<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, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to __________
COMMISSION FILE NUMBER 1-12342
AIRTOUCH COMMUNICATIONS, INC.
A DELAWARE CORPORATION I.R.S. EMPLOYER NUMBER 94-3213132
ONE CALIFORNIA STREET
SAN FRANCISCO, CA 94111
(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
--- ---
At October 31, 1996, 501,435,986 shares of common stock were outstanding.
<PAGE> 2
AIRTOUCH COMMUNICATIONS, INC.
INDEX TO REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
PART I -- FINANCIAL INFORMATION
<TABLE>
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ITEM 1. FINANCIAL STATEMENTS:
Consolidated Statements of Income ................................................. 3
Consolidated Balance Sheets ....................................................... 4
Consolidated Statements of Cash Flows ............................................. 5
Notes to Consolidated Financial Statements ........................................ 6
Selected Proportionate Financial Data ............................................. 12
Selected Proportionate Operating Data ............................................. 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ................................................... 15
REPORT OF INDEPENDENT ACCOUNTANTS ..................................................... 29
</TABLE>
PART II -- OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS ..................................................................... 30
ITEM 2. CHANGES IN SECURITIES ................................................................. 30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ....................................................... 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................................... 30
ITEM 5. OTHER INFORMATION ..................................................................... 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................................... 30
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements
of Income
AirTouch Communications, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three months ended Nine months ended
September 30 September 30
-------------------------- --------------------------
(Dollars in millions, except per share amounts) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Operating revenues(a) $ 600.7 $ 414.7 $1,530.9 $1,192.0
-------- -------- -------- --------
Operating expenses:
Cost of revenues(a) 122.2 92.4 327.8 264.8
Selling and customer operations expenses 165.5 121.1 456.9 368.9
General, administrative, and other expenses 111.6 116.7 299.5 284.4
Depreciation and amortization expenses 96.2 55.0 229.3 155.8
-------- -------- -------- --------
Total operating expenses 495.5 385.2 1,313.5 1,073.9
-------- -------- -------- --------
Operating income 105.2 29.5 217.4 118.1
Equity in net income (loss) of unconsolidated
wireless systems:
Domestic 37.3 58.2 151.9 137.0
International 0.4 (13.5) (16.1) (24.8)
Minority interests in net (income) loss of
consolidated wireless systems (20.5) (12.6) (54.8) (26.2)
Interest:
Expense (11.8) __ (28.8) (4.4)
Income 3.8 6.2 10.1 29.3
Foreign exchange gain (loss) 0.8 9.6 3.2 1.2
Miscellaneous income (expense) (4.2) (1.1) 4.7 (1.5)
-------- -------- -------- --------
Income before income taxes and preferred dividends 111.0 76.3 287.6 228.7
Income taxes 52.1 29.6 115.3 108.0
-------- -------- -------- --------
Net income before preferred dividends 58.9 46.7 172.3 120.7
Preferred dividends 6.7 __ 6.7 __
-------- -------- -------- --------
Net income available to common stockholders $ 52.2 $ 46.7 $ 165.6 $ 120.7
======== ======== ======== ========
Net income available to common stockholders-per share $ 0.10 $ 0.09 $ 0.33 $ 0.24
======== ======== ======== ========
Weighted average shares outstanding (in thousands) 500,183 495,094 499,447 494,590
======== ======== ======== ========
</TABLE>
(a) Presentation for 1995 has been restated to conform to current year
presentation. See Note A.
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
3
<PAGE> 4
Consolidated Balance Sheets
<TABLE>
<CAPTION>
AirTouch Communications, Inc. and Subsidiaries
(Unaudited)
September 30 December 31
(Dollars in millions) 1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11.8 $ 82.9
Accounts receivable, net of allowance for uncollectibles of
$29.5 and $21.2, respectively 344.6 232.4
Other receivables 34.0 103.6
Due from affiliates 23.4 21.0
Other current assets 127.7 66.3
---------- ----------
Total current assets 541.5 506.2
Property, plant, and equipment, net 1,911.6 1,320.2
Investments in unconsolidated wireless systems 2,083.2 3,076.3
Intangible assets, net 3,864.7 605.7
Deferred charges and other noncurrent assets 166.0 139.5
---------- ----------
Total assets $ 8,567.0 $ 5,647.9
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 156.1 $ 171.4
Short-term borrowings 71.1 __
Current portion of long-term debt 78.0 14.0
Other current liabilities 362.7 302.3
---------- ----------
Total current liabilities 667.9 487.7
Long-term debt 1,496.3 892.4
Deferred income taxes 1,118.8 258.6
Deferred credits 93.3 106.0
---------- ----------
Total liabilities 3,376.3 1,744.7
---------- ----------
Commitments and contingencies
Minority interests in consolidated wireless systems 172.6 152.5
---------- ----------
Stockholders' equity:
Preferred stock and additional paid-in capital ($.01 par value; 50,000,000
shares authorized):
Series A: 6,000,000 shares authorized, no shares issued or outstanding __ __
6.00% Class B Mandatorily Convertible: 24,000,000 shares authorized,
17,249,544 shares issued and outstanding (liquidation value of
$500.2 million) 500.0 __
4.25% Class C Convertible: 19,000,000 shares authorized, 11,077,761
shares issued and outstanding (liquidation value of $553.9 million) 540.6 __
Common stock and additional paid-in capital ($.01 par value; 1,100,000,000
shares authorized; 501,302,521 shares issued and 501,179,561 shares
outstanding at September 30, 1996; 498,692,430 shares issued and
498,569,470 shares outstanding at December 31, 1995) 3,953.8 3,882.2
Retained earnings (accumulated deficit) 7.5 (158.1)
Cumulative translation adjustment 8.1 17.1
Other 8.1 9.5
---------- ----------
Total stockholders' equity 5,018.1 3,750.7
---------- ----------
Total liabilities and stockholders' equity $ 8,567.0 $ 5,647.9
========== ==========
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
4
<PAGE> 5
Consolidated Statements
of Cash Flows
<TABLE>
<CAPTION>
AirTouch Communications, Inc. and Subsidiaries
(Unaudited)
Nine months ended
September 30
------------------
(Dollars in millions) 1996 1995
------------------
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 172.3 $ 120.7
Adjustments to reconcile net income before preferred dividends for
items currently not affecting operating cash flows:
Depreciation, amortization, and other non cash charges 229.3 155.8
Equity in net income of unconsolidated wireless systems (135.8) (112.2)
Distributions received from equity investments 181.9 64.2
Deferred income taxes 1.4 8.7
Minority interests in net income (loss) of consolidated wireless systems 54.8 26.2
Gain on sale of assets and telecommunications interests (4.7) __
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable, net (4.7) (51.2)
Other current assets and receivables 5.2 95.6
Deferred charges and other noncurrent assets 17.8 (22.7)
Accounts payable and other current liabilities (79.1) (116.2)
Deferred credits and other liabilities 10.6 (6.2)
--------- --------
Cash flows from operating activities 449.0 162.7
--------- --------
Cash flows from investing activities:
Investment in unconsolidated wireless systems (413.4) (504.9)
Purchase of Cellular Communications, Inc., including the January 1996
option purchase, net of cash acquired (296.9) __
Additions to property, plant, and equipment, net (201.4) (346.7)
Proceeds from sale of property, plant, and equipment 15.6 __
Proceeds from sale of telecommunications interests 19.0 __
Maturity of held-to-maturity investments __ 310.1
Maturity of available-for-sale securities __ 91.7
Other investing activities (26.7) 3.5
--------- --------
Cash flows from investing activities (903.8) (446.3)
--------- --------
Cash flows from financing activities:
Proceeds from issuing commercial paper 1,027.4 __
Retirement of commercial paper (638.9) __
Proceeds from issuing long-term debt 916.2 2.8
Retirement of long-term debt (1,004.2) (7.6)
Increase (decrease) in short-term borrowings 69.8 (10.3)
Distributions to minority interests in consolidated wireless systems (35.6) (17.4)
Contributions from minority interests in consolidated wireless systems 2.5 6.2
Proceeds from shares issued 52.2 32.9
Other financing activities (5.2) (2.6)
--------- --------
Cash flows from financing activities 384.2 4.0
--------- --------
Effect of exchange rate changes on cash and cash equivalents (0.5) 0.7
--------- --------
Net change in cash and cash equivalents (71.1) (278.9)
Beginning cash and cash equivalents 82.9 429.0
--------- --------
Ending cash and cash equivalents $ 11.8 $ 150.1
========= ========
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
5
<PAGE> 6
AirTouch Communications, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
A. Basis of Presentation
AirTouch Communications, Inc., a holding company, together with its
subsidiaries, unconsolidated partnerships, and joint ventures (collectively
referred to herein as the "Company"), provide wireless telecommunications
services in the United States, Europe, and Asia. The principal subsidiaries of
AirTouch Communications, Inc. are AirTouch Cellular, AirTouch Paging, and
AirTouch International. These subsidiaries principally provide cellular and
paging services. The majority of the Company's revenues are provided by its
domestic cellular operations.
The 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 1996
format. Most significantly, in the fourth quarter of 1995, the Company
classified the costs of its domestic cellular roaming fraud as an operating
expense. These costs had previously been recorded as an offset to operating
revenues. The reclassifications did not have an effect on previously reported
operating income, net income, or accumulated deficit.
The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") applicable in the United
States 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 the Consolidated Financial Statements and accompanying Notes
presented in the Company's 1995 Annual Report on Form 10-K, as amended.
Conformity with GAAP requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
In the Company's opinion, the 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 Consolidated Financial Statements have been reviewed
by the Company's independent accountants and their report is included herein.
With respect to the unaudited consolidated financial information of the Company
as of and for the three-month and nine-month periods ended September 30, 1996
and 1995 included in this Form 10-Q, Price Waterhouse LLP reported that they
have applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report dated November 7,
1996 appearing herein, states that they did not audit and they do not express an
opinion on the unaudited consolidated financial information. Price Waterhouse
LLP has not carried out any significant or additional audit tests beyond those
which would have been necessary if their report had not been included.
Accordingly, the degree of reliance on their report on such information should
be restricted in light of the limited nature of the review procedures applied.
Price Waterhouse LLP is not subject to the liability provisions of Section 11 of
the Securities Act of 1933 ("Act") for their report on the unaudited
consolidated financial information because that report is not a "report" or a
"part" of this Form 10-Q prepared or certified by Price Waterhouse LLP within
the meaning of Sections 7 and 11 of the Act.
6
<PAGE> 7
AirTouch Communications, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
B. Significant Changes since December 31, 1995
ACCOUNTING CHANGES
Effective January 1, 1996, the Company implemented the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Under SFAS No. 121, the Company is required to review long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
An impairment loss should be recognized whenever the review demonstrates that
the book value of a long-lived asset is not recoverable. The implementation of
SFAS No. 121 did not have an impact on the Company's financial position or
results of operations.
COMMERCIAL PAPER PROGRAM
In March 1996, the Company initiated a commercial paper program consisting of
the sale of discounted notes that is exempt from registration under the Act. The
Company's Board of Directors has authorized the issuance of commercial paper in
amounts necessary to finance the Company's working capital requirements,
provided that the amount outstanding under the commercial paper program,
together with all indebtedness incurred under the $2 billion long-term revolving
credit facility, does not in the aggregate exceed $2 billion. The Company
obtained A-2 and P-2 prime commercial paper ratings from Standard & Poor's
Corporation and Moody's Investor Service, respectively. These ratings may be
revised or withdrawn by the rating agencies at any time. At September 30, 1996,
borrowings of $388.5 million were payable to holders of commercial paper and
were classified as long-term debt because these borrowings are supported by the
Company's long-term revolving credit facility. The borrowings had an average
interest rate of 5.55% as of September 30, 1996.
DEBT ISSUANCE
On July 16, 1996, the Company issued $250 million in 7 1/8% Notes and $400
million in 7 1/2% Notes, maturing in July 2001 and July 2006, respectively.
Interest on the Notes is payable semi-annually on January 15 and July 15
commencing January 15, 1997. The purpose of the offering was to obtain funds
necessary to satisfy the cash component of the consideration for the acquisition
of Cellular Communications, Inc. ("CCI"), described below, and for general
corporate purposes. Pending such uses, the proceeds of the Notes were used to
retire then outstanding commercial paper. The Notes were issued pursuant to the
Company's shelf Registration Statement on Form S-3 (Reg. No. 33-62787).
PREFERRED STOCK ISSUANCE
In connection with the acquisition of CCI described below, the Company's Board
of Directors authorized the creation of 24 million shares of 6.00% Class B
Mandatorily Convertible Preferred Stock, Series 1996 (the "Class B Preferred")
and 19 million shares of 4.25% Class C Convertible Preferred Stock, Series 1996
(the "Class C Preferred"). Both the Class B and Class C Preferred (the
"Preferred Shares") have a par value of $0.01 per share. The description of the
Preferred Shares below is a summary and is qualified in its entirety by the full
text of the Certificates of Designation, Rights and Preferences for the Class B
Preferred and Class C Preferred, filed as exhibits 4.4 and 4.5, respectively, to
AirTouch's Registration Statement on Form S-4 (Reg. No. 333-03107).
Holders of the Preferred Shares are entitled to receive dividends in preference
to and in priority over any dividends upon any shares of the Company ranking
junior to the Preferred Shares as to dividends, but subject to the rights of
holders of shares of the Company having a preference and a priority over the
payment of dividends on the Preferred Shares. Holders of Class B Preferred are
entitled to receive cumulative preferential dividends at the rate of $1.74 per
share per annum, payable quarterly in arrears, and holders of Class C Preferred
are entitled to receive cumulative preferential dividends at the rate of $2.125
per share per annum, also payable quarterly in arrears.
Each share of Class B Preferred mandatorily converts into Company common stock
on August 16, 1999 (or earlier if the Company is a party to a merger or
consolidation in which the Company is not the surviving or continuing
corporation or if the Company transfers its property as an entirety or
substantially as an entirety). Each share of Class B Preferred mandatorily
converts into between 0.806 and one share of Company common stock, depending
upon the trading price of the Company common stock at the time of conversion.
Each Class B Preferred share is also convertible at the option of the holder at
any time into 0.806 of a share of Company common stock. Class B
7
<PAGE> 8
AirTouch Communications, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Preferred shares are not redeemable by the Company. In the event of liquidation,
whether voluntary or involuntary, the holders of Class B Preferred are entitled
to receive a liquidation preference equal to $29.00 per share plus all accrued
and unpaid dividends. The holders of Class B Preferred shares are entitled to
vote on any matter coming before any meeting in which the common stockholders
are entitled to vote, on the basis of four-fifths of a vote for each Class B
Preferred share held.
The Class C Preferred shares will mature on August 16, 2016, and the holders
will be entitled to receive cash equal to $50.00 per share plus an amount equal
to all accrued and unpaid dividends. Class C Preferred shares are convertible at
the option of the holder into 1.379 shares of the Company's common stock,
subject to certain adjustments. The Class C Preferred is not redeemable by the
Company prior to August 16, 1999, but thereafter may under certain circumstances
be redeemed for cash or converted into shares of common stock at the option of
the Company. Therefore, for financial reporting purposes, these shares are not
considered to be mandatorily redeemable. In the event of liquidation, either
voluntary or involuntary, the Class C Preferred holders are entitled to a
liquidation preference equal to $50.00 per share plus accrued and unpaid
dividends. The holders of Class C Preferred are not entitled to vote unless the
Class C Preferred dividends are in arrears and unpaid for six quarterly dividend
periods, and in certain other circumstances, in which case holders of Class C
Preferred are entitled to certain rights to vote for the election of two
directors.
Both the Class B Preferred and Class C Preferred are subject to certain
anti-dilution adjustments. For Delaware law purposes, the stated capital
attributable to the Preferred Shares is $0.01 per share.
CCI MERGER
On August 16, 1996, pursuant to the Agreement and Plan of Merger dated as of
April 5, 1996, as amended and restated as of July 12, 1996, (the "1996 Merger
Agreement") the Company completed its acquisition of the approximately 63% of
CCI's outstanding stock that it did not already own. Pursuant to the
transaction, CCI merged into the Company's wholly-owned subsidiary, AirTouch
Cellular, Inc. (the "CCI Merger"). CCI was a holding company whose primary asset
was its indirect ownership interest in New Par, a joint venture with the Company
that owned and operated cellular systems located principally in Michigan and
Ohio. The acquisition cost to the Company was approximately $1.6 billion
including liabilities less cash and cash equivalents acquired. Pursuant to the
1996 Merger Agreement, the merger consideration consisted of $1,040.3 million in
AirTouch preferred securities, $393.3 million in cash, and AirTouch stock
options valued at approximately $17.0 million. The cash portion of the
acquisition was funded through borrowings (see "Debt Issuance" above). Preferred
securities issued in connection with the acquisition consisted of 17,237,394
shares of Class B Preferred totaling $499.9 million and 11,069,958 shares of
Class C Preferred totaling $540.4 million. Options to purchase CCI stock were
converted into options to purchase 1,924,001 shares of Company common stock,
16,875 shares of Class B Preferred, and 10,837 shares of Class C Preferred. The
Company's subsidiary, AirTouch Cellular, Inc., has succeeded to the obligations
relating to CCI's $217 million Zero Coupon Convertible Subordinated Notes Due
1999 ("Zero Coupon Notes"). The Zero Coupon Notes are convertible into 2,831,850
shares of Class B Preferred and 1,818,677 shares of Class C Preferred. Holders
of Zero Coupon Notes had the right to require the Company to purchase such Notes
on October 7, 1996. None of the Zero Coupon Note holders elected this option.
The Company is obligated to make additional payment to holders of Class B
Preferred if the volume-weighted average trading price of the Class B Preferred
shares falls below $28.736 per share during a specified time period. The
aggregate amount of such contingent payment would be between $2.0 million and
$16.85 million, depending on the market price of Class B Preferred shares. Such
contingent payment may be made in cash, Class C Preferred, or Company common
stock, at the Company's option. Contingent payments, if any, associated with
Class B Preferred will not affect the aggregate purchase price for accounting
purposes, since the contingency is based on changes in the volume-weighted
average trading price of Class B Preferred.
The CCI Merger was accounted for under the purchase method of accounting. The
aggregate purchase price has been preliminarily allocated to the assets acquired
and liabilities assumed based on their estimated fair value. The excess of the
aggregate purchase price over the estimated fair values of the acquired tangible
and intangible assets of $9.1 million was recorded as goodwill. A deferred
income tax liability of $834.2 million was recorded in purchase accounting. The
principal intangible assets include FCC licenses of $1,853.9 million and
customer lists of $164.2 million. FCC licenses and goodwill are amortized over
40 years and customer lists are amortized over 5 years, both on a straight-line
basis. Changes to the allocation of the aggregate purchase price may occur upon
8
<PAGE> 9
AirTouch Communications, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
completion of the appraisal of the assets acquired. The Company does not
anticipate that changes in the allocations will have a material effect on its
financial position or its results of operations.
Prior to the merger, the Company owned approximately 37% of the outstanding
capital stock of CCI and the Company and CCI each held a 50% interest in New
Par. The Company used the equity method of accounting to report the results of
both CCI and New Par prior to the merger. CCI and New Par operating results
since the date of merger have been included in the Company's Consolidated
Statements of Income.
The following unaudited pro forma summary presents the Company's consolidated
results of operations as if the merger occurred at the beginning of the
respective periods, after giving effect to certain adjustments including
amortization of goodwill and other intangibles, increased interest expense from
debt issued to fund the merger, deduction for preferred stock dividends, and
related income tax effects. These pro forma results are not necessarily
indicative of those that would have occurred had the merger taken place at the
beginning of the respective periods.
<TABLE>
<CAPTION>
Nine months ended
September 30
(Dollars in millions, except per share amounts) 1996 1995
-----------------------
<S> <C> <C>
Operating revenues $ 2,009.9 $ 1,676.1
Net income available to common stockholders $ 112.5 $ 36.1
Net income available to common stockholders per share $ 0.23 $ 0.07
</TABLE>
C. Investments in Unconsolidated Wireless Systems
Interests owned in unconsolidated wireless systems are as follows:
<TABLE>
<CAPTION>
September 30 December 31
(Dollars in millions) 1996 1995
------------ -----------
<S> <C> <C>
Investments at equity $ 1,951.8 $ 3,006.5
Investments at cost 131.4 69.8
---------- ----------
$ 2,083.2 $ 3,076.3
========== ==========
</TABLE>
The Company's equity in net income of significant equity investees, which
included CCI and New Par through August 16, 1996, was $85.7 million and $70.8
million for the three months ended September 30, 1996 and 1995, respectively,
and $265.1 million and $182.0 million for the nine months ended September 30,
1996 and 1995, respectively. The Company's equity in net income of these
investees differs from its proportionate share of their reported net income in
the table below primarily due to adjustments required by the equity method of
accounting, including differences in recognized tax rates. Condensed operating
results for the Company's significant equity investments are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
(Dollars in millions) 1996 1995 1996 1995
--------------------- ----------------------
Mannesmann Mobilfunk GmbH
<S> <C> <C> <C> <C>
Operating revenues(a) $ 766.6 $ 486.9 $ 1,977.0 $1,279.0
Operating income $ 248.8 $ 100.4 $ 592.6 $ 272.1
Net income $ 106.0 $ 52.8 $ 251.5 $ 141.1
CMT Partners
Operating revenues(a) $ 138.7 $ 115.6 $ 397.8 $ 329.2
Operating income $ 44.2 $ 35.5 $ 135.1 $ 104.5
Net income $ 51.3 $ 42.6 $ 155.7 $ 121.6
</TABLE>
(a) Restated to conform to the Company's basis of presentation.
9
<PAGE> 10
AirTouch Communications, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
D. Contingencies
In November 1993, four class action complaints were filed on behalf of
AirTouch's cellular customers, three in Orange County Superior Court and one in
the United States District Court for the Central District of California, naming,
among others, the Company, and alleging certain facts, including a similarity in
the pricing structures of the two defendant cellular carriers, which plaintiffs
contend are circumstantial evidence that the Company, as general partner of Los
Angeles SMSA Limited Partnership, and Los Angeles Cellular Telephone Company
conspired to fix the prices of retail and wholesale cellular radio services in
the Los Angeles market. The complaints seek damages for the class "in a sum in
excess of $100,000,000." The federal suit has been dismissed and the three state
cases have been consolidated for purposes of discovery. Trial has been set for
July 7, 1997. The Company does not believe that these proceedings will have a
material adverse effect on the Company's financial position or results of
operations.
In 1994, two class action complaints were filed on behalf of AirTouch's cellular
customers, one in San Diego County Superior Court and one in the United States
District Court for the Southern District of California, alleging that the
Company and U S WEST conspired to fix the prices of retail and wholesale
cellular radio services in the San Diego market by engaging in tacit collusion
by setting their initial basic rates for cellular service at nearly identical
levels. Plaintiffs' expert has estimated the damages to the class at between $46
million and $59 million. The state case has been stayed pending the outcome of
the federal case. A class has been certified and the defendants motion for
summary judgment is set for hearing in November 1996. In late 1995, the
California Court of Appeals effectively reinstated a 1990 lawsuit filed by a U S
WEST agent against U S WEST and the Company containing allegations similar to
those in the other San Diego cases. The Appeals Court reversed a state trial
court decision dismissing the remaining plaintiff in the original suit. Two
additional cases, one in Orange County and one in San Diego, have been brought
by a number of individual agents against the Company. Each contains allegations
similar to those in the San Diego and Orange County price fixing cases, and also
allegations of various business torts and monopolization. One case seeks damages
of approximately $80 million and the other approximately $50 million. The
Company is vigorously defending these suits and does not believe that these
proceedings will have a material adverse effect on the Company's financial
position or results of operations.
In 1994, a class action complaint was filed on behalf of AirTouch's cellular
customers in San Francisco County Superior Court alleging certain facts,
including a similarity in the pricing structures of the two competitors which
plaintiffs contend is circumstantial evidence of an implicit conspiracy between
Bay Area Cellular Telephone Company, in which the Company has an indirect
interest, and GTE Mobilnet to fix the prices of retail and wholesale cellular
radio services in the San Francisco Bay Area market. This action is still in the
preliminary pleading phase. In 1996, an almost identical class action complaint
was filed by a different plaintiff in Alameda County Superior Court. It alleges
essentially the same facts as the San Francisco case alleges, but contends that
the facts are circumstantial evidence of an explicit conspiracy to fix prices
between the two companies. It also names as defendants the parents, former
parents, partners, and predecessors in interest to Bay Area Cellular Telephone
Company and GTE Mobilnet. The Company has moved to abate this complaint pending
resolution of the San Francisco case. The Company does not believe that these
proceedings will have a material adverse effect on the Company's financial
position or results of operations.
The Company is party to various other legal proceedings in the ordinary course
of business. Although the ultimate resolution of these various other proceedings
cannot be ascertained, management does not expect that they will have a material
adverse effect on the results of operations or financial position of the
Company.
In the ordinary course of business, the Company has issued letters of
responsibility and letters of support for performance guarantees, refundable
security deposits, and credit facilities of certain subsidiaries and affiliates
providing varying degrees of recourse to the Company. At September 30, 1996, the
Company's proportionate share under such arrangements was $229.8 million. The
Company believes it is remote that it will be required to pay under these
various arrangements.
10
<PAGE> 11
AirTouch Communications, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
E. Subsequent Events
On October 2, 1996, the Company issued 7% Notes in the aggregate principal
amount of $250 million, due October 2003. Interest on the Notes is payable
semi-annually on April 1 and October 1, commencing April 1, 1997. The Company
utilized the proceeds of the Notes to retire commercial paper which had been
issued to meet the Company's general corporate requirements and its cash
obligations in connection with the CCI Merger. The Notes were issued pursuant to
the Company's shelf Registration Statement on Form S-3 (Reg. No. 33-62787).
11
<PAGE> 12
AirTouch Communications, Inc. And Subsidiaries
Selected Proportionate Financial Data (UNAUDITED) (1)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
(Dollars in millions) 1996 1995(b) 1996(c) 1995(b)
------------------ -----------------------
<S> <C> <C> <C> <C>
TOTAL COMPANY(2)
Total net operating revenues(a) $ 1,011.6 $ 672.0 $ 2,693.4 $ 1,859.8
Total operating income $ 162.3 $ 65.8 $ 412.0 $ 226.8
Total operating cash flow(3) $ 327.5 $ 166.5 $ 847.7 $ 526.1
---------- -------- ---------- ----------
DOMESTIC CELLULAR OPERATIONS
Service and other revenues(a) $ 521.5 $ 387.8 $ 1,426.1 $ 1,109.8
Equipment sales 20.5 19.5 59.9 63.2
Cost of equipment sales (40.6) (27.5) (120.6) (84.0)
---------- -------- ---------- ----------
Net operating revenues 501.4 379.8 1,365.4 1,089.0
---------- -------- ---------- ----------
Cost of revenues(a) 57.6 46.1 158.5 138.1
Selling and customer operations expenses 164.2 133.1 465.7 380.7
General, administrative, and other expenses 45.8 35.0 117.4 100.0
Depreciation and amortization expenses 80.1 44.9 199.0 135.7
---------- -------- ---------- ----------
Total costs and expenses 347.7 259.1 940.6 754.5
---------- -------- ---------- ----------
Operating income $ 153.7 $ 120.7 $ 424.8 $ 334.5
========== ======== ========== ==========
Operating cash flow(3) $ 233.8 $ 165.6 $ 623.8 $ 470.2
Operating cash flow margin(d) 46.6% 43.6% 45.7% 43.2%
Capital expenditures, excluding acquisitions $ 85.1 $ 115.1 $ 240.1 $ 354.9
========== ======== ========== ==========
DOMESTIC PAGING OPERATIONS(4)
Service and other revenues $ 75.0 $ 55.8 $ 215.6 $ 159.9
Equipment sales 12.7 11.6 37.5 33.5
Cost of equipment sales (11.5) (10.2) (33.5) (29.2)
---------- -------- ---------- ----------
Net operating revenues 76.2 57.2 219.6 164.2
---------- -------- ---------- ----------
Total operating expenses before
depreciation and amortization expenses 53.9 38.0 153.2 110.1
Depreciation and amortization expenses 16.5 10.9 46.8 31.1
---------- -------- ---------- ----------
Operating income $ 5.8 $ 8.3 $ 19.6 $ 23.0
========== ======== ========== ==========
Operating cash flow(3) $ 22.3 $ 19.2 $ 66.4 $ 54.1
Operating cash flow margin 29.3% 33.6% 30.2% 32.9%
Capital expenditures, excluding acquisitions $ 33.9 $ 13.2 $ 80.6 $ 41.2
========== ======== ========== ==========
INTERNATIONAL CELLULAR OPERATIONS
Existing operations:(5)
Net operating revenues $ 407.1 $ 218.8 $ 1,053.8 $ 559.2
Operating income $ 84.8 $ 4.5 $ 168.0 $ 10.8
Operating cash flow(3) $ 139.7 $ 42.0 $ 324.4 $ 121.9
Income/(loss) $ 41.0 $ (2.6) $ 72.1 $ (15.3)
Start-up systems:(6)
Income/(loss) $ (41.9) $ (13.9) $ (91.3) $ (28.1)
Total cellular income/(loss) $ (0.9) $ (16.5) $ (19.2) $ (43.4)
---------- -------- ---------- ----------
</TABLE>
12
<PAGE> 13
AirTouch Communications, Inc. And Subsidiaries
Selected Proportionate Financial Data continued
Footnotes:
(a) Presentation for 1995 has been restated to classify roaming fraud as an
operating expense. See Note A, "Basis of Presentation," to the Consolidated
Financial Statements.
(b) Certain Total Company data has been restated to include effects of the
Company's interests in Italy, South Korea, and Spain.
(c) Certain Total Company data has been restated to include effects of the
Company's interest in PrimeCo Personal Communications, L.P.
(d) If net losses on equipment sales were reclassified as operating expenses,
operating cash flow margins would be 44.8% and 42.7% for the three months
ended September 30, 1996 and 1995, respectively, and 43.7% and 42.4% for the
nine months ended September 30, 1996 and 1995, respectively.
(1) This table is not required by GAAP and is not intended to replace the
Consolidated Financial Statements prepared in accordance with GAAP. It is
presented to provide supplemental data. Because significant assets of the
Company are not consolidated, the Company believes that proportionate
financial and operating data facilitates the understanding and assessment of
its Consolidated Financial Statements. Under GAAP, the Company consolidates
the entities in which it has a controlling interest and uses the equity
method to account for entities over which the Company has significant
influence but does not have a controlling interest. In contrast,
proportionate accounting reflects the Company's relative ownership interests
in operating revenues and expenses for both its consolidated and equity
method entities. For example, domestic cellular proportionate results
present the Company's share -- its percentage ownership -- for all
significant domestic cellular operations, including those joint ventures
and partnerships where the Company does not own more than 50 percent.
Similarly, total proportionate results show the Company's share of all its
significant worldwide operations.
(2) Reflects results of systems in which the Company owns an interest,
multiplied by the Company's ownership interest, exclusive of cost-based
investments and certain equity-based investments that are not material to
the information presented.
(3) Operating cash flow is defined as operating income plus depreciation and
amortization and is not the same as cash flow from operating activities in
the Company's Consolidated Statements of Cash Flows. Proportionate operating
cash flow represents the Company's ownership interests in the respective
entities' operating cash flows. As such, proportionate operating cash flow
does not represent cash available to the Company.
(4) Domestic Paging Operations are wholly owned by the Company; therefore,
proportionate information reflects 100% of the subsidiary's GAAP-basis
operating results.
(5) Effective January 1, 1996, existing operations represent the Company's share
of results (after foreign taxes where applicable) for the following
international cellular systems which have provided commercial service for
the full twelve months of any preceding calendar year: Germany, Portugal,
Sweden, Belgium, and Japan. Prior to January 1, 1996, existing operations
represented the Company's share of results (after foreign taxes where
applicable) for the following international cellular systems which had
completed twelve months of commercial service: Germany, Portugal, Sweden,
Belgium, and Japan.
(6) Effective January 1, 1996, start-up systems represent the Company's share of
income or loss (after foreign taxes where applicable) for the following
international cellular systems which did not provide commercial service for
the full twelve months of any preceding calendar year: Italy, South Korea,
Spain, India, and Poland. Prior to January 1, 1996, start-up systems
represented the Company's share of income or loss (after foreign taxes where
applicable) for the following international cellular systems which had not
yet completed twelve months of commercial service: Italy, South Korea,
Spain, and India.
13
<PAGE> 14
AirTouch Communications, Inc. And Subsidiaries
Selected Proportionate Operating Data(1)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
TOTAL COMPANY - OPERATING DATA (In thousands) 1996 1995 1996 1995
------------------ ------------------
<S> <C> <C> <C> <C>
Total cellular POPs(2) 172,024 116,560 172,024 116,560
Total cellular subscribers 4,480 2,550 4,480 2,550
Cellular subscriber net adds in period,
excluding acquisitions 393 203 1,044 601
Total paging units in service 2,756 2,010 2,756 2,010
DOMESTIC CELLULAR OPERATIONS -
OPERATING DATA (In thousands, except per unit data)
Total POPs(2) 42,876 35,597 42,876 35,597
Subscribers 3,072 1,915 3,072 1,915
Subscriber net adds in period, excluding acquisitions 151 111 440 355
Monthly average revenue per unit $ 62 $ 70 $ 63 $ 71
Monthly cash cost per unit $ 34 $ 40 $ 35 $ 41
DOMESTIC PAGING OPERATIONS - OPERATING DATA (In thousands)(3)
Units in service 2,735 1,875 2,735 1,875
Units in service net adds in period,
excluding acquisitions 123 113 397 350
INTERNATIONAL OPERATIONS - OPERATING DATA (In thousands)
Cellular POPs(2) 114,848 67,663 114,848 67,663
Cellular subscribers 1,408 635 1,408 635
Subscriber net adds in period, excluding acquisitions 242 92 605 246
</TABLE>
Footnotes:
(1) Reflects operating data of systems and total units in service of all paging
systems in which the Company owns an interest, multiplied by the Company's
ownership interest, exclusive of cost-based investments and certain equity-
based investments that are not material to the information presented.
(2) POPs are the estimated market population multiplied by the Company's
ownership interest in a licensee operating in that market and includes
markets in which the networks are under construction and the markets of
certain cost-based investments not included in proportionate operating
results. Total Company cellular POPs include 14,300 and 13,300 personal
communications services POPs at September 30, 1996 and September 30, 1995,
respectively.
(3) Domestic Paging Operations are wholly owned by the Company; therefore,
proportionate information reflects 100% of the subsidiary's GAAP-basis
operating data.
14
<PAGE> 15
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends related to the results of
operations and financial condition of AirTouch Communications, Inc., together
with its subsidiaries, partnerships, and joint ventures (collectively the
"Company" or "AirTouch"). This discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements and
accompanying Notes and the Company's 1995 Annual Report on Form 10-K, as
amended, including Item 1, "Business" therein.
Private Securities Litigation Reform Act Safe Harbor Statement. In addition to
historical information, Management's Discussion and Analysis includes certain
forward-looking statements regarding events and financial trends which may
affect the Company's future operating results and financial position. Such
statements are subject to risks and uncertainties that could cause the Company's
actual results and financial position to differ materially. Such factors
include, but are not limited to: a change in economic conditions in the
Company's markets which adversely affects the level of demand for wireless
services; greater-than-anticipated competition resulting in price reductions,
new product offerings, or higher customer acquisition costs;
better-than-expected customer growth necessitating increased investment in
network capacity; increased cellular fraud; the impact of new business
opportunities requiring significant initial investments; the impact of
deployment of new technologies on capital spending; and the risk that
technologies will not be developed according to anticipated schedules or perform
according to expectations. These and other risks and uncertainties related to
the business are described in detail in the Company's Annual Report on Form
10-K, as amended, under the heading "Investment Considerations," and in its
quarterly reports on Form 10-Q. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Under generally accepted accounting principles ("GAAP"), the Company reports
revenues and expenses in its Consolidated Statements of Income for each
subsidiary and partnership in which it has a controlling interest. The Company
uses the equity method to record the operating results of entities in which the
Company has significant influence, but does not have a controlling interest.
A discussion of the Company's results of operations on a proportionate basis
follows the discussion of the "GAAP-Basis Consolidated Results of Operations"
in "Proportionate Results of Operations." Proportionate accounting is not
required by GAAP or intended to replace the Consolidated Financial Statements
prepared in accordance with GAAP.
BUSINESS ENVIRONMENT
CELLULAR COMMUNICATIONS, INC. ("CCI") MERGER
On August 16, 1996, AirTouch completed its acquisition of the remaining 63% of
CCI's capital stock that it did not already own. As a result of the acquisition,
AirTouch now owns 100% of CCI and New Par, the equally owned joint venture
between the Company and CCI that operated cellular properties in Michigan and
Ohio. Accordingly, the operating results of CCI and New Par are reflected in
equity earnings through August 15, 1996 and in consolidated results thereafter.
The transaction was recorded using the purchase method of accounting for
business combinations and is expected to materially dilute earnings for at least
the next several years. See "GAAP-Basis Consolidated Results of Operations" and
"Proportionate Results of Operations" for further discussion of the effects of
the acquisition on results of operations. The total cost of the acquisition to
the Company was approximately $1.6 billion. For a detailed discussion of funding
for the acquisition and the related effect on liquidity and capital resources,
see "Liquidity and Capital Resources." The cellular properties formerly owned by
the New Par joint venture are referred to hereafter as "New Par" in discussions
related to unconsolidated wireless systems and as "the Great Lakes market" in
discussions related to consolidated wireless systems. The Great Lakes market
began providing services under the AirTouch Cellular brand name in October 1996.
For further information related to the acquisition, see Note B, "Significant
Changes since December 31, 1995-CCI Merger," to the Consolidated Financial
Statements.
15
<PAGE> 16
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
U S WEST JOINT VENTURE
In July 1994, the Company and U S WEST, Inc. ("U S WEST") entered into an
agreement to combine their domestic cellular properties into a joint venture
(the "AirTouch/U S WEST joint venture") in a multi-phased transaction. During
the initial phase of the transaction, the companies formed a jointly owned
management company to serve as a single management resource and provide support
services to both companies' domestic cellular operations, which remain
separately owned. In May 1996, U S WEST began providing cellular services under
the AirTouch Cellular brand name in the 12 states in which it operates.
The Company and U S WEST are currently seeking to obtain the regulatory and
other approvals and consents necessary to enter into the second phase of the
transaction, in which the companies will combine their respective domestic
cellular properties in the joint venture ("Phase II").
Concurrent with the formation of the AirTouch/U S WEST joint venture, the
companies also formed an equally owned personal communications services ("PCS")
partnership (the "PCS Partnership"), which is a 50% partner in PrimeCo Personal
Communications L.P. ("PrimeCo"). The Company and U S WEST plan to contribute
their respective interests in the PCS Partnership to the AirTouch/U S WEST joint
venture. The timing of such contribution is at U S WEST's discretion and will
occur either at the closing of the second phase or at a later date selected by U
S WEST, but no later than mid-1998. The Company anticipates that the PCS
Partnership will be required to make significant capital contributions to
PrimeCo for the build-out of its PCS markets and that it will continue to
experience substantial operating losses associated with the start-up phase of
the PCS business, which is expected to last several years. Upon contribution of
the PCS Partnership to the joint venture, the Company's relative share of PCS
capital investments and operating losses related to the PCS Partnership will
increase from 50% to its percentage ownership of the joint venture.
The Company presently owns 70% of the management company formed in the initial
phase of the transaction and expects to own approximately 74% of the AirTouch/U
S WEST joint venture upon the commencement of the second phase in the event that
all of its and U S WEST's domestic cellular properties (but not their interests
in the PCS Partnership) are contributed at that time. However, the actual
ownership interests of the Company and U S WEST in their joint venture at the
commencement of the second phase of the transaction or at any given point in
time thereafter will depend, among other things, on the ability of the companies
to contribute their respective domestic cellular properties, the timing of the
contributions of the domestic cellular properties, and the timing and value of
the PCS Partnership contribution. The Company could experience near-term
earnings dilution in connection with the contribution of its and U S WEST's
domestic cellular properties to the AirTouch/U S WEST joint venture. The extent
of such dilution, which could be material, will depend on the relative
profitability of the Company's and U S WEST's respective operations subsequent
to the contributions of such operations. Also, subsequent to the closing of the
second phase, the Company and U S WEST will each deconsolidate for financial
reporting purposes the operations they each contribute to the joint venture,
using instead the equity method of accounting to report their respective
percentage interests in subsequent operating results of the joint venture. The
Company cannot precisely assess the future impact of its joint venture with U S
WEST on the Company's results of operations due to the uncertain timing of the
second phase of the transaction and the uncertain timing of the contribution of
the PCS Partnership to the joint venture. The Company originally anticipated
that the second phase of the transaction would occur in the fourth quarter of
1996 or the first quarter of 1997. However, based on changes in the expected
timing of various actions deemed necessary by the parties to implement Phase II,
the Company anticipates that the second phase of the transaction is now likely
to occur in early 1997. See Pro Forma Condensed Combined Financial Statements in
the Company's Registration Statement on Form S-4 (Reg. No. 333-03107) for
further discussion of the transaction with U S WEST.
U S WEST has the right to exchange its interest in the AirTouch/U S WEST joint
venture for up to 19.9% of the Company's common stock outstanding at the time of
the exchange ("Phase III"), which is exercisable after (i) the commencement of
Phase II and (ii) the contribution of the PCS Partnership. This right expires on
July 25, 2004. Any such exchange would be made at a ratio reflecting the
appraised private market value of U S WEST's interest in the AirTouch/U S WEST
joint venture 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 the AirTouch/U S WEST joint venture
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
16
<PAGE> 17
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
the form of non-voting preferred stock which is redeemable at any time following
issuance, at the option of U S WEST, for cash or, at the option of the Company,
for the Company's common stock. The Company expects that an issuance of its
shares at Phase III would result in per share earnings dilution. The Company has
amended its stockholder rights agreement so that U S WEST will not be deemed to
be an Acquiring Person, as defined therein, by reason of the exchange.
If U S WEST exercises its right to exchange its interest in the AirTouch/U S
WEST joint venture for capital stock of the Company, U S WEST will be entitled
to representation on the Company's Board of Directors and will be subject to
certain voting restrictions. U S WEST is subject to certain standstill
restrictions with respect to the Company through July 24, 2004, unless such
restrictions are earlier terminated or suspended. U S WEST is also prohibited
from selling, exchanging, transferring or otherwise disposing of the Company's
common stock received in Phase III (or any interest therein) prior to July 25,
1999 (except for transfers to direct or indirect wholly-owned subsidiaries of U
S WEST), and thereafter is subject to certain transfer restrictions and entitled
to certain registration rights.
INTERNATIONAL START-UP LOSSES
Due to better than expected international cellular subscriber growth, primarily
in Spain, the Company has increased its estimate of international start-up
losses during 1996 from $100 million to approximately $130 million.
CONTINGENCIES
The Company is party to various legal proceedings, including certain antitrust
litigation. See Note D, "Contingencies," to the Consolidated Financial
Statements.
RESULTS OF OPERATIONS
The following discussions compare the results of operations for the three- and
nine-month periods ended September 30, 1996 to the three- and nine-month periods
ended September 30, 1995, respectively. The operating results for these periods
are not necessarily indicative of operating results in future periods. The
following comparative information should be read in conjunction with the
Consolidated Financial Statements and Notes for each period discussed, as well
as the information presented in the other sections of Management's Discussion
and Analysis.
CONSOLIDATED DOMESTIC AND INTERNATIONAL OPERATIONS
Consolidated operating revenues and expenses principally include domestic
cellular operations in the Company's seven consolidated domestic markets,
domestic paging operations, and the international operations of the Company's
Swedish cellular subsidiary, NordicTel Holdings A.B. ("NordicTel"). The
Company's seven consolidated domestic cellular markets are Los Angeles,
Sacramento, Atlanta, San Diego, Great Lakes, Wichita, and Topeka. Consolidation
of the Company's Great Lakes market commenced on August 16, 1996 in connection
with the Company's acquisition of the remaining capital stock of CCI ("See
Cellular Communications, Inc. Merger").
OPERATING REVENUES AND EXPENSES
Operating revenues primarily include cellular and paging service revenues and
equipment sales. Cellular service revenues primarily consist of air time
charges, access fees, and in-bound roaming charges. Paging service revenues
primarily consist of paging service charges and rentals of paging units in the
United States. Equipment sales consist of revenues from sales of cellular
telephones and pagers. Equipment sales are not a primary part of the Company's
cellular or paging businesses. Rather, the Company offers cellular and paging
equipment at competitive prices, which are usually at or below cost, in order to
market its cellular and paging services.
Operating expenses include: cost of revenues; cost of equipment sales; selling
and customer operations expenses; general, administrative, and other expenses;
and depreciation and amortization expenses. However, cost of equipment sales are
reported as a reduction to operating revenues for purposes of proportionate
reporting. Cost of revenues primarily consists of cellular and paging network
operating costs, interconnection fees assessed by local exchange carriers, and
costs of cellular roaming fraud. Interconnection costs have fixed and variable
components. The fixed component of interconnection costs consists of monthly
flat-rate fees for facilities leased from local exchange carriers. The variable
component of interconnection costs, which fluctuates in relation to the level of
cellular calls and paging transmissions, consists of per-minute usage fees
charged by local exchange carriers for cellular calls or paging transmissions
originating or terminating on their networks. Selling and customer operations
expenses primarily consist of compensation to sales channels; salaries, wages,
and related benefits for sales and customer service personnel; and billing,
advertising, and promotional expenses. General, administrative, and other
17
<PAGE> 18
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
expenses primarily consist of salaries, wages and related benefits for
general and administrative personnel, international license application costs,
bad debt, and other overhead expenses. Depreciation and amortization primarily
consists of depreciation recorded for the Company's cellular and paging
networks, as well as amortization of intangibles such as wireless license costs,
subscriber lists, and goodwill.
GAAP-BASIS CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
------------------------------------ ------------------------------------
Change Change
------------------ ----------------
(Dollars in millions) 1996 1995 $ % 1996 1995 $ %
------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wireless services and other revenues:
Cellular service(a) $ 489.3 $ 315.4 $ 173.9 55.1 $ 1,203.9 $ 898.7 $ 305.2 34.0
Paging service 65.9 56.0 9.9 17.7 197.6 161.1 36.5 22.7
Other revenues 13.4 17.4 (4.0) (23.0) 38.0 52.3 (14.3) (27.3)
-------- -------- -------- ----- ---------- ---------- -------- -----
568.6 388.8 179.8 46.2 1,439.5 1,112.1 327.4 29.4
Cellular and paging equipment sales 32.1 25.9 6.2 23.9 91.4 79.9 11.5 14.4
-------- -------- -------- ----- ---------- ---------- -------- -----
Operating revenues 600.7 414.7 186.0 44.9 1,530.9 1,192.0 338.9 28.4
-------- -------- -------- ----- ---------- ---------- -------- -----
Operating expenses:
Cost of revenues(a) 70.7 60.4 10.3 17.1 186.9 171.9 15.0 8.7
Cost of cellular and paging
equipment sales 51.5 32.0 19.5 60.9 140.9 92.9 48.0 51.7
Selling and customer operations
expenses 165.5 121.1 44.4 36.7 456.9 368.9 88.0 23.9
General, administrative, and
other expenses 111.6 116.7 (5.1) (4.4) 299.5 284.4 15.1 5.3
Depreciation and amortization
expenses 96.2 55.0 41.2 74.9 229.3 155.8 73.5 47.2
-------- -------- -------- ----- ---------- ---------- -------- -----
Total operating expenses 495.5 385.2 110.3 28.6 1,313.5 1,073.9 239.6 22.3
-------- -------- -------- ----- ---------- ---------- -------- -----
Operating income 105.2 29.5 75.7 256.6 217.4 118.1 99.3 84.1
Equity in net income (loss) of
unconsolidated wireless systems:
Domestic 37.3 58.2 (20.9) (35.9) 151.9 137.0 14.9 10.9
International 0.4 (13.5) 13.9 103.0 (16.1) (24.8) 8.7 35.1
Minority interests in net (income)
loss of consolidated wireless
systems (20.5) (12.6) (7.9) (62.7) (54.8) (26.2) (28.6) (109.2)
Interest:
Expense (11.8) -- (11.8) -- (28.8) (4.4) (24.4) (554.5)
Income 3.8 6.2 (2.4) (38.7) 10.1 29.3 (19.2) (65.5)
Foreign exchange gain (loss) 0.8 9.6 (8.8) (91.7) 3.2 1.2 2.0 166.7
Miscellaneous income (expense) (4.2) (1.1) (3.1) (281.8) 4.7 (1.5) 6.2 413.3
-------- -------- -------- ----- ---------- ---------- -------- -----
Income before income taxes and
preferred dividends 111.0 76.3 34.7 45.5 287.6 228.7 58.9 25.8
Income taxes 52.1 29.6 22.5 76.0 115.3 108.0 7.3 6.8
-------- -------- -------- ----- ---------- ---------- -------- -----
Net income before preferred
dividends $ 58.9 $ 46.7 $ 12.2 26.1 $ 172.3 $ 120.7 $ 51.6 42.8
======== ======== ======== ===== ========== ========== ======== =====
</TABLE>
(a) Presentation for 1995 has been restated to conform to the current year
presentation. See Note A, "Basis of Presentation," to the Consolidated
Financial Statements.
INTERNATIONAL OPERATIONS
Consolidated international results during the three and nine months ended
September 30, 1996 comprised 9.0% and 9.9% of operating revenues and 9.4% and
12.5% of operating expenses, respectively, as compared to 10.1% and 9.1% of
operating revenues and 12.2% and 13.7% of operating expenses during the three
and nine months ended September 30, 1995, respectively.
18
<PAGE> 19
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
CCI MERGER
Due to the acquisition of CCI's remaining capital stock (see "Business
Environment-Cellular Communications, Inc. Merger"), the Company began
consolidating the results of the Great Lakes market on August 16, 1996.
Accordingly, the Great Lakes market represented a significant portion of the
increase in operating revenues and expenses during the three and nine months
ended September 30, 1996. Excluding the effect of consolidation of the Great
Lakes market for the period from August 16, 1996 through September 30, 1996,
operating revenues and expenses increased 20.1% and 12.6% for the three months
ended September 30, 1996, respectively, and 19.8% and 16.6% during the nine
months ended September 30, 1996, respectively, as compared to the corresponding
periods of 1995. Except where specifically indicated, the discussion of
GAAP-Basis Consolidated Results of Operations which follows includes the effects
of consolidation of the Great Lakes market.
OPERATING REVENUES
The increase in cellular service revenues resulted primarily from a 35.8%
increase in the Company's domestic consolidated customer base from September 30,
1995 through September 30, 1996 (excludes customers acquired in connection with
the CCI Merger), partially offset by a 16.4% and a 15.0% decrease in the
corresponding average revenue per customer for the three and nine months
ended September 30, 1996, respectively, as compared to the corresponding periods
of 1995. The Company achieved customer growth in its consolidated markets
through advertising and by continuing to offer incentive programs such as waived
service establishment charges, heavily discounted monthly access fees, heavily
discounted cellular handsets, free or discounted air time packages, and reduced
or fixed rates for off-peak usage and roaming. The decline in average revenue
per customer was primarily attributable to continued success in penetrating the
consumer markets and to rate reductions and discounts associated with customer
incentive programs and marketing promotions. Consumer usage patterns contributed
to declines in average revenue per customer because consumers typically make
fewer telephone calls than business customers and often place many of their
calls during lower-rate, off-peak calling periods. Consistent with industry
trends, the Company expects the shift toward consumer markets to continue,
resulting in continuing declines in average revenue per customer.
The increases in paging service revenues for the three and nine months ended
September 30, 1996 resulted from the acquisition of Message Center Beepers, Inc.
("Message Center") in mid-December 1995, as well as from growth in existing and
start-up paging markets.
CELLULAR AND PAGING EQUIPMENT SALES AND COST OF SALES
Negative equipment margins increased from $6.1 and $13.0 million during the
three and nine months ended September 30, 1995, respectively, to $19.4 and $49.5
million during the three and nine months ended September 30, 1996, respectively,
primarily as a result of competitive pressures which required the Company to
offer new customers heavily discounted cellular equipment. The Company also
experienced an increase in the level of discounted equipment offered to existing
customers in connection with retention efforts. Competitive pressure to offer
heavily discounted cellular equipment became substantially more significant in
the Company's California markets subsequent to the lifting of California Public
Utilities Commission ("CPUC") restrictions on the bundling of cellular service
and equipment on April 5, 1995. Prior to the lifting of such restrictions,
cellular carriers in California were prohibited from requiring customers to
activate service in order to receive discounts on cellular equipment. The
effects of competitive pressures and customer retention efforts were partially
offset by decreases in handset prices. The Company expects cellular equipment
sales to continue to generate negative margins for the foreseeable future.
OPERATING EXPENSES
Excluding the effect of consolidation of the Great Lakes market, costs of
revenues remained relatively flat during the three and nine months ended
September 30, 1996, as compared to the corresponding periods of 1995. Relatively
stable costs despite strong subscriber growth were attributable primarily to
cost containment efforts, significant reductions in costs to the Company of
domestic cellular roaming fraud, and successful negotiation of reduced domestic
cellular interconnection rates, all of which were substantially offset by higher
interconnection costs associated with increased network usage attributable to
customer growth, as well as moderate increases in facility and employee costs
necessary to support network expansion. Moderate increases in Domestic Paging
cost of revenues, which were attributable to the Message Center acquisition and
start-up markets, were largely offset by the effect of the sale of the Company's
credit card verification operations during the first quarter of 1996. As a
percentage of wireless services and other revenues, cost of revenues decreased
from 15.5% during the three and
19
<PAGE> 20
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
nine months ended September 30, 1995, to 12.4% and 13.0% during the three and
nine months ended September 30, 1996, respectively, due to cost reductions and
increasing economies of scale. The Company anticipates cost of revenues to
continue to decline as a percentage of wireless services and other revenues as
customers are added to existing networks and additional economies of scale are
achieved.
Excluding the effect of consolidation of the Great Lakes market, selling and
customer operations expenses would have increased by approximately 17% during
the three and nine months ended September 30, 1996, as compared to the
corresponding periods during 1995. This increase was partially attributable to
increased selling costs associated with 44.5% and 34.0% increases in the gross
number of customers added to the Company's consolidated domestic cellular
networks during the three and nine months ended September 30, 1996,
respectively. Also contributing to the increase were costs of the AirTouch
national brand name advertising campaign, increased selling costs associated
with customer growth in consolidated international cellular operations, and
expansion of customer operations necessary to support domestic and international
cellular and paging customer growth. As a percentage of operating revenues,
consolidated customer operations costs remained flat despite expansion of
customer operations. Although aggregate selling expenses increased due to strong
customer growth, the average acquisition cost per gross customer added to
consolidated domestic cellular networks decreased due to improved performance of
lower-cost direct sales channels and to increased usage of customer incentive
programs such as discounted cellular service and telephones. However, increased
distribution through direct channels resulted in a shift of some customer
acquisition costs from selling expenses to negative margins on cellular
handsets. Including the impact of negative equipment margins, the consolidated
domestic cellular average acquisition cost per gross customer added remained
relatively flat during the three and nine months ended September 30, 1996, as
compared to the corresponding periods in 1995.
The decrease in general, administrative, and other expenses during the three
months ended September 30, 1996 was primarily attributable to a one-time charge
for the impairment of AirTouch Teletrac's assets recorded during the third
quarter of 1995, as well as the absence of 1996 activity for AirTouch Teletrac,
which was sold early in the first quarter of 1996. The foregoing decreases were
partially offset by the effect of consolidation of the Great Lakes market and
costs associated with the adoption of the AirTouch Cellular brand name in the
Great Lakes and U S WEST markets. The increase in general, administrative, and
other expenses during the nine months ended September 30, 1996 resulted from a
number of factors, including moderate expansion of administrative functions
necessary to support cellular and paging customer growth, the addition of
administrative functions associated with Message Center, costs associated with
the adoption of the AirTouch Cellular brand name in the Great Lakes and U S WEST
markets, increases in bad debt expenses, and costs associated with deployment of
new customer support systems. Increases in bad debt expenses were consistent
with increases in consolidated revenues. Increases in year-to-date expenses were
partially offset by a one-time charge for the impairment of AirTouch Teletrac's
assets recorded during the third quarter of 1995, as well as the absence of 1996
activity for AirTouch Teletrac. As a percentage of operating revenues, general,
administrative, and other expenses decreased 9.6 and 4.3 percentage points
during the three and nine months ended September 30, 1996, respectively,
reflecting increasing economies of scale despite significant one-time 1996
charges associated with AirTouch Cellular brand name adoptions and customer
support system deployments.
Despite the overall increase in cash costs, the average cash cost per customer
including losses on equipment sales decreased 21.3% and 16.1% for the three and
nine months ended September 30, 1996, respectively. Cash costs include all
operating expenses with the exception of depreciation and amortization expenses.
Decreases in average cash cost per customer resulted from the Company's efforts
to drive down cash costs faster than declines in average revenue per customer.
Increases in depreciation and amortization primarily reflect increased
investment in property, plant, and equipment. These increases were also
attributable to amortization of identifiable intangible assets and goodwill
associated with the acquisition of Message Center during December 1995, goodwill
associated with the purchase of an additional 24% interest in CCI during October
1995, and amortization of identifiable intangible assets and goodwill associated
with the August 16, 1996 acquisition of the remaining capital stock of CCI.
These same factors also contributed to an increase in depreciation and
amortization expenses as a percentage of operating revenues, which increased
from approximately 13% during the three and nine months ended September 30, 1995
to approximately 16% and 15% during the three and nine months ended September
30, 1996, respectively.
20
<PAGE> 21
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
EQUITY IN NET INCOME (LOSS) OF UNCONSOLIDATED WIRELESS SYSTEMS
Domestic. Equity earnings decreased primarily as a result of the consolidation
of CCI and New Par on August 16, 1996. This was partially offset by increased
earnings for CMT Partners and New Par (through August 16, 1996), due primarily
to significant growth in each of their respective customer bases. Both CMT and
New Par continued to experience declines in average revenue per customer
consistent with industry trend.
International. The decrease in losses during the three and nine months ended
September 30, 1996 was due to improved operating results for existing operations
in Germany, Portugal, Belgium, and Japan, resulting from significant expansion
of customer bases. Improved operating results of existing operations were
partially offset by increases in start-up and post-launch costs associated with
cellular operations in Spain, Italy, Korea, and Poland. Increases in start-up
costs were primarily attributable to costs associated with rapid customer growth
and continued network build-out.
OTHER INCOME AND EXPENSES
The increase in interest expense reflects higher debt balances during the three
and nine months ended September 30, 1996, as compared to the same periods during
1995, partially offset by increased capitalization of interest during 1996.
Similarly, the decrease in interest income reflects lower cash balances
available for investment during the three and nine months ended September 30,
1996, as compared to the same periods during the prior year.
The unfavorable variance in foreign exchange gain (loss) during the three months
ended September 30, 1996, as compared to the corresponding period during 1995,
resulted from losses recorded on foreign currency financial instruments not
qualifying for hedge accounting under GAAP. The unfavorable increase in
miscellaneous income (expense) during the three months ended September 30, 1996
was primarily attributable to losses recorded on the disposition of certain
international telecommunications interests. Similarly, the favorable variance in
miscellaneous income (expense) during the nine months ended September 30, 1996
was attributable to the net gain on the disposition of certain international
telecommunications interests.
INCOME TAXES
The effective tax rates for the three and nine months ended September 30, 1996
and September 30, 1995 were 46.9%, 40.1%, 38.8%, and 47.2%, respectively. The
increase in the effective rate during the three months ended September 30, 1996,
as compared to the same quarter of the prior year, resulted primarily from tax
benefits recorded during the third quarter of 1995 related to Teletrac and a
decrease in net domestic and international equity income. Conversely, the
decrease in the effective income tax rate during the nine months ended September
30, 1996, as compared to the corresponding period during 1995, resulted
primarily from a reduction in the consolidated valuation allowance recorded in
the second quarter of 1996 and an increase in net domestic and international
equity income. The aforementioned reduction in the valuation allowance was
attributable to certain consolidated international operations.
21
<PAGE> 22
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
PROPORTIONATE RESULTS OF OPERATIONS
The following tables for domestic and international proportionate cellular
operations are not required by GAAP or intended to replace the Consolidated
Financial Statements prepared in accordance with GAAP. The tables are presented
to provide supplemental data. Because significant assets of the Company are not
consolidated, the Company believes that proportionate financial and operating
data facilitates the understanding and assessment of its Consolidated Financial
Statements. The following proportionate accounting tables reflect the relative
weight of the Company's ownership interests in its domestic and international
cellular systems. Data from certain systems is excluded because the data is not
available on a timely basis and is not material to the information presented.
DOMESTIC CELLULAR PROPORTIONATE RESULTS
<TABLE>
<CAPTION>
For the Three Months Ended September 30
---------------------------------------
Change
------------------
OPERATING RESULTS (Dollars in millions) 1996 %(a) 1995 %(a) $ %
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service and other revenues(b) $ 521.5 104.0 $ 387.8 102.1 $ 133.7 34.5
Equipment sales 20.5 4.1 19.5 5.1 1.0 5.1
Cost of equipment sales (40.6) (8.1) (27.5) (7.2) (13.1) (47.6)
-------- ----- -------- ----- -------- -----
Net operating revenues 501.4 100.0 379.8 100.0 121.6 32.0
-------- ----- -------- ----- -------- -----
Cost of revenues(b) 57.6 11.5 46.1 12.1 11.5 24.9
Selling and customer operations expenses 164.2 32.7 133.1 35.0 31.1 23.4
General, administrative, and other expenses 45.8 9.1 35.0 9.2 10.8 30.9
Depreciation and amortization expenses 80.1 16.0 44.9 11.8 35.2 78.4
-------- ----- -------- ----- -------- -----
Total costs and expenses 347.7 69.3 259.1 68.1 88.6 34.2
-------- ----- -------- ----- -------- -----
Operating income $ 153.7 30.7 $ 120.7 31.9 $ 33.0 27.3
======== ===== ======== ===== ======== =====
Operating cash flow $ 233.8 $ 165.6 $ 68.2 41.2
Operating cash flow margin(c) 46.6% 43.6% 6.9
===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30
-------------------------------------- Change
-------------------
OPERATING RESULTS (Dollars in millions) 1996 % a 1995 %a $ %
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service and other revenues(b) $ 1,426.1 104.4 $ 1,109.8 101.9 $ 316.3 28.5
Equipment sales 59.9 4.4 63.2 5.8 (3.3) (5.2)
Cost of equipment sales (120.6) (8.8) (84.0) (7.7) (36.6) (43.6)
---------- ----- ---------- ----- -------- -----
Net operating revenues 1,365.4 100.0 1,089.0 100.0 276.4 25.4
---------- ----- ---------- ----- -------- -----
Cost of revenues(b) 158.5 11.6 138.1 12.7 20.4 14.8
Selling and customer operations expenses 465.7 34.1 380.7 35.0 85.0 22.3
General, administrative, and other expenses 117.4 8.6 100.0 9.2 17.4 17.4
Depreciation and amortization expenses 199.0 14.6 135.7 12.5 63.3 46.6
---------- ----- ---------- ----- -------- -----
Total costs and expenses 940.6 68.9 754.5 69.4 186.1 24.7
---------- ----- ---------- ----- -------- -----
Operating income $ 424.8 31.1 $ 334.5 30.6 $ 90.3 27.0
========== ===== ========== ===== ======== =====
Operating cash flow $ 623.8 $ 470.2 $ 153.6 32.7
Operating cash flow margin(c) 45.7% 43.2% 5.8
====== ====== ====
</TABLE>
(a) Percentage of net operating revenues.
(b) Presentation for 1995 has been restated to conform to the current year
presentation. See Note A, "Basis of Presentation," to the Consolidated
Financial Statements.
(c) If net losses on equipment sales were reclassified as operating expenses,
operating cash flow margins would be 44.8% and 42.7% for the three months
ended September 30, 1996 and 1995, respectively, and 43.7% and 42.4% for the
nine months ended September 30, 1996 and 1995, respectively.
22
<PAGE> 23
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
DOMESTIC CELLULAR PROPORTIONATE OPERATING DATA
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30 September 30
-------------------------- --------------------------
Change Change
------------------ -------------------
(In thousands, except per unit data) 1996 1995 Units/$ % 1996 1995 Units/$ %
---------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subscribers 3,072 1,915 1,157 60.4 3,072 1,915 1,157 60.4
Subscriber net adds in period,
excluding acquisitions 151 111 40 36.0 440 355 85 23.9
Monthly average revenue per unit $ 62 $ 70 $ (8) (11.4) $ 63 $ 71 $ (8) (11.3)
Monthly cash cost per unit $ 34 $ 40 $ (6) (15.0) $ 35 $ 41 $ (6) (14.6)
</TABLE>
ACQUISITION OF ADDITIONAL INTEREST IN CCI
For the nine months ended September 30, 1995, the Company's reported
proportionate ownership interest in New Par was 56.7% as compared to 68.8% for
the period from January 1, 1996 through August 15, 1996 and 100% for the period
from August 16, 1996 through September 30, 1996. Such ownership changes were
responsible for 13.9 and 8.6 percentage points of the total increase in net
operating revenues and 11.6 and 7.3 percentage points of the total increase in
operating expenses during the three and nine months ended September 30, 1996,
respectively, as compared to the corresponding periods of 1995.
SERVICE AND OTHER REVENUES
The increase in cellular service revenues resulted primarily from a 41.1%
increase in the Company's domestic customer base from September 30, 1995 through
September 30, 1996, partially offset by a 11.4% and a 11.3% decrease in the
corresponding average revenue per customer for the three and nine months
ended September 30, 1996, respectively. The Company achieved customer growth in
its domestic markets through advertising and by continuing to offer incentive
programs such as waived service establishment charges, discounted monthly access
fees, discounted cellular handsets, packages including free or discounted air
time, and reduced or fixed rates for off-peak usage and roaming. The decline in
average revenue per customer was primarily attributable to continued success in
penetrating the consumer markets and to rate reductions and discounts associated
with customer incentive programs and marketing promotions. Consumer usage
patterns contributed to declines in average revenue per customer because
consumers typically make fewer telephone calls than business customers and often
place many of their calls during lower-rate, off-peak calling periods. The
Company expects the shift toward consumer markets to follow industry trend and
continue to result in declining average revenue per customer.
EQUIPMENT SALES AND COST OF SALES
Negative equipment margins increased from $8.0 and $20.8 million during the
three and nine months ended September 30, 1995, respectively, to $20.1 and $60.7
million during the three and nine months ended September 30, 1996, respectively,
as a result of competitive pressures which required the Company to offer new
customers heavily discounted cellular equipment. The Company also experienced an
increase in the level of discounted equipment offered to existing customers in
connection with retention efforts. Competitive pressure to offer heavily
discounted cellular equipment became substantially more significant in the
Company's California markets, subsequent to the lifting of CPUC restrictions on
the bundling of cellular service and equipment on April 5, 1995. The effects of
competitive pressures and customer retention efforts were partially offset by
decreases in handset prices. The Company expects cellular equipment sales to
continue to generate negative margins for the foreseeable future.
OPERATING EXPENSES
The increases in cost of revenues were due primarily to incremental variable
interconnection costs associated with increased network usage attributable to
customer growth and moderate increases in facility and employee costs necessary
to support network expansion, substantially offset by significant reductions in
costs to the Company of domestic cellular roaming fraud and successful
negotiation of reduced domestic cellular interconnection rates. As a percentage
of wireless service and other revenues, cost of revenues decreased slightly
during the three and nine months ended September 30, 1996, as compared to the
corresponding periods of 1995. The decrease in costs as a percentage of revenue
was attributable to reduced costs of roaming fraud, cost containment efforts,
negotiation of reduced interconnection rates, and economies of scale. The
Company anticipates cost of revenues to continue to decline as a percentage of
wireless services and other revenues as customers are added to existing networks
and additional economies of scale are achieved.
23
<PAGE> 24
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
The increases in selling and customer operations expenses were partially
attributable to increased selling costs associated with a 31.9% and a 29.0%
increase in the gross number of customers added to the Company's domestic
cellular networks during the three and nine months ended September 30, 1996,
respectively. Increases were also attributable to costs of AirTouch national
brand name advertising campaigns, increases in bad debt expense, and expansion
of customer operations necessary to support cellular customer growth. Increases
in bad debt expenses were consistent with increases in revenues. Despite
expansion of customer operations, domestic customer operations costs remained
relatively stable as a percentage of net operating revenues. Although aggregate
selling expenses increased due to strong customer growth, the average
acquisition cost per gross customer added to domestic cellular networks
decreased due to improved performance of lower-cost direct sales channels and to
increased usage of customer incentive programs such as discounted or free
cellular service and telephones. However, increased distribution through direct
channels resulted in a shift of some customer acquisition costs from selling
expenses to negative margins on cellular handsets. Including the impact of
negative equipment margins, the domestic cellular average acquisition cost per
gross customer added remained relatively flat during the three and nine month
periods ended September 30, 1996, as compared to the corresponding periods in
1995.
The increases in general, administrative, and other expenses during the three
and nine months ended September 30, 1996 were due primarily to the Company's
costs incurred to adopt the AirTouch Cellular brand name in the Great Lakes and
US WEST markets, costs associated with deployment of a new customer support
system and, to a lesser extent, moderate expansion of administrative functions
necessary to support customer growth in domestic markets. As a percentage of net
operating revenues, general, administrative, and other expenses decreased
slightly during the three and nine months ended September 30, 1996,
reflecting increasing economies of scale despite significant one-time 1996
charges associated with AirTouch Cellular brand name adoptions and customer
support system deployments.
Despite the overall increase in cash costs, the average cash cost per customer
including losses on equipment sales decreased 15.0% and 14.6% for the three and
nine months ended September 30, 1996, respectively. Cash costs include all
operating expenses with the exception of depreciation and amortization expenses.
Decreases in average cash cost per customer resulted from the Company's efforts
to drive down cash costs faster than declines in average revenue per customer.
Increases in depreciation and amortization primarily reflect increased
investment in property, plant, and equipment. These increases were also
attributable to amortization of goodwill associated with the acquisition of an
additional 24% interest in CCI during October 1995 and amortization of
identifiable intangible assets and goodwill associated with the August 16, 1996
acquisition of the remaining capital stock of CCI. These factors also
contributed to an increase in depreciation and amortization expenses as a
percentage of net operating revenues, which increased from 11.8% and 12.5%
during the three and nine months ended September 30, 1995, respectively, to
16.0% and 14.6% during the three and nine months ended September 30, 1996,
respectively.
24
<PAGE> 25
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
INTERNATIONAL CELLULAR PROPORTIONATE RESULTS AND OPERATING DATA
<TABLE>
<CAPTION>
For the Three Months Ended September 30
--------------------------------------- Change
--------------------
OPERATING RESULTS (Dollars in millions) 1996 %(a) 1995(b) %(a) $ %
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Existing operations:(c)
Net operating revenues $407.1 100.0 $218.8 100.0 $188.3 86.1
Operating income $ 84.8 20.8 $4.5 2.1 $80.3 -
Operating cash flow $139.7 34.3 $42.0 19.2 $97.7 232.6
Income/ (loss) $ 41.0 $(2.6) $43.6 -
Start-up systems:(d)
Income/ (loss) $(41.9) $(13.9) $(28.0) (201.4)
Total cellular income/(loss) $ (0.9) $(16.5) $15.6 94.5
OPERATING DATA (In thousands)
Subscribers 1,408 635 773 121.7
Subscriber net adds in period, excluding
acquisitions 242 92 150 163.0
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30
------------------------------------------
Change
------------------
OPERATING RESULTS (Dollars in millions) 1996 %(a) 1995(b) %(a) $ %
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Existing operations:(c)
Net operating revenues $1,053.8 100.0 $559.2 100.0 $494.6 88.4
Operating income $168.0 15.9 $10.8 1.9 $157.2 -
Operating cash flow $324.4 30.8 $121.9 21.8 $202.5 166.1
Income/ (loss) $72.1 $(15.3) $87.4 571.2
Start-up systems:(d)
Income/ (loss) $(91.3) $(28.1) $(63.2) (224.9)
Total cellular income/(loss) $(19.2) $(43.4) $ 24.2 55.8
OPERATING DATA (In thousands)
Subscribers 1,408 635 773 121.7
Subscriber net adds in period, excluding
acquisitions 605 246 359 145.9
</TABLE>
(a) Percentage of net operating revenues.
(b) Certain data has been restated to include effects of the Company's interests
in Italy, South Korea, and Spain.
(c) Effective January 1, 1996, existing operations represent the Company's
share of results (after foreign taxes where applicable) for the following
international cellular systems which have provided commercial service for
the full twelve months of any preceding calendar year: Germany, Portugal,
Sweden, Belgium, and Japan. Prior to January 1, 1996, existing operations
represented the Company's share of results (after foreign taxes where
applicable) for the following international cellular systems which had
completed twelve months of commercial service: Germany, Portugal, Sweden,
Belgium, and Japan.
(d) Effective January 1, 1996, start-up systems represent the Company's share of
income or loss (after foreign taxes where applicable) for the following
international cellular systems which did not provide commercial service for
the full twelve months of any preceding calendar year: Italy, South Korea,
Spain, India, and Poland. Prior to January 1, 1996, start-up systems
represented the Company's share of income or loss (after foreign taxes where
applicable) for the following international cellular systems which had not
yet completed twelve months of commercial service: Italy, South Korea,
Spain, and India.
NET OPERATING REVENUES
Existing Operations. The increase in net operating revenues resulted primarily
from the 121.7% increase in proportionate customers as of September 30, 1996, as
compared to September 30, 1995, partially offset by a slight overall decline in
average revenue per customer. The decline in average revenue per customer was
due primarily to competitive pressures, continued penetration of international
consumer markets, and unfavorable movements in exchange rates.
25
<PAGE> 26
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
OPERATING INCOME
Existing Operations. The significant increases in proportionate operating income
resulted from improved profitability in existing international operations.
Improved profitability was primarily attributable to rapidly declining cash
costs per customer, achieved as the Company's existing operations gained
economies of scale, partially offset by a slight overall decline in average
revenue per customer.
TOTAL CELLULAR INCOME (LOSS)
Existing Operations. The improvement in income (loss) was due to improved
profitability in existing international operations, which resulted primarily
from the expanding customer base and economies of scale achieved as customers
were added to existing networks.
Start-up Systems. The increased losses resulted primarily from acquisition costs
associated with rapid subscriber growth in Spain, Italy, and South Korea. To a
lesser extent, start-up systems in India and Poland also contributed to the
increased losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company defines liquidity as its ability to generate resources to finance
business expansion, construct capital assets, and pay its current obligations.
The Company requires substantial capital to operate and expand its existing
wireless systems, to construct new wireless systems, and to acquire interests in
existing wireless systems.
1996 CAPITAL EXPENDITURES
During the nine months ended September 30, 1996, the Company incurred capital
expenditures of $201.4 million for additions to property, plant, and equipment
for its consolidated domestic and international wireless networks and other
capital expenditures, primarily to increase cellular and paging network capacity
and to expand customer operations functions necessary to support customer
growth. The Company invested an additional $413.4 million in its unconsolidated
wireless systems to fund the build-out of cellular and PCS networks.
CCI Merger. During January 1996, the Company purchased options for 2.4 million
shares of capital stock in CCI for an aggregate cost of $107.7 million, an
amount equal to the aggregate consideration paid by CCI for cancellation of its
employee replacement options pursuant to the transaction set forth in the
Company's original 1990 merger agreement with CCI. In addition, on August 16,
1996, pursuant to the Agreement and Plan of Merger dated as of April 5, 1996, as
amended and restated as of July 12, 1996, (the "1996 Merger Agreement"), the
Company completed its acquisition of the approximately 63% of CCI's stock that
it did not already own in exchange for a combination of AirTouch preferred stock
and cash. The acquisition cost to the Company was approximately $1.6 billion
including liabilities less cash and cash equivalents acquired. Pursuant to the
1996 Merger Agreement, the merger consideration consisted of $1,040.3 million in
AirTouch preferred securities, $393.3 million in cash paid to CCI shareholders,
and the issuance of AirTouch stock options valued at approximately $17 million.
Actual cash paid by AirTouch in connection with the acquisition was $296.9
million as follows:
<TABLE>
<CAPTION>
(Dollars in millions)
<S> <C>
Purchase of January 1996 options for 2.4 million shares of
CCI capital stock $ 107.7
Cash paid to CCI shareholders for August 16, 1996 acquisition 393.3
Less: cash acquired from CCI (215.4)
Direct acquisition costs and other 11.3
--------
Net cash used $ 296.9
========
</TABLE>
The cash portion of the acquisition was funded through borrowings (see "Funding
of 1996 Capital Needs"). Preferred securities issued in connection with the
acquisition consisted of 17,237,394 shares of Class B Preferred and 11,069,958
shares of Class C Preferred (See Note B, "Significant Changes since December 31,
1995-Preferred Stock Issuance," to the Consolidated Financial Statements). The
Class B and C preferred shares bear annual dividends at the rate of $1.74 and
$2.125 per share, respectively, both of which are payable quarterly in arrears.
26
<PAGE> 27
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
FUNDING OF 1996 CAPITAL NEEDS
The Company did not generate sufficient cash flows from operations to meet its
capital requirements during the nine months ended September 30, 1996.
Accordingly, in March 1996, the Company initiated a commercial paper program
consisting of the sale of discounted notes that is exempt from registration
under the Securities Act of 1933 (see Note B, "Significant Changes since
December 31, 1995-Commercial Paper Program," to the Consolidated Financial
Statements). The Company's Board of Directors authorized the issuance of
commercial paper in amounts necessary to finance the Company's working capital
requirements, provided that the amount outstanding under the commercial paper
program, together with all indebtedness incurred under the $2 billion long-term
revolving credit facility ("the Facility"), does not in the aggregate exceed $2
billion. In addition, on July 16, 1996, the Company issued long-term debt in the
form of $250.0 million in 7 1/8% Notes and $400.0 million in 7 1/2% Notes,
maturing in July 2001 and July 2006, respectively. The Notes were issued
pursuant to AirTouch's Registration Statement on Form S-3 (Reg. No. 33-62787),
which registered $2 billion in various forms of debt and equity securities (the
"Shelf"). Interest on the Notes is payable semi-annually on January 15 and July
15, commencing in 1997.
Funding needs in excess of cash flows from operations for the first nine months
of 1996 were satisfied primarily by proceeds from borrowings under the Shelf,
the Facility, and the commercial paper program. During the nine months ended
September 30, 1996, the Company raised $559.5 million in new capital consisting
of the issuance of $650.0 million in notes pursuant to the Shelf, the net
issuance of $388.5 million in commercial paper, and the issuance of $69.8
million in short-term borrowings, less the net repayment of $548.8 million on
indebtedness under the Facility and other long-term debt. In connection with the
CCI Merger, a subsidiary of the Company also succeeded to $173.7 million in zero
coupon notes with a face value of $217.0 million and retired $189.2 million in
other long-term debt acquired from CCI. In addition to debt financing, the
Company also received $52.2 million in proceeds from the issuance of capital
stock. The net proceeds from the issuance of debt and capital stock, in addition
to $449.0 million in cash flows from operating activities, were used primarily
to fund investments in unconsolidated wireless systems, capital expenditures,
and the cash portion of the August 16, 1996 CCI acquisition.
FUTURE CAPITAL EXPENDITURES
The Company will continue to be required to make substantial expenditures in
connection with its efforts to expand its wireless business. Domestic and
international capital requirements for 1996 are expected to reach approximately
$1 billion, excluding the cash portion of the CCI acquisition.
Consolidated Expenditures. The Company plans to incur significant capital
expenditures in its consolidated markets to expand its existing analog and
digital wireless networks and to construct and deploy new digital wireless
networks, including the continuing deployment of its Code Division Multiple
Access ("CDMA") or digital network in Los Angeles and San Diego, as well as in
other markets, under the brand name Powerband. The Company expects its future
capital expenditures for digital technology to continue to increase and, at some
point, surpass its capital expenditures for analog technology. The Company
anticipates that a significant portion of its future domestic wireless network
traffic will migrate to digital service as high-usage customers take advantage
of enhanced digital features such as superior voice quality, longer handset
battery life, improved security, and high-speed data transmission capabilities.
However, both analog and digital technologies are expected to coexist for the
foreseeable future due to continued demand for analog service and the fact that
analog networks provide the only common roaming platform currently available
throughout the United States. Management believes that a viable analog market
will continue to exist for the foreseeable future to serve consumers and other
customers who do not desire digital features or do not wish to purchase new
digital handsets. With respect to roaming capabilities, the Company believes
that a significant portion of its digital and analog customer base will continue
to require access to nationwide analog networks in the United States.
Accordingly, the Company plans to maintain and, as required, expand its analog
networks and to offer dual-mode analog/digital phones in each of its digital
markets to facilitate the greatest possible roaming capabilities for its
customers.
At September 30, 1996, the Company was committed to spend approximately $157.9
million for the acquisition of property, plant, and equipment for its
consolidated subsidiaries. In addition to these commitments, the Company plans
to make additional capital expenditures of approximately $280.5 million during
1996 to increase the capacity of its existing domestic analog wireless networks
and to deploy digital technology. At September 30, 1996, the Company had also
committed to spend approximately $13.1 million for the purchase of cellular
handsets.
27
<PAGE> 28
AirTouch Communications, Inc. And Subsidiaries
Management's Discussion and Analysis
Unconsolidated Wireless Systems. As of September 30, 1996, the Company was
committed to make capital contributions of approximately $106.3 million to its
unconsolidated wireless systems. In addition to these commitments, the Company
plans to make additional capital contributions of approximately $228.0 million
during 1996 to its existing international and domestic joint ventures, including
contributions to PrimeCo for the construction of its PCS networks. The majority
of PrimeCo's networks are expected to be operational by the fourth quarter of
1996. The Company constantly evaluates opportunities to increase its ownership
in its existing international ventures, which could result in additional capital
commitments.
FUTURE CAPITAL FUNDING
On October 2, 1996, the Company issued long-term debt in the form of $250
million in 7% Notes, maturing in October 2003. The Notes were issued pursuant to
the Shelf and require semi-annual interest payments due on April 1 and October
1, commencing in 1997.
Working capital raised by the sale of commercial paper, borrowings issued under
the Facility, and debt issued pursuant to the Shelf are currently expected to be
sufficient to meet the Company's cash requirements in excess of cash flows from
operations through the end of 1996. However, management anticipates that
additional external financing will be necessary to fund expansion and operations
beyond 1996. Accordingly, the Company will need to raise additional funds
through borrowings or public or private sales of debt or equity securities.
Additional funding beyond 1996 may be obtained through borrowings under the
Facility; through the Company's commercial paper program; from additional
securities which may be issued from time to time under the Shelf; through the
issuance of securities in a transaction exempt from registration under the
Securities Act of 1933; or a combination of one or more of the foregoing. The
Company believes that it will be able to access the capital markets on terms and
in amounts adequate to meet its objectives. However, given the possibility of
changes in market conditions or other occurrences, there can be no certainty
that such funding will be available in quantities or on terms favorable to the
Company.
28
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of AirTouch Communications, Inc.:
We have reviewed the accompanying Consolidated Balance Sheets of AirTouch
Communications, Inc. and subsidiaries ("Company") as of September 30, 1996 and
the related Consolidated Statements of Income and of Cash Flows for the
three-month and nine-month periods ended September 30, 1996 and 1995. These
Consolidated Financial Statements are the responsibility of the Company's
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 primarily of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted 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 accompanying Consolidated Financial Statements for them to be in
conformity with generally accepted accounting principles.
Our review was made for the purpose of expressing limited assurance on the
Consolidated Financial Statements taken as a whole. The Selected Proportionate
Financial Data ("Proportionate Financial Data") for the three-month and
nine-month periods ended September 30, 1996 and 1995 appearing on page 12 is
presented for additional analysis and is not a required part of the basic
financial statements. As discussed in the Footnotes to the Proportionate
Financial Data, the Proportionate Financial Data has been prepared by the
Company to present financial information that, in the opinion of management, is
not provided by financial statements prepared in conformity with generally
accepted accounting principles. Such Proportionate Financial Data, prepared on
the basis of presentation described in the Footnotes to the Proportionate
Financial Data, has been subjected to the inquiry and analytical procedures
applied in the review of the basic financial statements. Based on our review, we
are not aware of any material modifications that should be made to such
information in relation to the basic Consolidated Financial Statements taken as
a whole.
We previously audited in accordance with generally accepted auditing standards,
the Consolidated Balance Sheet as of December 31, 1995, and the related
Consolidated Statements of Income, of Stockholders' Equity, and of Cash Flows
for the year then ended (not presented herein), and in our report dated February
23, 1996 we expressed an unqualified opinion on those Consolidated Financial
Statements. In our opinion, the information set forth in the accompanying
Consolidated Balance Sheet information as of December 31, 1995, is fairly stated
in all material respects in relation to the Consolidated Balance Sheet from
which it has been derived.
/s/ Price Waterhouse LLP
San Francisco, California
November 7, 1996
29
<PAGE> 30
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Footnote D, "Contingencies", in the Notes to Consolidated Financial
Statements.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibits identified below are incorporated herein by reference as
exhibits hereto.
Exhibit
Number Description
------- -----------
15.1 Letter of Price Waterhouse LLP Re: Unaudited
Financial Information
27 Financial Data Schedule
(b) Reports on Form 8-K:
Date of Report: July 2, 1996
Item 7. Financial Statements and Exhibits
Date of Report: July 3, 1996
Item 5. Other Events and Item 7. Financial Statements and Exhibits
Date of Report: July 11, 1996
Item 7. Financial Statements and Exhibits
Date of Report: August 16, 1996
Item 2. Acquisition or Disposition of Assets and Item 7.
Financial Statements and Exhibits
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, INC.
By: /s/ Mohan S. Gyani
---------------------------
Mohan S. Gyani
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: November 8, 1996
31
<PAGE> 32
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
15.1 Letter of Price Waterhouse LLP Re: Unaudited Financial
Information
27 Financial Data Schedule
32
<PAGE> 1
Exhibit 15.1
November 7, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that AirTouch Communications, Inc. has included our report dated
November 7, 1996 (issued pursuant to the provisions of Statement on Auditing
Standards No. 71) in the Company's Report on Form 10-Q for the quarter ended
September 30, 1996 which is incorporated by reference in the Registration
Statements on Form S-8 (No. 33-57083, No. 33-57077, No. 33-57081 and No.
33-10389), the Prospectus constituting part of the Registration Statement on
Form S-3 (No. 33-62787) and the Prospectus constituting part of the Registration
Statement on Form S-4 (No. 333-03107). We are also aware of our responsibilities
under the Securities Act of 1933.
Yours very truly,
/s/ Price Waterhouse LLP
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