<PAGE>
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 March 31, 1994
Commission File Number 1-12342
AIRTOUCH COMMUNICATIONS
A California Corporation I.R.S. Employer Number 94-2995122
425 Market Street
San Francisco, CA 94105
(415) 658-2000
Former Address:
---------------
2999 Oak Road
Walnut Creek, CA 94596
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 April 30, 1994, 492,651,613 shares of common stock were outstanding.
<PAGE>
PART I -- FINANCIAL INFORMATION
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 15
CONDITION AND RESULTS OF OPERATIONS.
Report of Independent Accountants 27
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION. 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 29
2
<PAGE>
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)
For the 3 Months Ended
March 31,
----------------------
1994 1993
---------- ----------
OPERATING REVENUES
Wireless services and other revenues........... $256.6 $238.1
Cellular and paging equipment sales............ 19.6 14.3
Cost of cellular and paging equipment sales.... (18.9) (13.3)
---------- ----------
NET OPERATING REVENUES......................... 257.3 239.1
---------- ----------
OPERATING EXPENSES
Cost of revenues............................... 33.8 36.3
Selling, general, administrative,
and other expenses........................... 144.1 131.9
Depreciation and amortization.................. 45.5 42.7
---------- ----------
TOTAL OPERATING EXPENSES....................... 223.4 210.9
---------- ----------
OPERATING INCOME............................... 33.9 28.2
Interest expense............................... (1.6) (10.6)
Minority interests in net income of consol-
idated partnerships and corporations......... (6.3) (12.0)
Equity in net income (loss) of unconsol-
idated partnerships and corporations:
Domestic................................... 26.4 9.2
International.............................. (4.0) (8.2)
Interest income................................ 12.8 3.2
Miscellaneous expense.......................... (4.5) (3.0)
---------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE................... 56.7 6.8
Income taxes................................... 29.2 9.1
---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE............................. 27.5 (2.3)
Cumulative effect of accounting change for
other postretirement benefits (net of
income taxes of $3.5) (Note B)............... - (5.6)
---------- ----------
NET INCOME (LOSS).............................. $ 27.5 $ (7.9)
========== ==========
(Continued next page)
3
<PAGE>
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Dollars in millions, except per share amounts)
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
1994 1993
---------- ----------
PER SHARE AMOUNTS:
Income (loss) before cumulative effect of the
change in accounting for other postretirement
benefits in 1993.............................. $0.06 $(0.01)
Cumulative effect of the change in
accounting for other postretirement
benefits in 1993.............................. - (0.01)
---------- ----------
Net income (loss).............................. $0.06 $(0.02)
========== ==========
Weighted average shares outstanding
(in millions)................................ 492.5 424.0
========== ==========
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
4
<PAGE>
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
March 31, December 31,
1994 1993
---------- -----------
(Unaudited)
Cash and cash equivalents...................... $ 371.6 $ 646.7
Accounts receivable-net of allowance for
uncollectibles of $10.3 and $9.2 in 1994 and
1993, respectively .......................... 136.8 132.7
Held-to-maturity investments................... 1,064.4 814.0
Other receivables.............................. 20.9 15.1
Due from affiliates............................ 2.6 7.0
Other current assets........................... 54.7 45.3
---------- -----------
Total current assets........................... 1,651.0 1,660.8
---------- -----------
Property, plant, and equipment................. 1,234.4 1,175.5
Less: accumulated depreciation................. 469.5 433.4
---------- -----------
Property, plant, and equipment-net............. 764.9 742.1
Investments in unconsolidated partnerships and
corporations................................. 1,185.8 1,154.5
Intangible assets-net.......................... 416.5 413.2
Deferred charges and other noncurrent assets... 95.3 106.1
---------- -----------
TOTAL ASSETS................................... $4,113.5 $4,076.7
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................... $ 129.2 $ 149.2
Due to affiliates within one year.............. 11.0 40.7
Other current liabilities...................... 130.2 124.1
---------- -----------
Total current liabilities...................... 270.4 314.0
Due to non-affiliates.......................... 72.9 68.6
Deferred income taxes.......................... 205.7 197.6
Deferred credits............................... 57.1 54.1
---------- -----------
TOTAL LIABILITIES.............................. 606.1 634.3
---------- -----------
Commitments and contingencies.
Minority interests in consolidated
partnerships and corporations................ 139.2 105.1
---------- -----------
(Continued on Next Page)
5
<PAGE>
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in millions, except per share amounts)
March 31, December 31,
1994 1993
---------- -----------
(Unaudited)
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; 492,622,960 shares issued
and 492,500,000 shares outstanding at
March 31, 1994 and December 31, 1993,
respectively................................. 4.9 4.9
Additional paid-in capital..................... 3,719.5 3,719.5
Accumulated deficit............................ (360.4) (387.9)
Currency translation adjustment................ (0.3) 0.8
Other.......................................... 4.5 -
---------- -----------
TOTAL SHAREHOLDERS' EQUITY..................... 3,368.2 3,337.3
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..... $4,113.5 $4,076.7
========== ===========
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
6
<PAGE>
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
1994 1993
---------- ----------
CASH FROM (USED FOR) OPERATING ACTIVITIES:
Net income (loss).............................. $ 27.5 $ (7.9)
Adjustments to reconcile net income (loss) for
items currently not affecting operating cash
flows:
Depreciation and amortization................. 45.5 42.7
Deferred income taxes......................... (2.5) 0.7
Minority interests in net income of
consolidated partnerships and
corporations................................ 6.3 12.0
Equity in net income of unconsolidated
partnerships and corporations............... (22.4) (1.0)
Distributions received from equity
investments................................. 13.9 -
Gain on sale of property, plant, and
equipment................................... 0.7 0.8
Cumulative effect of accounting change
for postretirement costs.................... - 9.1
Changes in assets and liabilities:
Accounts receivable-net..................... 0.4 5.2
Other current assets and receivables........ (9.2) (0.4)
Deferred charges and other noncurrent
assets.................................... (7.8) 2.4
Accounts payable and other current
liabilities............................... - (50.3)
Deferred credits and other
liabilities............................... (34.6) 7.1
--------- ---------
CASH FROM OPERATING ACTIVITIES................. 17.8 20.4
--------- ---------
CASH FROM (USED FOR) INVESTING ACTIVITIES:
Additions to property, plant, and equipment.... (80.5) (54.2)
Proceeds from sale of property, plant,
and equipment................................ 2.0 1.9
Capital contributions to unconsolidated
partnerships and corporations................ (0.9) (60.2)
Cost of acquiring interests in
Cellular Communications, Inc................. - (4.9)
Purchase of held-to-maturity investments.......
(250.4) -
Other investing activities..................... (2.1) (11.8)
--------- ---------
CASH USED FOR INVESTING ACTIVITIES............. (331.9) (129.2)
--------- ---------
(Continued on next page)
7
<PAGE>
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in millions)
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
1994 1993
---------- ----------
CASH FROM (USED FOR) FINANCING ACTIVITIES:
Retirement of notes and obligations payable....... (2.6) (0.1)
Retirement of long-term debt from affiliate....... - (155.0)
Distributions to minority interests in
consolidated partnerships and corporations....... (7.0) (8.4)
Contributions from minority interests in
consolidated partnerships and corporations....... 34.7 3.6
Decrease in short-term borrowings from
affiliates....................................... (0.3) (335.5)
Proceeds from non-current affiliate borrowings.... - 0.3
Proceeds from issuing long-term debt.............. 8.8 -
Equity infusion by parent......................... - 564.2
Loan repayments from affiliate.................... - 41.5
Other financing activities........................ 5.4 1.6
--------- ---------
CASH FROM FINANCING ACTIVITIES.................... 39.0 112.2
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.. (275.1) 3.4
BEGINNING CASH AND CASH EQUIVALENTS............... 646.7 17.1
--------- ---------
ENDING CASH AND CASH EQUIVALENTS.................. $ 371.6 $ 20.5
========= =========
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
8
<PAGE>
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of
AirTouch Communications (the "Company") and its wholly and majority owned
subsidiaries and partnerships. 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 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. Their report is on page 27.
B. ACCOUNTING CHANGES
On January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("SFAS 112"), and No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115").
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 in 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
9
<PAGE>
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
restated.
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions" ("SFAS 106"). 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.
C. EARNINGS PER SHARE
Earnings per share were computed using weighted average common shares
outstanding totalling 492,500,000 at March 31, 1994 and 424,000,000 at
March 31, 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 Securities and Exchange
Commission. Condensed operating results for New Par and MMO are as
follows:
For the 3 Months Ended
March 31,
----------------------
1994 1993
---------- ----------
(Dollars in millions)
NEW PAR
Net operating revenues................. $116.0 $ 80.9
Operating income....................... $ 24.6 $ 15.4
Net income............................. $ 21.6 $ 15.6
MMO
Net operating revenues................. $171.1 $ 65.8
Operating loss......................... $ (2.9) $(47.7)
Net loss............................... $ (4.3) $(25.2)
10
<PAGE>
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 (dollars in
millions):
March 31, December 31,
1994 1993
--------- ------------
(Unaudited)
United States government treasury bonds.. $708.0 $661.3
State governmental municipal bonds....... 126.3 58.5
Local governmental municipal bonds....... 66.3 54.6
Miscellaneous commercial paper
and auction rate reset type securities. 151.5 26.7
--------- ------------
1,052.1 801.1
Accrued interest......................... 12.3 12.9
--------- ------------
$1,064.4 $814.0
========= ============
The Company also owns 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 to an available-for-sale security effective January
1, 1994. Accordingly, the Company increased its investment in Qualcomm to
reflect fair value and created a corresponding unrealized holding gain as
a separate component of shareholders' equity. Qualcomm is included in
"Deferred charges and other noncurrent assets" in the Condensed
Consolidated Balance Sheet. At March 31, 1994, the Company carried its
investment in Qualcomm at $9.8 million, which reflected fair value,
compared to a net cost of $2.0 million. The Company's unrealized holding
gain in Qualcomm, net of tax, is $4.5 million at March 31, 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, on
available-for-sale securities (dollars in millions):
For the 3 Months
Ended March 31,
1994
---------------
Balance at beginning of period........... -
Unrealized holding gains, net of tax..... $4.5
---------------
Balance at end of period................. $4.5
===============
11
<PAGE>
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
F. 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.
G. CELLULAR COMMUNICATIONS, INC.
Under the terms of a merger agreement with Cellular Communications,
Inc.("CCI"), the Company is obligated to purchase 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.
In connection with the merger agreement, the Company is required to pledge
to CCI certain CCI shares owned by the Company. In March, 1994 the
Company pledged its entire investment in CCI which represented
approximately 11% 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. As of March 31, 1994, collateral pledged to
CCI carried a net investment of $175.4 million and had a market value of
$226.2 million.
H. INCOME TAX EXPENSE
The Company's estimated annualized effective tax rate for 1994 is
approximately 51.5%, a decline of approximately 11.3 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 revenues; and eliminating in 1994 the tax effects
of changing deferred taxes for increasing the corporate tax rate from 34%
to 35% in 1993.
12
<PAGE>
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
I. COMMITMENTS AND CONTINGENCIES
CELLULAR PLUS INC.
A lawsuit was filed in San Diego against the Company's wholly owned
subsidiary, AirTouch Cellular ("Cellular") and US West (Cellular's
competitor in San Diego), alleging on behalf of agents and dealers that
Cellular engaged in price fixing of wholesale and retail cellular service.
Cellular has reached settlements with all but one of the plaintiffs. The
settlements paid did not have a material adverse impact on the Company's
results of operations or financial condition. Similarly, the final
outcome is not expected to have a material adverse impact on the Company's
results of operations or financial condition.
GARABEDIAN DBA WESTERN MOBILE TELEPHONE COMPANY V. LASMSA LIMITED
PARTNERSHIP, ET AL.
A class action complaint has been filed naming as defendants, among
others, Los Angeles Cellular Telephone Company ("LACTC") and the Company,
as general partner for Los Angeles SMSA Limited Partnership. The
plaintiff alleges that LACTC 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." On January 31, 1994, the Company filed a demurrer to the
complaint. The Company intends to defend itself vigorously. The Company
does not anticipate that this proceeding will have a material adverse
effect on the Company's financial position.
OTHER
The Company has various letters of responsibility and letters of support
for performance guarantees, refundable security deposits and credit
facilities of certain subsidiaries and affiliates. These letters of
responsibility and letters of support do not provide for recourse to the
Company. Separately, as of March 31, 1994, the Company guaranteed
approximately $10.4 million owed by a third party. The Company believes
that the likelihood of having to pay under the guarantee is remote.
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 March 31, 1994, the potential liability is approximately $6.7
million. The Company believes that the likelihood of having to pay under
the letter is remote.
13
<PAGE>
AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
J. SUBSEQUENT EVENTS
At March 31, 1994, the Company was an 86.1% owned subsidiary of Pacific
Telesis Group ("Telesis"). In March 1994, the Telesis Board of Directors
gave final approval to the separation of the Company's operations from
Telesis' other businesses by distributing its ownership interest in the
Company to Telesis shareholders (the "spin-off"). The spin-off occurred
on April 1, 1994.
In April 1994, the Company granted approximately 810,000 shares of
restricted stock to selected employees. Employees are not required to pay
for shares received. The quoted market value of the Company's common
stock on the date of grant was $20.375 per share. Restricted shares are
shares of common stock that are nontransferable and subject to forfeiture
prior to vesting. Restricted shares have the same voting and dividend
rights as other shares of common stock. The restricted shares will vest
on the earlier of (a) the 15th consecutive trading day on which the
closing price of common stock is at least $46 per share (200% of the
initial public offering price), (b) the 10th anniversary of the grant
date, or (c) a change in control of the Company. Compensation expense
associated with the restricted shares of approximately $16.5 million will
be recognized over the anticipated 10-year vesting period. The Company
will accelerate the recognition of the remaining unamortized compensation
expense if the vesting period is accelerated.
14
<PAGE>
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 (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. The Company also consolidated the
partnership which operates a cellular system in the San Francisco and San Jose
markets prior to the closing of the partnership with McCaw Cellular
Communications, Inc. ("CMT Partners") in September 1993. In addition, the
Company consolidates its domestic paging operations, all of which are wholly
owned, AirTouch Teletrac ("Teletrac"), a 51%-owned partnership offering
vehicle location service in six markets in the United States, NordicTel
Holdings AB ("NordicTel"), a 51%-owned cellular network in Sweden, its paging
subsidiaries in Thailand, and the Korean subsidiary providing credit card
verification system sale 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. These entities primarily
include the partnership with Cellular Communications, Inc. ("New Par"), CMT
Partners (commencing in September 1993), and certain international interests,
including Mannesmann Mobilfunk GmbH ("MMO") and Telecel Comunicacoes Pessoais,
S.A. ("Telecel"). With respect to the entities accounted for under the equity
method, 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.
Prior to the formation of CMT Partners in September 1993, the operations of
the Company's cellular systems in San Francisco and San Jose were
consolidated. The use of the equity method to account for CMT Partners since
its formation has reduced the growth of the Company's reported revenues and
expenses.
PROPORTIONATE ACCOUNTING. Because significant assets of the Company are not
consolidated and because of the substantial effect of 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. Unlike consolidation accounting, proportionate
accounting is not in accordance with generally accepted accounting principles
("GAAP") for the cellular industry. Proportionate accounting reflects the
relative weight of the Company's ownership interests in its domestic cellular
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
systems.
For example, under GAAP, 100% of the operating revenues and expenses of the
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 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."
RESULTS OF OPERATIONS
The following discussions and data compare the three-month period ended March
31, 1994 to the corresponding period in 1993. Results for the first three
months of 1994 for AirTouch Communications may not be indicative of results
for the full year.
NET OPERATING REVENUES. The components of the Company's net operating
revenues are shown below:
For the Three Months
Ended March 31,
--------------------
1994 1993
--------- ---------
(Dollars in millions)
NET OPERATING REVENUES
Wireless services and other revenues:
Cellular service ...................... $199.0 $194.0
Paging service ........................ 43.1 33.2
Vehicle location service .............. 1.6 0.8
Other revenues ........................ 12.9 10.1
--------- ---------
256.6 238.1
--------- ---------
Net cellular and paging equipment sales:
Revenues .............................. 19.6 14.3
Costs of equipment sold ............... (18.9) (13.3)
--------- ---------
0.7 1.0
--------- ---------
Net operating revenues .................. $257.3 $239.1
========= =========
CELLULAR SERVICE. Cellular service revenues primarily consist of air time,
access fees, and in-bound roaming charges. Cellular revenues increased
slightly in the first quarter of 1994 due to continued domestic subscriber
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
growth offset by the effects of the formation of CMT Partners in September
1993. Since the formation of the partnership, the Company's share of the net
income has been recorded in "Equity in net income (loss) of unconsolidated
partnerships and corporations." This change from consolidation to the equity
method of accounting for the properties contributed to CMT Partners caused
first quarter 1994 revenues to be significantly lower. The amount of first
quarter 1993 revenues related to the properties transferred to CMT Partners,
was approximately $45.2 million. This change similarly increased the amount
of "Equity in net income (loss) of unconsolidated partnerships and
corporations - domestic" recorded in the first quarter of 1994 by $16.5
million.
The increase in cellular service revenues did not keep pace with subscriber
growth because of declining average revenue per subscriber, caused by lower
usage by new subscribers and rate reductions made in 1993 to meet competitive
pressures. The Company expects that average revenue per subscriber will
continue to decline as it adds new subscribers and responds to further
competitive pressures.
PAGING SERVICE. Paging service revenues primarily consist of paging service
charges and rentals of paging units in the United States and, to a small
extent, Thailand. Paging service revenues increased 29.9% in the first
quarter of 1994. The increases in paging service revenues primarily resulted
from a 40.1% increase in the number of domestic paging units in service in the
first quarter of 1994. The increase in domestic paging units in service
reflect increased penetration in existing markets primarily through successful
retail and reseller pager sales programs, the establishment of new paging
operations, and an acquisition.
VEHICLE LOCATION SERVICE. Vehicle location service revenues from AirTouch
Teletrac ("Teletrac") primarily consist 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. Teletrac's vehicle location service revenues increased
100.0% in the first quarter of 1994. The increase resulted from a greater
number of units in service.
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 27.7% in the first quarter of 1994. The increase is
due to higher paging activation and voice retrieval charges, and credit card
verification sales and maintenance charges.
NET PAGING AND CELLULAR EQUIPMENT SALES. Equipment sales consist of revenues
from sales of cellular telephones and sales of paging units. Equipment sales
are not a primary part of the Company's cellular and paging businesses and
therefore the costs associated with these sales have been removed from the
cost of revenues and netted with equipment sales in the revenue section of the
income statement. The increase in equipment sales in the first quarter of
1994 is attributable to increases in sales of paging units and, to a lesser
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
extent, sales of cellular telephones. The Company sells cellular telephones
at or below cost and paging units approximately at cost.
OPERATING EXPENSES. The following table sets forth the components of the
Company's operating expenses:
For the Three Months
Ended March 31,
--------------------
1994 1993
--------- ---------
(Dollars in millions)
OPERATING EXPENSES
Cost of revenues............................... $ 33.8 $36.3
Selling and customer operations
expenses..................................... 72.0 68.8
General, administrative, and other
expenses..................................... 72.1
63.1
Depreciation and amortization.................. 45.5 42.7
--------- ---------
Total operating expenses....................... $223.4 $210.9
========= =========
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 network-related expenses. Cost of revenues, as a
percentage of net operating revenues, declined from 15.2% to 13.1% for the
first quarter of 1994 compared to the same period in 1993. This decline was
primarily the result of economies of scale and technical efficiencies, the
reassessment of property taxes, and lower interconnect charges, partially
offset by costs related to paging system capacity expansion and the addition
of NordicTel.
The 6.9% decline in the dollar amount of cost of revenues was primarily caused
by the formation of CMT Partners in September 1993. This change from
consolidation to the equity method of accounting for the properties
contributed to CMT Partners caused first quarter 1994 cost of revenues to be
significantly lower. The amount of first quarter 1993 cost of revenues
related to the properties transferred to CMT Partners was approximately $5.8
million. Cost of revenues rose by $3.3 million, or 10.8% after normalizing for
this change. (See the preceding discussion under Cellular Service Revenues.)
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. As a percentage of net operating
revenues, these expenses were 28.0% and 28.9% in the first quarter of 1994 and
1993, respectively. The slight decrease in the first quarter of 1994 was
primarily attributable to increased revenues from the larger subscriber base
and cost containment initiatives, particularly in the Company's domestic
billing operations. This was partially offset by an increase in agent
commissions resulting from the increase in cellular subscribers.
GENERAL, ADMINISTRATIVE, AND OTHER EXPENSES. General, administrative, and
other expenses primarily consist of salaries and wages and related benefits
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
for general and administrative personnel, bad debt, international license
application costs and investments in new technologies. As a percentage of net
operating revenues, these expenses were 28.0% and 26.4% in the first quarter
of 1994 and 1993, respectively. The increase was primarily the result of
increased international activity, investment in new technologies, and
increases in bad debt, which were partially offset by cost containment
efforts. The Company expects to incur additional expenses as it performs
certain corporate functions previously provided to the Company by Pacific
Telesis Group ("Telesis"). The Company estimates $15.0 million in incremental
operating expenses in 1994 for these costs.
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. The increase in depreciation and amortization expense in the first
quarter of 1994 mainly reflects increased capital investment in the Company's
domestic cellular network.
NON-OPERATING INCOME (EXPENSE). The following table sets forth the components
of the Company's non-operating income (expense):
For the Three Months
Ended March 31,
--------------------
1994 1993
--------- ---------
(Dollars in millions)
Interest expense............................... $(1.6) $(10.6)
========= =========
Minority interests in net income of consol-
idated partnerships and corporations......... $(6.3) $(12.0)
========= =========
Equity in net income (loss) of unconsolidated
partnerships and corporations:
Domestic................................... $26.4 $ 9.2
International.............................. (4.0) (8.2)
--------- ---------
$22.4 $ 1.0
========= =========
Interest income................................ $12.8 $ 3.2
========= =========
Miscellaneous expense.......................... $(4.5) $ (3.0)
========= =========
INTEREST EXPENSE. The $9 million decrease in interest expense in the first
quarter of 1994, compared to the same period in 1993, primarily resulted from
the retirement of 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, totalling $50.1
million at December 31, 1993.
MINORITY INTERESTS IN NET INCOME OF CONSOLIDATED PARTNERSHIPS AND
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CORPORATIONS. The minority partners' portions of net income in consolidated
partnerships and corporations are reported as "Minority interests in net
income of consolidated partnerships and corporations." The decrease in the
first quarter of 1994 was primarily attributable to the result of including
the net losses of NordicTel and the effects of forming CMT Partners. The
decrease was partially offset by improved operating results of consolidated
domestic partnerships and corporations.
EQUITY IN NET INCOME (LOSS) OF UNCONSOLIDATED PARTNERSHIPS AND CORPORATIONS.
DOMESTIC. Domestic equity earnings increased in the first quarter of 1994
compared to the same period in 1993 primarily as a result of the inclusion of
CMT Partners commencing September 1, 1993. 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.
INTERNATIONAL. The decrease in international equity losses in the first
quarter of 1994 compared to the same period in 1993 was primarily due to lower
losses incurred by cellular operations in Germany and Portugal, partially
offset by higher losses for cellular systems under construction in Japan, and
paging systems in Portugal, Spain, and France.
INTEREST INCOME. In the first quarter of 1994, interest income reflected
earnings on the initial public offering ("IPO") proceeds. The Company's
interest income the first quarter of 1993 was primarily the result of the
interest earned on amounts loaned to an affiliate and interest earned by the
San Francisco/San Jose cellular system. The affiliated loan was settled
during the third quarter of 1993 and the interest earned by the San
Francisco/San Jose cellular system is no longer reflected in this account
subsequent to the September 1, 1993 formation of CMT Partners, which is
accounted for under the equity method. At least in the short term, the
Company will continue earning interest income on the investment of proceeds
from the IPO.
MISCELLANEOUS EXPENSE. Miscellaneous expense primarily consists of currency
exchange gains or losses on financial instruments which have not been deferred
and one-time items such as gains and losses on sales of property, plant, or
equipment. The Company attempts to mitigate the effects of foreign currency
fluctuation through the use of hedges and local banking accounts. At March
31, 1994, the Company had hedged a majority of its international investments
against the risk of currency fluctuations. Certain of these hedge instruments
do not qualify, in whole or in part, as hedges for financial accounting
purposes. Accordingly, the Company is required to recognize the currency
exchange gain or loss on these hedge instruments in the current period results
of operations. The Company is unable to foresee the impact of future currency
exchange gains and losses.
INCOME TAXES. The Company's effective tax rate for the first quarters of 1994
and 1993 were 51.5% and 133.8%, respectively. The decline in the effective
tax rate was primarily caused by the large increase in pre-tax income
accompanied by a slight increase in the amount of tax associated with income
and expense items treated differently for book and tax purposes. Two such
income and expense items contributing to this decline were tax-exempt interest
earned in 1994 and non-deductible reorganization expenses incurred in 1993.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Additionally, partially offsetting the decline in effective tax rate, a tax
loss sharing agreement with a minority interest holder in a consolidated
subsidiary reduced the amount of tax benefit recorded by the Company in the
first quarter of 1994.
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE. The Company
reported an increase in income (loss) before cumulative effect of an
accounting change of $29.8 million in first quarter of 1994. This increase
was primarily due to: increased cellular revenues (after normalizing for the
contribution to CMT Partners), paging revenues, interest income, improved
results by domestic and international equity method investees, economies of
scale, cost containment initiatives, and decreased interest expense, partially
offset by additional agent commissions resulting from the increase in new
cellular subscribers, and start-up costs associated with wireless data
services.
Teletrac reported pre-tax losses of $9.0 million and $11.1 million during the
first quarter of 1994 and 1993, respectively. The Company does not expect
Teletrac's operations to be profitable for several years. 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
its technology and radio location spectrum.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. The Company adopted SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
effective January 1, 1993 and recognized $5.6 million (net of $3.5 million tax
benefit) transition obligation.
On January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("SFAS 112"), and No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," ("SFAS 115"). 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 to the condensed consolidated financial statements for
further discussion.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
PROPORTIONATE RESULTS OF OPERATIONS
The following table is unaudited and provides supplemental financial and
operating data for the Company's domestic cellular operations.
SELECTED PROPORTIONATE DOMESTIC CELLULAR OPERATING DATA (1)
For the Three Months
Ended March 31,
--------------------
1994 1993
--------- ---------
(Dollars in millions)
OPERATING RESULTS:
Service and other revenues...................... $257.7 $197.9
Equipment sales................................. 18.2 7.2
Cost of equipment sales......................... (18.3) (7.1)
--------- ---------
Net operating revenues.......................... 257.6 198.0
--------- ---------
Cost of revenues................................ 30.1 28.3
Selling and customer operations................. 81.3 64.4
General, administrative and other............... 27.5 24.4
Depreciation and amortization................... 44.2 38.0
--------- ---------
Total operating expenses........................ 183.1 155.1
--------- ---------
Operating income................................ $ 74.5 $ 42.9
========= =========
Operating cash flow (2)......................... $118.7 $ 80.9
========= =========
Capital expenditures, excluding
acquisitions.................................. $ 50.8 $ 40.9
========= =========
For the Three Months
Ended March 31,
--------------------
1994 1993
--------- ---------
OPERATING DATA:
POPs (3).................................... 34,889,000 34,702,000
Total Proportionate cellular
subscribers (4).......................... 1,131,000 797,000
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
--------------------
(1) 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. Unlike consolidation accounting, proportionate
accounting is not in accordance with generally accepted accounting
principles. Proportionate accounting reflects the relative weight of the
Company's ownership interests in its domestic systems and excludes
certain minority investments for which the Company does not receive
timely financial and operating data.
(2) 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.
(3) Domestic total POPs are the estimated market population multiplied by the
Company's ownership interest in that market.
(4) 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 30.2%
in the first quarter of 1994 compared to the same period in 1993, primarily as
a result of a 40.6% increase in cellular subscribers. The increase in cellular
service revenues did not keep pace with subscriber growth because of declining
average revenue per subscriber, caused by lower usage by new subscribers and
rate reductions to meet competitive pressures. The Company plans to mitigate
the impacts of the lower average revenue per subscriber by offering new
products and services. The Company expects that average revenues per
subscriber will continue to decline as it adds new subscribers and responds to
further competitive pressures.
Equipment sales consist of revenues from sales of cellular telephones.
Equipment sales are not a primary part of the Company's cellular business and
therefore the costs associated with these sales have been removed from the
cost of revenues and netted with equipment sales in the revenue section of the
income statement.
Total operating expenses on a proportionate basis as a percentage of net
operating revenues were 71.1% and 78.3% in the first quarters of 1994 and
1993, respectively. The decrease in this percentage primarily reflects cost
containment efforts, economies of scale, and increased efficiency. The
increase in total operating expenses is associated with subscriber growth and
increased investments in new products and services. Total operating expenses
include cost of revenues, selling and customer operations, general and
administrative expenses, and depreciation and amortization. The decrease in
cost of revenues, as a percentage of net operating revenues, is primarily the
result of the realization of economies of scale, technical efficiencies, the
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
reassessment of property taxes, and lower interconnect charges. The decrease
in selling and customer operations expenses, as a percentage of net operating
revenues, reflects the effects of economies of scale, operational
efficiencies, and cost containment initiatives. The decrease in general,
administrative and other expenses, as a percentage of net operating revenues,
reflects the effects of economies of scale and cost containment initiatives.
The increase in depreciation and amortization expense in the first quarter of
1994 reflects the Company's increasing capital investment in its cellular
systems.
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 December 1993 IPO), and external
financing through issuance of common stock.
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. In the past, the Company has met its funding
requirements primarily through short-term borrowings from an affiliate, PacTel
Capital Resources ("PTCR") and equity contributions from Telesis. Prior to
the IPO, the Company continued to borrow from PTCR to the extent that its
existing cash resources and cash flow from operations were not sufficient to
meet the Company's funding requirements. In December 1993, the Company
received $1,489.2 million in net proceeds from the IPO.
As of March 31, 1994, the Company was committed to spend up to $229 million
for the acquisition of property, plant and equipment. The Company expects
that capital contributions to its existing international ventures will total
approximately $123 million prior to the end of 1995.
In March 1994, the Italian government announced its selection of a consortium,
Omnitel Pronto Italia, to which Italy's second digital cellular license will
be awarded. The formal award and acceptance is expected to take place within
the next six months. AirTouch International ("International") will hold a
10.2 percent indirect interest in the consortium. International's share of the
license fee of approximately $450 million is estimated to be approximately $46
million. The Company's net income will increase in the quarter in which the
license is awarded due to costs reimbursed by 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 low-cost, global-access, satellite-based mobile telephone
system being formed by Loral Corporation and QUALCOMM. The Company expects to
pay $37.5 million over the next year for its 8.3 percent stake, which will
include the rights to provide service in 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
circumnavigating the globe. The Company expects to incur additional costs to
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
construct gateway systems in its exclusive markets.
In May 1994, International was selected as a partner in a consortium that will
develop, build, and operate a second cellular telephone system in South Korea.
Subject to the execution of a final agreement, International will hold a 10
percent interest in the consortium, the third largest behind Pohang Iron &
Steel Company holding a 15 percent interest and Kolon Group holding a 14
percent interest. In accordance with the preliminary plan provided by the
Korean partners, International anticipates that its initial capital investment
will be approximately $12.4 million, increasing to a total of approximately
$50 million by the end of 1996. This preliminary plan is subject to change
upon ratification by the consortium partners. The cellular telephone system
is expected to start commercial services by the beginning of 1996.
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
additional 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.
Under the terms of a merger agreement with Cellular Communications,
Inc.("CCI"), the Company is obligated to purchase an additional 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 for the benefit
of CCI. This letter of credit expires in 1996 and is issued under the
Facility.
In connection with the merger agreement, the Company is required to pledge to
CCI certain CCI shares owned by the Company. In March, 1994 the Company
pledged its entire investment in CCI which represented approximately 11% 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. As
of March 31, 1994, collateral pledged to CCI carried a net investment of
$175.4 million and had a market value of $226.2 million.
The Company's cash received from financing activities was $39.0 million in the
first quarter of 1994, consisting primarily of capital contributions made by
minority interest holders. 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
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
26
<PAGE>
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 March 31,
1994 and the related condensed consolidated statements of income and cash
flows for the three-month periods ended March 31, 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
May 6, 1994
27
<PAGE>
PART II--OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The following table of selected supplemental financial data is unaudited.
SELECTED SUPPLEMENTAL FINANCIAL DATA (1)
For the 3 Months Ended
March 31,
----------------------
1994 1993
---------- ----------
(Dollars in millions)
SELECTED TOTAL PROPORTIONATE DATA
Total proportionate net operating revenues..... $370.7 $263.3
Total proportionate operating cash flow........ $121.8 $ 60.4
SELECTED PROPORTIONATE DOMESTIC CELLULAR
OPERATING RESULTS
Cellular service and other revenues............ $257.7 $197.9
Equipment sales....... ........................ $ 18.2 $ 7.2
Cost of equipment sales........................ $(18.3) $ (7.1)
Net operating revenues......................... $257.6 $198.0
Total operating expenses....................... $183.1 $155.1
Operating income............................... $ 74.5 $ 42.9
Operating cash flow (2)........................ $118.7 $ 80.9
Capital expenditures, excluding acquisitions... $ 50.8 $ 40.9
SELECTED CELLULAR OPERATING DATA
Domestic:
Total POPs (3)............................... 34,889 34,702
Proportionate subscribers.................... 1,131 797
International
POPs (3)..................................... 40,401 39,948
Proportionate subscribers (4)................ 191 60
DOMESTIC PAGING OPERATING RESULTS (5)
Service and other revenues..................... $42.5 $32.2
Equipment sales................................ $ 9.1 $ 6.9
Cost of equipment sales........................ $ 8.1 $ 6.0
Net operating revenues......................... $43.5 $33.1
Total operating expenses before depreciation
and amortization............................ $28.5 $22.5
Depreciation and amortization................. $ 8.6 $ 6.9
Operating income............................... $ 6.4 $ 3.7
Operating cash flow (2)........................ $15.0 $10.6
Capital expenditures, excluding acquisitions... $11.6 $10.5
SELECTED PAGING OPERATING DATA (in thousands)
Domestic (5):
Units in Service............................. 1,264 902
International:
Proportionate units in service (4)........... 111 85
28
<PAGE>
------------------------
(1) 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. Unlike consolidation accounting, proportionate
accounting is not in accordance with generally accepted accounting
principles. Proportionate accounting reflects the relative weight of the
Company's ownership interests in its domestic and international systems
and excludes certain minority investments for which the Company does not
receive timely financial and operating data.
(2) 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.
(3) Domestic total POPs are the estimated market population multiplied by the
Company's ownership interest in that market. International POPs are
based upon the mid-1992 estimated population of the licensed cellular
market multiplied by the Company's ownership interest and includes
markets in which the networks are under construction.
(4) 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.
(5) Domestic paging is wholly owned by the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 15
----------
Letter re unaudited interim financial information.
(b) Reports on Form 8-K
On January 20, 1994, the Company filed a Current Report on Form 8-K to
report certain financial information for the year ended December 31,
1993.
29
<PAGE>
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: May 11, 1994 By: /s/ Mohan S. Gyani
Vice President, Finance
and Treasurer
(Principal Accounting Officer)
30
<PAGE>
Exhibit 15
----------
May 12, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: AirTouch Communications
Registration Statements on Form S-8
Gentlemen:
We are aware that our report dated May 6, 1994 on our review of interim
financial information of AirTouch Communications (formerly PacTel Corporation)
and Subsidiaries ("the Company") for the period ended March 31, 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 PacTel Corporation Retirement Plan,
PacTel Corporation Employee Stock Purchase Plan, and PacTel Corporation 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
1
