as of the dates presented.
The following unaudited pro forma proportionate data reflect the Merger as
if it had been effective as of the beginning of the each period presented, and
after giving effect to the purchase method of accounting and other
merger-related adjustments. Changes to these adjustments are expected as
valuations and appraisals of assets and liabilities acquired are completed.
However, based on the preliminary results of the appraisal of assets and
liabilities acquired, such changes are not expected to be material. These
selected pro forma data are intended for information purposes only and are not
necessarily indicative of the future results of operations of the combined
Company or the results of operations of the combined Company that would have
actually occurred.
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
-------------------- -----------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30 JUNE 30 DECEMBER 31,
-------------------- -------------------- -------------
1998 1997 1998 1997 1997
--------- --------- --------- --------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
TOTAL COMPANY FINANCIAL DATA
Service and other revenues.............................. $ 3,153 $ 2,311 $ 3,479 $ 2,891 $ 6,094
Operating expenses before depreciation and amortization
expenses (1).......................................... 1,898 1,472 2,106 1,839 3,958
--------- --------- --------- --------- -------------
Operating cash flow (2)................................. 1,255 839 1,373 1,052 2,136
Depreciation and amortization expenses.................. 551 378 673 589 1,218
--------- --------- --------- --------- -------------
Operating income........................................ $ 704 $ 461 $ 700 $ 463 $ 918
--------- --------- --------- --------- -------------
--------- --------- --------- --------- -------------
Net income applicable to common stockholders............ $ 300 $ 170 $ 262 $ 95 $ 226
--------- --------- --------- --------- -------------
--------- --------- --------- --------- -------------
TOTAL COMPANY OPERATING AND FINANCIAL DATA (CUSTOMERS AND
POPS IN THOUSANDS)
Cellular and PCS POPS................................. 233,815 178,071 233,815 212,730 214,691
Total customers....................................... 15,051 9,064 15,051 11,184 13,190
Cellular and PCS Customers............................ 11,734 6,033 11,734 8,153 10,002
Net adds (3).......................................... 1,524 887 1,600 1,124 2,921
Operating cash flow margin (4)........................ 39.8% 36.3% 39.5% 36.4% 43.7%
Capital expenditures and capital calls (excluding
acquisitions)....................................... $ 692 $ 588 $ 773 $ 733 $ 1,718
FINANCIAL AND OPERATING DATA BY BUSINESS (CUSTOMERS AND
POPS IN THOUSANDS)
U.S. Cellular Operations
POPS.................................................. 65,962 43,364 65,962 63,794 63,794
Customers............................................. 7,290 3,745 7,290 5,818 6,683
Net adds (3).......................................... 427 342 474 542 1,408
Operating cash flow................................... $ 753 $ 568 $ 888 $ 823 $ 1,535
Operating cash flow margin............................ 48.1% 48.7% 47.4% 47.4% 43.7%
U.S. PCS Operations
POPS.................................................. 29,195 14,229 29,195 28,458 28,458
Customers............................................. 282 47 282 94 184
Net adds (3).......................................... 70 38 98 74 166
</TABLE>
11
<PAGE>
RECENT FINANCIAL DEVELOPMENTS ON A PROPORTIONATE BASIS
<TABLE>
<CAPTION>
AS REPORTED
--------------------
SIX MONTHS ENDED
JUNE 30
--------------------
1998 1997
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
International Operations
POPS..................................................................................... 138,658 120,478
Customers................................................................................ 4,162 2,241
Net adds (3)............................................................................. 1,027 507
Operating cash flow...................................................................... $ 533 $ 299
Operating cash flow margin (4)........................................................... 39.8% 30.6%
U.S. Paging Operations (5)
Paging units in service.................................................................. 3,228 2,992
Net adds (3)............................................................................. 127 142
Operating cash flow...................................................................... $ 60 $ 53
Operating cash flow margin............................................................... 33.1% 33.1%
</TABLE>
- ------------------------------
(1) Includes net losses on equipment sold to acquire and retain customers.
(2) Operating cash flow is defined as operating income plus depreciation and
amortization and is not the same as cash flow from operating activities in
the Company's Consolidated Statements of Cash Flows. Proportionate operating
cash flow represents the Company's ownership interests in the respective
entities' operating cash flows. As such, proportionate operating cash flow
does not represent cash available to the Company.
(3) New customers during the period net of disconnects excluding the impact of
acquisitions.
(4) Operating cash flow margin is calculated by dividing "Operating cash flow"
by "Service and other revenues" or in the case of U.S. Paging Operations,
dividing "Operating cash flow" by "Net operating revenues."
(5) PCS data relates to PrimeCo Personal Communications, L.P., a U.S. PCS
business in which the Company had a 50% interest immediately after the
Merger.
OUTLOOK FOR 1998
The following guidance is provided on a pro forma basis as if the Merger had
closed on January 1, 1997. In 1998, AirTouch expects to add over three million
proportionate global cellular and PCS customers, reflecting the record
performance of its international ventures in the first half of 1998. Pro forma
proportionate operating cash flow is expected to increase approximately 25% over
1997's pro forma proportionate operating cash flow of $2.1 billion. Pro forma
proportionate capital expenditures are currently expected to be 5% higher than
1997 pro forma proportionate capital expenditures, or approximately $1.9
billion. These expectations do not include the impact of any new investment
opportunities such as new licenses, acquisitions or increases in ownership in
existing ventures.
12
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WHEN USED IN THIS
PROSPECTUS, THE WORDS "ESTIMATE," "PROJECT," INTEND," "EXPECT," "PLAN," "GOAL"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS
REGARDING EVENTS AND FINANCIAL TRENDS WHICH MAY AFFECT THE COMPANY'S FUTURE
OPERATING RESULTS AND FINANCIAL POSITION. SUCH STATEMENTS ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS AND FINANCIAL
POSITION TO DIFFER MATERIALLY. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO THOSE DESCRIBED BELOW UNDER "RISK FACTORS." READERS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO RESPONSIBILITY TO PUBLICLY RELEASE
THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
RISK FACTORS
COMPETITION. The Company and its ventures face an increasing number of
competitors in each of their markets. In the United States, competition has been
steadily increasing since PCS providers first began offering service in late
1996. There can now be up to nine wireless competitors in each cellular and PCS
market in the United States. Germany and Sweden currently have four licensees
per market, and Italy, Spain, Poland, Portugal and Romania have three. A third
license is expected to be awarded in Belgium in 1998. South Korea has licensed a
total of five mobile operators and Japan a total of seven operators per market.
There are currently two licensees in Egypt and India. The Company also faces
intense competition in each of its paging markets.
Increased competition has led to declines in the prices the Company charges
for its wireless services and is expected to lead to further price declines in
the future. Price reductions have attracted an increasing number of consumer
customers, who tend to make calls during lower-rate, off-peak periods. As a
result of these factors, in recent years the Company's proportionate average
revenue per cellular customer has declined at rates between 12% and 15% per year
in the United States to $53 for 1997 and between 20% and 30% per year, including
the impact of foreign exchange fluctuations, to $79 for 1997 in the Company's
international markets and is expected to continue to decline at similar rates in
1998. Historically the Company has been able to match or exceed declines in
average revenue per customer with reductions in operating cash costs per
customer. However, there can be no assurance that the Company will be able to
continue to do so. If it cannot, the Company may experience decreased
profitability.
Competition could also lead to a decrease in the rate at which the Company
adds new customers and even to a decrease in the size of the Company's customer
base as customers choose to receive wireless service from other providers.
Customer deactivations are measured by the Company's churn rate, which is the
number of subscribers in a given period who terminate their service or have
their service terminated by the Company divided by the average number of
customers for the same period, expressed as a percentage. Historically the
Company has experienced average churn rates in its United States and
international markets of approximately 2% per month. There can be no assurance
that the Company will not experience an increase in churn rates, particularly as
competition intensifies. An increase in churn rates could adversely affect
profitability because the Company would experience lower revenues and increased
selling costs to replace customers.
INCREASED RATE OF INVESTMENT IN NETWORKS AND NEW TECHNOLOGY. The Company
expects that it will be required to make substantial future investments in its
wireless networks due to customer growth, increased usage and the need to offer
new services and greater functionality. Accordingly, the rate of the Company's
capital expenditures in future years could materially exceed that experienced by
the Company in recent years. The operations of the Company and its ventures
depend in part upon the successful deployment of continuously evolving wireless
telecommunications technologies. The Company uses technologies from a number of
vendors and makes significant capital expenditures in connection with the
deployment of such
13
<PAGE>
technologies. There can be no assurance that technologies will be developed
according to anticipated schedules, that they will perform according to
expectations or that they will achieve commercial acceptance. The failure of
vendor performance or technology performance to meet the Company's expectations
or the failure of a technology to achieve commercial acceptance could result in
additional capital expenditures by the Company or a reduction in net income due
to the recognition of the impairment of assets.
LICENSE RENEWAL. The Company's international and U.S. wireless licenses are
granted for specific periods of time. The most significant U.S. cellular and
paging licenses are granted for a period of ten years. Based upon its prior
experience with expired licenses and upon FCC rules establishing a presumption
in favor of licensees that have substantially complied with their regulatory
obligations during the license period, the Company believes that each of its
U.S. licenses will be renewed as they expire. The terms of the licenses granted
to the Company's international ventures and conditions for license renewal vary
from country to country. In some countries, there is no specified mechanism for
license renewal and accordingly it is not certain what criteria will be used by
the governments of those countries to determine whether the licenses should be
renewed. There can be no assurance that any U.S. or international license will
be renewed.
EARNINGS DILUTION. The Company expects to experience start-up losses
associated with its recent investment in Egypt and continues to experience start
up losses associated with its Korean, Romanian and Indian ventures. In addition,
the Company expects to continue to experience losses associated with PrimeCo for
the next several years. The Company expects to continue to pursue selected new
opportunities in international markets. The Company expects the foregoing to
have a dilutive effect on the Company's earnings. In addition, the Company has
granted certain restricted stock awards which provide early vesting if the
Company meets certain targets for the Company's common stock and operating cash
flow. If this happens, the Company would need to accelerate the recognition of
compensation expense, which could be material to the Company's results of
operations for the quarter in which the goal is achieved. See
"Business--Employees."
On April 6, 1998, the Company acquired the U.S. cellular and PCS interests
of MediaOne Group, as described under "Business--Recent Developments." The
Company expects earnings per share dilution from the acquisition to reach
approximately $0.40 per share in the first full year following the transaction
and to decline thereafter. This dilution represents the net amount of
amortization of acquisition intangibles, incremental interest expense, preferred
dividends and common shares issued, as partially offset by incremental earnings.
ANTITRUST PROCEEDINGS. The Company believes that its cellular and paging
pricing and marketing practices were and are in compliance with antitrust laws.
However, the Company was and is a defendant in certain class action complaints
and complaints filed by individual agents with respect to its Los Angeles, San
Francisco and San Diego cellular operations which allege that the Company
conspired to fix retail and wholesale cellular prices. The Company has reached
settlements in each of the class action proceedings which in the aggregate will
not have a material adverse effect on the Company's financial condition or
results of operations. No assurance can be given, however, that any disposition
of the remaining proceedings, if adverse to the Company, might not have a
material adverse effect on the Company's results of operations in the year of
such disposition.
IMPLICATIONS OF LICENSEE OWNERSHIP STRUCTURE. The Company holds most of its
U.S. cellular properties and PCS properties through partnership interests, a
number of which are controlling interests. In addition, except for its interests
in Europolitan Holdings AB ("Europolitan"), the Company's cellular system in
Sweden, and Telecel Communicacoes Pessoais, S.A. ("Telecel"), its cellular
system in Portugal, the Company's interests in international wireless licenses
are held through foreign entities in which the Company is a significant but not
controlling owner. Under the governing documents for certain of these
partnerships and corporations, certain key matters such as the approval of
business plans and decisions as
14
<PAGE>
to the timing and amount of cash distributions require the consent of the
Company's partners or may be approved without the consent of the Company.
Although the Company has not been materially constrained by the nature of its
wireless ownership interests from pursuing its corporate objectives, no
assurance can be given that it will not experience difficulty in this regard in
the future. The Company may enter into similar arrangements as it participates
in ventures formed to pursue additional opportunities.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company has investments
in operations outside the United States and proportionate operating cash flow
from these investments represents a substantial portion of total Company
proportionate operating cash flow. Investments in international operations are
subject to risks and uncertainties which may include taxation, nationalization,
inflation, currency fluctuations, increased regulation and approval
requirements. Certain Asian countries are currently experiencing severe economic
turmoil, resulting in depressed business conditions, volatility in local
currencies and ongoing financial market dislocations. In addition to the
negative impact that such economic turmoil could have on usage of wireless
services, it could also have a negative effect on the ability of the Company's
partners to provide their share of the ventures' funding requirements. There can
be no assurance that the foregoing risks and uncertainties or that present or
future economic turmoil or dislocations will not have a material adverse effect
on the Company's business, operating results and financial condition.
EXCHANGE RATE FLUCTUATIONS. Foreign currency exchange rates may be material
to the Company's results of operations. The Company evaluates the risk of
significant exchange rate volatility and its ability to hedge against such
volatility as part of its decision whether to pursue an international
opportunity. A significant weakening against the dollar of the currency of a
country where the Company generates revenues or earnings may adversely affect
the Company's results, while any weakening of the dollar against such currency
could have an adverse effect if the Company is obligated to make significant
foreign currency denominated capital investments in such country. The Company
attempts to mitigate the effect of certain foreign currency fluctuations through
the use of foreign currency contracts and foreign currency denominated credit
arrangements. There can be no assurance that the Company will be successful in
its foreign currency hedging efforts.
FRAUD. The cellular industry continues to be subject to fraudulent
activity. The Company is working to reduce the negative impacts of fraud in its
U.S. markets through the deployment of new technologies and other measures
including Fraud Detection Profiler, RF Fingerprinting, authentication, roamer
verification and precision roaming. The cost of fraud, including the cost of
developing and deploying anti-fraud technologies, will have an impact on the
Company's operating results for the foreseeable future.
THE YEAR 2000 ISSUE. Many of the Company's systems are affected by the year
2000 problem, which refers to the inability of information technology to process
dates beyond December 31, 1999. The Company has implemented a comprehensive plan
to address the year 2000 problem in its mission critical systems. Mission
critical systems are those whose failure poses a risk of disruption to the
Company's ability to provide wireless services, to collect revenues, to meet
safety standards or to comply with legal requirements. The Company's plan
includes (i) the complete inventory of all mission critical systems employed in
the Company's consolidated markets and the identification of the hardware and
software affected by the year 2000 problem; (ii) modification of the affected
systems; and (iii) testing of the modified systems, including testing of systems
on an integrated basis. The Company is using both internal and external sources
to implement its plan.
Much of the Company's information technology, including technology
associated with its mission critical systems, is purchased from third parties.
The Company is dependent on those third parties to assess the impact of the year
2000 problem on the technology they have supplied and to take any necessary
corrective action. The Company is monitoring the progress of these third parties
and selectively conducting tests to determine whether they have accurately
assessed the problem and taken corrective action.
15
<PAGE>
Based on its current assessments and its remediation plan, which are based
in part upon certain representations of third parties, the Company expects that
it will not experience a disruption of its operations as a result of the change
to the new millennium. However, there can be no assurance that the third parties
who have supplied information technology used in the Company's mission critical
systems will be successful in taking corrective action in a timely manner. The
Company is developing contingency plans with respect to certain key information
technology used in its mission critical systems, although there can be no
assurance that these contingency plans will successfully avoid service
disruption. In addition, the Company's systems are interconnected with public
switch telecommunications networks ("PSTNs") and the networks of other service
providers who are responsible for addressing the year 2000 problem in their own
systems. The ability of the Company's systems to operate is dependent upon such
PSTNs and other networks being year 2000 compliant, as to which there can be no
assurance.
If the Company is unsuccessful in its efforts to correct or cause to be
corrected its mission critical systems or if third parties with whom the
Company's systems interconnect do not correct their systems, the Company could
experience significant disruption to its operations, including disruption of its
ability to provide certain wireless services and to correctly bill customers
resulting in potential revenue loss and increased costs that could have a
material adverse effect on the Company's financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Basis of Presentation--Year 2000 Compliance."
IMPACT OF THE PIES ON THE MARKET FOR THE COMMON STOCK. The price of the
shares of Common Stock could become more volatile and could be depressed by
investors' anticipation of the potential distribution into the market of
additional shares of Common Stock as a result of the delivery of shares of
Common Stock by MediaOne Group at the maturity of the PIES, by possible sales of
shares of Common Stock by investors who view the PIES as a more attractive means
of equity participation in the Company and by hedging or arbitrage trading
activity that may develop involving the PIES and the Common Stock. The price of
the Common Stock could also be impacted by investors' anticipation of the
distribution into the market by MediaOne Group of additional shares of Common
Stock otherwise than in connection with the PIES. MediaOne Group currently owns
a total of 59,313,621 shares of Common Stock (constituting approximately 10.3%
of the outstanding Common Stock), up to 26 million shares of which (29,900,000
shares if the Underwriters' over-allotment option is exercised in full) may be
delivered at the maturity of the PIES.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the PIES or
delivery thereunder of the shares of Common Stock by MediaOne Group.
16
<PAGE>
CAPITALIZATION TABLE
The following table sets forth the capitalization of the Company as of June
30, 1998. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and related notes thereto included in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998,
incorporated herein by reference, and in its Annual Report on Form 10-K for the
year ended December 31, 1997, incorporated herein by reference.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------
(DOLLARS IN
MILLIONS)
<S> <C>
Current portion of long-term debt............................................................ $ 49
-------
Long-term debt:
Bank debt and commercial paper............................................................. 949
Notes due 2001 to 2008..................................................................... 2,000
Capital lease obligations.................................................................. 9
-------
Long-term debt, excluding current portion................................................ 2,958
-------
Minority interests in consolidated wireless systems.......................................... 372
-------
Redeemable preferred stocks:
5.143% Class D Cumulative Preferred Stock, Series 1998..................................... 786
5.143% Class E Cumulative Preferred Stock, Series 1998..................................... 787
-------
Total redeemable preferred stocks........................................................ 1,573
-------
Stockholders' equity:
Preferred stock and additional paid-in capital:
6.0% Class B Mandatorily Convertible Preferred Stock, Series 1996........................ 500
4.25% Class C Convertible Preferred Stock, Series 1996................................... 541
Common stock and additional paid-in capital................................................ 7,302
Retained earnings.......................................................................... 715
Other comprehensive income................................................................. 1
Deferred compensation...................................................................... (36)
-------
Total stockholders' equity............................................................... 9,023
-------
Total capitalization................................................................... $ 13,975
-------
-------
</TABLE>
17
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is listed on the NYSE and is traded under the symbol "ATI."
The following table sets forth the high and low sales prices for the Common
Stock, as reported on the NYSE Composite Tape:
<TABLE>
<CAPTION>
SALES PRICE
--------------------
1996 HIGH LOW
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter.................................................................................... 33 5/8 25 5/8
Second Quarter................................................................................... 33 1/8 27 5/8
Third Quarter.................................................................................... 29 5/8 25
Fourth Quarter................................................................................... 28 3/8 24 7/8
</TABLE>
<TABLE>
<CAPTION>
1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter.................................................................................... 29 1/2 22 7/8
Second Quarter................................................................................... 29 1/4 22
Third Quarter.................................................................................... 38 1/8 26 15/16
Fourth Quarter................................................................................... 42 33
</TABLE>
<TABLE>
<CAPTION>
1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter.................................................................................... 50 7/8 40 5/16
Second Quarter................................................................................... 58 15/16 46 1/4
Third Quarter through July 30, 1998.............................................................. 65 5/8 57 3/16
</TABLE>
On July 30, 1998, the last reported sale price of the Common Stock on the
NYSE Composite Tape was 58 1/8 per share. As of June 30, 1998, there were
532,342 holders of record of Common Stock and 573,537,166 shares of Common Stock
outstanding.
Dividends are not currently paid on the Common Stock. The declaration of
dividends on the Common Stock is at the discretion of the Board of Directors of
the Company. The declaration and payment of future dividends and the amount
thereof will be dependent upon the Company's results of operations, financial
condition, cash requirements for its business, future prospects and other
factors deemed relevant by the Board of Directors.
18
<PAGE>
BUSINESS
GENERAL
AirTouch Communications, Inc. is the largest wireless telecommunication
services company in the world based on the 31.5 million total wireless customers
served by the Company and its ventures as of June 30, 1998. Through its
operations in the United States, Europe, Asia and North Africa, the Company
provides a full range of wireless telecommunications services, including
cellular, PCS and paging, and in the future will also provide global satellite
communications.
The Company's principal objective is to be the premier provider of wireless
telecommunication services worldwide. To achieve its objective the Company
focuses on profitable growth of its existing operations; pursues new wireless
licenses in selected countries and ownership increases in existing markets; and
pursues other value-creating opportunities around the world.
The cellular and PCS licenses of the Company and its ventures cover more
than 719 million people around the world in 13 countries on four continents.
Based on its ownership percentages, the Company's cellular and PCS interests
represented approximately 233.8 million POPs and, together with paging
customers, 15.1 million proportionate customers as of June 30, 1998.
Driven by growing worldwide demand for wireless service and acquisitions and
new license awards that have more than doubled AirTouch's worldwide presence
from 100 million POPs in 1994 to 233 million POPs at June 30, 1998, the Company
has experienced significant growth in the number of cellular, PCS and paging
customers that it serves, as demonstrated by the following chart:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
END OF PERIOD
<S> <C> <C> <C> <C> <C> <C>
Proportionate Subscribers (000's)
Paging US Cellular/PCS International Totals
1991 669 558 1,227
1992 899 744 35 1,678
1993 1,269 1,046 160 2,475
1994 1,647 1,560 388 3,595
1995 2,474 2,262 797 5,533
1996 2,895 3,403 1,734 8,032
1997 3,188 4,401 3,135 10,724
1997* 3,188 6,867 3,135 13,190*
6/30/98 3,317 7,572 4,162 15,051
Year over
year growth 29% 37% 48% 45% 54% 45%
* Restated on a pro forma basis
as if the Merger had closed on 1/1/97.
1997 growth rate shown is for AirTouch as
reported.
<CAPTION>
<S> <C> <C> <C>
Year over
year growth 34% N/A 35%
</TABLE>
RECENT DEVELOPMENTS
On April 6, 1998, the Company and MediaOne Group completed the merger of
MediaOne Group's U.S. cellular and PCS interests into the Company. In the
Merger, the Company acquired NewVector, which held MediaOne Group's U.S.
cellular business, and MediaOne Group's 25% interest in PrimeCo. As a result of
the Merger, the Company added 2.5 million proportionate U.S. wireless customers
and 35 million proportionate POPs.
19
<PAGE>
The total value of the Merger was approximately $5.9 billion. The Company
issued approximately 59.4 million shares of Common Stock valued at $2.9 billion
based on the April 3, 1998 closing price of $49 per share and $1.65 billion of
preferred stock and assumed $1.35 billion of debt.
The Company expects earnings per share dilution from the Merger to reach
$0.40 per share in 1999 and to decline thereafter. This dilution represents the
net amount of amortization of acquisition intangibles, incremental interest
expense, preferred dividends and common shares issued, as partially offset with
incremental earnings. The Company plans to pursue cost savings to partially
mitigate this dilution, there being no assurance that such plans will be
successful.
OVERVIEW OF WIRELESS INDUSTRY
Wireless telecommunication services are fundamentally changing the way
people live and work. Driven by customer preference for the convenience of
mobility as well as regulatory liberalization, technological improvements, and
lower priced service plans, the number of global wireless customers has reached
more than 200 million. Dataquest, a research and analysis company that follows
the wireless industry, expects that number to triple by 2001.
Over the last five years, the number of cellular and PCS subscribers has
increased tenfold. Since its introduction in 1983 in the United States, wireless
telecommunication has grown dramatically. According to Dataquest, as of June 30,
1998, there were approximately 61 million cellular and PCS subscribers in the
United States--representing a penetration rate of approximately 23%. In
comparison, Sweden and Japan had penetration rates of approximately 38.1% and
30.6%, respectively, at March 31, 1998 and, like the United States, are expected
to experience continued growth. The following table shows industry-wide
penetration rates and subscriber growth figures in the 13 countries where
AirTouch and its ventures offer wireless telecommunication services:
ANNUAL HISTORICAL PENETRATION AND SUBSCRIBER GROWTH BY COUNTRY
<TABLE>
<CAPTION>
% GROWTH IN
SUBSCRIBERS OVER
PENETRATION PRIOR YEAR
------------------------------- --------------------
COUNTRY 1995 1996 1997 1996 1997
- ------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
UNITED STATES 13.4% 16.8% 21.9% 27.6% 30.7%
GERMANY 4.7% 6.8% 10.1% 46.4% 49.2%
ITALY 6.8% 11.2% 19.9% 63.6% 78.6%
SPAIN 2.3% 7.6% 11.0% 226.9% 44.7%
PORTUGAL 3.1% 6.7% 15.2% 107.0% 127.2%
BELGIUM 2.4% 4.7% 9.6% 103.4% 103.9%
SWEDEN 22.8% 28.3% 36.0% 23.9% 27.4%
POLAND 0.2% 0.6% 2.3% 158.5% 324.5%
ROMANIA 0.05% 0.07% 0.56% 36.8% 712.5%
JAPAN 6.4% 18.4% 28.5% 187.0% 54.7%
SOUTH KOREA 3.4% 7.0% 14.4% 104.8% 105.0%
INDIA 0.01% 0.03% 0.09% 321.3% 246.5%
EGYPT 0.02% 0.08% 0.08% 258.3% -2.3%
</TABLE>
- ------------------------------
Source: Kagan World Media, Ltd. INTERNATIONAL CELLULAR, January 31, 1996 and
February 26, 1998. Penetration as of year end.
As wireless telecommunications continue to evolve, service providers will
measure success not just in increased customers but in increased usage. As the
quality and cost of wireless telecommunication continue to converge with
wireline, wireless is expected to earn a greater share of overall
telecommunications usage. By one estimate, in 1996 wireline usage worldwide
constituted 98% of the total telecommunication usage, whereas wireless accounted
for only 2%. By 2007, it is estimated that 25% of telecommunication usage will
occur on wireless networks (STRATEGY ANALYTICS, January 1998).
20
<PAGE>
OVERVIEW OF U.S. CELLULAR AND PCS OPERATIONS
The Company is the largest provider of cellular and PCS services in the
United States based on the 8.9 million total customers served by the Company and
its ventures as of June 30, 1998. The Company's U.S. cellular and PCS interests
represented approximately 95.2 million POPs and over 7.6 million proportionate
customers as of June 30, 1998, and include some of the most attractive cellular
markets based upon population size and demographic characteristics.
The Company controls or shares control over cellular and PCS systems
operating in 22 of the 30 largest metropolitan statistical areas in the United
States.
<TABLE>
<CAPTION>
CELLULAR PROPERTIES
- -------------------------------------------------------------------------------------------------------------------------
MSA(1) POPULATION(2) PERCENT POPS
RANK CITY STATE (000) OWNERSHIP (000) BRAND NAME
- ------------- ------------------------------ ------------- ------------- ----------- --------- --------------------
<C> <S> <C> <C> <C> <C> <C>
2 Los Angeles CA 14,978 82.30% 12,327 AirTouch Cellular
5 Detroit-Ann Arbor MI 4,596 100.00% 4,596 AirTouch Cellular
10 San Francisco-Oakland(3) CA 3,925 47.00% 1,845 CellularOne
12 Atlanta GA 3,235 100.00% 3,235 AirTouch Cellular
13 San Diego CA 2,705 100.00% 2,705 AirTouch Cellular
14 Minneapolis-St. Paul(4) MN-WI 2,649 100.00% 2,649 AirTouch Cellular
15 Phoneix(4) AZ 2,519 100.00% 2,519 AirTouch Cellular
18 Seattle-Everett(4) WA 2,165 99.13% 2,146 AirTouch Cellular
19 Denver-Boulder(4) CO 2,162 100.00% 2,162 AirTouch Cellular
23 Cleveland OH 1,835 100.00% 1,835 AirTouch Cellular
24 Portland(4) OR-WA 1,642 100.00% 1,642 AirTouch Cellular
25 San Jose CA 1,600 47.00% 752 CellularOne
26 Kansas City MO-KS 1,539 50.00% 770 CellularOne
27 Cincinnati OH-KY-IN 1,519 100.00% 1,519 AirTouch Cellular
28 Sacramento CA 1,503 49.88% 750 AirTouch Cellular
Other 35,942 24,510
------ ---------
TOTAL UNITED STATES CELLULAR 84,514 65,962
------ ---------
</TABLE>
<TABLE>
<CAPTION>
PCS PROPERTIES(6)
- -----------------------------------------------------------------------------------------------------------------
MTA(5) POPULATION(5) PERCENT POPS
RANK MARKET (000) OWNERSHIP(7) (000) BRAND NAME
- ------------- -------------------- ------------- ------------- ------------ ------------
<C> <S> <C> <C> <C> <C>
3 Chicago 12,624 50.00% 6,312 PrimeCo
7 Dallas(8) 10,697 40.00% 4,279 PrimeCo
13 Tampa 6,064 50.00% 3,032 PrimeCo
14 Houston(8) 5,832 40.00% 2,333 PrimeCo
15 Miami 5,792 50.00% 2,896 PrimeCo
17 New Orleans 5,235 50.00% 2,618 PrimeCo
20 Milwaukee 4,782 50.00% 2,391 PrimeCo
23 Richmond 4,115 50.00% 2,057 PrimeCo
33 San Antonio(8) 3,518 40.00% 1,407 PrimeCo
37 Jacksonville 2,531 50.00% 1,265 PrimeCo
47 Honolulu 1,210 50.00% 605 PrimeCo
------------- ------------
TOTAL UNITED STATES PCS 62,400 29,195
------------- ------------
TOTAL UNITED STATES WIRELESS 146,914 95,157
------------- ------------
------------- ------------
</TABLE>
- ------------------------------
(1) MSA refers to metropolitan statistical area. There are 306 MSAs in the
United States, as determined by Rand McNally and adopted by the FCC to
establish coverage areas for cellular networks.
(2) MSA 1996 population figures and rank according to 1997 Paul Kagan
Associates, Inc. CELLULAR TELEPHONE ATLAS.
(3) Ownership interest held through CMT Partners, the Company's partnership with
AT&T Wireless.
(4) Acquired in the Merger.
(5) There are 51 MTAs, as determined by Rand McNally and adopted by the FCC to
establish PCS service areas.
(6) MTA 1996 population figures and rank according to Paul Kagan Associates,
Inc. 1996 CELLULAR/PCS POP BOOK.
(7) The Company's percent ownership increased from 25% to 50% as a result of the
Merger.
(8) PrimeCo's ownership percentage of Texas MTAs reflects partnership with Texas
Utilities.
21
<PAGE>
U.S. CELLULAR OPERATIONS
MARKETING
The Company markets its cellular services under the AirTouch Cellular name,
with the exception of its systems in the San Francisco Bay Area, Kansas and
Missouri, which market service under the CellularOne-Registered Trademark- brand
name. The Company sells its service directly to customers through its own sales
force, telemarketing centers and the Internet and indirectly through
arrangements with independent agents such as consumer electronic stores,
specialized cellular stores, automobile dealers and department and other retail
stores. In certain markets, the Company's cellular service is sold through
resellers who, pursuant to FCC requirements, are allowed to purchase blocks of
cellular telephone numbers and to access cellular services at wholesale rates
for resale to the public. The Company's costs for attracting new customers
(referred to as "selling costs") primarily consist of advertising and marketing
costs, costs of direct distribution, including costs related to the Company's
stores, sales commissions paid to independent agents or to its own sales force
and handset subsidies. The Company has been taking steps to align selling costs
with revenues by emphasizing residual or account management payments to agents
over upfront commissions and by increasing the proportion of sales through
Company-controlled direct distribution channels, which have historically been
less costly. As a result of these efforts, average selling costs per new
customer for 1997 were about $350, down 13% over 1996.
PRODUCTS AND SERVICES
The Company offers analog service in all of its markets and offers digital
service in most markets. In most markets the Company offers custom calling
services such as voice mail, call forwarding, call waiting, three way calling,
no-answer and busy transfer. The Company also offers a variety of other enhanced
features, including display messaging, which allows a cellular phone to receive
and store voice mail messages, short alphanumeric messages and pages even if the
handset is in use or switched off, and enhanced directory assistance, which
enables callers to be connected to the party whose number was requested without
hanging up and redialing. In many markets, the Company has introduced a pre-paid
cellular calling program with no monthly service charge, no contract commitment,
and no billings. The Company maintains a customer service department in each of
its managed cellular markets for billing and service inquiries. The majority of
the Company's customers elect to receive long-distance service from the Company,
which it offers as a reseller. Alternatively, customers can select a
long-distance provider and be billed directly by that carrier.
The Company has a variety of pricing plans that differ from market to
market. Certain pricing plans feature a fixed monthly access fee and per-minute
charges while others offer a fixed monthly price for a bundle of minutes with
per-minute charges for excess minutes. Most of the Company's new customers
select pricing plans that require them to sign a service contract for one or
more years. The Company believes that one of its competitive strengths lies in
its ability to offer customers choice through service and handset pricing that
appeal to different market segments. Customers seeking safety and convenience
are attracted to the low monthly access fees and inexpensive handsets generally
available with analog service. To meet the needs of higher volume users, the
Company offers digital service with rate plans that include higher monthly
access fees and bundles of lower-priced minutes. The Company believes that its
pricing plans are generally competitive with those being offered by other
providers in the markets in which they are applicable.
NETWORK
The Company offers analog service in all of its markets and offers digital
service in most markets. The Company's digital service is based on Code Division
Multiple Access ("CDMA"), except in the San Francisco Bay Area, Kansas and
Missouri, where it is based on Time Division Multiple Access ("TDMA"). The
Company's digital networks cover about 70% of the Company's POPs in the United
States and in the
22
<PAGE>
second quarter approximately 30% of the Company's peak minutes were carried on
its digital networks. Because the Company offers dual-mode cellular telephones
capable of sending and receiving both analog and certain digital transmissions,
the Company's analog and digital cellular customers can roam to virtually any
cellular market in the United States.
The Company believes that digital cellular technology offers certain
advantages over analog technology, including substantially increased capacity,
greater call privacy, superior voice quality, enhanced services, reduced
susceptibility to fraud and the opportunity to provide improved data
transmissions. However, the Company expects that analog and digital technologies
will continue to coexist for the foreseeable future due to continued demand for
analog service and the fact that analog networks provide the only common roaming
platform currently available throughout the United States. The Company expects
the majority of its capital expenditures in the future to be spent on its
digital networks.
COST STRUCTURE
The Company's cash costs consist primarily of costs for attracting new
customers, as described above under "--Marketing," customer service and billing
costs, fees paid to the local telephone service company for interconnection of
cellular networks with the wireline telephone network, and general and
administrative costs. The Company attempts to decrease its cash costs per
customer at a rate equal to declines in average revenue per customer. The
Company has taken the following steps to decrease cash costs:
- increased the scale of its operations through acquisitions, allowing the
Company to consolidate common functions and spread costs over a larger
customer base;
- negotiated handset and infrastructure contracts jointly with partners,
resulting in lower prices;
- executed new interconnection agreements with the major local carriers in
its markets, resulting in significant savings on interconnect costs; and
- managed churn and associated selling costs by taking proactive steps to
retain customers, including changing customer rate plans and offering free
handsets.
As a result of these and other cost saving efforts, the Company reduced its
average monthly cash cost per customer to $29 in 1997, a 19% decline from 1996.
In addition, ongoing investments by the Company in its networks are
necessary in order to increase coverage and capacity. These expenditures are
reflected as depreciation expense. In the future, the Company believes the
majority of such expenditures will be directed towards increasing digital
coverage and capacity.
JOINT VENTURES
CMT PARTNERS. In September 1993, the Company and AT&T Wireless (at the
time, McCaw Cellular Communications Inc.) formed CMT Partners, an equally owned
partnership that holds interests in cellular systems operating in San Francisco,
San Jose, Dallas/Ft. Worth, Kansas City and certain adjacent suburban areas. In
a related transaction, the Company purchased McCaw's Wichita and Topeka systems.
CMT Partners is governed by a four-person committee consisting of two members
from each company. CMT Partners has a 15 year term, ending in 2008, which may be
extended by either partner or shortened under certain circumstances. Upon
dissolution of CMT Partners its assets will be sold unless either the Company or
AT&T Wireless elects to have the assets distributed in kind to the partners.
TOMCOM. The Company and Bell Atlantic are partners in TOMCOM, L.P., a
partnership formed to develop technical and service standards for the partners'
wireless properties, pursue national marketing strategies, develop information
technology, create a national distribution strategy and implement joint
23
<PAGE>
purchasing arrangements. TOMCOM is governed by a board composed of three members
from AirTouch and three members from Bell Atlantic.
U.S. PCS OPERATIONS
The Company and Bell Atlantic Mobile are equal partners in PrimeCo Personal
Communications, L.P., which owns eleven 30 MHz PCS licenses covering
approximately 62 million POPs in the Chicago, Dallas, Tampa, Houston, Miami, New
Orleans, Milwaukee, Richmond, San Antonio, Jacksonville and Honolulu markets.
The Company's interest in PrimeCo increased from 25% to 50% in connection with
the Merger. The PrimeCo markets complement the existing U.S. cellular franchises
of the partners. PrimeCo began providing service in November 1996 and as of June
30, 1998, PrimeCo had over 598,000 customers and provided service in more than
20 major cities. The Company expects to continue to make significant capital
contributions to PrimeCo and to experience substantial operating losses
associated with the start-up phase of the PCS business, which is expected to
last several years.
PrimeCo's success as a competitor depends on the same factors as that of the
Company's United States cellular operations. PrimeCo's operations are structured
in a manner similar to those of the Company's United States cellular businesses
with respect to marketing, products and services and cost structure. PrimeCo
initiated service in late 1996 and has not yet achieved the critical size to
enable it to achieve all of the economies of scale that the Company's cellular
business currently enjoys. PrimeCo, a 100% CDMA-digital network, has recently
introduced dual-mode handsets that enable customers to roam on a nationwide
basis on analog cellular networks.
Either the Company or Bell Atlantic may cause PrimeCo to be dissolved on
October 20, 2001, and if dissolution occurs the PrimeCo properties will be
allocated between them according to agreed upon criteria. Bell Atlantic is
subject to certain standstill restrictions with respect to the Company through
October 20, 2001, unless such restrictions are earlier terminated or suspended.
24
<PAGE>
INTERNATIONAL CELLULAR OPERATIONS
The Company has ownership interests, with board representation and
significant operating influence, in diverse markets throughout the world. The
Company's international cellular interests represented 138.6 million POPs and
4.2 million proportionate customers as of June 30, 1998.
OVERVIEW OF INTERNATIONAL CELLULAR VENTURES
(ALL INFORMATION AS OF JUNE 30, 1998 UNLESS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
Market Market Service Total Increase Total
Population Penetra- Initiation Venture Over AirTouch Licensees in
(millions)(1) tion(2) Date Customers 6/30/97 Interest(3) Market
------------- --------- ------------- ---------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
EUROPEAN OPERATIONS:
Germany/D2 PRIVAT............. 81.9 11.3% 6/92 >4,600,000 ~64% 34.8% 4
Italy/OMNITEL................. 57.5 22.5% 10/95 3,900,000 211% 15.5%(4) 3
Spain/AIRTEL.................. 39.4 12.1% 10/95 1,508,000 73% 21.7% 3
Portugal/TELECEL.............. 9.9 17.4% 10/92 981,000 115% 50.9% 3
Belgium/PROXIMUS.............. 10.1 11.5% 1/94(5) >900,000 74% 25.0% 2
Sweden/EUROPOLITAN............ 8.8 38.1% 9/92(5) 528,000 62% 51.1% 4
Poland/PLUS GSM............... 38.5 2.6% 10/96 ~450,000 ~136% 19.3% 3
Romania/CONNEX................ 23.2 1.4% 4/97 ~195,000 786% 10.0%(6) 3
ASIAN AND OTHER OPERATIONS:
Japan: 30.6%
DIGITAL PHONE
COMPANIES(7).............. 77.2 4/94-7/94 2,672,000 28% 13.0- 7
15.0%
DIGITAL TU-KA(8)............ 46.3 1/96-2/97 1,905,000 50% 4.5% 7
South Korea/SHINSEGI TELECOMM
LTD.......................... 45.6 18.5% 4/96 1,537,000 139% 10.7% 5
India 0.1%
Madhya Pradesh/CCIL......... 72.7 2/97 * 49.0% 2
Madras/RPG CELLCOM
LIMITED................... 6.7 9/95 * 20.0% 2
----------
29,000 71%
Egypt/MISRFONE(9)............. 54.5 0.2% (n/a9) n/a (9) n/a(9) 30.0% 2
--- ----------
Total..................... 572.3 ~19,205,000
</TABLE>
- ------------------------------
* Not disclosed
(1) Population estimates as of December 31, 1997 from Kagan World Media, Ltd.
INTERNATIONAL CELLULAR, May 29, 1998.
(2) Penetration estimates as of March 31, 1998 from Kagan World Media, Ltd.
INTERNATIONAL CELLULAR, May 29, 1998. Market penetration reflects
penetration by the cellular industry as a whole and is not specific to the
Company's ventures.
(3) Exclusive of any options, warrants or other rights to increase ownership.
(4) Indirect ownership interest through Pronto-Italia S.p.A. The Company holds
an option to acquire an additional 6.2% indirect interest in Omnitel-Pronto
Italia, which, if exercised, would bring its interest to 21.7%.
(5) The Company acquired its interest after commercial launch. In Belgium,
reflects launch of digital system only; analog system was launched in
January 1987.
(6) The Company holds an option to purchase an additional 10%.
(7) Includes the Tokyo, Kansai and Central Japan Digital Phone Companies.
(8) Includes Kyushu, Chugoku, Tohoku, Hokkaido, Hokuriku and Shikoku regions.
Customers are not included in proportionate customer numbers because the
Company accounts for these investments on a cost basis.
(9) License issued on May 5, 1998. The Company anticipates launch of service in
the second half of 1999.
25
<PAGE>
OPERATIONS
The Company's international ventures rely on the same core competencies for
success as its United States business: high quality networks with extensive
roaming capabilities, well-established direct and indirect distribution
channels, and innovative products and services that appeal to various customer
segments. A number of the Company's international ventures are less mature than
its United States cellular ventures and accordingly have not yet achieved the
critical size that will provide economies of scale from cost reductions and
operating efficiencies. However, because the markets are generally newer and
less penetrated, they have on average over the past year experienced stronger
customer growth than in the United States.
In addition to being driven by strong overall demand for wireless service,
the growth in wireless usage in the Company's international markets is
attributable to two factors not present in the United States. The first is known
as calling party pays. In most countries, calls received by wireless customers
are paid for by the calling party, thereby encouraging customers to distribute
their mobile phone numbers widely. The second factor is the popularity of
pre-paid pricing plans, which allow customers to have wireless service without
minimum monthly access or service charges. These two factors have enabled a
large segment of the population who would otherwise be unable to afford wireless
service to more fully use the service. Pre-paid customers accounted for about
half of the Company's new international customers in the first six months of
1998 and about 25% of its international customer base as of June 30, 1998.
Due to strong customer growth and usage, 12 of the Company's 16
international ventures currently generate positive operating cash flow. To date,
the Company has received $279 million of distributions from its German venture,
$12 million from its Swedish venture and $17 million from its Portuguese
venture.
OWNERSHIP RIGHTS AND OBLIGATIONS
The ownership of the Company's international cellular ventures typically
includes majority local ownership at the time of the award of a license,
necessitated as a result of political, legal, and economic factors. This
frequently changes over time. In structuring its international investments, the
Company attempts to obtain operating influence through board representation, the
right to appoint certain key members of management and consent rights for
significant matters such as capital contributions, incurrence of recourse debt
and fundamental corporate transactions. In addition, the Company tries to ensure
its ability to maintain a position of influence in its ventures by obtaining
rights of first refusal on future sales by other partners and issuances of new
equity by the venture. The particular governance rights of the Company vary from
venture to venture and are often dependent upon the size of the Company's
investment relative to other investors. The Company currently has the majority
interest in its Portuguese and Swedish ventures, the largest ownership interest
in its Spanish venture, the second largest ownership interest in three of its
Japanese ventures, the third largest ownership interest in its Korean and
Italian ventures. It also shares the largest ownership interest in its Egyptian
venture. In Germany, the Company is the only shareholder other than the majority
shareholder, Mannesmann A.G., and in Belgium, the Company is the only other
partner in a joint venture with Belgacom.
TECHNOLOGICAL EXPERTISE
LEAD TECHNOLOGICAL PARTNER. The Company usually plays the lead role in the
design, construction, operation and maintenance of the cellular networks for the
ventures in which it has ownership interests. For example, the Company has taken
the technical lead in the development of the digital systems in Belgium,
Germany, India (Madras and Madhya Pradesh), Italy, Poland, Portugal, Romania,
South Korea and Spain, and was integrally involved in the design and
construction of three of the systems in Japan. In all of those markets, the
Company has appointed the chief technical officer, who is responsible for
network construction and technical operations.
26
<PAGE>
GSM. The Company's cellular systems in Europe and India conform to the GSM
digital cellular standard. Developed by a standards body within the European
Telecommunications Standards Institute with substantial input from the Company's
engineers, the GSM standard is a wide-band TDMA standard substantially different
from United States TDMA technology and has been adopted in more than 110
countries worldwide, including all European union member countries Australia,
New Zealand, Singapore, Hong Kong and South Africa. The Company's German
venture, Mannesmann Mobilfunk GmbH, was the first GSM system to offer commercial
service. In 1996 and 1997, one of the Company's employees held the position of
Chairman of the GSM MOU Association, an organization with 256 members
representing 227 GSM networks that oversees GSM technical standards and promotes
the use and evolution of GSM throughout the world.
JAPAN DIGITAL CELLULAR STANDARD. The technology utilized by the Company's
Japanese ventures represents Japan's entry into second-generation cellular
communications. The Japan Digital Cellular standard uses a narrowband Japanese
TDMA standard that allows enhanced roaming and expanded supplementary services
potential. To provide service to customers away from their home regions, all of
the Company's Japanese ventures are implementing automatic roaming throughout
their combined coverage areas. Customers of any of the companies will be able to
initiate and receive calls anywhere within the combined coverage area.
KOREAN CDMA. The Company's cellular venture in South Korea employs a CDMA
technology standard developed by Samsung, Lucent and Hyundai under a license
from QUALCOMM, Inc.
NEW OPPORTUNITIES
The Company constantly evaluates opportunities to increase its ownership in
its existing international ventures, especially where contractual rights of
first refusal provide the Company with favorable opportunities. The Company also
plans to continue pursuing selected opportunities to acquire new interests in
wireless systems throughout the world. The Company believes that its proven
technical, operating and marketing expertise makes it a highly desired
participant in ventures formed to pursue new international opportunities and
that such expertise has been a significant factor in the success of the
subsequent license applications by its ventures.
The Company measures each international investment against a strict set of
criteria in determining whether the investment offers an opportunity for value
creation. These criteria include the country's demographic factors, the degree
of economic, political and regulatory stability, the quality of local partners
and the degree to which the Company would control or meaningfully participate in
management. Until recently, the Company's primary focus in pursuing licenses has
been Europe and Asia; however, the Company has increasingly been considering
opportunities in other parts of the world, as demonstrated by its recent
investment in Egypt.
The pursuit of new international wireless telecommunications opportunities
is expected to remain highly competitive and may introduce a greater degree of
political and currency risk as new opportunities are concentrated in developing
economies. The trend toward awarding new licenses on the basis of an auction
rather than on merit-based selection criteria may limit the Company's ability to
win new licenses, particularly if competing bidders place a higher value on the
license or have less stringent return requirements than the Company.
PAGING
The Company offers local, regional, statewide, and nationwide paging
services under the AirTouch Paging brand name in 32 states and the District of
Columbia. As of June 30, 1998, the Company had approximately 3.2 million paging
units in service in the United States. Based upon industry surveys, the Company
is among the largest providers of paging services in the United States and the
only large paging company in the United States to achieve and maintain positive
net income and free cash flow. The
27
<PAGE>
Company's growth strategy is to offer new services, to provide superior customer
service, to refine its distribution channels, and to expand into new geographic
markets through start-ups or acquisitions.
OTHER SERVICES
The Company believes that its focus on wireless services offers the best
opportunity for value creation. However, in light of the continuing evolution of
telecommunications technology and customer requirements, the Company
continuously evaluates the possibility of expanding its operations into lines of
business beyond its historical base of high mobility wireless services where
such expansion would enhance or complement existing wireless services. Some
areas of possible expansion could include: wireless local loop (the construction
and operation of dedicated wireless networks designed to compete directly with
or substitute for wireline networks); international long-distance service for
the Company's wireless subscribers; and international wireline long-distance
services that complement the Company's wireless properties. Any decision by the
Company to enter any of these lines of business will depend on the Company's
evaluation of its ability to create value by employing the assets or expertise
of its wireless operations, including networks and customer bases, as well as
the standalone attractiveness of the opportunity.
ARCOR
The Company owns a 3.37% indirect interest in Mannesmann Arcor K.G.
("Arcor"), Germany's second largest wireline telecommunications company. The
interest is owned through a consortium, led by Mannesmann A.G. (the
"Consortium"), that has a 74.9% interest in Arcor. Deutsche Bahn, the German
national railway company, holds the other 25.1% of Arcor. The Company has an
option to increase its 4.5% interest in the Consortium to 9% by 2000. The
Company and Mannesmann A.G. currently jointly own Mannesmann Mobilfunk GmbH
("MMO"), Germany's leading cellular operator, which operates under the name D2
Privat. MMO plans to resell Arcor long distance service beginning in 1998, and
Arcor has plans to resell MMO's cellular service.
GLOBALSTAR
The Company holds a 5.7% interest in Globalstar, L.P. ("Globalstar"), a
limited partnership led by Loral Space & Communications Corporation Ltd.
("Loral") and QUALCOMM, Inc. ("QUALCOMM") that will construct and operate a 48
satellite low earth orbit constellation utilizing CDMA technology designed to
offer wireless communications services in virtually every populated area of the
world. Commercial service is expected to begin in the third quarter of 1999. The
Company has the exclusive right to provide Globalstar services in the United
States, the Caribbean and eastern Asia (Indonesia, Japan, Malaysia) and, though
a partnership with Loral, in Canada and Mexico.
EMPLOYEES
The Company believes that setting goals for its employees and providing
incentives to reach those goals contribute to the Company's success. The
Company's current employee goals are to deliver world class performance by
ranking first in customer loyalty in every market, ranking in the top 10% of
companies in employee satisfaction, and achieving a "stretch" goal of an average
annual compound growth in proportionate operating cash flow of 25% from December
31, 1997 or reaching a $65 or higher stock price for 15 consecutive trading days
by the end of 2000. No assurance can be given that the Company will meet its
employee goals. At June 30, 1998, the Company and its wholly-owned subsidiaries
had approximately 12,333 employees. None of the Company's employees are
represented by a labor organization, although employees of certain international
subsidiaries and joint ventures are represented by labor or trade organizations.
Management considers its relations with the Company's employees to be good.
28
<PAGE>
REGULATION
UNITED STATES
GENERAL. The Company's U. S. cellular, paging and PCS licenses are issued
and regulated by the FCC. In addition, the Company's U.S. wireless operations
are subject to public utility regulation in the states in which service is
provided and to local regulations. States are preempted from regulating cellular
and paging rates and market entry but may regulate certain other terms and
conditions of service. The Company does not anticipate that state regulation
will interfere with efficient operation of its wireless businesses. The location
and construction of wireless service facilities are also often subject to state
or local zoning, land use and other local regulation and fees.
TELECOMMUNICATIONS ACT OF 1996 AND FCC IMPLEMENTATION. This Act, which
fundamentally changed the rules and regulations under which all U.S. providers
of telecommunications services operate, did not impose rate regulation on
wireless operators. Among other things, the Act modified certain requirements
for interconnection between local telephone companies and commercial mobile
radio service carriers and established requirements for wireline number
portability. The Company has executed cellular interconnection agreements with
the major local carriers in its managed markets with terms of between one and
three years. These agreements resulted in substantial savings on the Company's
interconnect costs in 1997. The FCC extended number portability requirements to
wireless carriers following the passage of the Act. Number portability is the
ability of customers to retain telephone numbers if they change landline or
wireless carriers. FCC rules require carriers such as the Company to provide
certain number portability services by December 31, 1998, and to complete local
number portability services by June 30, 1999. The Company and other wireless
industry groups have petitioned the FCC for a delay in the June 30, 1999,
implementation date. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PAGING MARKET AREA LICENSING. In February 1997, the FCC issued an order
significantly altering the manner in which paging licenses will be offered in
the future, changing from the "site" or transmitter by transmitter licenses
previously awarded to "market area" licenses which will be auctioned beginning
in late 1998. Previously awarded "site" licenses are not affected.
INTERNATIONAL
The Company's international cellular and paging operations provide services
pursuant to the terms of licenses granted by the telecommunications agency or
similar supervisory authority in the various countries. Such agencies typically
also promulgate and enforce regulations regarding the construction and operation
of network equipment. Other regulations commonly encountered in international
markets include legal restrictions on the percentage ownership of
telecommunications licensees by foreign entities such as the Company, and
transfer restrictions or governmental approval requirements regarding changes in
the ownership of such licensees.
29
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth selected historical data for the Company on a
GAAP basis. Except for capital expenditures and capital calls, the data for each
of the five years ended December 31, 1997 were derived from the Company's
audited financial statements. Data for the quarters ended March 31, 1998 and
March 31, 1997 were derived from the unaudited quarterly financial statements.
The following information should be read in conjunction with the audited
Consolidated Financial Statements, including the accompanying notes, of the
Company which are included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and in its Quarterly Report on Form 10-Q for the
period ended March 31, 1998 and which are incorporated herein by reference.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31 YEAR ENDED DECEMBER 31
-------------------- ------------------------------------------------
1998 1997 1997(a) 1996(a) 1995 1994(b)
--------- --------- ----------- ----------- --------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenues................................... $ 958 $ 836 $ 3,594 $ 2,252 $ 1,619 $ 1,247
Operating income..................................... $ 234 $ 208 $ 706 $ 281 $ 113 $ 73
Equity in net income of unconsolidated wireless
systems............................................ $ 77 $ 8 $ 200 $ 133 $ 152 $ 110
Interest:
Expense............................................ $ (19) $ (26) $ (90) $ (52) $ (13) $ (10)
Income............................................. $ 6 $ 5 $ 18 $ 14 $ 35 $ 55
Income from operations(c)............................ $ 167 $ 77 $ 448 $ 199 $ 132 $ 98
Preferred dividends.................................. $ 14 $ 13 $ 54 $ 20 $ -- $ --
Net income applicable to common stockholders......... $ 153 $ 64 $ 394 $ 179 $ 132 $ 98
Per share data:
Income from operations(c)
Basic and diluted................................ $ 0.33 $ 0.15 $ 0.89 $ 0.40 $ 0.27 $ 0.20
Net income applicable to common stockholders
Basic and diluted................................ $ 0.30 $ 0.13 $ 0.78 $ 0.36 $ 0.27 $ 0.20
<CAPTION>
1993(b)
-----------
<S> <C>
INCOME STATEMENT DATA
Operating revenues................................... $ 1,058
Operating income..................................... $ 129
Equity in net income of unconsolidated wireless
systems............................................ $ 32
Interest:
Expense............................................ $ (22)
Income............................................. $ 12
Income from operations(c)............................ $ 41
Preferred dividends.................................. $ --
Net income applicable to common stockholders......... $ 35
Per share data:
Income from operations(c)
Basic and diluted................................ $ 0.09
Net income applicable to common stockholders
Basic and diluted................................ $ 0.08
</TABLE>
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
-------------------- ------------------------------------------------
1998 1997 1997(a) 1996(a) 1995 1994(b)
--------- --------- ----------- ----------- --------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Investments in unconsolidated wireless systems..... $ 2,382 $ 1,888 $ 2,068 $ 1,992 $ 3,076 $ 1,698
Intangible assets, net............................. $ 3,279 $ 3,358 $ 3,297 $ 3,409 $ 606 $ 471
Total assets....................................... $ 9,401 $ 8,486 $ 8,970 $ 8,524 $ 5,648 $ 4,488
Long-term debt, including current portion.......... $ 1,534 $ 1,622 $ 1,419 $ 1,669 $ 906 $ 130
Total stockholders' equity......................... $ 5,918 $ 5,114 $ 5,529 $ 5,062 $ 3,751 $ 3,459
OTHER DATA
Working capital (deficit).......................... $ 30 $ (44) $ (254) $ (120) $ 19 $ 736
Capital expenditures and capital calls, excluding
acquisitions(d).................................. $ 265 $ 164 $ 1,023 $ 890 $ 1,015 $ 494
<CAPTION>
1993(b)
-----------
<S> <C>
BALANCE SHEET DATA
Investments in unconsolidated wireless systems..... $ 1,155
Intangible assets, net............................. $ 413
Total assets....................................... $ 4,077
Long-term debt, including current portion.......... $ 79
Total stockholders' equity......................... $ 3,337
OTHER DATA
Working capital (deficit).......................... $ 1,347
Capital expenditures and capital calls, excluding
acquisitions(d).................................. $ 304
</TABLE>
- ------------------------------
(a) In December 1996, the Company obtained a controlling interest in Telecel.
The Company consolidated Telecel's Balance Sheet as of December 31, 1996 and
began consolidating Telecel's results of operations on January 1, 1997. In
August 1996, the Company completed its acquisition of Cellular
Communications, Inc. See Note F, "Partnerships and Acquisitions," to the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 for further information.
(b) Prior to April 1, 1994, the Company was an 86.1% owned subsidiary of Pacific
Telesis Group ("Telesis"). On April 1, 1994, the Company was spun off from
Telesis. Prior to December 3, 1993, the Company was 100% owned by Telesis.
(c) Income before preferred dividends (1997 and 1996) and cumulative effect of
accounting changes (1993).
(d) For the three months ended March 31 and the year ended December 31.
30
<PAGE>
SELECTED HISTORICAL CONSOLIDATED DATA BY BUSINESS UNIT
The following tables set forth the results of operations for selected
business units of the Company on a GAAP basis. The following unaudited financial
information is provided to facilitate the discussion and analysis of the results
of the Company's operations. Effective August 16, 1996, the Company owned 100%
of CCI and New Par (referred to elsewhere herein as "Great Lakes" market). The
Pro Forma 1996 column for U.S. cellular operations presents the results as if
the Great Lakes market had been wholly owned and consolidated during the year
ended December 31, 1996.
On December 31, 1996, the Company consolidated Telecel after acquiring a 51%
controlling interest. The Pro Forma 1996 column for International Operations
presents the results for the year ended December 31, 1996 as if (1) Telecel had
been consolidated and the Company's ownership interest in Telecel had been 51%
and (2) the Company's 1997 ownership interests in its unconsolidated wireless
systems had been the ownership interests during the corresponding periods of
1996.
This table should be read in conjunction with the management's discussion
and analysis herein and with the Consolidated Financial Statements, including
the accompanying notes, of the Company included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, incorporated herein by
reference and in its Quarterly Report on Form 10-Q for the period ended March
31, 1998, incorporated herein by reference.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31
MARCH 31 --------------------------------------------
-------------------- PRO FORMA
1998 1997 1997 1996 1996(E) 1995
--------- --------- --------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
U.S. CELLULAR OPERATIONS
Service and other revenues............................. $ 617 $ 557 $ 2,351 $ 1,634 $ 2,092 $ 1,145
Equipment sales........................................ 30 28 125 60 81 44
--------- --------- --------- --------- ----------- ---------
Operating revenues..................................... 647 585 2,476 1,694 2,173 1,189
--------- --------- --------- --------- ----------- ---------
Operating expenses before depreciation
and amortization expenses............................ 359 316 1,452 1,055 1,301 771
Depreciation and amortization expenses................. 98 94 381 240 350 128
--------- --------- --------- --------- ----------- ---------
Operating income....................................... 190 175 643 399 522 290
Equity in net income (loss) of unconsolidated
wireless systems..................................... 30 30 121 200 105 197
Minority interests in net (income) loss of
consolidated wireless systems........................ (21) (24) (70) (71) (71) (56)
Other (income) expense included in equity
income and minority interests(a)..................... (4) (4) (26) 1 (23) (15)
--------- --------- --------- --------- ----------- ---------
U.S. cellular operating contribution
to net income(b)..................................... $ 195 $ 177 $ 668 $ 529 $ 533 $ 416
--------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- ----------- ---------
U.S. PAGING OPERATIONS
Service and other revenues............................. $ 88 $ 79 $ 330 $ 293 -- $ 220
Equipment sales........................................ 10 9 39 50 -- 45
--------- --------- --------- --------- ---------
Operating revenues..................................... 98 88 369 343 -- 265
--------- --------- --------- --------- ---------
Operating expenses before depreciation
and amortization expenses............................ 68 63 261 255 -- 190
Depreciation and amortization expenses................. 19 18 74 64 -- 43
--------- --------- --------- --------- ---------
Operating income....................................... $ 11 $ 7 $ 34 $ 24 -- $ 32
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Operating cash flow(c)................................. $ 30 $ 25 $ 108 $ 88 -- $ 75
Operating cash flow margin(d).......................... 30.6% 28.4% 29.3% 25.7% -- 28.3%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
31
<PAGE>
SELECTED HISTORICAL CONSOLIDATED DATA BY BUSINESS UNIT
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31
MARCH 31 --------------------------------------------
-------------------- PRO FORMA
1998 1997 1997 1996 1996(F) 1995
--------- --------- --------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL OPERATIONS
Service and other revenues.......................... $ 198 $ 151 $ 685 $ 190 $ 521 $ 133
Equipment sales..................................... 15 12 66 22 62 19
--------- --------- --------- --------- ----------- ---------
Operating revenues.................................. 213 163 751 212 583 152
--------- --------- --------- --------- ----------- ---------
Operating expenses before depreciation
and amortization expenses......................... 134 104 551 239 479 214
Depreciation and amortization expenses.............. 25 21 85 34 68 27
--------- --------- --------- --------- ----------- ---------
Operating income (loss)............................. 54 38 115 (61) 36 (89)
Equity in net income (loss) of unconsolidated
wireless systems.................................. 81 10 199 (18) (42) (36)
Minority interests in net (income) loss of
consolidated wireless systems..................... (22) (15) (49) (24) (49) 20
Other (income) expense included in equity
income and minority interests(a).................. 62 52 181 198 155 75
--------- --------- --------- --------- ----------- ---------
International operating contribution
to net income(b).................................. $ 175 $ 85 $ 446 $ 95 $ 100 $ (30)
--------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- ----------- ---------
</TABLE>
- ------------------------------
(a) Represents income taxes and non-operating expenses or income included in
equity in net income (loss) of unconsolidated wireless systems and in
minority interests in net (income) loss of consolidated wireless systems.
(b) Represents the Company's share of combined operating income of consolidated
and unconsolidated U.S. cellular and international operations, net of the
interests of minority and equity partners (equal to proportionate operating
income).
(c) Operating cash flow is defined as operating income plus depreciation and
amortization and is not the same as cash flow from operating activities in
the Company's Consolidated Statements of Cash Flows. Proportionate operating
cash flow represents the Company's ownership interests in the respective
entities' operating cash flows. As such, proportionate operating cash flow
does not represent cash available to the Company.
(d) Operating cash flow margin is calculated by dividing "Operating cash flow"
by "Service and other revenues."
(e) Adjusted to present results as if the Great Lakes market had been wholly
owned and consolidated during the year ended December 31, 1996.
(f) Adjusted to present results for the year ended December 31, 1996 as if (1)
Telecel had been consolidated and the Company's ownership interest in
Telecel had been 51% and (2) the Company's 1997 ownership interests in its
unconsolidated wireless systems had been the ownership interests during the
corresponding periods in 1996.
32
<PAGE>
SELECTED HISTORICAL PROPORTIONATE DATA
The following tables are not required by GAAP and are not intended to
replace the Company's Consolidated Financial Statements prepared in accordance
with GAAP. They are presented to provide supplemental data and have not been
audited. Because significant assets of the Company are not consolidated and
because of the substantial effect of the formation of certain entities on
year-to-year comparability of the Company's consolidated financial results, the
Company believes that proportionate financial and operating data facilitates the
understanding and assessment of its Consolidated Financial Statements.
Under GAAP, the Company consolidates the entities in which it has a direct
controlling interest and uses the equity method to account for entities over
which the Company has significant influence but does not have a direct
controlling interest. In contrast, proportionate accounting reflects the
Company's relative ownership interests in operating revenues and expenses for
both its consolidated and equity method entities. For example, U.S. cellular
proportionate results present the Company's share--its percentage ownership--for
all significant U.S. cellular operations, including those corporations and
partnerships where the Company does not own more than 50%. Similarly, total
proportionate results show the Company's share of all its significant worldwide
operations.
Net income is the same under GAAP and proportionate presentations.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31 YEAR ENDED DECEMBER 31
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL COMPANY
Service and other revenues.................. $ 1,355 $ 1,113 $ 4,907 $ 3,925 $ 2,679 $ 1,799 $ 1,228
Operating expenses before
depreciation and amortization
expenses(1)............................... 808 700 3,171 2,801 1,976 1,293 876
--------- --------- --------- --------- --------- --------- ---------
Operating cash flow(2)...................... 547 413 1,736 1,124 703 506 352
Depreciation and amortization
expenses.................................. 216 188 789 603 406 334 254
--------- --------- --------- --------- --------- --------- ---------
Operating income............................ $ 331 $ 225 $ 947 $ 521 $ 297 $ 172 $ 98
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income applicable to common
stockholders.............................. $ 153 $ 64 $ 394 $ 179 $ 132 $ 98 $ 35
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Operating cash flow margin(3)............... 40.4% 37.1% 35.4% 28.6% 26.2% 28.1% 28.7%
U.S. CELLULAR OPERATIONS
Service and other revenues.................. $ 621 $ 562 $ 2,363 $ 1,984 $ 1,523 $ 1,160 $ 892
Cost of revenues............................ 63 57 236 222 188 136 116
Selling and customer operations
expenses(1)............................... 225 197 902 781 591 423 299
General, administrative, and
other expenses............................ 36 36 169 160 139 122 97
Depreciation and amortization
expenses.................................. 102 95 388 292 189 186 165
--------- --------- --------- --------- --------- --------- ---------
Operating income............................ $ 195 $ 177 $ 668 $ 529 $ 416 $ 293 $ 215
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Operating cash flow(2)...................... $ 297 $ 272 $ 1,056 $ 821 $ 605 $ 479 $ 380
Operating cash flow margin(3)............... 47.8% 48.4% 44.7% 41.4% 39.7% 41.3% 42.6%
</TABLE>
33
<PAGE>
SELECTED HISTORICAL PROPORTIONATE DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31 YEAR ENDED DECEMBER 31
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
INTERNATIONAL OPERATIONS
<S> <C> <C> <C> <C> <C> <C> <C>
Service and other revenues.................. $ 626 $ 470 $ 2,181 $ 1,640 $ 918 $ 435 $ 175
Operating expenses before
depreciation and amortization
expenses(1)............................... 370 321 1,452 1,319 794 405 205
Depreciation and amortization
expenses.................................. 81 64 283 226 154 96 48
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)..................... $ 175 $ 85 $ 446 $ 95 $ (30) $ (66) $ (78)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Operating cash flow(2)...................... $ 256 $ 149 $ 729 $ 321 $ 124 $ 30 $ (30)
Operating cash flow margin(3)............... 40.9% 31.7% 33.4% 19.6% 13.5% 6.9% (17.1)%
U.S. PAGING OPERATIONS(4)
Service and other revenues(5)............... $ 89 $ 79 $ 330 $ 297 $ 226 $ 189 $ 149
Operating expenses before
depreciation and amortization
expenses.................................. 59 54 222 209 151 122 99
Depreciation and amortization
expenses.................................. 19 18 74 64 43 37 31
--------- --------- --------- --------- --------- --------- ---------
Operating income............................ $ 11 $ 7 $ 34 $ 24 $ 32 $ 30 $ 19
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Operating cash flow(2)...................... $ 30 $ 25 $ 108 $ 88 $ 75 $ 67 $ 50
Operating cash flow margin(3)............... 33.7% 31.6% 32.7% 29.6% 33.2% 35.4% 33.6%
U.S. PCS OPERATIONS(6)
Service and other revenues.................. $ 19 $ 3 $ 33 $ 1 $ -- $ -- $ --
</TABLE>
- ------------------------------
(1) Includes net losses on equipment sold to acquire and retain customers.
(2) Operating cash flow is defined as operating income plus depreciation and
amortization and is not the same as cash flow from operating activities in
the Company's Consolidated Statements of Cash Flows. Proportionate operating
cash flow represents the Company's ownership interests in the respective
entities' operating cash flows. As such, proportionate operating cash flow
does not represent cash available to the Company.
(3) Operating cash flow margin is calculated by dividing "Operating cash flow"
by "Service and other revenues."
(4) U.S. Paging Operations, which are wholly owned by the Company, include
operations in Canada.
(5) Includes any gain or loss on equipment sales.
(6) PCS data relates to PrimeCo, in which the Company had a 25% interest as of
March 31, 1998, which was prior to the Merger. Because PrimeCo does not own
100% of all its markets, the Company's overall effective ownership in these
markets is slightly less.
34
<PAGE>
RECENT FINANCIAL DEVELOPMENTS ON A PROPORTIONATE BASIS
On July 22, the Company announced its earnings for the second quarter of
fiscal 1998 which ended June 30, 1998. The following tables set forth selected
unaudited pro forma and historical Income Statement data for the periods
presented.
The pro forma proportionate data reflect the Merger as if it had been
effective as of the beginning of each period presented, after giving effect to
the purchase method of accounting and other merger-related adjustments. Changes
to these adjustments are expected as valuations and appraisals of the acquired
assets and liabilities are completed. However, based on the preliminary results
of the appraisal of assets and liabilities acquired, such changes are not
expected to be material. These selected pro forma proportionate data are
intended for informational purposes only and are not necessarily indicative of
the future results of operations of the combined Company or the results of
operations of the combined Company that would have actually occurred.
<TABLE>
<CAPTION>
HISTORICAL PROPORTIONATE
PRO FORMA PROPORTIONATE
------------------------ ---------------------------------------
SIX MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
YEAR ENDED
------------------------ ------------------------ DECEMBER 31,
1998 1997 1998 1997 1997
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
TOTAL COMPANY
Service and other revenues.......................... $ 3,153 $ 2,311 $ 3,479 $ 2,891 $ 6,094
Operating expenses before depreciation and
amortization expenses(1).......................... 1,898 1,472 2,106 1,839 3,958
----------- ----------- ----------- ----------- ------
Operating cash flow(2).............................. 1,255 839 1,373 1,052 2,136
Depreciation and amortization expenses.............. 551 378 673 589 1,218
----------- ----------- ----------- ----------- ------
Operating income.................................... $ 704 $ 461 $ 700 $ 463 $ 918
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
Net income applicable to common stockholders........ $ 300 $ 170 $ 262 $ 95 $ 226
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
Operating cash flow margin(3)....................... 39.8% 36.3% 39.5% 36.4% 35.1%
U.S. CELLULAR OPERATIONS
Service and other revenues.......................... $ 1,566 $ 1,166 $ 1,873 $ 1,736 $ 3,516
Cost of revenues.................................... 161 118 190 186 349
Selling and customer operations expenses(1)......... 556 406 676 613 1,377
General, administrative, and other expenses......... 96 74 119 114 255
----------- ----------- ----------- ------
Operating cash flow(2).............................. 753 568 888 823 1,535
Depreciation and amortization expenses.............. 305 191 413 381 775
----------- ----------- ----------- ----------- ------
Operating income.................................... $ 448 $ 377 $ 475 $ 442 $ 760
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
Operating cash flow margin(3)....................... 48.1% 48.7% 47.4% 47.4% 43.7%
U.S. PCS OPERATIONS(6)
Service and other revenues.......................... $ 66 $ 10 $ 86 $ 20 $ 68
INTERNATIONAL OPERATIONS
Service and other revenues.......................... $ 1,339 $ 977 -- -- --
Operating expenses before depreciation and
amortization expenses(1).......................... 806 678 -- -- --
----------- -----------
Operating cash flow(2).............................. 533 299 -- -- --
Depreciation and amortization expenses.............. 167 131 -- -- --
----------- -----------
Operating income.................................... $ 366 $ 168 -- -- --
----------- -----------
----------- -----------
Operating cash flow margin(3)....................... 39.8% 30.6% -- -- --
</TABLE>
35
<PAGE>
RECENT FINANCIAL DEVELOPMENTS ON A PROPORTIONATE BASIS
<TABLE>
<CAPTION>
HISTORICAL PROPORTIONATE
------------------------
SIX MONTHS ENDED JUNE 30
------------------------
1998 1997
----------- -----------
<S> <C> <C>
(DOLLARS IN MILLIONS)
U.S. PAGING OPERATIONS(4)
Net operating revenues(5)............................................................... $ 181 $ 160
Operating expenses before depreciation and amortization expenses........................ 121 107
----------- -----------
Operating cash flow(2).................................................................. 60 53
Depreciation and amortization expenses.................................................. 38 37
----------- -----------
Operating income........................................................................ $ 22 $ 16
----------- -----------
----------- -----------
Operating cash flow margin(3)........................................................... 33.1% 33.1%
</TABLE>
- ------------------------------
(1) Includes net losses on equipment sold to acquire and retain customers.
(2) Operating cash flow is defined as operating income plus depreciation and
amortization and is not the same as cash flow from operating activities in
the Company's Consolidated Statements of Cash Flows. Proportionate operating
cash flow represents the Company's ownership interests in the respective
entities' operating cash flows. As such, proportionate operating cash flow
does not represent cash available to the Company.
(3) Operating cash flow margin is calculated by dividing "Operating cash flow"
by "Service and other revenues" or in the case of U.S. Paging Operations,
dividing "Operating cash flow" by "Net operating revenues."
(4) U.S. Paging Operations, which are wholly owned by the Company, include
operations in Canada.
(5) Includes any gain or loss on equipment sales.
(6) PCS data relates to PrimeCo Personal Communications, L.P., a U.S. personal
communications service business in which the Company has a 50% interest
including the interest acquired in the Merger. Because PrimeCo does not own
100% of all its markets, the Company's overall effective ownership in these
markets is slightly less than 50%.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis is intended to assist in the
understanding and assessment of significant changes and trends related to the
results of operations and financial condition of the Company together with its
subsidiaries and partnerships. This discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements and
accompanying Notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, incorporated herein by reference.
BASIS OF PRESENTATION
CONSOLIDATION V. THE EQUITY METHOD
In accordance with GAAP, the Company consolidates revenues and expenses of
each subsidiary and partnership in which the Company has a direct controlling
interest. The Company uses the equity method to record the operating results of
entities in which the Company has significant influence, but does not have a
direct controlling interest. Consolidated operating revenues and expenses during
1997, 1996, and 1995 principally included six U.S. cellular markets, all U.S.
paging markets, and Europolitan, the Company's cellular system in Sweden. On
December 31, 1996, AirTouch consolidated Telecel, its cellular system in
Portugal, subsequent to acquiring a controlling interest and, accordingly,
Telecel's results were included in consolidated results for the year ended
December 31, 1997. The six U.S. cellular markets included in consolidated
revenues and expenses during 1997, 1996, and 1995 were Los Angeles, Sacramento,
Atlanta, San Diego, Wichita, and Topeka. In addition, the Company began
consolidating the results of its Great Lakes market (cellular properties in
Michigan and Ohio, including Detroit, Cleveland and Columbus) on August 16,
1996, the date on which AirTouch completed its acquisition of the remaining
capital stock of Cellular Communications, Inc. ("CCI") that it did not already
own. For further information regarding this acquisition, see "1997 v. Pro Forma
1996."
GAAP V. PROPORTIONATE PRESENTATION
Proportionate information is included as supplementary information in the
discussion and analysis of results of operations for the Company's U.S. cellular
and international operations. Proportionate presentation is a pro rata
consolidation which reflects the Company's share of revenues and expenses in
both its consolidated and unconsolidated wireless systems, net of interests of
minority and equity partners. Proportionate results are calculated by
multiplying the Company's ownership interest in each wireless system by each
system's total operating results, whereas the presentation prepared in
accordance with GAAP requires consolidation of wireless systems controlled by
the Company and the equity method of accounting for wireless systems in which
the Company has significant influence, but not a direct controlling interest.
Net income is the same under both GAAP and proportionate presentations.
Proportionate presentation is not required by GAAP, nor is it intended to
replace the consolidated operating results prepared and presented in accordance
with GAAP. However, since significant wireless systems are not consolidated,
proportionate information is provided as supplemental data to facilitate a more
detailed understanding and assessment of consolidated operating results prepared
and presented in accordance with GAAP.
COMPOSITION OF OPERATING REVENUES AND EXPENSES
Operating revenues include cellular and paging service revenues, as well as
equipment sales. Cellular service revenues primarily consist of charges for air
time use, monthly network access fees, and in-bound
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roaming charges (in-bound roaming refers to use of the Company's wireless
networks by customers of other cellular carriers). Paging service revenues
primarily consist of paging service charges and rentals of paging units in the
United States. Equipment sales consist of revenues from sales of cellular
telephones, pagers, and accessories. Equipment sales are not a primary part of
the Company's cellular or paging businesses. Rather, the Company offers cellular
and paging equipment at competitive prices, which are often at or below cost, as
an incentive for new customers to subscribe to its cellular and paging services.
The Company also offers discounted or free equipment as an incentive for certain
existing customers to remain a subscriber to its wireless services. For purposes
of proportionate presentation, the Company reflects the net loss on sales of
cellular telephones as a selling and customer operations expense.
Operating expenses include: cost of revenues; cost of equipment sales;
selling and customer operations expenses; general, administrative, and other
expenses; and depreciation and amortization expenses. Cost of revenues primarily
consists of cellular and paging network operating costs, interconnection fees
assessed by local exchange carriers, and costs of cellular roaming fraud.
Interconnection costs have fixed and variable components. The fixed component of
interconnection costs consists of monthly flat-rate fees for facilities leased
from local exchange carriers. The variable component of interconnection costs,
which fluctuates in relation to the level of cellular calls and paging messages,
consists of per-minute use fees charged by local exchange carriers for cellular
calls or paging messages terminating on their networks. Selling and customer
operations expenses primarily consist of compensation to sales channels;
salaries, wages, and related benefits for sales and customer service personnel;
and billing, advertising, and promotional expenses. General, administrative, and
other expenses primarily consist of salaries, wages, and related benefits for
general and administrative personnel, international license application costs,
bad debt, and other overhead expenses. Depreciation and amortization primarily
consists of depreciation recorded for the Company's cellular and paging networks
and amortization of intangibles such as wireless license costs, subscriber
lists, and goodwill.
YEAR 2000 COMPLIANCE.
Many of the Company's systems are affected by the year 2000 problem, which
refers to the inability of information technology to process dates beyond
December 31, 1999. The Company has implemented a comprehensive plan to address
the year 2000 problem in its mission critical systems. Mission critical systems
are those whose failure poses a risk of disruption to the Company's ability to
provide wireless services, to collect revenues, to meet safety standards or to
comply with legal requirements. The Company's plan includes (i) the complete
inventory of all mission critical systems employed in the Company's consolidated
markets and the identification of the hardware and software affected by the year
2000 problem; (ii) modification of the affected systems; and (iii) testing of
the modified systems, including testing of systems on an integrated basis. The
Company is using both internal and external sources to implement its plan.
Much of the Company's information technology, including technology
associated with its mission critical systems, is purchased from third parties.
The Company is dependent on those third parties to assess the impact of the year
2000 problem on the technology they have supplied and to take any necessary
corrective action. The Company is monitoring the progress of these third parties
and selectively conducting tests to determine whether they have accurately
assessed the problem and taken corrective action.
Based on its current assessments and its remediation plan, which are based
in part upon certain representations of third parties, the Company expects that
it will not experience a disruption of its operations as a result of the change
to the new millennium. However, there can be no assurance that the third parties
who have supplied information technology used in the Company's mission critical
systems will be successful in taking corrective action in a timely manner. The
Company is developing contingency plans with respect to certain key information
technology used in its mission critical systems, although there can be no
assurance that these contingency plans will successfully avoid service
disruption. In addition, the Company's systems are interconnected with PSTNs and
the networks of other service providers who are
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responsible for addressing the year 2000 problem in their own systems. The
ability of the Company's systems to operate is dependent upon such PSTNs and
other networks being year 2000 compliant, as to which there can be no assurance.
While costs incurred to date to address the year 2000 problem have not been
material, the Company expects to incur incremental consolidated pre-tax expenses
of approximately $75 million through the end of 1999 to implement its plan for
its mission critical systems. In addition, the Company has redeployed internal
resources to address the problem. The substantial majority of these expenses
will be incurred in the second half of 1998 and the first half of 1999.
Additionally, the Company will incur capitalized costs that represent ongoing
investment in new systems and system upgrades, the timing of which is being
accelerated in order to facilitate year 2000 compliance and which are not
expected to have a material impact on the Company's financial position or
results of operations. This estimate assumes that third party suppliers have
accurately assessed the compliance of their products and that they will
successfully correct the issue in non-compliant products and that they will
successfully correct the issue in non-compliant products. Because of the
complexity of correcting the year 2000 problem, actual costs may vary from this
estimate. Subject to these assumptions, the Company's guidance for 1998 as
described under "Summary-- Outlook for 1998" includes the impact of the
estimated costs for 1998.
If the Company is unsuccessful in its efforts to correct or cause to be
corrected its mission critical systems or if third parties with whom the
Company's systems interconnect do not correct their systems, the Company could
experience significant disruption to its operations, including disruption of its
ability to provide certain wireless services and to correctly bill customers
resulting in potential revenue loss and increased costs that could have a
material adverse effect on the Company's financial condition or results of
operations.
Management believes that the original manufacturers of handsets and pagers
are primarily liable for failures of such products. However, in the event of
such product failures, the Company could experience service revenue loss and be
required to incur additional costs to furnish customers with replacement
equipment on a temporary or permanent basis to prevent further service revenue
loss.
RESULTS OF OPERATIONS
The following discussions compare the results of operations for the quarter
ended March 31, 1998 to the quarter ended March 31, 1997 and the results of
operations for the year ended December 31, 1997 to the year ended December 31,
1996. The operating results of these periods are not necessarily indicative of
operating results in future periods. The following comparative information
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes for each period discussed, as well as the information
presented in all other sections of management's discussion and analysis. Because
the Merger was effective on April 6, 1998, results of operations do not include
the properties acquired from MediaOne. See "Pro Forma Condensed Combined
Financial Statements" for a description of the Merger and certain pro forma
financial statements.
CONSOLIDATED RESULTS OF OPERATIONS
First Quarter 1998 v. First Quarter 1997. Consolidated operating revenues
increased 15% while consolidated operating income rose 13% primarily as a result
of substantial subscriber growth in the Company's U.S. and international
cellular markets. Increases in equity in net income of unconsolidated
international wireless systems is primarily attributable to continued growth in
the subscriber base by the wireless systems operated by the Company's equity
investees.
The net change in miscellaneous income (expense) was primarily related to
foreign currency exchange losses and reflects the unfavorable changes in foreign
currency exchange rates compared to the U.S. Dollar.
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Excluding the effect of equity in net income of unconsolidated international
wireless systems and the effect of foreign consolidated entities, the effective
tax rates were approximately 40% and 45% for the three-month periods ended March
31, 1998 and 1997, respectively.
1997 v. 1996. Improvements in consolidated operating income resulted
primarily from increases in the operating income of U.S. cellular and
international operations. As indicated in the U.S. cellular and international
operations' discussions, the increase in consolidated operating income resulted
from consolidation during 1997 of the Great Lakes (Michigan and Ohio) market and
Telecel, as well as substantial subscriber growth in U.S. and international
cellular markets.
The decrease in U.S. equity in net income (loss) of unconsolidated wireless
systems was attributable to consolidation of the Great Lakes market beginning
August 16, 1996 as a result of the Company's acquisition of CCI (see "1997 v.
Pro Forma 1996") and increased operating losses of PrimeCo associated with the
start-up phase of the PCS business. Decreases due to consolidation of the Great
Lakes market and increased losses of PrimeCo were partially offset by improved
operating results of CMT Partners. The improvements in international equity in
net income (loss) of unconsolidated wireless systems were due primarily to
improved profitability resulting from substantial growth in the subscriber base
and, secondarily, to favorable adjustments resulting from changes in estimates
based on the Company's assessment of various tax positions recorded in 1997.
The increases in interest expense resulted from higher average debt balances
and a reduction in capitalized interest as the related assets under construction
were placed in service.
The decrease in miscellaneous income was primarily attributable to a $56
million gain recorded during 1996 for the sale of Dansk Mobiltelefon AB ("DMT"),
an investment held by Europolitan. Net of minority interest and taxes, the sale
of DMT resulted in a $6 million increase in consolidated net income.
Excluding the effect of equity in net income (loss) of unconsolidated
international wireless systems, foreign income tax rate differences and minority
interest for consolidated international operations, and a 1996 reduction in the
valuation allowance related to consolidated international operations, the
effective tax rates were approximately 43% and 44% for the years ended December
31, 1997 and 1996, respectively.
U.S. CELLULAR OPERATIONS
First Quarter 1998 v. First Quarter 1997. The improvement in the Company's
U.S. cellular operating revenues was primarily the result of a 26% increase in
subscribers. Continued customer growth in U.S. cellular's consolidated markets
was primarily achieved through advertising and by continuing to offer
competitive incentive programs such as waived service establishment charges,
discounted monthly access fees, discounted cellular handsets, discounted air
time packages, promotional air time credits at the beginning of service
contracts, options to purchase bundled minutes of use at fixed monthly rates,
and reduced or fixed rates for off-peak usage and roaming. Year-over-year
revenue improvement associated with the increase in subscribers was partially
offset by a 12% decline in revenue per minute of use (excluding revenue from
equipment sales) primarily attributable to continued penetration of consumer
markets and to rate reductions and discounts offered to new and existing
customers in response to increasing competition. In addition, average revenue
per customer (excluding revenue from equipment sales) declined 12%. Consumer
usage patterns contributed to declines in average revenue per customer because
consumers typically use their telephones more during lower-rate, off-peak
calling periods. The Company anticipates increasing competitive pressure to
result in continuing price declines and reduced customer growth rates in the
near term and possibly in future years, which could reduce revenues of its U.S.
cellular operations compared to current revenue levels. The Company expects the
shift toward
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consumer markets and such increasing competitive pressures to continue to result
in declines in average revenue per customer and revenue per minute of use.
However, the Company believes that, over time, declining prices and other
factors may lead to increases in per subscriber usage as customers shift their
calling from landline to wireless networks.
U.S. cellular operating margins remained relatively constant year-over-year,
going from 29.9% in 1997 to 29.4% in 1998. Operating cash flow margins
(operating margins excluding the effect of depreciation and amortization
expenses) moved slightly downward from 46.0% during 1997 to 44.5% during 1998.
The stability in operating margins despite a decline in revenue per minute of
use resulted from a decline of 10% in the cash cost per minute of use (including
the loss on equipment sales). Decreases in average revenue per customer were
partially offset by decreases in the average cash costs per customer (including
the loss on equipment sales) of 10%. Decreases in cash costs resulted from
several factors, including increased economies of scale, reductions in roaming
fraud, a reduction in interconnection rates, declines in handset costs and
reductions in handset subsidies offered to customers, and a shift to lower cost
sales channels. The Company continues to focus on improving customer service and
on its customer incentive programs designed to retain existing customers.
Retaining customers is significantly less expensive than replacing customers who
discontinue service.
Depreciation and amortization expenses increased 4% during 1998 primarily
due to depreciation of larger property, plant, and equipment balances associated
with digital cellular deployment across all consolidated markets. U.S. cellular
operations' equity in net income (loss) of unconsolidated wireless systems
remained constant and primarily reflects the operating results of CMT Partners.
1997 v. Pro Forma 1996. Effective August 16, 1996, AirTouch acquired the
remaining 63% of CCI's capital stock that it did not already own. As a result of
the acquisition, AirTouch now owns 100% of CCI and New Par, the equally owned
partnership between the Company and CCI that operated cellular properties in
Michigan and Ohio prior to the merger. Accordingly, the operating results of CCI
and New Par (referred to elsewhere in management's discussion and analysis as
the "Great Lakes" market) are reflected in equity earnings at the Company's
ownership interest prior to the merger and in consolidated results at 100%
thereafter. Since the actual results of operations for the years ended December
31, 1997 and 1996 are not comparable, pro forma results for the year ended
December 31, 1996 are included in the table set forth on page 31 to reflect
results as if the Great Lakes market had been wholly owned and consolidated
during all of 1996.
The improvement in U.S. cellular consolidated operating revenues during the
year ended December 31, 1997, was due to an approximate 30% increase in total
minutes of use attributable primarily to a 26% increase in subscribers,
partially offset by an approximate 14% decline in average revenue per minute of
use. The average revenue per customer declined approximately 13% comparing the
year ended December 31, 1997 to the year ended December 31, 1996. The Company
achieved customer growth in its consolidated markets through advertising and by
continuing to offer competitive incentive programs such as waived service
establishment charges, discounted monthly access fees, discounted cellular
handsets, discounted air time packages, promotional air time credits at the
beginning of service contracts, options to purchase bundled minutes of use at
fixed monthly rates, and reduced or fixed rates for off-peak usage and roaming.
The declines in average revenue per customer and average revenue per minute of
use were primarily attributable to continued penetration of consumer markets and
to rate reductions and discounts offered to new and existing customers in
response to increasing competition. Consumer usage patterns contributed to
declines in average revenue per customer because consumers typically use their
telephones more during lower-rate, off-peak calling periods. Declines in average
revenue per customer and average revenue per minute of use were partially offset
by a slight increase in minutes of use per customer during 1997, as compared to
the prior year. The Company anticipates increasing competitive pressure to
result in continuing price declines and reduced customer growth rates in the
near term and possibly in future years, which could reduce revenues in the
Company's U.S. cellular business compared to current revenue levels. The Company
expects the shift toward consumer markets and such increasing competitive
pressures to
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continue to result in declines in average revenue per customer and average
revenue per minute of use. However, the Company believes, that over time,
declining prices and other factors will result in migration of minutes of use
from landline systems to the Company's wireless systems.
U.S. cellular operating margins increased from 24% during 1996 to 26% during
1997. Operating cash flow margins (operating margins excluding the effect of
depreciation and amortization expenses) increased from 40% during 1996 to 41%
during 1997. Improvements in operating margins despite a 14% decline in average
revenue per minute of use resulted from a greater decline of 16% in the average
cash cost per minute of use (including the loss on equipment sales). The average
revenue per customer declined 13%, while the average cash cost per customer
(including the loss on equipment sales) declined 15%. Declining cash costs per
customer and per minute of use reflect the Company's continuing efforts to
reduce cash costs more rapidly than the related declines in average revenue per
customer and average revenue per minute of use. Decreases in average cash costs
resulted from several factors, including increased economies of scale,
reductions in roaming fraud, a reduction in interconnection rates, declines in
handset costs and reductions in handset subsidies offered to customers, and a
shift in customer acquisitions to lower-cost direct sales channels. The Company
has also reduced the rate at which customers discontinue service ("churn") by
continually improving customer service and increasing its focus on customer
incentive programs designed to retain existing customers, which is significantly
less expensive than replacing customers who discontinue service. Depreciation
and amortization increased 9%, due primarily to depreciation of significantly
larger property, plant, and equipment balances associated with analog network
expansion and digital cellular deployment across all consolidated markets.
The improvement in U.S. cellular equity in net income (loss) of
unconsolidated wireless systems resulted from improved operating results of CMT
Partners. Consistent with the Company's consolidated U.S. markets, CMT Partners
achieved increased earnings through substantial customer growth and significant
reductions in the average cash cost per customer, partially offset by declines
in average revenue per customer.
U.S. PAGING OPERATIONS
First Quarter 1998 v. First Quarter 1997. Operating revenues increased 11%
primarily due to a 7% increase in paging units in service and a 3% increase in
the average revenue per unit in service. Operating cash flow margins (operating
margins excluding the effect of depreciation and amortization) increased from
28.4% to 30.6% due to increased service and other revenues, partially offset by
moderate increases in network operating costs necessary to serve the expanded
customer base.
1997 v. 1996. Operating revenues increased approximately 8%, due primarily
to a 9% increase in paging units in service, partially offset by an approximate
3% decline in the average revenue per unit in service. Increased revenues
associated with subscriber growth were also offset by declines in pager sales
attributable to decreases in the number of units in service added. Operating
cash flow margins (operating margins excluding the effect of depreciation and
amortization) increased from 26% to 29%, due to increased service and other
revenues and lower costs of paging equipment sales attributable to declines in
units in service added, partially offset by moderate increases in network
operating costs necessary to serve the expanded customer base. Increased service
and other revenues resulted from growth in paging units in service, a shift from
paging service sold at wholesale rates through resellers to service sold
directly by the Company or through retail sales channels, and retail service
price increases in selected markets. Increased depreciation and amortization
resulted from expansion of paging networks and higher depreciation of more
expensive leased alphanumeric pagers, which comprised a larger percentage of
leased pagers during 1997.
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INTERNATIONAL OPERATIONS
First Quarter 1998 v. First Quarter 1997. International operating revenues
increased 31% over the first quarter of 1997 primarily due to an increase of
approximately 100% in Europolitan's and Telecel's combined subscribers. The
increase in operating revenues associated with the increase in subscribers was
partially offset by a 33% decrease in Europolitan's and Telecel's combined
average revenue per customer and unfavorable changes in foreign exchange rates
compared to the U.S. Dollar. If foreign exchange rates had remained constant,
operating revenues would have increased by 46%. Operating margins improved 2.1
percentage points in 1998 primarily from substantial subscriber growth and a 38%
decline in the combined cash cost per customer achieved as Europolitan's and
Telecel's operations continued to gain operating scale. If foreign exchange
rates had remained constant, the operating margin would have increased 3.1
percentage points.
The significant improvement in equity in net income of international
unconsolidated wireless systems was primarily due to strong operating results
achieved by the Company's equity investees in Europe. Improved results in these
wireless systems resulted primarily from increasing economies of scale and
continued subscriber growth, partially offset by overall declines in the average
revenue per customer. Equity income increases were partially offset by
unfavorable movements in foreign currency exchange rates.
1997 v. Pro Forma 1996. Actual consolidated international operating results
presented in the tables for the year ended December 31, 1996 included on page 32
reflect the operations of Europolitan, the Company's 51%-owned cellular system
in Sweden. On December 31, 1996, the Company consolidated Telecel, its cellular
system in Portugal, subsequent to acquiring a 51% controlling interest and,
accordingly, consolidated international operating results presented in the
preceding table for the year ended December 31, 1997 reflect the operations of
both Telecel and Europolitan. Operating results for other international markets
are reflected in equity in net income (loss) of unconsolidated wireless systems
during all periods presented. Since the actual results of operations for each
period are not comparable, pro forma results for the year ended December 31,
1996 are included in the table set forth on page 32 to reflect results, as
described in footnote (f) of that table.
The increase in operating revenues resulted primarily from an 80% increase
in Europolitan and Telecel's combined average subscribers, partially offset by a
25% decrease in Europolitan and Telecel's combined average revenue per customer
and unfavorable changes in foreign exchange rates compared to the U.S. Dollar.
If foreign exchange rates had remained constant, operating revenues would have
increased 46%. Operating margins improved from 6% during 1996 to 15% during
1997, due primarily to substantial subscriber growth and rapidly declining cash
costs per customer achieved as Europolitan and Telecel's operations continued to
gain operating scale. If foreign exchange rates had remained constant, operating
income would have increased 344%.
Improvement in equity in net income (loss) of unconsolidated wireless
systems was due to improved operating results in Europe and Japan. Improved
results in these wireless systems resulted primarily from increasing economies
of scale and continued subscriber growth, partially offset by overall declines
in the average revenue per customer. In addition, the Company recognized certain
favorable adjustments resulting from changes in estimates based on the Company's
assessment of various tax positions. Improvements were also partially offset by
unfavorable movements in all foreign currency exchange rates.
Other Matters Affecting International Operations
Foreign Currencies. The Company engages in risk management activities to
hedge foreign currency denominated investments and firm capital commitments. The
Company does not engage in speculative foreign exchange activities.
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The Company's foreign exposures primarily take the form of equity
investments in foreign wireless systems and are viewed as long-term assets
valued in the local currency, translated into United States dollars and reported
in the Company's financial statements. The Company hedges a portion of these
investments with forward foreign currency exchange contracts and foreign
currency denominated loans. These hedges are in accordance with the Company's
objective to offset the United States dollar values of foreign currency
denominated assets with foreign currency denominated liabilities. The accounting
treatment is described in Note A, "Summary of Significant Accounting
Policies--Financial Instruments," to the Consolidated Financial Statements for
the year ended December 31, 1997.
Virtually all of the Company's economic hedges qualify as hedges under
accounting rules. Non-qualifying hedges relate to cost method investments that
do not qualify for hedge accounting or mismatches between the hedge instruments
and the hedged investments due to equity losses of foreign wireless systems
during start-up. All gains and losses pertaining to hedges that do not qualify
for hedge accounting are included in net income.
Deferred Taxes. International equity in net income (loss) of unconsolidated
wireless systems included tax benefits of $30 million and $10 million in 1997
and 1996, respectively. These tax benefits are recorded in "Equity in net income
(loss) of unconsolidated wireless systems" on the Consolidated Statements of
Income. The tax benefits were recorded as an asset that represents future
benefits the international unconsolidated wireless systems will receive by
deducting the net operating losses from future taxable income. At December 31,
1997, the Company's proportionate share of deferred tax assets of its
international equity investees was approximately $161 million, which was offset
by a valuation allowance of approximately $84 million. While the Company
believes that it is more likely than not that the net deferred tax assets will
be fully realized, there can be no assurance this will happen as certain factors
beyond the control of the equity investees and the Company, such as
deteriorating local economic conditions and increasing competition, can affect
future timing and amounts of taxable income.
MARKET RISK
INTEREST AND FOREIGN EXCHANGE RATE RISKS
The Company is exposed to risks of unfavorable movements in interest and
foreign currency exchange rates. In certain cases, the Company enters into
derivative financial instrument contracts to manage its exposure to such risks.
With respect to foreign currency exchange rate risk, the Company enters into
forward foreign currency exchange contracts ("forward contracts") to hedge its
net investment in its international wireless systems and to manage risks
associated with firm capital commitments denominated in foreign currencies. With
respect to interest rate risks, the Company attempts to mitigate its exposure to
interest rate changes and to minimize its costs of funds using interest rate
swaps. In general interest rate swaps are used to convert variable-rate debt to
fixed-rate debt and to reduce interest rate risk associated with future
borrowings. The Company does not enter any such arrangements for purposes of
trading or speculation. Additionally, the Company does not anticipate any
near-term changes in the nature of its market risk exposures or in management's
objectives and strategies with respect to managing such exposures.
As of December 31, 1997, the Company's financial instruments that are
subject to interest and foreign currency exchange rate risks included long-term
debt with an aggregate fair value of $1.4 billion and forward contracts with an
aggregate positive market value of $60 million. The long-term debt was
denominated in U.S. Dollars, Swedish Krona, German Deutschmarks, Japanese Yen,
and Portuguese Escudos. The forward contracts were denominated in German
Deutschmarks, Japanese Yen, Belgian Francs, Spanish Pesetas, Italian Lira,
Korean Won, Portuguese Escudos, and Swedish Krona. Long-term debt held in the
U.S. and denominated in U.S. Dollars totaled approximately $1 billion, which
included $900 million in public debt bearing interest at fixed rates between
7.0% and 7.5% and $70 million in commercial paper bearing interest at a variable
money market rate. Long-term debt held in the U.S. also
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included $180 million denominated in German Deutschmarks bearing interest at a
weighted average Deutschmark interest rate of 3.87%. In addition, as of December
31, 1997, Europolitan and Telecel also held various long-term debt instruments
totaling $148 million and $55 million, respectively, all of which were
denominated in their domestic currencies. The remaining long-term debt consisted
of individually insignificant, fixed-rate instruments predominantly denominated
in U.S. Dollars. See Note H, "Debt and Credit Facilities," to the Consolidated
Financial Statements for the year ended December 31, 1997 for further detailed
information concerning the Company's debt instruments and credit facilities.
The Company uses a statistical modeling technique known as "value-at-risk"
("VAR") to compute required disclosures of the maximum probable loss, within a
certain confidence level, in the fair value of its financial instruments subject
to interest and foreign currency exchange rate risks. VAR may be calculated
using several types of models. The Company uses the "variance/co-variance"
model, which calculates VAR based on the actual historical volatility of the
related interest and foreign exchange rates and the actual historical
correlation of such rates with one another. The Company's calculations were
based on the actual correlation of such rates observed during the preceding
year, a 95% confidence level, and a one-year holding period for each financial
instrument (except for those instruments maturing prior to December 31, 1998).
The model was applied to all of the Company's debt instruments and forward
contracts. With respect to foreign exchange rate risk, the VAR for the Company's
debt instruments and forward contracts was $18 million and $49 million,
respectively. With respect to interest rate risk, the VAR for the Company's debt
instruments and forward contracts was $58 million and $53 million, respectively.
VAR amounts are statistical estimates representing the maximum probable loss
in fair value that the Company could incur given a certain confidence level
(i.e., with 95% certainty, the value of the instruments included in the VAR
model is not likely to decline more than the VAR amounts shown above due to
movements in the relevant market rates). VAR amounts do not represent actual
losses which will be incurred by the Company. In addition, although changes in
market rates may adversely impact the fair value of the Company's debt
instruments, market rate changes will have an immaterial impact on earnings or
cash flows since the majority of the Company's existing debt bears interest at
fixed rates. Further, potential changes in the fair value of forward contracts
will be offset by changes in the fair value of the underlying asset hedged by
the forward contract.
EQUITY PRICE RISK
The Company also holds a cost-based, available-for-sale investment in common
stock and warrants for common stock of QUALCOMM, Inc., a publicly traded company
in the U.S. In accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities," the
investment in common stock of QUALCOMM is reported at its market value of $55
million in the Company's financial statements for the year ended December 31,
1997. The Company's investment in QUALCOMM is subject to equity price risks. A
10% decline in the price of QUALCOMM stock would result in a $6 million decrease
in the fair value of the Company's investment.
In addition to QUALCOMM, the Company holds certain cost-based investments in
Globalstar L.P. (a satellite-based wireless communications partnership), a
German landline telephone company, a Japanese long distance company, certain
smaller U.S. cellular properties, and certain Japanese cellular properties. As
of December 31, 1997, investment balances for these entities totaled $110
million and were reported in "Investments in unconsolidated wireless systems,"
in the Company's Consolidated Balance Sheets. These investments also expose the
Company to risk of loss; however, it is not practicable to estimate the fair
value of these investments as quoted market prices are not available and
alternative information which might be relevant to estimating such fair value is
not readily available to the Company. Accordingly, it is not practicable to
provide information concerning sensitivity to relevant market rates for these
investments.
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LIQUIDITY AND CAPITAL RESOURCES
The Company defines liquidity as its ability to generate resources to
finance business expansion, construct capital assets, and pay its current
obligations. The Company requires substantial capital to operate and expand its
existing wireless systems, to construct new wireless systems, and to acquire
interests in existing wireless systems.
CAPITAL SPENDING, DEBT SERVICE, AND DIVIDEND REQUIREMENTS
The Company spent $171 million during the first quarter of 1998 for
additions to property, plant, and equipment primarily to increase cellular and
paging network system capacity. The Company invested an additional $137 million
during the first quarter of 1998 in its unconsolidated wireless systems to fund
the expansion and build-out of cellular and PCS networks and to purchase
interests in certain cellular systems. The Company also paid $13 million during
the first quarter of 1998 for preferred dividends.
During 1997, the Company incurred capital expenditures of $683 million for
additions to property, plant, and equipment for its consolidated wireless
networks and other capital expenditures, primarily to increase cellular and
paging network capacity and to expand customer operations functions necessary to
support customer growth. The Company invested an additional $445 million in its
unconsolidated wireless systems to fund the expansion and build-out of cellular
and PCS networks and to increase its interest in certain systems. In addition to
capital funding, the Company elected to retire $179 million of long-term debt in
the U.S. prior to its maturity. The Company also paid $54 million in preferred
dividends and reduced its net commercial paper and debt position approximately
$42 million.
FUNDING OF CAPITAL SPENDING, DEBT SERVICE, AND DIVIDEND REQUIREMENTS
In the first quarter of 1998, cash flows from operations of $142 million,
proceeds from the issuance of commercial paper and other long-term debt, and
proceeds from the exercise of stock options were the primary sources utilized to
fund capital requirements, preferred dividends, debt service, and net
distributions to minority partners.
In 1997, cash flows from operations of $1.3 billion, combined with beginning
cash balances, proceeds from the issuance of common stock, and net proceeds from
other investing and financing activities, were sufficient to fund net debt
retirement, capital requirements, preferred dividend obligations, and net
distributions to minority partners.
FUTURE FUNDING REQUIREMENTS
The Company will continue to be required to make substantial expenditures in
connection with its efforts to expand its existing wireless business and,
potentially, to pursue opportunities to expand into new markets. U.S. and
international capital expenditures and contributions to unconsolidated wireless
systems for existing operations are expected to be approximately $1.4 billion
from March 31, 1998 through the end of 1998, including the impact of the Merger.
CONSOLIDATED EXPENDITURES
The Company plans to incur significant capital expenditures in its
consolidated U.S. markets to expand its existing analog and CDMA digital
wireless networks and to construct and deploy new digital wireless networks to
meet current and future capacity requirements resulting from both subscriber
growth and increased network use by existing customers. The Company now offers
CDMA digital cellular service in all of its AirTouch-branded U.S. cellular
markets.
The Company's 1997 capital expenditures for digital technology surpassed
1997 capital expenditures for analog technology, and the Company expects annual
digital spending to continue to be greater than annual analog spending for the
foreseeable future. Digital networks enable significant increases in the
46
<PAGE>
Company's cellular network capacity and allow the Company to offer additional
services and features comparable to those available on digital networks
operating at PCS frequencies. Accordingly, the Company anticipates that a
significant portion of its future U.S. wireless network traffic will migrate to
digital service as customers take advantage of enhanced digital features such as
greater call privacy and security, superior voice quality, reduced
susceptibility to fraud and the opportunity to provide improved data
transmissions. However, both analog and digital technologies are expected to
coexist for the foreseeable future due to continued demand for analog service
and the fact that analog networks provide the only common roaming platform
currently available throughout the United States.
Management believes that a viable analog market will continue to exist for
the foreseeable future to serve customers who do not desire digital features or
who do not wish to purchase new digital handsets. With respect to roaming
capabilities, the Company believes that a significant portion of its digital and
analog customer base, as well as customers of other carriers who roam on the
Company's networks, will continue to require access to nationwide analog
networks in the United States. Accordingly, the Company plans to maintain and,
as required, expand its analog networks and to offer dual-mode (analog/CDMA
digital), dual-band (cellular/PCS frequencies) handsets in each of its U.S.
markets to facilitate the greatest possible roaming capabilities for its
customers.
At March 31, 1998, excluding the impact of the Merger, the Company's
existing U.S. and international operations were committed to spend approximately
$286 million for the acquisition of property, plant, and equipment and
approximately $147 million for the purchase of cellular handsets, pagers, and
other items. For the remainder of 1998 the Company plans to make additional
capital expenditures of approximately $600 million, including the impact of the
Merger, to increase the capacity of its existing wireless networks and to
continue deployment of CDMA digital technology.
In addition, the FCC has recently adopted rules requiring carriers such as
the Company to provide customers in the U.S. with local number portability, the
ability for customers to retain their telephone numbers if they choose to switch
landline or wireless carriers. Providing this functionality will result in
additional capital requirements and operating expenses in future years. FCC
rules require the Company to provide certain local number portability services
by December 31, 1998 and to provide complete local number portability services
by June 30, 1999. The Company and certain wireless industry groups have
petitioned the FCC for a delay in the June 30, 1999 implementation date. The
Company has not yet fully assessed the cost of complying with the FCC's number
portability rules; such costs could be material to the Company's results of
operations or financial position in future reporting periods.
The Company will also be required to upgrade its wireless networks in the
U.S. to provide certain functionality to authorized law enforcement agencies. In
this regard, the FCC has adopted rules requiring wireless carriers to
electronically provide "Emergency 911" authorities with the physical location of
wireless callers requesting emergency assistance. In addition, new U.S. Federal
laws pursuant to the Communications Assistance Law Enforcement Act ("CALEA")
will require the Company to provide law enforcement agencies with certain
network functionality and other assistance in criminal investigations, including
digital wiretapping capabilities. The FCC rules concerning "Emergency 911"
services and CALEA both require the responsible government agencies to reimburse
the Company for its costs incurred to upgrade its networks and to provide
on-going assistance to law enforcement agencies; however, the Company can
provide no assurance that all such costs will be recoverable.
UNCONSOLIDATED WIRELESS SYSTEMS
As of March 31, 1998, commitments for capital contributions to existing
unconsolidated wireless systems were not significant. However, the Company plans
to make additional capital contributions of approximately $265 million,
including the impact of the Merger, during the remainder of 1998 to certain of
its existing U.S. and international unconsolidated wireless systems, including
contributions to PrimeCo to fund its operating losses and the continuing
build-out of its PCS networks.
47
<PAGE>
On March 4, 1998, the Company announced that a venture, of which it is a
member, was named the winner of a nationwide cellular service license in Egypt.
The venture bid $516 million for the license, of which the Company's share is
expected to be approximately $155 million. In addition to the license cost, the
Company could be required to begin funding operations of the Egyptian venture
during 1998. The Company continually evaluates opportunities to increase its
ownership interests in its existing international wireless systems and to
acquire interests in new international wireless licenses, either of which could
result in incremental capital commitments.
OTHER REQUIREMENTS
In October 1997, the Company's Board of Directors authorized the repurchase
of up to $1 billion of AirTouch common and preferred stock. The Company plans to
buy shares on the open market from time to time, based on market conditions.
FINANCING SOURCES
In March 1996, the Company initiated a commercial paper program consisting
of the sale of discounted notes that are exempt from registration under the
Securities Act of 1933. The Company's Board of Directors authorized the issuance
of commercial paper in amounts necessary to finance the Company's working
capital requirements, provided that the amount outstanding under the commercial
paper program, together with all indebtedness incurred under the Company's $2
billion long-term revolving credit facility (the "Facility"), does not in the
aggregate exceed $2 billion.
In addition to its Facility and commercial paper program, the Company may
obtain any required financing under its Registration Statement on Form S-3 (Reg.
No. 33-56645) of which this Prospectus is a part, which registered $2.5 billion
in various forms of debt and equity securities (the "Shelf"). As of June 30,
1998, there had been no issues pursuant to the Shelf. The Company has undertaken
an offering of DEM 400 million 5.5% Notes due 2008. The Company intends to use
the proceeds of that offering to retire commercial paper and borrowings under
the Facility. Approximately $1 billion is expected to be available under the
Shelf after giving effect to the offer and sale of the Common Stock by MediaOne
Group pursuant to the PIES and based upon the last reported sale price of the
Common Stock on the NYSE Composite Tape. Under a prior registration statement,
the Company issued a series of Notes in an aggregate principal amount of $1.6
billion due 2001, 2003, 2005, 2006 and 2008.
FUNDING OF FUTURE REQUIREMENTS
The Company anticipates cash flows from operations to be its primary source
of funding for capital requirements of its existing operations, debt service,
and preferred dividends through the end of 1998, including the Company's
incremental debt service and preferred dividend obligations resulting from the
Merger. However, should additional funding be required due to award of one or
more new international cellular licenses, new investment opportunities, other
unanticipated events, or the repurchase of AirTouch common or preferred stock,
the Company may raise the required funds through borrowings or public or private
sales of debt or equity securities. Such funding may be obtained through
borrowings under the Facility; through the Company's commercial paper program;
from additional securities which may be issued from time to time under the
Shelf; through the issuance of securities in a transaction exempt from
registration under the Securities Act of 1933; or a combination of one or more
of the foregoing. The Company believes, that in the event of such requirements,
it will be able to access the capital markets on terms and in amounts adequate
to meet its objectives. However, given the possibility of changes in market
conditions or other occurrences, there can be no certainty that such funding
will be available in quantities or on terms favorable to the Company.
48
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Combined Balance Sheet combine
(1) the historical consolidated balance sheets of the Company and its
subsidiaries and NewVector and its subsidiaries as if the Merger had been
effected on March 31, 1998 and after giving effect to the purchase method of
accounting and other merger-related adjustments described in the accompanying
explanatory notes, and (2) MediaOne Group's 25% interest in PrimeCo as if the
interest had been acquired on March 31, 1998 and after giving effect to related
adjustments described in the accompanying explanatory notes. The following
unaudited Pro Forma Condensed Combined Statements of Income present the combined
results of operations of the Company, NewVector and MediaOne Group's interest in
PrimeCo as if the Merger had been effected on January 1 of each period presented
and after giving effect to the purchase method of accounting and other
merger-related adjustments described in the accompanying explanatory notes.
BASIS OF PRESENTATION
DESCRIPTION OF TRANSACTION
On April 6, 1998 (the "Effective Date"), the Company acquired NewVector and
MediaOne Group's 25% interest in PrimeCo pursuant to the Agreement and Plan of
Merger dated as of January 29, 1998 among U S WEST, Inc., MediaOne Group,
NewVector, U S WEST PCS Holdings, Inc. ("Holdings") and the Company (the
"Agreement"), filed as Exhibit 2.1 to the Company's Current Report on Form 8-K,
Date of Report: January 29, 1998. On the Effective Date, NewVector and Holdings
(the wholly owned subsidiary of MediaOne Group that held MediaOne Group's
interest in PrimeCo) merged into the Company, with the Company surviving.
In the Merger, the Company issued approximately 59.4 million shares of the
Company's Common Stock with an approximate fair value of $2.9 billion based on
the closing price of $49 on the Effective Date. The Company also issued 825,000
shares of the Company's 5.143% Class D Cumulative Preferred Stock, Series 1998,
and 825,000 shares of its 5.143% Class E Cumulative Preferred Stock, Series 1998
(together, the "Preferred Stock") having an aggregate face value of
approximately $1.65 billion with a liquidation amount of $1,000 per share. In
the Merger, the Company assumed $1.35 billion of debt associated with the
acquired businesses, which it refinanced through the issuance of commercial
paper and debt issues under its shelf Registration Statement.
METHOD OF ACCOUNTING
The acquisition of NewVector and MediaOne Group's interest in PrimeCo is
accounted for by the Company under the purchase method of accounting in
accordance with APB Opinion No. 16, "Business Combinations," and the acquired
PrimeCo interest is accounted for under the equity method in accordance with APB
Opinion No. 18, "The Equity Method of Accounting for Investments in Common
Stock." Accordingly these methods of accounting have been applied in the Pro
Forma Condensed Combined Financial Statements.
DETERMINATION OF PURCHASE PRICE
In accordance with APB Opinion No. 16, "Business Combinations," the purchase
price recorded is based on the fair value of the Common Stock and Preferred
Stock issued pursuant to the Merger as of the Effective Date. Excluding the
assumption of NewVector and PrimeCo debt totaling $1.35 billion and
merger-related expenses, the purchase price for the acquisition of NewVector and
MediaOne Group's interest in PrimeCo is summarized below (in millions of
dollars):
<TABLE>
<S> <C>
Value of Common Stock............................................... $ 2,913
Estimated value of Preferred Stock.................................. 1,650
---------
Total estimated purchase price...................................... $ 4,563
---------
---------
</TABLE>
49
<PAGE>
This purchase price calculation is preliminary, is subject to the results of
the appraisal of the Preferred Stock, and includes estimates for certain post
closing adjustments. The appraisal of the Preferred Stock was completed in June
1998, and the appraised fair value as of the Effective Date was approximately
$1.57 billion. The estimate of $1.65 billion was used for the Pro Forma
Condensed Combined Financial Statements. The impact on these statements would
not be material had the appraised fair value been used. The difference between
aggregate face value and fair value of the Preferred Stock will be amortized
over the maturity periods of the Preferred Stock, using the interest method.
Additionally, certain post closing adjustments when finalized are not expected
to have a materially different effect from that shown in these Pro Forma
Condensed Combined Financial Statements.
ALLOCATION OF PURCHASE PRICE
Under the purchase method of accounting, the purchase price is allocated to
the assets acquired and liabilities assumed based on their estimated fair values
at the Effective Date. Estimates of the fair values of NewVector's assets and
liabilities have been combined with recorded values of the assets and
liabilities of the Company in the unaudited Pro Forma Condensed Combined
Financial Statements. Under the equity method of accounting, the purchase price
of MediaOne Group's interest in PrimeCo is allocated in a similar manner to the
purchase method described above. Also, the Company recognizes its acquired share
of the financial condition of PrimeCo, together with related identifiable
intangibles and goodwill, on one line in the Pro Forma Condensed Combined
Balance Sheet, and its share of operating results of PrimeCo, together with
related amortization expense, on one line in the Pro Forma Condensed Combined
Statements of Income.
Allocation of the purchase price as reflected in the Pro Forma Condensed
Combined Financial Statements is preliminary. Accordingly, changes are expected
as valuations and appraisals of assets and liabilities acquired are completed,
and as additional information becomes available. As a result, actual amounts
will differ from those stated in the Pro Forma Condensed Combined Financial
Statements. However, based on the preliminary results of the appraisal of assets
acquired and liabilities assumed, such changes are not expected to be material.
PRO FORMA NET INCOME PER SHARE
Pro forma net income applicable to common stockholders per share is
calculated based on net income after deducting total preferred dividends of $35
million (including $21 million for Preferred Stock), and $139 million (including
$85 million for Preferred Stock), for the quarter ended March 31, 1998 and the
year ended December 31, 1997, respectively, and on weighted average shares of
568.9 million and 563.3 million for the quarter ended March 31, 1998 and the
year ended December 31, 1997, respectively.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
These Pro Forma Condensed Combined Financial Statements are intended for
informational purposes only and are not necessarily indicative of the future
financial position or future results of operations of the combined company or
the financial position or the results of operations of the combined company that
would have actually occurred had the transaction described herein been in effect
as of the dates or for the periods presented.
The Pro Forma Condensed Combined Financial Statements and explanatory notes
should be read in conjunction with and are qualified in their entirety by the
Consolidated Financial Statements, including accompanying notes, of the Company
included in its Annual Report on Form 10-K for the year ended December 31, 1997,
incorporated herein by reference and of NewVector, attached as Exhibit No. 99.2
to the Company's Current Report on Form 8-K/A-1, Date of Report: April 6, 1998,
File No. 1-12342; and by the Consolidated Financial Statements of the Company
included in its Quarterly Report on Form 10-Q for the period ended March 31,
1998, incorporated herein by reference and of NewVector, attached as Exhibit
99.1 to the Company's Current Report on Form 8-K, Date of Report: May 28, 1998,
File No. 1-12342.
50
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
UNAUDITED
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
------------------------ PRO FORMA NEWVECTOR
AIRTOUCH NEWVECTOR ADJUSTMENTS MERGER
----------- ----------- ------------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Current assets................................................... $ 868 $ 224 $ (12)(a) $ 1,080
Property, plant, and equipment, net.............................. 2,597 999 3,596
Investments in unconsolidated wireless systems................... 2,382 10 840(a) 3,232
12(a)
4,283(a)
1,216(b)
Intangible assets, net........................................... 3,279 412 (412)(a) 8,790
Deferred charges and other noncurrent assets..................... 275 275
----------- ----------- ------ -----------
Total assets................................................... $ 9,401 $ 1,645 $ 5,927 $ 16,973
----------- ----------- ------ -----------
----------- ----------- ------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities.............................................. $ 838 $ 327 $ 1,165
Long-term debt................................................... 1,488 900 $ 450(a) 2,838
Deferred income taxes............................................ 731 1,216(b) 1,947
Deferred credits and other liabilities........................... 89 24 113
----------- ----------- ------ -----------
Total liabilities.............................................. 3,146 1,251 1,666 6,063
----------- ----------- ------ -----------
Minority interests in consolidated wireless systems.............. 337 92 429
----------- ----------- ------ -----------
Redeemable preferred stocks
5.143% Class D Cumulative Preferred Stock, Series 1998......... 825(a) 825
5.143% Class E Cumulative Preferred Stock, Series 1998......... 825(a) 825
------ -----------
1,650 1,650
------ -----------
Stockholders' equity:
Preferred stock and additional paid-in capital
6.0% Class B Mandatorily Convertible Preferred Stock, Series
1996....................................................... 500 500
4.25% Class C Convertible Preferred Stock, Series 1996....... 541 541
Common stock and additional paid-in capital.................... 4,343 2,913(a) 7,256
Retained earnings.............................................. 568 568
Accumulated other comprehensive income......................... (6) (6)
Deferred compensation.......................................... (28) (28)
Stockholders' equity--NewVector................................ 302 (302)(a)
----------- ----------- ------ -----------
Total stockholders' equity..................................... 5,918 302 2,611 8,831
----------- ----------- ------ -----------
Total liabilities and stockholders' equity................... $ 9,401 $ 1,645 $ 5,927 $ 16,973
----------- ----------- ------ -----------
----------- ----------- ------ -----------
</TABLE>
See Explanatory Notes to the Pro Forma Condensed Combined Financial Statements.
51
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE QUARTER ENDED MARCH 31, 1998
UNAUDITED
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
------------------------- PRO FORMA NEWVECTOR
AIRTOUCH NEWVECTOR ADJUSTMENTS MERGER
---------- ------------- --------------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues.............................................. $ 958 $ 341 $ 1,299
---------- ----- -----------
Operating expenses:
Cost of revenues.............................................. 201 71 272
Selling and customer operations expenses...................... 261 69 330
General, administrative, and other expenses................... 118 63 181
Depreciation and amortization expenses........................ 144 51 $ 55(c) 250
---------- ----- --- -----------
Total operating expenses........................................ 724 254 55 1,033
---------- ----- --- -----------
Operating income................................................ 234 87 (55) 266
(34)(d)
Equity in net income (loss) of unconsolidated wireless
systems....................................................... 77 1 (2)(e) 42
Minority interests in net (income) loss of consolidated wireless
systems....................................................... (42) (10) (52)
Interest income................................................. 6 6
Interest expense................................................ (19) (14) (7)(f) (40)
Miscellaneous income (expense).................................. (10) 7 (3)
---------- ----- --- -----------
Income before income taxes and preferred dividends.............. 246 71 (98) 219
Income tax expense (benefit).................................... 79 24 (34)(g) 69
---------- ----- --- -----------
Income before preferred dividends............................... 167 47 (64) 150
Preferred dividends............................................. 14 21(h) 35
---------- ----- --- -----------
Net income (loss) applicable to common stockholders............. $ 153 $ 47 $ (85) $ 115
---------- ----- --- -----------
---------- ----- --- -----------
Net income applicable to common stockholders--per share:
Basic and diluted............................................. $ 0.30 $ 0.20
---------- -----------
---------- -----------
Weighted average shares outstanding (in thousands).............. 509,424 568,871
---------- -----------
---------- -----------
</TABLE>
See Explanatory Notes to the Pro Forma Condensed Combined Financial Statements.
52
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
UNAUDITED
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
------------------- PRO FORMA NEWVECTOR
AIRTOUCH NEWVECTOR ADJUSTMENTS MERGER
-------- --------- ----------- -------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues............................................... $ 3,594 $1,428 $ 5,022
-------- --------- -------------
Operating expenses:
Cost of revenues............................................... 846 344 1,190
Selling and customer operations expenses....................... 990 321 1,311
General, administrative, and other expenses.................... 503 229 732
Depreciation and amortization expenses......................... 549 178 $ 219(c) 946
-------- --------- ----- -------------
Total operating expenses......................................... 2,888 1,072 219 4,179
-------- --------- ----- -------------
Operating income................................................. 706 356 (219) 843
(112) (d)
Equity in net income (loss) of unconsolidated wireless systems... 200 3 (10)(e) 81
Minority interests in net (income) loss of consolidated wireless
systems........................................................ (119) (42) (161)
Interest income.................................................. 18 18
Interest expense................................................. (90) (6) (78)(f) (174)
Miscellaneous income (expense)................................... (1) 1
-------- --------- ----- -------------
Income before income taxes and preferred dividends............... 714 312 (419) 607
Income tax expense (benefit)..................................... 266 122 (146)(g) 242
-------- --------- ----- -------------
Income before preferred dividends................................ 448 190 (273) 365
Preferred dividends.............................................. 54 85(h) 139
-------- --------- ----- -------------
Net income (loss) applicable to common stockholders.............. $ 394 $ 190 $(358) $ 226
-------- --------- ----- -------------
-------- --------- ----- -------------
Net income applicable to common stockholders--per share:
Basic and diluted.............................................. $ 0.78 $ 0.40
-------- -------------
-------- -------------
Weighted average shares outstanding (in thousands)............... 503,883 563,330
-------- -------------
-------- -------------
</TABLE>
See Explanatory Notes to the Pro Forma Condensed Combined Financial Statements.
53
<PAGE>
EXPLANATORY NOTES TO THE PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS
(a) Records the purchase price, allocation of the excess purchase price to
identifiable intangible assets and goodwill and merger-related fees.
For Pro Forma Financial Statement purposes, as-reported amounts for
NewVector's and PrimeCo's net assets have been estimated to approximate fair
value and NewVector's as-reported intangible assets are eliminated. The entry
allocates the full amount of the excess purchase price over adjusted net assets
acquired of NewVector to identifiable intangible assets and goodwill (see Note
(c)). The excess purchase price related to the acquired interest in PrimeCo was
allocated to goodwill for purposes of determining the Company's equity in
PrimeCo's results of operations (see Note (e)). In addition, this entry assumes
estimated professional fees of $12 million (primarily legal, investment bankers'
and accountants' fees) related to the Merger are paid from the Company's
available cash. $840 million was preliminarily allocated to PrimeCo,
representing $390 million related to the Company's Common and Preferred Stock,
and $450 million related to the debt assumed.
AGGREGATE PURCHASE PRICE
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------
NEWVECTOR PRIMECO TOTAL
----------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Total estimated purchase price............................... $ 4,173 $ 390 $ 4,563
Net deficit (assets) (after adjustments and including a debt
assumed)................................................... 110 (30) 80
----------- ----- ---------
Excess purchase price........................................ $ 4,283 $ 360 $ 4,643
----------- ----- ---------
----------- ----- ---------
</TABLE>
(b) Records the deferred tax liability related to identifiable intangible
assets, and a corresponding adjustment to goodwill (see Note (c)).
The Company is required by GAAP to record deferred tax liabilities for the
temporary differences between the initial assigned values to the identifiable
intangible assets and their tax bases. The deferred tax liabilities will be
amortized as a reduction of income tax expense over the useful lives of the
related identifiable intangible assets. Goodwill is considered a residual for
which no related deferred tax liability is recorded.
(c) Records the amortization expense for NewVector's identifiable intangible
assets and goodwill. For purposes of calculating the amortization of
intangibles, management has preliminarily estimated that the excess purchase
price should be allocated as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
MILLIONS)
-------------------
<S> <C>
Customer lists................................................................ $ 413
FCC licenses.................................................................. $ 2,574
</TABLE>
The remaining excess purchase price of $1,296 million at March 31, 1998 was
allocated to goodwill, together with $12 million related to Merger fees and
$1,216 million related to deferred tax liability on identifiable intangibles.
The amortization period for customer lists is four years and is forty years for
FCC licenses and goodwill.
(d) Records the Company's acquired 25% share of PrimeCo's net loss for the
quarter ended March 31, 1998 and the year ended December 31, 1997 under the
equity method of accounting.
(e) Records the amortization expense on goodwill for the acquisition of
MediaOne Group's 25% share of PrimeCo.
54
<PAGE>
EXPLANATORY NOTES TO THE PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
Management has preliminarily estimated that all the excess purchase price be
allocated to goodwill. PrimeCo is in its start-up phase and management
preliminarily estimates that the book value of its net assets, including its
licenses, approximates fair value. The amortization period for goodwill is forty
years.
(f) Records interest expense on $1,350 million of borrowings assumed by the
Company in the Merger.
The rates are based on assumed average interest rates of 6.6% for estimated
fixed-rate borrowings of $800 million and 5.67% on estimated variable-rate
borrowings of $550 million.
Upon consummation of the Merger, the Company borrowed under its commercial
paper program to refinance the debt of $1,350 million assumed in the Merger.
$700 million of this commercial paper was subsequently retired with proceeds
from two fixed-rate debt issuances in late April and May 1998. These debt
issuances were done under the Company's prior Registration Statement on Form S-3
(Reg. No. 33-62787), and have an effective interest rate of 6.475%. The Company
is about to close the sale of DEM 400 million 5.5% Notes due 2008. These Notes
will bring the total fixed-rate borrowings in excess of the amount assumed for
pro forma purposes. However, the combined effects of the differences in the
amounts estimated for fixed-rate debt and the differences in interest rates do
not materially change the Pro Forma Condensed Combined Statements of Income.
The interest rate applied to the estimated variable-rate borrowings of $550
million represents the average interest rate experienced by the Company for
commercial paper during 1997. The average interest rate for the first quarter of
1998 is not significantly different. The effect of a 1/8% change in interest
rates on interest expense to pro forma net income of the Company is immaterial.
(g) Records the income tax effects on the relevant pro forma adjustments
arising from the Merger at the combined statutory rate of 40.7%.
Relevant pro forma adjustments to the Condensed Combined Statements of
Income include interest, amortization expenses, and equity in the losses of
PrimeCo. Except for the amortization of goodwill, these adjustments were
tax-effected at the statutory rate resulting in a net tax benefit of $34 million
for the quarter ended March 31, 1998 and $146 million for the year ended
December 31, 1997.
(h) Records dividends on the Preferred Stock of $21 million for the quarter
ended March 31, 1998 and $85 million for the year ended December 31, 1997.
Dividends are based on a rate of 5.143%.
SELLING STOCKHOLDER
Pursuant to the terms of the PIES, MediaOne Group may deliver up to 26
million shares of Common Stock to the holders of the PIES at the maturity
thereof. This Prospectus relates to the offer and sale by MediaOne Group of such
shares of Common Stock, and up to 3.9 million additional shares of Common Stock
with respect to the PIES that are subject to an option granted by MediaOne Group
to the Underwriters in the PIES Offering solely to cover over-allotments. The
PIES are being offered by MediaOne Group pursuant to the PIES Prospectus.
MediaOne Group currently owns approximately 10.3% (59,313,621 shares) of the
outstanding Common Stock of the Company.
MediaOne Group acquired its shares of Common Stock subject to the terms of
an Amended and Restated Investment Agreement (the "Investment Agreement") dated
as of April 6, 1998 with the Company in connection with the Merger. The
Investment Agreement provides, among other things, that, subject to certain
exceptions, MediaOne Group, without the consent of the Company, shall not
acquire any additional shares of capital stock of the Company which would
increase MediaOne Group's ownership percentage of the voting capital stock of
the Company or take other specified actions with respect to the Company,
commonly the subject of standstill agreements between an issuer and a
significant stockholder.
55
<PAGE>
Pursuant to the Investment Agreement, MediaOne Group has certain
registration rights with respect to the shares of Common Stock it owns and may
not transfer any shares of Common Stock to any of its affiliates or any "group"
(within the meaning of section 13(d) of the Exchange Act) of which such
affiliate is a part. In addition, subject to certain limited exceptions,
MediaOne Group may not sell or transfer any shares of Common Stock to any person
or group in the event of a tender or exchange offer unless the Board of
Directors of MediaOne Group, upon the advice of legal counsel and financial
advisors, in good faith believes such a tender offer will result in shares being
purchased and MediaOne Group first offers the shares of Common Stock to the
Company. MediaOne Group may, however, under limited circumstances, make
competing acquisition proposals in the event of such a tender or exchange offer
or other acquisition proposals meeting certain criteria from non-affiliated
MediaOne Group entities. The Investment Agreement requires that MediaOne Group
vote the shares of Common Stock owned by it in favor of the individuals
nominated by the Company for election to the Board of Directors of the Company.
DESCRIPTION OF THE CAPITAL STOCK
COMMON STOCK
GENERAL
Under the Company's Certificate of Incorporation (the "Certificate of
Incorporation"), the Company is authorized to issue up to 1.1 billion shares of
Common Stock. The Common Stock is not redeemable, does not have any conversion
rights and is not subject to call. Holders of shares of Common Stock have no
preemptive rights to maintain their percentage of ownership in future offerings
or sales of stock of the Company. Holders of shares of Common Stock have one
vote per share in all elections of directors and on all other matters submitted
to a vote of stockholders of the Company. The holders of Common Stock are
entitled to receive dividends, if any, as and when declared from time to time by
the Board of Directors of the Company out of funds legally available therefor.
Upon liquidation, dissolution or winding up of the affairs of the Company, the
holders of Common Stock will be entitled to participate equally and ratably, in
proportion to the number of shares held, in the net assets of the Company
available for distribution to holders of Common Stock. The shares of Common
Stock currently outstanding are fully paid and nonassessable.
CERTAIN CERTIFICATE OF INCORPORATION PROVISIONS
Certain provisions in the Company's Certificate of Incorporation and Bylaws
may have the effect of delaying, deferring or preventing a change in control of
the Company. These provisions require that the Company's Board of Directors be
divided into three classes that are elected for staggered three-year terms;
provide that stockholders may act only at annual or special meetings and may not
act by written consent; do not provide for cumulative voting in the election of
directors; authorize the directors of the Company to determine the size of the
Board of Directors; require a vote of 66 2/3% of the shares outstanding for the
amendment of any of the foregoing provisions; require that stockholder
nominations for directors be made to the Nominating Committee of the Company
prior to a meeting of stockholders or pursuant to timely notice; provide that
special meetings of stockholders may be called only by certain officers of the
Company or by the Board of Directors; and authorize the Board of Directors to
establish one or more series of Preferred Stock, without any further stockholder
approval, having rights, preferences, privileges and limitations that could
impede or discourage the acquisition of control of the Company.
The Company's Certificate of Incorporation provides that outstanding shares
of the Company's stock are subject to redemption by the Company, by action of
the Board of Directors, if in the judgment of the Board of Directors such action
should be taken pursuant to applicable law to the extent necessary to prevent
the loss or secure the reinstatement of any license or franchise issued to the
Company or any subsidiary by any governmental agency to conduct any portion of
the business of the Company or any subsidiary, which license or franchise is
conditioned upon some or all of the holders of the Company's
56
<PAGE>
stock possessing prescribed qualifications. The redemption price is to be equal
to the fair market value of such shares. The redemption price may be paid in
cash, redemption securities or any combination thereof.
RIGHTS AGREEMENT
The Company's Board of Directors has adopted a stockholder rights plan (the
"Rights Plan") that provides for the distribution of rights ("Rights") to
holders of outstanding shares of Common Stock. Except as set forth below, each
Right, when exercisable, entitles the holder thereof to purchase from the
Company one one-hundredth of a share of Series A Preferred Stock at a price of
$80 per share, subject to adjustment. The Rights do not have voting rights.
Initially, the Rights are attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights certificates will
be distributed. The Rights will not separate from the Common Stock and will not
be exercisable until the earlier of either (i) a public announcement that a
person or group of affiliated or associated persons has acquired, or obtained
the right to acquire, beneficial ownership of securities representing 10% or
more of the outstanding shares of Common Stock (an "Acquiring Party") or (ii) 10
days following the commencement of (or a public announcement of an intention to
make) a tender offer or exchange offer which would result in any person or group
of affiliated persons becoming an Acquiring Party. The Rights will expire on the
earliest of (x) September 19, 2004, (y) consummation of a merger transaction
with a person or group acquiring Common Stock pursuant to a Permitted Offer
(defined below), or (z) redemption by the Company, as described below.
In the event that a person has become an Acquiring Party, proper provision
will be made so that each holder of a Right (other than an Acquiring Party) will
thereafter have the right (the "Subscription Right") for a 60-day period to
receive, upon the exercise of the Right by the holder at the then current
exercise price, that number of shares of Common Stock of the Company (or of
Series A Preferred Stock or other common stock equivalents if all Common Stock
has been issued) which would have a market value at the time of such transaction
of two times the exercise price for each Right. This provision of the Rights
Plan does not apply, however, to a tender offer or exchange offer for all
outstanding shares of the Company's Common Stock at a price and on terms
determined by at least a majority of the disinterested members of the Board of
Directors to be in the best interests of the Company and its stockholders (a
"Permitted Offer").
If, after a public announcement has been made that a person has become an
Acquiring Party, either (i) the Company is involved in a merger or other
business combination (other than with a person who acquired shares pursuant to a
Permitted Offer) or (ii) 50% or more of the Company's assets are sold in one or
a series of transactions, proper provision will be made so that each holder of a
Right (other than an Acquiring Party) will thereafter have the right to receive,
upon the exercise of the Right by the holder at the then current exercise price,
that number of shares of Common Stock of the Company or of the acquiring company
(whichever remains as the surviving corporation under the terms of the merger or
consolidation) which would have a market value at the time of such transaction
of two times the exercise price for each Right.
The Board of Directors, at its option, may at any time after a person
becomes an Acquiring Party (but not after the acquisition by such person of 50%
or more of the outstanding Common Stock) exchange on behalf of the Company all
or part of the then outstanding and exercisable Rights for shares of Common
Stock (or Common Stock equivalents), at an exchange ratio of one share of Common
Stock or equivalent for each Right.
At any time prior to the earlier to occur of either (i) a person becoming an
Acquiring Party or (ii) the expiration of the Rights, the Company may redeem the
Rights in whole, but not in part, at a price of $0.01 per Right (the "Redemption
Price"). After a person becomes an Acquiring Party, the Company may also redeem
the Rights in whole, but not in part, at the Redemption Price (x) if such
redemption is incidental to a merger or other business combination transaction
or series of transactions involving the
57
<PAGE>
Company but not involving an Acquiring Party or certain other related parties or
(y) following an event giving rise to, and the expiration of the 60-day exercise
period for, the Subscription Right if and for as long as any Acquiring Party
owns less than 10% of the Company's voting securities.
The Rights Plan may have the effect of delaying, deferring or preventing a
change in control of the Company without further action of the stockholders and
therefore could have a depressive effect on the price of the Common Stock.
LISTING
The Common Stock is listed on the New York Stock Exchange and the Pacific
Exchange under the symbol "ATI."
PLAN OF DISTRIBUTION
Lehman Brothers Inc., Morgan Stanley & Co. Incorporated and Goldman, Sachs &
Co., as underwriters of the PIES Offering (the "Underwriters"), have severally
agreed, subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") among MediaOne Group, AirTouch and the Underwriters,
to purchase from MediaOne Group, and MediaOne Group has agreed to sell to the
Underwriters, the aggregate number of PIES set forth opposite their names below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF PIES
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Lehman Brothers Inc.......................................................... 11,336,000
Morgan Stanley & Co. Incorporated............................................ 5,720,000
Goldman, Sachs & Co.......................................................... 5,720,000
BT Alex. Brown............................................................... 260,000
CIBC Oppenheimer Corp........................................................ 260,000
A.G. Edwards & Sons, Inc..................................................... 260,000
Everen Securities, Inc....................................................... 260,000
PaineWebber Incorporated..................................................... 260,000
Prudential Securities Incorporated........................................... 260,000
Advest, Inc.................................................................. 104,000
Robert W. Baird & Co. Incorporated........................................... 104,000
Dain Rauscher Wessels........................................................ 104,000
A Division of Dain Rauscher Incorporated
D.A. Davidson & Co. Incorporated............................................. 104,000
Fahnestock & Co. Inc......................................................... 104,000
Edward D. Jones & Co., L.P................................................... 104,000
Legg Mason Wood Walker, Incorporated......................................... 104,000
McDonald & Company Securities, Inc........................................... 104,000
Piper Jaffray Inc............................................................ 104,000
Ragen MacKenzie Incorporated................................................. 104,000
Raymond James & Associates, Inc.............................................. 104,000
Muriel Siebert & Co., Inc.................................................... 104,000
Stifel, Nicolaus & Company, Incorporated..................................... 104,000
Sutro & Co. Incorporated..................................................... 104,000
Tucker Anthony Incorporated.................................................. 104,000
Wheat First Securities, Inc.................................................. 104,000
---------------
Total.................................................................... 26,000,000
---------------
---------------
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase PIES is subject to certain conditions, and that, if any of the
foregoing PIES are purchased by the Underwriters
58
<PAGE>
pursuant to the Underwriting Agreement, all the PIES agreed to be purchased by
the Underwriters must be so purchased.
The Company has been advised by MediaOne Group that the Underwriters propose
to offer the PIES directly to the public at the public offering price set forth
on the cover page of the PIES Prospectus and to certain selected dealers at such
initial public offering price less a selling concession not in excess of $0.96
per PIES. The Underwriters may allow and such dealers may reallow, a concession
not in excess of $0.10 per PIES to certain brokers and dealers. After the
initial public offering, the public offering price, the concession to selected
dealers and the reallowance may be changed by the Underwriters.
MediaOne Group and AirTouch have agreed not to offer for sale, sell or
contract to sell, or otherwise dispose of, or announce the offering of, or file
or cause the filing of any registration statement under the Securities Act with
respect to, without the prior written consent of Lehman Brothers Inc., any
shares of Common Stock or any securities convertible into or exchangeable for,
or warrants to acquire, shares of Common Stock for a period of 90 days following
the date of the PIES Prospectus; provided, however, that such restriction shall
not effect the ability of (i) MediaOne Group or AirTouch to take any such
actions in connection with the PIES Offering or (ii) AirTouch to take any such
actions in connection with any employee stock option plan, stock ownership plan
or dividend reinvestment plan of AirTouch in effect at the date of the PIES
Prospectus.
MediaOne Group has granted to the Underwriters an option to purchase up to
an additional 3,900,000 PIES at the price to public less the aggregate
underwriting discount, solely to cover over-allotments, if any. Such option may
be exercised at any time up to 30 days after the date of the PIES Prospectus. To
the extent that this option is exercised, each Underwriter will be committed,
subject to certain conditions, to purchase the same proportion of PIES as the
number of PIES to be purchased and offered by such Underwriter in the above
table bears to the total number of initial PIES to be purchased by the
Underwriters.
MediaOne Group and AirTouch have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended and to contribute to payments that the Underwriters may be
required to make in respect thereof.
Until the distribution of the PIES is completed, rules of the Securities and
Exchange Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase PIES and Common Stock. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the PIES and Common Stock. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the PIES and Common Stock.
If the Underwriters create a short position in the PIES in connection with
the PIES Offering, (i.e., if they sell more PIES than are set forth on the cover
page of the PIES Prospectus), the Underwriters may reduce that short position by
purchasing PIES in the open market. The Underwriters also may elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.
The Underwriters also may impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase PIES in the open market to
reduce the Underwriters' short position or to stabilize the price of the PIES,
they may reclaim the amount of the selling concession from the selling group
members who sold those PIES as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might otherwise be in the absence of such purchases. The imposition of a
penalty bid might have an effect on the price of a security to the extent that
it were to discourage resales of the security by purchasers in the offering.
In the ordinary course of their business, including without limitation in
connection with their market making activities, the Underwriters and their
affiliates may effect transactions for their own account or for
59
<PAGE>
the account of their customers, and hold long or short positions, in PIES and
Common Stock. In addition, in connection with the PIES Offering, the
Underwriters or their affiliates may enter into one or more hedging transactions
with respect to the Common Stock. In connection with such hedging or market-
making activities or with respect to proprietary or other trading activities by
the Underwriters and their affiliates, the Underwriters or their affiliates may
enter into transactions in the Common Stock which may affect the market price,
liquidity or value of the PIES and which could be deemed to be adverse to the
interests of the holders of the PIES.
Lehman Brothers Inc., Morgan Stanley & Co. Incorporated and their respective
affiliates have from time to time performed various investment banking and
financial advisory services for AirTouch and its affiliates, for which customary
compensation has been received.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon by
Margaret G. Gill, Senior Vice President Legal, External Affairs and Secretary of
the Company. Pillsbury Madison & Sutro LLP, San Francisco, California has
advised the Company in connection with certain legal matters. Certain legal
matters will be passed upon for the Underwriters by Cleary, Gottlieb, Steen &
Hamilton, New York, New York.
EXPERTS
The consolidated financial statements of the Company and subsidiaries
incorporated in this Prospectus by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
With respect to the unaudited consolidated financial information of the
Company for the three-month periods ended March 31, 1998 and 1997, incorporated
in this Prospectus by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, PricewaterhouseCoopers LLP reported that
they have applied limited procedures in accordance with professional standards
for a review of such information. However, their separate report dated May 4,
1998, incorporated by reference herein, states that they did not audit and they
do not express an opinion on that unaudited consolidated financial information.
PricewaterhouseCoopers LLP has not carried out any significant or additional
audit tests beyond those which would have been necessary if their report had not
been included. Accordingly, the degree of reliance on their report on such
information should be restricted in light of the limited nature of the review
procedures applied. PricewaterhouseCoopers LLP is not subject to the liability
provisions of section 11 of the Securities Act of 1933 for their report on the
unaudited consolidated financial information because that report is not a
"report" or a "part" of the Registration Statement prepared or certified by
PricewaterhouseCoopers LLP within the meaning of sections 7 and 11 of the
Securities Act.
The consolidated financial statements and schedule of Cellular
Communications, Inc. incorporated by reference in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
incorporated by reference therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Mannesmann Mobilfunk GmbH as of December 31,
1997 and 1996, and for each of the years in the three-year period ended December
31, 1997 included in the Company's Annual Report on Form 10-K have been
incorporated by reference herein in reliance upon the report of KPMG Deutsche
Treuhand-Gesellschaft Aktiengesellschaft, independent auditors, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
60
<PAGE>
The financial statements of CMT Partners incorporated in this Prospectus by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, except as they relate to Kansas Combined Cellular, have been
audited by PricewaterhouseCoopers LLP, independent accountants, and, insofar as
they relate to Kansas Combined Cellular, by Arthur Andersen LLP, independent
accountants. Such financial statements have been so incorporated in reliance on
the reports of such independent accountants given on the authority of such firms
as experts in auditing and accounting.
The consolidated financial statements of New Par (A Partnership)
incorporated by reference in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon incorporated by
reference therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The audited consolidated financial statements of U S WEST NewVector Group,
Inc. and Subsidiaries as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997, incorporated by reference in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
61
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY AGENT. 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. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
CERTAIN DEFINITIONS............................ 2
AVAILABLE INFORMATION.......................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE.................................... 3
SUMMARY........................................ 4
DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS................................... 13
RISK FACTORS................................... 13
USE OF PROCEEDS................................ 16
CAPITALIZATION TABLE........................... 17
PRICE RANGE OF COMMON STOCK.................... 18
BUSINESS....................................... 19
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA......................................... 30
SELECTED HISTORICAL CONSOLIDATED DATA BY
BUSINESS UNIT................................ 31
SELECTED HISTORICAL PROPORTIONATE DATA......... 33
RECENT FINANCIAL DEVELOPMENTS ON A
PROPORTIONATE BASIS.......................... 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 37
PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................... 49
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS
OF MARCH 31, 1998............................ 51
PRO FORMA CONDENSED COMBINED STATEMENT OF
INCOME FOR THE QUARTER ENDED MARCH 31,
1998......................................... 52
PRO FORMA CONDENSED COMBINED STATEMENT OF
INCOME FOR THE YEAR ENDED DECEMBER 31,
1997......................................... 53
SELLING STOCKHOLDER............................ 55
DESCRIPTION OF THE CAPITAL STOCK............... 56
PLAN OF DISTRIBUTION........................... 58
LEGAL MATTERS.................................. 60
EXPERTS........................................ 60
</TABLE>
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
26,000,000 SHARES
AIRTOUCH COMMUNICATIONS, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-------------------
PROSPECTUS
July 30, 1998
---------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION, OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED
IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY MEDIAONE GROUP, INC. OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND
THEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF MEDIAONE GROUP SINCE THE DATE HEREOF. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS ARE NOT AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of the Offering................................................... S-3
Risk Factors.............................................................. S-5
MediaOne Group, Inc....................................................... S-9
Recent Developments....................................................... S-9
AirTouch Communications, Inc.............................................. S-10
Relationship Between MediaOne Group and AirTouch.......................... S-10
Capitalization............................................................ S-11
Summary Financial Data.................................................... S-12
Price Range and Dividend History of AirTouch Common Stock................. S-14
Use of Proceeds........................................................... S-14
Description of the PIES................................................... S-15
United States Federal Income Tax Consequences............................. S-26
Plan of Distribution...................................................... S-30
Legal Matters............................................................. S-32
Additional Information.................................................... S-32
PROSPECTUS
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 3
MediaOne Group, Inc....................................................... 4
Use of Proceeds........................................................... 5
Ratio of Earnings to Fixed Charges........................................ 5
Description of Debt Securities............................................ 5
Plan of Distribution...................................................... 10
Legal Opinions............................................................ 11
Experts................................................................... 11
</TABLE>
26,000,000 PIES(SM)
PREMIUM INCOME EXCHANGEABLE SECURITIES(SM)
OF
[LOGO]
6 1/4% EXCHANGEABLE NOTES
DUE AUGUST 15, 2001
EXCHANGEABLE INTO COMMON STOCK OF
[LOGO]
---------------------
PROSPECTUS SUPPLEMENT
JULY 30, 1998
------------------------
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
GOLDMAN, SACHS & CO.
- --------------------------------------------------------------------------------
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