<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- - - --- Exchange Act of 1934
For the quarterly period ended September 30, 1994
Commission File Number 1-12342
AIRTOUCH COMMUNICATIONS
A California Corporation
I.R.S. Employer Number 94-2952076
425 Market Street
San Francisco, CA 94105
(415) 658-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
On October 31, 1994, 493,567,503 shares of common stock were outstanding.
<PAGE> 2
PART I -- FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows . . . . . . . . . . 7
Notes to Condensed Consolidated Financial Statements . . . . . . . . 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . 17
Report of Independent Accountants . . . . . . . . . . . . . . . . . 28
</TABLE>
PART II -- OTHER INFORMATION
<TABLE>
<S> <C> <C>
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 31
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
----------------------------- -----------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Revenues
Wireless services and other revenues $293.4 $252.8 $828.7 $748.5
Cellular and paging equipment sales 24.4 19.1 65.5 51.7
Cost of cellular and paging equipment sales (27.4) (17.2) (67.3) (46.9)
--------- --------- --------- ---------
Net Operating Revenues 290.4 254.7 826.9 753.3
--------- --------- --------- ---------
Operating Expenses
Cost of revenues 39.7 37.4 111.6 111.6
Selling, general, administrative, and other expenses 182.7 125.7 489.3 393.3
Depreciation and amortization 51.9 43.7 147.4 129.9
--------- --------- --------- ---------
Total Operating Expenses 274.3 206.8 748.3 634.8
--------- --------- --------- ---------
Operating Income 16.1 47.9 78.6 118.5
Interest expense (2.0) (2.9) (5.2) (20.3)
Minority interests in net income of consolidated
partnerships and corporations (5.5) (13.9) (18.8) (43.0)
Equity in net income (loss) of unconsolidated
partnerships and corporations:
Domestic 37.1 19.0 100.1 44.6
International (0.7) (12.2) (6.9) (29.5)
Interest income 14.0 2.3 39.3 8.2
Miscellaneous income (expense) (0.5) 0.2 (5.2) (3.4)
--------- --------- --------- ---------
Income before income taxes and cumulative
effect of accounting change 58.5 40.4 181.9 75.1
Income taxes 24.1 25.1 86.9 49.6
--------- --------- --------- ---------
Income before cumulative effect of
accounting change 34.4 15.3 95.0 25.5
Cumulative effect of accounting change for
other postretirement benefits (net of
income taxes of $3.5) (Note B) - - - (5.6)
--------- --------- --------- ---------
Net Income $ 34.4 $ 15.3 $ 95.0 $ 19.9
====== ====== ====== ======
</TABLE>
(Continued next page)
3
<PAGE> 4
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Dollars in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
----------------------------- -----------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Per Share Amounts:
Income before cumulative effect of
accounting change $0.07 $0.04 $0.19 $0.06
Cumulative effect of accounting change for
other postretirement benefits (net of income taxes) - - - (0.01)
----- ----- ----- -----
Net income $0.07 $0.04 $0.19 $0.05
===== ===== ===== =====
Weighted average shares outstanding
(in millions) 493.4 424.0 493.1 424.0
===== ===== ===== =====
</TABLE>
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
4
<PAGE> 5
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 650.6 $ 646.7
Accounts receivable, net of allowance for
uncollectibles of $10.7 and $9.2 in 1994
and 1993, respectively 165.8 132.7
Held-to-maturity investments 503.2 814.0
Available-for-sale securities 110.4 --
Other receivables 20.7 22.1
Other current assets 64.7 45.3
-------- --------
Total current assets 1,515.4 1,660.8
-------- --------
Property, plant, and equipment 1,418.9 1,175.5
Less: accumulated depreciation 547.9 433.4
-------- --------
Net property, plant, and equipment 871.0 742.1
Investments in unconsolidated partnerships and corporations 1,316.8 1,154.5
Intangible assets, net 475.7 413.2
Deferred charges and other noncurrent assets 79.6 106.1
-------- --------
Total Assets $4,258.5 $4,076.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $138.7 $ 149.2
Due to Telesis affiliates -- 40.7
Other current liabilities 171.1 124.1
-------- --------
Total current liabilities 309.8 314.0
Long-term debt 86.7 68.6
Deferred income taxes 219.0 197.6
Deferred credits 62.6 54.1
-------- --------
Total Liabilities 678.1 634.3
-------- --------
Commitments and contingencies.
Minority interests in consolidated
partnerships and corporations 137.9 105.1
-------- --------
</TABLE>
(Continued on Next Page)
5
<PAGE> 6
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in millions, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
----------- -----------
(Unaudited)
<S> <C> <C>
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 50,000,000
shares authorized; no shares issued or
outstanding) -- --
Common stock ($.01 par value; 1,100,000,000
shares authorized; 493,624,614 shares issued and
493,501,654 shares outstanding at September 30, 1994;
492,622,960 shares issued and 492,500,000 shares
outstanding at December 31, 1993) 4.9 4.9
Additional paid-in capital 3,725.1 3,719.5
Accumulated deficit (293.1) (387.9)
Currency translation adjustment 1.7 0.8
Other 3.9 --
-------- --------
Total Shareholders' Equity 3,442.5 3,337.3
-------- --------
Total Liabilities and Shareholders' Equity $4,258.5 $4,076.7
======== ========
</TABLE>
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
6
<PAGE> 7
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
For the 9 Months Ended
September 30,
-----------------------------
1994 1993
----------- -----------
<S> <C> <C>
Cash From (Used For) Operating Activities:
Net income $ 95.0 $ 19.9
Adjustments to reconcile net income for items
currently not affecting operating cash flows:
Depreciation and amortization 147.4 129.9
Deferred income taxes 4.2 20.9
Minority interests in net income of
consolidated partnerships and corporations 18.8 43.0
Equity in net income of unconsolidated
partnerships and corporations (93.2) (15.1)
Distributions received from equity investments 60.2 27.2
(Gain) Loss on sale of assets 0.6 (0.1)
Cumulative effect of accounting change
for other postretirement benefits -- 9.1
Changes in assets and liabilities:
Accounts receivable, net (28.4) (22.0)
Other current assets and receivables (12.8) 137.5
Deferred charges and other noncurrent assets (68.6) (12.5)
Accounts payable and other current liabilities (0.7) (31.1)
Deferred credits and other liabilities 8.6 7.2
--------- ---------
Cash From Operating Activities 131.1 313.9
--------- ---------
Cash From (Used For) Investing Activities:
Additions to property, plant, and equipment (258.3) (158.4)
Proceeds from sale of property, plant, and equipment 7.4 7.1
Capital contributions to unconsolidated
partnerships and corporations (77.4) (108.2)
Cost of acquiring telecommunications interests (52.1) (107.2)
Maturities of held-to-maturity investments 310.8 --
Purchase of available-for-sale securities (100.3) --
Other investing activities 1.5 (1.7)
--------- ---------
Cash Used For Investing Activities (168.4) (368.4)
--------- ---------
</TABLE>
(Continued on next page)
7
<PAGE> 8
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
For the 9 Months Ended
September 30,
-----------------------------
1994 1993
----------- -----------
<S> <C> <C>
Cash From (Used For) Financing Activities:
Retirement of notes and obligations payable (5.4) (0.4)
Retirement of long-term debt from Telesis affiliate -- (185.0)
Distributions to minority interests in
consolidated partnerships and corporations (25.4) (23.3)
Contributions from minority interests in
consolidated partnerships and corporations 37.4 3.8
Dividends paid to Telesis -- (75.5)
Decrease in short-term borrowings from Telesis affiliates (0.3) (821.3)
Proceeds from issuing long-term debt 19.2 1.1
Equity infusion by Telesis 5.5 1,046.9
Issuance of loan to Telesis affiliates -- (6.8)
Loan repayments from Telesis affiliates -- 106.5
Other financing activities 10.2 2.2
--------- ---------
Cash From Financing Activities 41.2 48.2
--------- ---------
(Decrease) Increase In Cash and Cash Equivalents 3.9 (6.3)
Beginning Cash and Cash Equivalents 646.7 17.1
--------- ---------
Ending Cash and Cash Equivalents $650.6 $ 10.8
========= =========
Supplemental schedule of noncash investing activities:
Contribution of assets to CMT Partners at book value -- $ 206.0
========= =========
</TABLE>
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
8
<PAGE> 9
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
Prior to April 1, 1994, AirTouch Communications (the "Company") was an
86.1% owned subsidiary of Pacific Telesis Group ("Telesis"). On April
1, 1994 Telesis distributed to its shareholders all of the common
stock of the Company owned by Telesis.
The Condensed Consolidated Financial Statements include the accounts
of the Company, its subsidiaries and partnerships in which the Company
has controlling interests. All significant intercompany balances and
transactions have been eliminated. Certain prior period items have
been reclassified to conform with the 1994 format; however, these
reclassifications did not affect previously reported net income or
accumulated deficit.
The Condensed Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles and are
presented in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC") applicable to interim
financial information. Accordingly, certain footnote disclosures have
been condensed or omitted. The Company recommends that these interim
financial statements be read in conjunction with its 1993 financial
statements included with the 1993 Annual Report on Form 10-K.
In the Company's opinion, the Condensed Consolidated Financial
Statements include all adjustments necessary to present fairly the
financial position and results of operations for each interim period
presented. All such adjustments are normal recurring adjustments.
The Condensed Consolidated Financial Statements have been reviewed by
Coopers & Lybrand, independent accountants, and their report is
included herein.
B. ACCOUNTING CHANGES
On January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 112, "Employers'
Accounting for Postemployment Benefits," and SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities."
SFAS 112 establishes accounting standards for employers who provide
benefits to former or inactive employees after employment but before
retirement ("postemployment benefits"). SFAS 112 requires the Company
to use the accrual method of accounting for the estimated costs of
postemployment benefits. Implementation of SFAS 112 did not materially
impact the Company's results of operations or its financial condition.
SFAS 115 establishes accounting standards for investments in equity
securities that have readily determinable fair values and for all
investments in debt securities. SFAS 115 requires the Company to
classify certain investments in debt and equity securities into one of
three categories: held-to-maturity, available-for-sale or trading.
SFAS 115 also requires the Company to recognize unrealized holding
gains and losses associated with available-for-sale securities as a
separate component of shareholders' equity. Implementation of SFAS
115 did not materially impact the Company's financial condition or
its results of operations. Implementation of SFAS 115, however, did
change the classification and carrying value of certain noncurrent
investments in marketable equity securities. See Note E for further
discussion. In accordance with SFAS 115, prior years' financial
statements have not been restated.
Effective January 1, 1993, the Company adopted the provisions of SFAS
106, "Employers' Accounting for Postretirement Benefits Other than
Pensions". SFAS 106 required the Company to change its method of
accounting for postretirement benefits from a cash basis to an accrual
basis. The implementation of SFAS 106 required the Company to record a
one-time after-tax transition obligation of $5.6 million ($9.1 million
pre-tax) in the first quarter of 1993.
9
<PAGE> 10
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
C. EARNINGS PER SHARE
Earnings per share were computed using weighted average common shares
outstanding totaling 493,422,000 for the 3 months ended September 30,
1994, 493,072,000 for the 9 months ended September 30, 1994 and
424,000,000 for the 3 and the 9 months ended September 30, 1993.
D. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS AND CORPORATIONS
The equity method of accounting is used for all unconsolidated entities
in which the Company has significant influence. Two of these
investments, New Par and Mannesmann Mobilfunk GmbH ("MMO"), meet the
criteria for "significant subsidiaries" as defined by the SEC.
Condensed operating results for New Par and MMO are as follows:
<TABLE>
<CAPTION>
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
--------------------------- ---------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C>
NEW PAR
Net operating revenues $121.1 $108.1 $337.0 $ 300.0
Operating income $ 35.4 $ 24.4 $ 94.0 $ 70.1
Net income $ 35.4 $ 24.3 $ 92.3 $ 70.3
MMO
Net operating revenues $247.9 $118.7 $627.8 $ 274.4
Operating income (loss) $ 33.6 $(36.3) $ 48.9 $(110.1)
Net income (loss) $ 18.5 $(32.2) $ 19.3 $ (57.7)
</TABLE>
E. INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company's held-to-maturity investment portfolio consists
principally of highly liquid debt instruments with contractual
maturities in excess of three months but less than one year. Auction
rate reset type securities are shares in variable rate preferred
municipal funds with contractual reset periods greater than 90 days.
The portfolio, carried at amortized cost which approximates fair
value, is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
----------- -----------
(Dollars in millions)
(Unaudited)
<S> <C> <C>
United States government securities $294.2 $661.3
State governmental municipal bonds 142.1 58.5
Local governmental municipal bonds 19.4 54.6
Miscellaneous commercial paper
and auction rate reset type securities 38.8 26.7
------ ------
494.5 801.1
Accrued interest 8.7 12.9
------ ------
$503.2 $814.0
====== ======
</TABLE>
10
<PAGE> 11
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company's available-for-sale securities of $110.4 million consist
of United States government securities for $100.3 million and Qualcomm
for $10.1 million. The recorded asset value of these securities
approximates market.
The Company owns 400,000 shares of common stock in Qualcomm, a
publicly held developer of digital mobile communications technology.
Prior to January 1, 1994, the Company carried its investment in
Qualcomm at cost. To comply with the provisions of SFAS 115, the
Company was required to reclassify its investment in Qualcomm as an
available-for-sale security effective January 1, 1994. Accordingly,
the Company increased its carrying value of the investment in Qualcomm
to reflect fair value and created a corresponding unrealized holding
gain as a separate component of shareholders' equity. At September 30,
1994, the Company carried its investment in Qualcomm at $10.1 million,
which reflected market value, compared to a net cost of $2.0 million.
The Company's unrealized holding gain in Qualcomm, net of tax, is $4.8
million at September 30, 1994. At December 31, 1993, the Company's
net investment in Qualcomm was $2.0 million compared to a market value
of $10.6 million. The following table summarizes the changes in
unrealized holding gains, net of tax:
<TABLE>
<CAPTION>
For the 9 Months
Ended September 30,
1994
---------------
(Dollars in millions)
<S> <C>
Balance at beginning of period --
Unrealized holding gains, net of tax $4.8
----
Balance at end of period $4.8
====
</TABLE>
F. DEBT
During September 1994 NordicTel Holdings AB obtained an additional
credit facility payable to a group of lenders. At September 30, 1994,
a balance of approximately $16.7 million was outstanding. Under the
facility approximately $55.6 million of advances are available for the
purchase of digital (GSM) cellular telephone equipment. Interest
accrues on the outstanding balance at the STIBOR rate at the beginning
of each interest period plus 0.4% per annum. Interest is payable in
either three or six month periods as specified by NordicTel. The
principal amount of the advances and any unpaid interest is due on
February 28, 1997.
G. REVOLVING LINE OF CREDIT
In March 1994, the Company signed a definitive bank loan agreement for
a $600 million non-amortizing revolving line of credit (the
"Facility"). The Facility provides the Company with funding for
general corporate purposes and with standby letters of credit to
support its obligations to purchase shares in Cellular Communications,
Inc. The Facility is available in the form of committed advances or
standby letters of credit and expires in March 1997. Interest on
advances accrues at a rate equal to an index selected by the Company
plus a margin which is based upon the Company's long-term senior
unsecured debt rating. Interest on outstanding but undrawn standby
letters of credit accrues at a margin which is based upon the
Company's long-term senior unsecured debt rating. The Company also
has the option to pledge United States Treasury and agency securities
in exchange for a significantly reduced margin. At September 30,
1994, the Company had voluntarily pledged approximately $600 million
of securities classified as held-to-maturity and available-for-sale.
Provided the Company is not in default under the Facility, these
securities are immediately, without restriction, available for
redemption by the Company.
11
<PAGE> 12
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
H. CELLULAR COMMUNICATIONS, INC.
Under the terms of a merger agreement with Cellular Communications,
Inc. ("CCI"), the Company is obligated to purchase up to 10.04 million
CCI shares in October 1995 at $60 per share. To support this
obligation, the Company has issued a $600 million irrevocable letter
of credit under the Facility for the benefit of CCI. This letter of
credit expires in 1996. As of September 30, 1994, there have been no
draws against the letter of credit.
In connection with the merger agreement, the Company is required to
pledge to CCI certain CCI shares owned by the Company. At September
30, 1994, such shares pledged to CCI carried a net investment of
$202.8 million and had a market value of $301.2 million. The shares
represent approximately 12% of CCI's outstanding common stock on a
fully diluted basis. The Company will continue to pledge any
additional CCI shares it acquires up to 15% of CCI's outstanding
common stock on a fully diluted basis.
I. INCOME TAX EXPENSE
The Company's estimated annualized effective tax rate for 1994 is
approximately 47.8%, a decline of approximately 15.0 percentage points
from the 62.8% effective tax rate for the year ended December 31,
1993. The decline in the estimated annualized effective tax rate for
1994 was primarily caused by: tax-exempt interest income earned in
1994; a decline in equity losses of unconsolidated partnerships and
corporations as a percentage of operating income; and the inclusion of
the tax effects of changing deferred taxes for the increase in the
corporate tax rate from 34% to 35% in 1993.
J. U S WEST Joint Venture
On July 25, 1994, the Company and U S WEST, Inc. ("U S WEST")
announced an agreement to combine their domestic cellular properties.
The initial phase involves the formation of a partnership known as WMC
Partners, L.P. ("WMC"), in which the Company and U S WEST will hold
initial equity interests of approximately 70 percent and 30 percent,
respectively. The closing of this initial phase (the "Closing"),
which is conditioned on certain federal and state regulatory
approvals, is expected to occur in the third quarter of 1995. After
the Closing, WMC will provide services to the partners and their
domestic cellular properties. During this phase, the cellular
properties of the parties will continue to be owned by the individual
partners.
Simultaneous with the formation of WMC, the parties formed an equally
owned partnership to pursue new Personal Communications Services
("PCS") opportunities. In conjunction with the partnership described
in Note M in the Notes to the Condensed Consolidated Financial
Statements, the PCS partnership will construct and operate PCS systems
in areas where the partners currently do not have cellular operations.
WMC will also provide services to the PCS partnership.
In the next phase, the partners will contribute their domestic
cellular properties to WMC. This contribution is expected to occur
upon the lifting of certain restrictions imposed by the Modification
of Final Judgment (the "MFJ"), or earlier, at the Company's option,
but will occur in any event no later than July 25, 1998. The PCS
partnership also will be merged into WMC, either at the time the
cellular properties are contributed or three years after it acquires
its PCS license, whichever is later.
12
<PAGE> 13
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
U S WEST has the right, which is exercisable after full relief from
the MFJ has been obtained but which expires on July 25, 2004, to
exchange its interest in WMC for up to 19.9% of the Company's common
stock outstanding at the time of the exchange. Any such exchange will
be made at a ratio reflecting the appraised private market value of US
WEST's interest in WMC and the appraised public market value of the
shares of the Company's common stock to be acquired by U S WEST in the
exchange. In the event that the value of U S WEST's interest in WMC
determined by such appraisals would result in the issuance to U S WEST
of more than 19.9% of the Company's then outstanding common stock, U S
WEST is entitled to receive the excess in the form of non-voting
preferred stock. The Company has amended its shareholder rights
agreement so that U S WEST will not be deemed to be an "Acquiring
Person," as defined therein, by reason of its rights in connection
with the exchange.
U S WEST also has the right, exercisable between July 25, 1999, and
July 25, 2009, to exchange its interest in WMC for common stock of the
Company to be held by a trust for purposes of systematic sale to the
public. Any such exchange will be made at a ratio reflecting the
appraised private market value of U S WEST's interest in WMC and an
averaged trading price of the Company's common stock during a period
prior to U S WEST's exercise of the right.
The Company has the right to cause the exchange to occur either (a)
after the later of full MFJ relief and July 25, 2004, if there is a
deadlock with U S WEST regarding the management of WMC or (b) at any
time after full MFJ relief has been obtained, if at such time U S WEST
holds less than a 5% interest in WMC.
Upon the exercise by U S WEST of its right to exchange its interest in
WMC for capital stock of the Company, U S WEST will be entitled to
certain governance rights (including representation on the Company's
board of directors) as well as registration rights. U S WEST is
subject to certain standstill restrictions with respect to the Company
through July 25, 2004, unless such restrictions are earlier terminated
or suspended.
K. COMMITMENTS AND CONTINGENCIES
Antitrust Litigation
A class action complaint was filed in November 1993 naming the Company
as general partner for Los Angeles SMSA Limited Partnership. The
plaintiff alleges that Los Angeles Cellular Telephone Company and the
Company conspired to fix the price of wholesale and retail cellular
service in the Los Angeles market. The plaintiff alleges damages for
the class "in a sum in excess of $100 million." The Company has
answered the complaint and intends to defend itself vigorously. The
Company is attempting to coordinate for discovery several other
antitrust cases brought by individual plaintiffs. The Company does
not anticipate that these proceedings will have a material adverse
effect on the Company's financial position.
In four separate class action complaints filed during October 1994 in
Los Angeles, San Diego and San Francisco, plaintiffs allege similar
facts and circumstances as the complaint described in the previous
paragraph. The Company does not anticipate that these proceedings will
have a material adverse effect on the Company's financial position.
California Public Utilities Commission Actions
In December 1993, the California Public Utilities Commission ("CPUC")
issued an Order Instituting Investigation ("OII") into the regulation
of mobile telephone service and wireless communications. In an
interim decision issued on August 3, 1994, the CPUC stated its intent
to exercise its option under federal law to file a petition with the
Federal Communications Commission ("FCC") to retain regulatory
authority over the rates and entry of cellular carriers for an interim
period of 18 months beginning September 1, 1994. The CPUC made the
filing with the FCC on August 9, 1994. The FCC has twelve months to
rule on the petition. The Company filed its Opposition to the CPUC's
petition on September 19, 1994. Reply comments were filed with the
FCC on October 19, 1994. Pending the FCC's decision, the CPUC will
continue its current authority in California.
13
<PAGE> 14
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In its August 3, 1994 decision, the CPUC decided to retain the
existing pricing guidelines. In addition, the CPUC stated it was
adopting, as an interim measure, the unbundling of wholesale network
elements from other service functions. This limited measure requires
no cost-of-service determination as it continues to allow cellular
carriers to charge market rates for these unbundled services, the sum
of which can not exceed the current wholesale rates. Based on the
Company's interpretation of the CPUC's interim order, the Company does
not anticipate any material adverse effect on its financial position
or results of operations. On September 6, 1994, the Company filed an
Application for Rehearing of the CPUC August 3rd decision stating that
the CPUC exceeded its authority by ordering that cellular carriers
must unbundle their wholesale rates and allow a reseller's switch to
be interconnected. The Company also requested that the CPUC stay its
decision immediately. The CPUC has not ruled on the Company's
application or any of the other applications for rehearing.
The CPUC deferred to later phases of its ongoing investigation into
the mobile telephone service industry any other issues not decided in
its August 3, 1994 order. At this time, the Company is unable to
predict the financial effects of this ongoing investigation.
Other
The Company has executed various forms of financial support on behalf
of certain subsidiaries and affiliates to secure performance
guarantees, refundable security deposits and other credit facilities.
These forms of financial support range from letters of responsibility,
which provide little or no financial recourse to the Company, to
unconditional guarantees. The Company estimates the amount of
financial recourse created by these various forms of financial support
not otherwise presented on the consolidated balance sheet as an
obligation as of September 30, 1994 at $12.0 million. This amount
includes $10.5 million in guarantees executed on behalf of a single
third party. The Company believes that the likelihood of having to
pay under these guarantees is remote.
Separately, a subsidiary of the Company guarantees the liabilities of
a third party, for which the subsidiary is indemnified by minority
shareholders unaffiliated with the Company. The Company believes it
is remote that it will be required to pay under this guarantee.
Additionally, in August 1993, the Company provided a letter supporting
the commercial paper program entered into by Telecel Comunicacoes
Pessoais, S.A. in which the Company may be liable for its
proportionate share of the loans issued under the program if certain
loan covenants are not met. As of September 30, 1994, the potential
liability is approximately $7.3 million. The Company believes that
the likelihood of having to pay under the letter is remote.
L. 1993 LONG TERM STOCK INCENTIVE PLAN
Under the 1993 Long Term Stock Incentive Plan (the "Plan"), the
Company has reserved 24.0 million shares of common stock to be granted
to eligible employees in the form of stock options, stock appreciation
rights ("SARs"), restricted shares and stock units. In connection
with the spin-off of the Company by Telesis on April 1, 1994, the
Company replaced 1.3 million Telesis options and SARs with 3.3 million
options and SARs of the Company. An additional 2.4 million options
were granted to certain key employees.
14
<PAGE> 15
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Through September 30, 1994, 0.7 million restricted shares of the
Company's common stock with a fair market value of $20.8 million were
issued under the Plan to eligible employees. The restrictions will be
removed upon vesting, which will occur over a 3 to 10 year period.
Early vesting can occur under certain circumstances, such as upon a
doubling of the Company's IPO share value of $23 for a specified
period of time or upon a change in control of the Company. The
remaining deferred compensation at September 30, 1994 (approximately
$14.6 million) is a reduction to Additional Paid in Capital.
Compensation expense is amortized to the Income Statement over the
vesting period ranging from 3 to 10 years. Upon vesting, the
remaining deferred compensation, if any, will be recognized
immediately.
M. SUBSEQUENT EVENTS
On October 20, 1994, the Company and U S WEST further announced the
formation of a consortium between their wireless joint venture
("ATI/USW") and the wireless joint venture announced in June of this
year between Bell Atlantic Corporation ("BA") and NYNEX Corporation
("NYNEX") ("BA/NYN"). This consortium consists of two partnerships,
each equally owned by ATI/USW and BA/NYN.
The first partnership (the "Combined PCS Partnership") is intended to
bid for, construct and operate PCS licenses and systems in areas which
complement the existing domestic cellular franchises of the Company,
US WEST, BA and NYNEX. This entity will be governed by a board
composed of three members from each of ATI/USW and BA/NYN.
The second partnership is intended to provide services to the existing
cellular businesses of the four parties and to any PCS properties
acquired by the consortium. It also is chartered to develop technical
and service standards for wireless properties, adopt a national brand
and marketing strategy, develop information technology and create a
national distribution strategy. The entity will be governed by a
board composed of three members from each of ATI/USW and BA/NYN, as
well as one independent member.
Unlike the Company's joint venture with U S WEST, the agreements with
BA/NYN do not provide for further merger of cellular properties.
Accordingly, each of ATI/USW and BA/NYN will continue to hold such
properties separately. In addition, either such joint venture after
seven years may cause the Combined PCS Partnership to be dissolved and
any PCS properties owned by it to be allocated as equally as possible
between them. BA and NYNEX each are subject to certain standstill
restrictions with respect to the Company through October 20, 2001,
unless such restrictions are earlier terminated or suspended.
Under the agreements with BA/NYN, the Company as a partner in ATI/USW
may be responsible for a portion of any tax liability that BA and
NYNEX might incur by divesting cellular properties in territories that
overlap with those of the Company or U S WEST. The Company is unable
to estimate the impact, if any, of this provision at this time.
On November 8, 1994, the Company was a successful bidder in the FCC
auction of regional narrowband PCS licenses, purchasing three regional
50/12.5 KHz licenses. These licenses, covering the northeast,
central, and western regions of the United States will be used to
expand services in existing and new markets.
In October 1994 the Financial Accounting Standards Board issued SFAS
No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments." SFAS 119 requires additional
disclosures concerning derivatives and certain financial instruments
which will not have a significant impact on the financial position or
the results of operations of the Company. The standard requires the
Company to implement its requirements by fiscal year ending December
31, 1994.
15
<PAGE> 16
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
N. ADDITIONAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
September 30, December 31
1994 1993
------------- ------------
(Dollars in millions)
<S> <C> <C>
Miscellaneous other current liabilities:
Accrued taxes $18.9 $28.2
Advance billings and customer deposits $33.7 $22.4
Accrued FCC narrowband license $37.6 -
Current portion of long-term debt $16.8 $10.3
</TABLE>
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion is intended to facilitate the understanding and
assessment of significant changes and trends related to the results of
operations and financial condition of AirTouch Communications together with its
consolidated subsidiaries and partnerships (the "Company"). This discussion
and analysis should be read in conjunction with the Company's condensed
consolidated financial statements and notes.
CONSOLIDATION VS. EQUITY METHOD OF ACCOUNTING. For financial statement
reporting purposes, the Company consolidates each subsidiary and partnership in
which it has a controlling interest. Therefore, in addition to the Company's
wholly owned cellular systems in San Diego and Atlanta, the Company
consolidates the entities that hold the licenses for cellular systems operating
in Los Angeles and Sacramento. Prior to the formation of the partnership with
McCaw Cellular Communications, Inc. ("CMT Partners") in September 1993, the
Company consolidated the partnership that operated a cellular system in the San
Francisco and San Jose markets. In addition, the Company consolidates its
domestic paging operations, all of which are wholly owned; AirTouch Teletrac
("Teletrac"), a 51%-owned joint venture offering vehicle location service in
six markets in the United States; NordicTel Holdings AB ("NordicTel"), a
51%-owned joint venture that owns and operates a cellular network in Sweden
through its subsidiary; its paging subsidiaries in Thailand; and the Korean
subsidiary providing credit card verification system sales and support.
Revenues, expenses, assets, and liabilities of consolidated entities are
reflected in the corresponding line items in the Company's condensed
consolidated financial statements.
The equity method of accounting is generally used to account for the operating
results of entities over which the Company has significant influence but in
which it does not have a controlling interest. The Company has used the equity
method to account for CMT Partners since its formation. The use of the equity
method to account for CMT Partners has reduced the growth of the Company's
reported revenues and expenses. Additional entities accounted for under the
equity method primarily include the partnership ("New Par") with Cellular
Communications, Inc. ("CCI"), and certain international interests, including
Mannesmann Mobilfunk GmbH ("MMO") and Telecel Comunicacoes Pessoais, S.A.
("Telecel"). With respect to these entities, the Company recognizes its
proportionate share of the net income (loss) of each such entity in the line
item entitled "Equity in net income (loss) of unconsolidated partnerships and
corporations." The revenues and expenses of such entities are not otherwise
reflected in the Company's condensed consolidated financial statements.
PROPORTIONATE ACCOUNTING. Proportionate accounting is not required by, or
intended to replace the Condensed Consolidated Financial Statements prepared in
accordance with, generally accepted accounting principles ("GAAP") for the
cellular industry. However, because significant assets of the Company are not
consolidated and because of the substantial effect of the formation of certain
joint ventures on the year-to-year comparability of the Company's consolidated
financial results, the Company believes that proportionate operating data
facilitates the understanding and assessment of its condensed consolidated
financial statements. Proportionate accounting reflects the relative weight of
the Company's ownership interests in its domestic and international operations.
For example, the Company owns an 84% interest in a partnership which operates a
cellular system in Los Angeles. Under GAAP, 100% of the operating revenues and
expenses of the Company's Los Angeles cellular system would be included in the
respective line items in the Company's condensed consolidated financial
statements with 16% of the net income from the system included in the line item
entitled "Minority interests in net income of consolidated partnerships and
corporations." By contrast, under proportionate accounting, only 84% of such
system's revenues and expenses would be included. In addition, under
proportionate accounting, the Company includes its share of revenues and
expenses of equity investments in which it shares control. For example, 50% of
the revenues and expenses of New Par, as well as an additional interest
reflecting the Company's ownership of equity in CCI, would be included. A
discussion of the Company's domestic cellular results of operations on a
proportionate basis is set forth below under "Proportionate Results of
Operations."
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
U S WEST JOINT VENTURE
On July 25, 1994, the Company and U S WEST, Inc. ("U S WEST") announced an
agreement to combine their domestic cellular properties. (See Note J in the
Notes to Condensed Consolidated Financial Statements.) As a result of this
transaction, one of management's priorities will be to mitigate potential
near-term dilutive effects that this transaction may have on domestic cellular
earnings.
BELL ATLANTIC/NYNEX CONSORTIUM
On October 20, 1994, the Company and U S WEST announced the formation of a
consortium between their wireless joint venture and the wireless joint venture
between Bell Atlantic Corporation and NYNEX Corporation. (See Note M of Notes
to Condensed Consolidated Financial Statements.)
RESULTS OF OPERATIONS
The following discussions and data compare both the three-month and nine-month
periods ended September 30, 1994 to the corresponding periods in 1993. Results
for the first nine months of 1994 may not be indicative of results for the full
year. The discussions below do not assess the impact of the U S WEST joint
venture on future operating results, future financial condition, or future
liquidity. See "U S WEST Joint Venture" above and in Note J in the Notes to
Condensed Consolidated Financial Statements.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
NET OPERATING REVENUES. The components of the Company's net operating revenues
are shown below:
<TABLE>
<CAPTION>
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
----------------------------- -----------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C>
Operating Revenues
Wireless services and other revenues:
Cellular service $228.0 $200.7 $642.9 $603.4
Paging service 48.6 38.8 138.2 108.5
Vehicle location service 1.6 1.1 4.5 2.8
Other revenues 15.2 12.2 43.1 33.8
--------- --------- --------- ---------
293.4 252.8 828.7 748.5
--------- --------- --------- ---------
Net cellular and paging equipment sales:
Revenues 24.4 19.1 65.5 51.7
Cost of equipment sold (27.4) (17.2) (67.3) (46.9)
--------- --------- --------- ---------
(3.0) 1.9 (1.8) 4.8
--------- --------- --------- ---------
Net operating revenues $290.4 $254.7 $826.9 $753.3
========= ========= ========= =========
</TABLE>
CELLULAR SERVICE. Cellular service revenues primarily consist of air time,
access fees, and in-bound roaming charges. Consolidated cellular service
revenues for the 1994 periods are not comparable to those for the 1993 periods
because revenues for the San Francisco/San Jose cellular system were
consolidated until the formation of CMT Partners on September 1, 1993. If the
revenues from such system are not included in the 1993 amounts, the Company's
third quarter and year to date revenues increased 35.1% and 34.5%,
respectively. Third quarter and year to date comparisons hereafter are based
on 1993 amounts as adjusted to give retroactive effect to the adoption of
equity accounting for CMT Partners (the "CMT Adjustment"). Third quarter and
year to date revenue increases were driven primarily by continued domestic
subscriber growth. Domestic subscribers, after giving effect to the CMT
Adjustment, grew 10% during the third quarter of 1994 compared to 9% during the
third quarter of 1993. Total domestic subscribers, giving effect to the CMT
Adjustment, grew 42% from September 30, 1993 to September 30, 1994. Domestic
subscribers are customers in the Company's six managed markets which include
Los Angeles, Atlanta, Sacramento, San Diego, Wichita, and Topeka. Domestic
revenue gains from subscriber growth were partially offset by continued
declining average revenue per subscriber caused by lower usage from new
subscribers and rate reductions made in 1993 and 1994 to meet competitive
pressures. The Company expects that average revenue per domestic subscriber
will continue to decline, consistent with industry trends, as it adds new
domestic subscribers and responds to competitive market pressures. Third
quarter and year to date revenue increases were also attributable to the
international revenues of NordicTel, which accounted for 12.5% of the third
quarter increase and 10.4% of the year to date increase. The Company acquired
a 51% interest in NordicTel in October 1993 and consolidates its operations.
PAGING SERVICE. Paging service revenues consist primarily of paging service
charges and rentals of paging units in the United States and, to a lesser
extent, Thailand. Revenues from paging services increased 25.3% in the third
quarter of 1994, reflecting the Company's continued penetration in existing
markets primarily through successful retail and reseller pager sales programs.
Year to date revenues from paging services improved 27.4% primarily due to a
35% increase in the number of domestic paging units in service, the
establishment of new paging operations, and an acquisition. Year to date
revenues were partially offset by an 8% decline in average revenue per domestic
unit. The Company expects revenue per domestic unit to continue to decline,
consistent with industry trends, as it responds to competitive market
pressures.
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
VEHICLE LOCATION SERVICE. Vehicle location service revenues from Teletrac
consist primarily of charges for corporate fleet tracking and stolen vehicle
tracking services. Teletrac's vehicle location business is in the start-up
phase and its services have not yet achieved a significant degree of commercial
acceptance. Teletrac initiated operations in Los Angeles, Chicago, Detroit,
and Dallas/Fort Worth in 1991 and in Miami and Houston in 1992. The
improvement in vehicle location service revenues is directly attributable to an
increased number of units placed in service. Units in service increased 33%
from September 30, 1993 to September 30, 1994.
OTHER REVENUES. Other revenues consist of cellular equipment rental and
installation charges, pager replacement program revenues, paging voice
retrieval revenues, paging activation charges, vehicle location unit sales and
revenues related to credit card verification terminal sales and maintenance.
Other revenues increased 25% in the third quarter of 1994 and 27% year to date,
principally due to higher revenues from domestic paging activation fees, which
increased 92.8% year to date, and higher revenues from domestic paging voice
retrieval charges, which increased 52.2% year to date. The Company is actively
marketing its domestic voice messaging service and expects other paging
revenues to continue to increase. In addition, other revenues improved year to
date in 1994 due to increasing unit sales of credit card verification terminals
in Korea.
NET PAGING AND CELLULAR EQUIPMENT SALES. Equipment sales consist of cellular
telephone sales and paging unit sales. Equipment sales are not a primary part
of the Company's cellular and paging businesses. The Company generally sells
cellular telephones at or below cost, and paging units approximately at cost.
Cost of equipment sales increased 59% in the third quarter while sales revenue
increased only 28%, and year to date cost of equipment sales increased 44%
while sales revenues increased only 27%. The Company expects contribution
margins of equipment sales to remain negative as it responds to competitive
market pressures.
OPERATING EXPENSES. The following table sets forth the components of the
Company's operating expenses:
<TABLE>
<CAPTION>
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------------- ----------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C>
Operating Expenses
Cost of revenues $ 39.7 $ 37.4 $111.6 $111.6
Selling and customer operations expenses 96.4 67.9 252.9 210.1
General, administrative, and other expenses 86.3 57.8 236.4 183.2
Depreciation and amortization 51.9 43.7 147.4 129.9
------ ------ ------ ------
Total operating expenses $274.3 $206.8 $748.3 $634.8
====== ====== ====== ======
</TABLE>
COST OF REVENUES. Cost of revenues primarily consists of charges for
interconnections of the Company's cellular and paging operations with wireline
telephone companies and other related network expenses. Cost of revenues,
giving effect to the CMT Adjustment, declined from 14.7% of net operating
revenues to 13.7% for the third quarter of 1994 and from 14.9% to 13.5% for
year to date 1994. The declines were primarily the result of economies of
scale as more domestic subscribers are added to the existing network, effective
cost management, the reassessment of property taxes related to domestic
cellular network assets, and technical efficiencies. The declines were
partially offset by costs related to paging system capacity expansion and the
addition of NordicTel.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
SELLING AND CUSTOMER OPERATIONS EXPENSES. 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. These expenses, giving effect to the
CMT Adjustment, increased from 27.1% of net operating revenues to 33.2% for the
third quarter and increased slightly from 29.1% to 30.6% for year to date 1994.
Third quarter increases include additional expenditures associated with an
expanded customer base and growth initiatives including agent commissions,
advertising and promotional costs, and expenses of $6.3 million for NordicTel
(which was acquired in October 1993). The Company expects selling and customer
operations expenses during the fourth quarter of 1994 to increase as a
percentage of net operating revenues due to costs associated with plans to
accelerate customer growth.
GENERAL, ADMINISTRATIVE, AND OTHER EXPENSES. General, administrative, and
other expenses primarily consist of salaries and wages and related benefits for
general and administrative personnel, bad debt, international license
application costs and investments in new technologies. These expenses, giving
effect to the CMT Adjustment, increased from 24.6% of net operating revenues to
29.7% for the third quarter and increased from 27.0% to 28.6% for the year to
date. General, administrative, and other expenses should continue to increase
as the Company incurs incremental costs associated with its anticipated growth
and investment in new technologies, such as wireless data services and personal
communication services ("PCS"), and digital technology. However, general,
administrative and other expenses should decline as a percentage of net
operating revenues. Increases in the third quarter also reflect the impact of
absorbing certain corporate functions previously provided to the Company by
Pacific Telesis Group. The Company estimates that incremental expenses
associated with these functions will be approximately $15 million in 1994.
Other third quarter increases include costs related to developing and acquiring
foreign licenses, expenses for NordicTel (which was acquired in October 1993),
an increase in bad debt expenses largely due to aggressive growth strategies in
selected domestic cellular markets, and legal expenses associated with
defending against several antitrust suits brought against the Company and other
cellular operators. The Company expects to continue to incur costs defending
itself against these actions, but does not expect these costs to be significant
to its financial position. (See Note K in the Notes to the Condensed
Consolidated Financial Statements.) Third quarter increases were also
partially offset by cost containment efforts at Teletrac where staff was
reduced by 30% to approximately 200 employees in February 1994.
In 1993 the Company provided approximately $9.2 million ($5.0 million after
tax) in reserve for spin-off related expenses. At September 30, 1994, the
amount remaining in the reserve was approximately $3.5 million. Costs incurred
relate to expenditures for changing the corporate identity for the company's
physical assets, legal, and other expenses associated with the spin-off. The
Company anticipates using the remaining amount during the fourth quarter of
1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization primarily consist
of depreciation expense on the Company's domestic cellular and paging networks,
as well as amortization of intangibles such as FCC license costs and goodwill.
Depreciation and amortization, giving effect to the CMT Adjustment, increased
$12.1 million during the third quarter of 1994 and $32.3 million year to date
1994 primarily as a result of the Company's increased capital investment in its
domestic cellular and paging networks, paging rental units, and the acquisition
of NordicTel.
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
NON-OPERATING INCOME/EXPENSE. The following table sets forth the components
of the Company's non-operating income/expense:
<TABLE>
<CAPTION>
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------------- ----------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C>
Interest expense $ 2.0 $ 2.9 $ 5.2 $ 20.3
====== ====== ====== ======
Minority interests in net income of consolidated
partnerships and corporations $ 5.5 $ 13.9 $ 18.8 $ 43.0
====== ====== ====== ======
Equity in net income (loss) of unconsolidated
partnerships and corporations:
Domestic $ 37.1 $ 19.0 $100.1 $ 44.6
International (0.7) (12.2) (6.9) (29.5)
------ ------ ------ ------
$ 36.4 $ 6.8 $ 93.2 $ 15.1
====== ====== ====== ======
Interest income $ 14.0 $ 2.3 $ 39.3 $ 8.2
====== ====== ====== ======
Miscellaneous income (expense) $ (0.5) $ 0.2 $ (5.2) $ (3.4)
====== ====== ====== ======
</TABLE>
INTEREST EXPENSE. The decrease in interest expense in the third quarter of 1994
and year to date 1994 is primarily the result of retiring a majority of the
Company's debt in the second and third quarters of 1993. This decrease was
partially offset by interest on the debt assumed by the Company as part of the
NordicTel acquisition. NordicTel debt outstanding at September 30, 1994 was
$73.5 million.
MINORITY INTERESTS IN NET INCOME OF CONSOLIDATED PARTNERSHIPS AND CORPORATIONS.
The minority partners' portions of net income/loss in consolidated partnerships
and corporations are reported as "Minority interests in net income of
consolidated partnerships and corporations." Earnings allocated to minority
interests, giving effect to the CMT Adjustment, decreased $3.2 million in the
third quarter of 1994 and $3.3 million year to date. Although the Company's
domestic cellular consolidated partnerships' earnings allocated to minority
interests increased in 1994, total earnings allocated to minority interests are
lower in 1994 due to the losses incurred by NordicTel (which was acquired in
October 1993).
EQUITY IN NET INCOME (LOSS) OF UNCONSOLIDATED PARTNERSHIPS AND CORPORATIONS.
DOMESTIC. Domestic equity earnings increased in the third quarter and year to
date 1994 compared to the same periods in 1993 primarily due to including in
1994 the Company's share of equity income from CMT Partners and improving net
income from other unconsolidated domestic investments. For at least the near
term, equity earnings attributable to CMT Partners are likely to be less than
the Company's prior share of the net income of the contributed cellular systems
because, through the formation of CMT Partners, the Company reduced its
interest in the San Francisco/San Jose cellular system, which had the highest
average revenue per subscriber and operating cash flow margin of any of the
Company's domestic cellular systems.
INTERNATIONAL. International equity losses decreased in the third quarter of
1994 and year to date 1994 compared to the same periods in 1993. The primary
factors contributing to the decreases were reduced losses incurred by the
Company's cellular joint venture in Portugal and the attainment of positive net
income by MMO. Improvements in 1994 were partially offset by higher losses for
cellular systems that were under construction in Japan. The Company
anticipates future improvements in certain international ventures to be
partially offset by start-up losses incurred by its South Korean, Japanese, and
Italian cellular consortia.
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
INTEREST INCOME. Interest income in 1994 reflects earnings on proceeds from
the initial public offering of the Company's common stock (the "IPO") completed
in December 1993. The Company's interest income in the third quarter of 1993
consisted primarily of interest earned by the San Francisco/San Jose cellular
system, which is no longer reflected in this account subsequent to the
September 1, 1993 formation of CMT Partners. At least in the short term, the
Company will continue earning interest income on the investment of proceeds
from the IPO.
MISCELLANEOUS INCOME/EXPENSE. Miscellaneous income/expense primarily consists
of currency exchange gains or losses on financial instruments that have not
been deferred and one-time items such as gains and losses on sales of property,
plant, or equipment and telecommunications interests. The Company attempts to
mitigate the effects of foreign currency fluctuation through the use of
forward foreign exchange contracts which serve as hedges, and local banking
accounts. At September 30, 1994, the Company had hedged a majority of its
international investments against the risk of currency fluctuations. Certain of
these contracts do not qualify, in whole or in part, as hedges for financial
accounting purposes. Accordingly, the Company recognizes any currency exchange
gain or loss on such contracts in the current period results of operations.
The Company is unable to forecast the impact of future currency exchange gains
and losses on its results of operations or financial position.
INCOME TAXES. The Company's estimated annualized effective tax rates for year
to date 1994 and 1993 were 47.8% and 66.1%, respectively. The decline in the
estimated annualized effective tax rate for 1994 was primarily caused by:
tax-exempt interest income earned in 1994; a decline in equity losses of
unconsolidated partnerships and corporations as a percentage of operating
income; the inclusion of the tax effects of changing deferred taxes for the
increase in the corporate tax rate from 34% to 35% in 1993; and goodwill.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" effective January 1, 1993 and
recognized a one-time transition obligation of $5.6 million, net of a $3.5
million tax benefit.
On January 1, 1994, the Company adopted the provisions of SFAS 112, "Employers'
Accounting for Postemployment Benefits," and SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS 112 establishes accounting
standards for employers who provide benefits to former or inactive employees
after employment but before retirement. Implementation of SFAS 112 did not
materially impact the Company's results of operations or its financial
condition. SFAS 115 establishes accounting standards for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. Implementation of SFAS 115 did not materially impact the
Company's financial condition or its results of operations. See Note E in the
Notes to Condensed Consolidated Financial Statements for further discussion.
In accordance with SFAS 115, prior years' financial statements have not been
restated.
In October 1994 the Financial Accounting Standards Board issued SFAS No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments." SFAS 119 requires additional disclosures concerning
derivatives and certain financial instruments which will not have a significant
impact on the financial position or the results of operations of the Company.
The standard requires the Company to implement its requirements by fiscal year
ending December 31, 1994.
TELETRAC. The Company does not expect Teletrac's operations to be profitable
for several years. Teletrac reported pre-tax losses of $5.4 million during the
third quarter of 1994 compared to $8.7 million for the same period in 1993, and
$19.2 million for the year to date 1994 compared to $33.3 million for the year
to date 1993. The Company intends to continue actions to reduce Teletrac's
operating losses and does not intend to expand Teletrac's operations
significantly until its services achieve a higher level of commercial
acceptance. In February of 1994, the Company reduced Teletrac's staff by 30% to
approximately 200 employees. The Company is continuously evaluating and
considering other commercial applications of Teletrac's technology and radio
location spectrum.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
PROPORTIONATE RESULTS OF OPERATIONS
The following table is unaudited and is not required by, or intended to replace
the Condensed Consolidated Financial Statements prepared in accordance with,
generally accepted accounting principles. It is presented to provide
supplemental data. Significant assets of the Company are not consolidated, and
because of the substantial effect of the formation of certain joint ventures 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.
Proportionate accounting reflects the relative weight of the Company's
ownership interests in its consolidated subsidiaries and in New Par
(Ohio/Michigan), Cellular Communications, Inc. (Ohio and Michigan), and CMT
Partners (California, Texas, Missouri, and Kansas).
SELECTED PROPORTIONATE DOMESTIC CELLULAR OPERATING DATA
<TABLE>
<CAPTION>
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------------- ----------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C>
Operating Results:
Service and other revenues $296.3 $227.3 $838.8 $640.6
Equipment sales 17.9 10.2 49.3 26.7
Cost of equipment sales (22.1) (9.5) (55.0) (25.3)
------ ------ ------ ------
Net operating revenues 292.1 228.0 833.1 642.0
------ ------ ------ ------
Cost of revenues 31.4 30.5 92.4 87.2
Selling and customer operations 104.1 71.0 274.6 203.2
General, administrative and other 31.1 20.7 88.9 68.0
Depreciation and amortization 46.3 42.3 136.0 120.0
------ ------ ------ ------
Total operating expenses 212.9 164.5 591.9 478.4
------ ------ ------ ------
Operating income $ 79.2 $ 63.5 $241.2 $163.6
====== ====== ====== ======
Operating cash flow (1) $125.5 $105.8 $377.2 $283.6
====== ====== ====== ======
Capital expenditures, excluding acquisitions $ 69.1 $ 40.2 $197.6 $129.2
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
September 30,
-----------------------------
1994 1993
---------- ----------
<S> <C> <C>
Operating Data (in thousands):
POPs (2) 35,002 34,702
Proportionate cellular subscribers (3) 1,336 934
</TABLE>
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
(1) 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 Condensed Consolidated Statements of Cash
Flows. Proportionate operating cash flow represents the Company's
ownership interest in the respective domestic cellular entities
multiplied by the entities' operating cash flow. As such,
proportionate operating cash flow does not represent cash available to
the Company.
(2) POPs are the estimated market population multiplied by the Company's
ownership interest in the cellular system in that market.
(3) Cellular subscriber data includes only those cellular systems that are
included in the operating results shown in Selected Proportionate
Domestic Cellular Operating Data multiplied by the Company's ownership
interest.
Cellular service and other revenues increased on a proportionate basis 30% in
the third quarter of 1994 and 31% for the year to date 1994. These gains
primarily reflect an increase of 43% in end of period domestic proportionate
subscribers between September 30, 1993 and September 30, 1994. The subscriber
gains are due to the growth initiative which New Par began in the first half of
1994 and the other markets began in the second half of 1994. Increases in the
subscriber base are being partly offset by declining average revenue per
subscriber due to changes in the customer mix and price decreases due to
competitive pressures. For example, many new customers are taking advantage of
lower cost contract plans that provide a flat rate for access plus a specific
number of monthly airtime minutes. The Company plans to mitigate the impact of
lower average revenue per subscriber by offering new products and services.
The Company expects that average revenue per subscriber will continue to
decline, consistent with industry trends, as it adds new subscribers and
responds to further competitive pressures.
Equipment Sales on a proportionate basis increased primarily due to higher
direct sales from retail sales locations in managed markets and focus on
equipment pricing as a part of the New Par growth initiative to increase the
subscriber base. Negative gross margins primarily reflect equipment pricing
promotions to meet competition. Equipment sales are not a primary part of the
Company's cellular business. The Company expects contribution margins of
equipment sales to remain negative as it responds to competitive market
pressure.
Cost of Revenues on a proportionate basis increased by 3% in the third quarter
of 1994 and 6% for the year to date 1994. Cost of Revenues increased at a
lower rate than revenues because of economies of scale achieved as a result of
spreading fixed network costs over a larger subscriber base and cost
containment efforts in each of the Company's markets.
Selling and customer operations expenses on a proportionate basis increased 47%
in the third quarter of 1994 and 35% for the year to date 1994. These
increases were primarily due to increased commissions associated with higher
gross gains, increased advertising and promotion costs to support the growth
initiatives, and increased advertising in managed markets as a result of the
change of the Company's name to AirTouch Communications. The Company expects
selling and customer operations expenses during the remainder of the year to
increase as a percentage of net operating revenues due to costs associated with
plans to accelerate customer growth. Proportionate acquisition costs per
retail gross gain increased slightly by 0.5% between September 30, 1993 and
September 30, 1994.
General, administrative and other expenses on a proportionate basis remained
relatively constant in 1994 compared to 1993 as a percentage of net operating
revenues. These expenses were 11% of net operating revenues in the third
quarter compared to 9% for the same period in 1993, and 11% for the year to
date 1994 compared to 11% for the same period in 1993. These expenses are
expected to remain constant as a percentage of net operating revenues. The
stability of these expenses reflects market-wide cost containment efforts which
were partially offset by higher costs associated with new services that are not
yet generating revenues.
25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Depreciation and amortization on a proportionate basis increased by 10% in the
third quarter of 1994 and 13% for the year to date 1994. The increases are
primarily due to a significant increase in network capital, which is generally
depreciated over seven years. Network capital in service increased by $227.2
million between September 1993 and September 1994 on a proportionate basis.
Capital expenditure increases in the third quarter of 1994 and for the year to
date 1994 primarily reflect the overall network enhancements to increase
capacity and improve service quality, deployment of digital technology in the
San Francisco Bay Area, early purchases of digital equipment for planned future
deployment in the Southern California market, and technological upgrades in the
Southern California market to provide future additional customer features.
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 has met its financing needs from internally generated funds, equity
infusions from Telesis prior to the IPO, and proceeds from the IPO.
The Company requires substantial capital to expand and operate its existing
wireless systems, to construct new wireless systems, and to acquire interests
in existing wireless systems. Prior to the IPO, the Company met its funding
requirements primarily through short-term borrowings from a former affiliate,
PacTel Capital Resources ("PTCR"), and equity contributions from Telesis. In
December 1993, the Company received $1,489.2 million in net proceeds from the
IPO.
As of September 30, 1994, the Company was committed to spend up to $197 million
for the acquisition of property, plant, and equipment through 1995. The
Company expects that capital contributions to its international ventures,
Globalstar, and the nationwide Narrowband PCS license will total approximately
$296 million prior to the end of 1995. In addition, the Company had funded $67
million for its new 1994 ventures as of September 30, 1994. These ventures are
described in the following paragraphs and include Omnitel Pronto Italia,
Globalstar, South Korean cellular, Belgacom Mobile, the nationwide narrowband
PCS license, and three regional narrowband PCS licenses.
In March 1994, the Italian government announced its award of Italy's second
digital cellular license to the consortium Omnitel Pronto Italia. The formal
award and acceptance is expected to take place within the next several months.
The Company holds a 10.2 percent indirect interest in the consortium. The
Company's net income will increase in the quarter in which the license is
awarded due to costs reimbursed from the Company's consortium partners and the
capitalization of previously expensed application costs. The amount of
reimbursed or capitalized costs cannot be determined at this time.
In March 1994, the Company announced it will become a strategic partner in
Globalstar, a new global-access, satellite-based mobile telephone system being
formed by Loral Corporation and Qualcomm. The Company's 8.3 percent stake will
give the Company exclusive service provider rights under the agreement for nine
countries and regions: the United States, Japan, Indonesia, Austria,
Switzerland, the Netherlands, Belgium, Portugal, and the Caribbean.
Globalstar, which is expected to begin service in 1998, will offer low-cost
voice, data, fax and position locating services using a constellation of 48
low-earth-orbit satellites. The Company expects to incur additional costs to
construct gateway systems in the United States and abroad.
In May 1994, the Company was selected as a member in the consortium that will
develop, build, and operate the first digital cellular system in South Korea to
compete with an existing analog cellular system. The Company holds an 11.3
percent interest, the third largest interest in the consortium. The cellular
system is expected to begin offering commercial service by the beginning of
1996.
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
In June 1994, the Company agreed in principle to form a mobile communications
joint venture with Belgacom, the Belgian-state-owned telecommunications network
operator. The agreement, subject to the Belgian government's approval which is
expected in the fourth quarter of 1994, entitles the Company to acquire a 25
percent interest in Belgacom Mobile, payable within a three-year period. The
amounts payable are subject to adjustments to reflect the Company's role in
Belgacom's successful GSM network launch (Global System for Mobile
Communications) and are contingent on the business meeting specific
performance milestones through the end of 1996. The new company will include
Belgacom's analog and digital cellular businesses.
On July 29, 1994, the Company was a successful bidder in the FCC auction for a
nationwide 50/12.5 KHz narrowband PCS license. The license will allow the
Company to offer advanced paging communication services. The plans for
utilization of this channel are still being formalized.
On November 8, 1994, the Company was a successful bidder in the FCC auction of
regional narrowband PCS licenses, purchasing three regional 50/12.5 KHz
licenses. These licenses, covering the northeast, central, and western regions
of the United States will be used to expand services in existing and new
markets.
In March 1994, the Company signed a definitive bank loan agreement for a $600
million non-amortizing revolving line of credit (the "Facility"). The Facility
provides the Company with funding for general corporate purposes and with
standby letters of credit to support its obligations to purchase shares in CCI.
The Facility is available in the form of committed advances or standby letters
of credit and expires in March 1997. Interest on advances accrues at a rate
equal to an index selected by the Company plus a margin which is based upon the
Company's long-term senior unsecured debt rating. Interest on outstanding but
undrawn standby letters of credit accrues at a margin which is based upon the
Company's long-term senior unsecured debt rating. The Company also has the
option to pledge United States Treasury and agency securities in exchange for a
significantly reduced margin. At September 30, 1994, the Company had
voluntarily pledged approximately $600 million of securities classified as
held-to-maturity and available-for-sale. Provided the Company is not in
default under the Facility, these securities are immediately, without
restriction, available for redemption by the Company.
Under the terms of a merger agreement with CCI, the Company is obligated to
purchase up to 10.04 million CCI shares in October 1995 at $60 per share. To
support this obligation the Company has issued a $600 million irrevocable
letter of credit under the Facility for the benefit of CCI. This letter of
credit expires in 1996. As of September 30, 1994, there have been no draws
against the letter of credit. In connection with the merger agreement, the
Company is required to pledge to CCI certain CCI shares owned by the Company.
At September 30, 1994, such shares pledged to CCI carried a net investment of
$202.8 million and had a market value of $301.2 million. The pledged
investment represents approximately 12% of CCI's fully diluted shares. The
Company will continue to pledge any additional CCI shares it acquires up to 15%
of CCI's fully diluted shares.
The Company, through the Combined PCS Partnership intends to participate in the
FCC auction of broadband PCS licenses in December 1994. The Combined PCS
Partnership has filed applications to bid on 26 markets. In the event the
partnership is successful in bidding for or acquiring such licenses, the
Company's share of the licenses and construction costs for the PCS networks
could be significant; however, the amounts cannot be estimated at this time.
The Company's cash received from financing activities for the first nine months
of 1994 was $41.2 million. The activity consists primarily of capital
contributions from international minority interest holders, proceeds of
increasing international long-term debt, partially reduced by distributions to
domestic minority interest holders. The 1994 proceeds were partially offset by
distributions to domestic cellular minority partners. The Company does not
expect its operations to generate sufficient cash to meet its capital
requirements for the next several years. However, the Company currently
believes that the net proceeds from the IPO, together with cash flow from
operations, will be sufficient to satisfy the Company's estimated funding
requirements through mid-1995. After such proceeds are invested, the Company
expects that it will need to raise additional funds through bank borrowings or
public or private sales of debt or equity securities. Although there can be no
assurance that such funding will be available, the Company believes that it
will be able to access the capital markets on terms and in amounts adequate to
meet its objectives.
27
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of AirTouch Communications:
We have reviewed the condensed consolidated balance sheet of AirTouch
Communications (formerly PacTel Corporation) and Subsidiaries as of September
30, 1994 and the related condensed consolidated statements of income for the
three-month and nine-month periods ended September 30, 1994 and 1993 and cash
flows for the nine-month periods ended September 30, 1994 and 1993. These
financial statements are the responsibility of management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of AirTouch Communications and
Subsidiaries as of December 31, 1993, and the related consolidated statements
of income, cash flows, and stockholders' equity for the year then ended (not
presented herein); and in our report dated March 3, 1994 (except for Notes B,
L, and R, as to which the date is March 9, 1994), we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1993 is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Coopers & Lybrand
San Francisco, California
November 9, 1994
28
<PAGE> 29
PART II--OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The following table is unaudited and is not required by, or intended to replace
the Condensed Consolidated Financial Statements prepared in accordance with,
generally accepted accounting principles. It is presented to provide
supplemental data. Significant assets of the Company are not consolidated.
Because of the substantial effect of the formation of certain joint ventures
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. Proportionate accounting for domestic cellular reflects the
relative weight of the Company's ownership interests in its domestic cellular
consolidated subsidiaries and in New Par (Ohio/Michigan), Cellular
Communications, Inc. (Ohio and Michigan), and CMT Partners (California, Texas,
Missouri, and Kansas). In addition, the selected total proportionate data
includes domestic paging and the relative weight of Company's ownership
interests in NordicTel Holdings AB, Mannesmann Mobilfunk GmbH, and Telecel.
(See Management's Discussion and Analysis of Financial Condition and Results
of Operations - General - Proportionate Accounting.)
SELECTED SUPPLEMENTAL FINANCIAL DATA
<TABLE>
<CAPTION>
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------------- ----------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C>
Selected Total Proportionate Data
Total proportionate net operating revenues $441.0 $318.3 $1,227.3 $873.1
Total proportionate operating cash flow $133.5 $106.2 $ 393.9 $256.3
Selected Proportionate Domestic Cellular
Operating Results
Cellular service and other revenues $296.3 $227.3 $ 838.8 $640.6
Equipment sales $ 17.9 $ 10.2 $ 49.3 $ 26.7
Cost of equipment sales $(22.1) $ (9.5) $ (55.0) $(25.3)
Net operating revenues $292.1 $228.0 $ 833.1 $642.0
Total operating expenses $212.9 $164.5 $ 591.9 $478.4
Operating income $ 79.2 $ 63.5 $ 241.2 $163.6
Operating cash flow (1) $125.5 $105.8 $ 377.2 $283.6
Capital expenditures, excluding acquisitions $ 69.1 $ 40.2 $ 197.6 $129.2
</TABLE>
<TABLE>
<CAPTION>
September 30,
---------------------------
1994 1993
---------- ----------
<S> <C> <C>
Selected Cellular Operating Data (in thousands)
Domestic:
Total POPs (2) 35,002 34,702
Proportionate subscribers 1,336 934
International
POPs (2) & (5) 54,710 35,964
Proportionate subscribers (3) & (6) 276 114
</TABLE>
29
<PAGE> 30
OTHER INFORMATION
(continued)
<TABLE>
<CAPTION>
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
---------------------------- ----------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C>
Domestic Paging Operating Results (4)
Service and other revenues $ 47.2 $38.0 $134.7 $105.5
Equipment sales $ 11.9 $ 9.3 $ 32.4 $ 25.2
Cost of equipment sales $(10.6) $(8.1) $(28.5) $(21.9)
Net operating revenues $ 48.5 $39.2 $138.6 $108.8
Total operating expenses before depreciation
and amortization $ 31.2 $25.8 $ 89.3 $ 72.9
Depreciation and amortization $ 9.3 $ 7.6 $ 27.0 $ 21.7
Operating income $ 8.0 $ 5.8 $ 22.3 $ 14.2
Operating cash flow (1) $ 17.3 $13.4 $ 49.3 $ 35.9
Capital expenditures, excluding acquisitions $ 17.0 $12.8 $ 43.3 $ 37.6
</TABLE>
<TABLE>
<CAPTION>
September 30,
----------------------------
1994 1993
---------- ----------
<S> <C> <C>
Selected Paging Operating Data (in thousands)
Domestic (4):
Units in service 1,434 1,066
International:
Proportionate units in service (3) 119 97
</TABLE>
(1) Operating cash flow is defined as operating income plus depreciation
and amortization. Proportionate operating cash flow represents the
Company's interest in the entities multiplied by the entities'
operating cash flow. As such, proportionate operating cash flow does
not represent cash available to the Company.
(2) POPs are the estimated market population multiplied by the Company's
ownership interest in the cellular system in that market and include
international markets in which the networks are under construction.
(3) Reflects total subscribers of all cellular systems and total units in
service of all paging systems outside the United States in which the
Company owns an interest multiplied by the Company's ownership
interest.
(4) Domestic paging is wholly owned by the Company.
(5) Third quarter 1994 data includes POPs for Italy, Belgium, South Korea
and the Kyushu region of Japan, where licenses are currently being
finalized or the systems are under construction. Excluding Italy and
Belgium, international POPs would be 46,370 and total proportionate
cellular POPs would be 81,372.
(6) Third quarter 1994 data does not include subscribers in the cellular
system in Belgium.
Other
The CPUC in its filing with the FCC on August 9, 1994 (see Note K in the Notes
to Condensed Consolidated Financial Statements) disclosed the existence of a
confidential antitrust investigation being conducted by the California State
Attorney General into the cellular industry within California. The Company is
aware of the investigation and understands that it involves the distribution of
cellular telephone service in the Los Angeles area market in the late 1980s.
The investigation may also encompass other California cellular markets. No
formal charges have been made and no complaint has been filed. The Company is
cooperating fully with the Attorney General's investigation and believes that
its pricing and marketing practices were and are in compliance with the
antitrust laws.
30
<PAGE> 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibits identified below are incorporated herein by reference as
exhibits hereto.
<TABLE>
<CAPTION>
Exhibit
Number Description
---------- -----------------
<S> <C>
15 Letter re unaudited interim financial information.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
Reports on Form 8-K were filed on the following dates.
July 25, 1994
October 3, 1994
November 3, 1994
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIRTOUCH COMMUNICATIONS
Date: November 10, 1994 By: /s/ Mohan S. Gyani
Vice President, Finance and
Treasurer
(Principal Accounting Officer)
32
<PAGE> 33
EXHIBIT INDEX
Exhibits identified below are incorporated herein by reference as exhibits
hereto and are provided as part of the electronic transmission.
<TABLE>
<CAPTION>
Exhibit
Number Description
---------- ----------------
<S> <C>
15 Letter re unaudited interim financial information.
27 Financial Data Schedule
</TABLE>
33
<PAGE> 1
Exhibit 15
November 10, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: AirTouch Communications
Registration Statements on Form S-8
Ladies and Gentlemen:
We are aware that our report dated November 9, 1994 on our review of interim
financial information of AirTouch Communications (formerly PacTel Corporation)
and Subsidiaries (the "Company") for the period ended September 30, 1994 and
included in the Company's quarterly report on Form 10-Q for the quarterly
period then ended is incorporated by reference in the registration statements
of the Company on Form S-8 relating to the AirTouch Communications Retirement
Plan, AirTouch Communications Employee Stock Purchase Plan and AirTouch
Communications 1993 Long Term Stock Incentive Plan. Pursuant to Rule 436(c)
under the Securities Act of 1933, this report should not be considered a part
of the registration statements prepared or certified by us within the meaning
of Sections 7 and 11 of that Act.
Very truly yours,
/s/ Coopers & Lybrand
34
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 650,600
<SECURITIES> 613,600
<RECEIVABLES> 176,500
<ALLOWANCES> 10,700
<INVENTORY> 0
<CURRENT-ASSETS> 1,515,400
<PP&E> 1,418,900
<DEPRECIATION> 547,900
<TOTAL-ASSETS> 4,258,500
<CURRENT-LIABILITIES> 309,800
<BONDS> 0
<COMMON> 4,900
0
0
<OTHER-SE> 3,437,600
<TOTAL-LIABILITY-AND-EQUITY> 4,258,500
<SALES> 65,500
<TOTAL-REVENUES> 894,200
<CGS> 67,300
<TOTAL-COSTS> 178,900
<OTHER-EXPENSES> 147,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,200
<INCOME-PRETAX> 181,900
<INCOME-TAX> 86,900
<INCOME-CONTINUING> 95,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,000
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
