<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, 1997
[ ] 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, 1997, 504,771,115 shares of common stock were outstanding.
<PAGE> 2
AIRTOUCH COMMUNICATIONS, INC.
INDEX TO REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I -- FINANCIAL INFORMATION
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 ...........................10
Selected Proportionate Operating Data ...........................12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...............................13
REPORT OF INDEPENDENT ACCOUNTANTS .................................22
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ..................................................23
ITEM 2. CHANGES IN SECURITIES ..............................................23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ....................................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................23
ITEM 5. OTHER INFORMATION ..................................................23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................23
2
<PAGE> 3
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 information) 1997 1996 1997 1996
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues $ 916 $ 601 $ 2,653 $ 1,531
-------- ------- -------- --------
Operating expenses:
Cost of revenues 209 122 597 328
Selling and customer operations expenses 233 165 672 457
General, administrative, and other expenses 120 112 354 299
Depreciation and amortization expenses 139 96 408 229
-------- ------- -------- --------
Total operating expenses 701 495 2,031 1,313
-------- ------- -------- --------
Operating income 215 106 622 218
Equity in net income (loss) of unconsolidated wireless systems:
U. S. 8 37 12 152
International 55 -- 114 (17)
Minority interests in net (income) loss of consolidated wireless systems (35) (21) (106) (55)
Interest:
Expense (21) (12) (69) (29)
Income 5 4 14 10
Foreign exchange gain (loss) 1 1 1 3
Miscellaneous income (expense) (3) (4) (7) 5
-------- ------- -------- --------
Income before income taxes and preferred dividends 225 111 581 287
Income taxes 84 52 244 115
-------- ------- -------- --------
Income before preferred dividends 141 59 337 172
Preferred dividends 14 7 40 7
-------- ------- -------- --------
Net income applicable to common stockholders $ 127 $ 52 $ 297 $ 165
======== ======= ======== ========
Net income applicable to common stockholders - per share $ 0.25 $ 0.10 $ 0.59 $ 0.33
======== ======= ======== ========
Weighted average shares outstanding (in thousands) 504,235 500,183 503,549 499,447
======== ======= ======== ========
</TABLE>
The accompanying Notes are an integral part of the Consolidated
Financial Statements.
3
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
September 30 December 31
------------ -----------
(Dollars in millions) 1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22 $ 28
Accounts receivable, (net of allowance for uncollectibles
of $44 and $61, respectively) 445 416
Inventories 66 55
Other receivables 22 33
Due from related parties 56 34
Other current assets 85 58
------------ -----------
Total current assets 696 624
Property, plant, and equipment, net 2,394 2,322
Investments in unconsolidated wireless systems 1,995 1,992
Intangible assets, net 3,291 3,409
Deferred charges and other noncurrent assets 316 177
------------ -----------
Total assets $ 8,692 $ 8,524
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 123 $ 200
Short-term borrowings 13 53
Current portion of long-term debt 4 16
Other current liabilities 614 491
------------ -----------
Total current liabilities 754 760
Long-term debt 1,431 1,637
Deferred income taxes 715 693
Deferred credits 81 104
------------ -----------
Total liabilities 2,981 3,194
------------ -----------
Commitments and contingencies
Minority interests in consolidated wireless systems 307 268
------------ -----------
Stockholders' equity:
Preferred stock and additional paid-in capital
($.01 par value; 50 million shares authorized):
Series A (6 million shares authorized, no shares issued or outstanding) -- --
6.00% Class B Mandatorily Convertible (24 million shares authorized;
17.2 million shares issued and outstanding;
liquidation value of $500) 500 500
4.25% Class C Convertible (19 million shares authorized,
11.1 million shares issued and outstanding; liquidation value of $554) 541 541
Common stock and additional paid-in capital ($.01 par value;
1.1 billion shares authorized, 504.6 million shares issued and
504.5 million shares outstanding at September 30, 1997,
502.4 million shares issued and 502.3 million shares
outstanding at December 31, 1996) 4,047 3,987
Retained earnings 318 21
Cumulative translation adjustment (33) 3
Other 31 10
------------ -----------
Total stockholders' equity 5,404 5,062
------------ -----------
Total liabilities and stockholders' equity $ 8,692 $ 8,524
============ ===========
</TABLE>
The accompanying Notes are an integral part of the
Consolidated Financial Statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
September 30
-------------------------
(Dollars in millions) 1997 1996
------- --------
<S> <C> <C>
Cash flows from operating activities:
Income before preferred dividends $ 337 $ 172
Adjustments to reconcile income before preferred dividends
for items currently not affecting operating cash flows:
Depreciation, amortization, and other non cash charges 417 229
Distributions received from equity investees 222 182
Minority interests in net income (loss) of consolidated wireless systems 106 55
Deferred income tax (benefit) expense 5 1
Equity in net (income) loss of unconsolidated wireless systems (126) (135)
Loss (gain) on sale of assets and telecommunications interests 1 (5)
Changes in assets and liabilities:
Accounts receivable, net (41) (5)
Other current assets and receivables (45) 5
Deferred charges and other noncurrent assets 20 18
Accounts payable and other current liabilities 62 (79)
Deferred credits and other liabilities (11) 11
------- -------
Cash flows from operating activities 947 449
------- -------
Cash flows from investing activities:
Investments in unconsolidated wireless systems (260) (710)
Additions to property, plant, and equipment (459) (201)
Other investing activities 21 7
------- -------
Cash flows from investing activities (698) (904)
------- -------
Cash flows from financing activities:
Proceeds from issuing long-term debt and commercial paper 341 1,944
Retirement of long-term debt and commercial paper (534) (1,643)
Distributions to minority interests of consolidated wireless systems (57) (36)
Payment of preferred stock dividends (40) --
Other financing activities 40 119
------- -------
Cash flows from financing activities (250) 384
------- -------
Effect of exchange rate changes on cash and cash equivalents (5) --
------- -------
Net change in cash and cash equivalents (6) (71)
Beginning cash and cash equivalents 28 83
------- -------
Ending cash and cash equivalents $ 22 $ 12
======= =======
</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)
(Dollar amounts in millions, unless otherwise noted)
A. BASIS OF PRESENTATION
The unaudited consolidated financial statements of AirTouch Communications, Inc.
(the "Company") furnished herein have been reviewed by independent accountants
and reflect all adjustments which are, in the opinion of the Company, necessary
to present fairly the financial position and results of operations for each
interim period presented. All such adjustments are normal recurring adjustments.
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 1996 Annual Report on Form 10-K.
In December 1996, the Company acquired a controlling interest in Telecel
Communicacoes Pessoias, S.A. ("Telecel"), the Company's cellular system in
Portugal, and began consolidating its results of operations as of January 1,
1997.
With respect to the unaudited consolidated financial information of the Company
as of and for the three- and nine-month periods ended September 30, 1997 and
1996 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 6,
1997 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 (the "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.
B. ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS 131"). SFAS 131 establishes
standards for reporting information about operating segments in annual financial
statements and requires reporting of selected information in interim reports.
Consistent with the required adoption period, the Company intends to adopt SFAS
131 effective with the issuance of its December 31, 1998 financial statements.
The implementation of SFAS 131 will not have an impact on the Company's
financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of financial statements. Consistent with
the required adoption period, the Company intends to adopt SFAS 130 effective
with the issuance of its December 31, 1998 financial statements. The
implementation of SFAS 130 will not have an impact on the Company's financial
position or results of operations.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128"). SFAS
128 establishes new standards for computing and disclosing earnings per share
("EPS"). SFAS 128 is effective for both interim and annual periods ending after
December 15, 1997. Earlier application is not permitted. SFAS 128, when adopted,
will require the Company to replace its traditional EPS disclosures with a dual
presentation of "Basic" and "Diluted" EPS and to restate all prior period EPS
data presented. Consistent with the required adoption period, the Company
intends to adopt SFAS 128 effective with the issuance of its December 31, 1997
financial statements. However, if SFAS 128 had been in effect for the quarter
ended September 30, 1997, Basic and Diluted EPS would be the same for all
periods as the EPS presented in the Company's Consolidated Statements of Income
on page 3.
C. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to market risks arising from foreign currency and
interest rate fluctuations. The Company enters into foreign currency hedging
activities to reduce currency exposures to its long-term investments in
international wireless systems. The Company hedges a portion of these
investments with long-dated forward foreign currency exchange contracts
("forward contracts"). In addition, the Company enters into forward contracts to
reduce exposures of firm capital commitments denominated in foreign currencies.
The Company also enters into interest rate swap agreements to manage its
exposure to fluctuations in interest rates in an effort to minimize the
Company's cost of funds. Swap agreements are primarily used to effectively
convert existing variable rate debt to fixed rate and to reduce the interest
rate risk for future borrowings. The Company does not hold or issue financial
instruments for trading or speculative purposes.
6
<PAGE> 7
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Dollar amounts in millions, unless otherwise noted)
Foreign currency hedges. Under a forward contract, the Company undertakes to
exchange an agreed upon amount of a foreign currency for equivalent U.S. dollars
at a specified rate at a stated future date. Gains or losses associated with
forward contracts that are designated and effective as economic hedges
("qualifying hedges") of net foreign investments are recorded in the "Cumulative
translation adjustment" account (the "CTA account"), a separate component of
stockholders' equity, with a corresponding adjustment to a deferred asset or
liability account. Cash flows resulting from such hedges are reported in the
Statements of Cash Flows in investing activities. Gains and losses upon
termination of net investment hedges are recorded in the CTA account. Gains and
losses related to qualifying hedges of firm commitments are deferred and are
recognized as adjustments of carrying amounts when the hedged transactions
occur. Cash flows resulting from these hedges are reported in the Statements of
Cash Flows in the same category as the cash flows from the items being hedged.
Gains or losses on forward contracts that do not qualify as hedges are recorded
in "Foreign exchange gain (loss)" in the Consolidated Statements of Income.
Interest rate hedges. Under an interest rate swap, the Company agrees with
another party to exchange interest payments at specified intervals over a
defined term. Interest payments are calculated by reference to the notional
amount of the instrument based on the fixed and variable terms of the swap
agreement. The net interest received or paid as part of the interest rate swap
is accounted for as an adjustment to interest expense. The Company amortizes the
fair value of forward interest rate swaps used to hedge future borrowings over
the term of the related debt when incurred. Cash flows resulting from such
hedges are reported in the Statements of Cash Flows in operating activities.
Also, gains or losses on termination of interest rate swaps are deferred and
amortized over the remaining term of the related debt.
D. INVESTMENTS IN UNCONSOLIDATED WIRELESS SYSTEMS
The Company's investments in unconsolidated wireless systems consist of the
following:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
----------- -----------
<S> <C> <C>
Investments at equity $ 1,896 $ 1,920
Investments at cost 99 72
----------- -----------
$ 1,995 $ 1,992
=========== ===========
</TABLE>
The Company's equity in net income of significant equity investees (Mannesmann
Mobilfunk GmbH and CMT Partners in 1997 and 1996, and New Par and Cellular
Communications, Inc. through August 16, 1996) was $95 and $86 for the three
months ended September 30, 1997 and 1996, respectively, and $256 and $265 for
the nine months ended September 30, 1997 and 1996, 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 amortization of
intangibles and other adjustments. 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
---------------------------------------------
1997 1996 1997 1996
------- ------ ------- ------
<S> <C> <C> <C> <C>
Mannesmann Mobilfunk GmbH
Operating revenues $ 846 $ 767 $2,336 $1,977
Operating income $ 334 $ 249 $ 870 $ 593
Net income $ 143 $ 106 $ 372 $ 252
CMT Partners
Operating revenues $ 144 $ 139 $ 433 $ 398
Operating income $ 61 $ 44 $ 175 $ 135
Net income $ 67 $ 52 $ 196 $ 156
====== ====== ====== ======
</TABLE>
7
<PAGE> 8
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Dollar amounts in millions, unless otherwise noted)
E. AIRTOUCH/U S WEST PARTNERSHIP
On May 16, 1997, the Company and U S WEST, Inc. ("U S WEST") entered into an
agreement to merge U S WEST Media Group's domestic wireless business and its
interest in PrimeCo Personal Communications L.P. into the Company (the "1997
Agreement"). The 1997 Agreement was conditioned upon their being no legislation
imposing a material amount of income tax in connection with the transaction. On
August 5, 1997, such legislation was enacted and accordingly, the parties
terminated the 1997 Agreement. Under the terms of the 1997 Agreement, the
parties will continue with their 1994 agreement as described in the Company's
Form 10-K for the year ended December 31, 1996 under "Business--Joint
Ventures--U S WEST Transaction". Under the terms of the 1997 Agreement, the
parties agreed not to proceed to Phase II of their 1994 transaction until nine
months after the termination of the 1997 Agreement.
F. CONTINGENCIES
In November 1993, a class action complaint was filed on behalf of AirTouch's
cellular customers in Orange County Superior Court naming, among others, the
Company. This complaint alleged 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 complaint sought damages for the class "in a sum in
excess of $100,000,000." In July 1997, a tentative settlement was reached in the
case which has preliminary approval from the court. The Company's portion of the
settlement represents a total value of $90 million to cellular customers through
the date of settlement, consisting of discount coupons on accessories, first
free inbound minutes, and/or free mobile to mobile calls on the AirTouch system
in Los Angeles. A final fairness hearing is scheduled for December 1997.
Sufficient reserves have previously been established with respect to this
matter, and the proposed settlement will not have a material adverse effect on
the financial position or results of operations of the Company. A similar suit
filed in federal court and two similar agent cases were previously settled for
immaterial amounts.
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 U.S. District
Court for the Southern District of California, alleging that there is
circumstantial evidence that the Company and U S WEST colluded to fix the prices
of retail and wholesale cellular radio services in the San Diego market by
setting their initial basic rates for cellular service at nearly identical
levels and having similar basic rates thereafter. Plaintiffs estimate damages to
the class at between $46 million and $69 million. The state case has been
dismissed. A class has been certified in the remaining case. U S WEST has
settled the lawsuit with respect to their potential liability for $4 million.
The Company reached a tentative settlement in the case in September 1997 which
has preliminary approval from the court. A final fairness hearing is scheduled
for January 1998. The proposed settlement will not have a material adverse
effect on the financial position or results of operations of the Company.
Two additional cases, one in Orange County and one in San Diego, have been
brought by a number of individual agents against the Company and others. 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 a tacit 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. A class has been stipulated. In
1996, an almost identical class action complaint was filed by a different
plaintiff in Alameda County Superior Court against Bay Area Cellular Telephone
Company, GTE Mobilnet, and a number of other companies, including the Company.
It alleges essentially the same facts as the San Francisco case alleges. The two
cases have been assigned to a single judge for coordination. A tentative
settlement has been reached in the case filed in San Francisco County which, if
approved by the court, would resolve both cases. A preliminary approval hearing
is scheduled for November 1997. The proposed settlement will not have a material
8
<PAGE> 9
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Dollar amounts in millions, unless otherwise noted)
adverse effect on the financial position or results of operations of the
Company.
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, 1997, the
Company's proportionate share under such arrangements was $447 million. The
Company believes it is remote that it will be required to pay under these
various arrangements.
G. SUBSEQUENT EVENTS
In October 1997, the Company's Board of Directors authorized the repurchase of
up to $1 billion of AirTouch common and preferred stock. The Company plans to
buy shares on the open market from time to time, based on market conditions.
9
<PAGE> 10
AirTouch Communications, Inc. and Subsidiaries
(Dollar amounts in millions, unless otherwise noted)
<TABLE>
<CAPTION>
SELECTED PROPORTIONATE FINANCIAL DATA (UNAUDITED)(1)
=====================================================================================================
Three Months Ended Nine Months Ended
September 30 September 30
-----------------------------------------------
1997 1996 (2) 1997 1996 (2)
------- ------ ------- -------
<S> <C> <C> <C> <C>
TOTAL COMPANY
Service and other revenues $ 1,275 $ 1,051 $ 3,586 $ 2,806
Operating expenses before
depreciation and amortization expenses (3) 786 724 2,258 1,958
Depreciation and amortization expenses 204 165 582 436
------- ------ ------- -------
Operating income $ 285 $ 162 $ 746 $ 412
======= ======= ======= =======
Net income applicable to common stockholders $ 127 $ 52 $ 297 $ 165
Operating cash flow (4) $ 489 $ 327 $ 1,328 $ 848
Operating cash flow margin (5) 38.4% 31.1% 37.0% 30.2%
------- ------ ------- -------
U.S. CELLULAR OPERATIONS
Service and other revenues $ 602 $ 521 $ 1,768 $ 1,426
Cost of revenues 57 57 175 159
Selling and customer operations expenses (3) 208 184 614 527
General, administrative, and other expenses 41 46 115 116
Depreciation and amortization expenses 99 80 290 199
------- ------ ------- -------
Operating income $ 197 $ 154 $ 574 $ 425
======= ======= ======= =======
Operating cash flow (4) $ 296 $ 234 $ 864 $ 624
Operating cash flow margin (5) 49.2% 44.9% 48.9% 43.8%
------- ------ ------- -------
INTERNATIONAL OPERATIONS
Service and other revenues $ 578 $ 453 $ 1,555 $ 1,158
Operating expenses before
depreciation and amortization expenses (3) 379 352 1,057 932
Depreciation and amortization expenses 74 63 205 177
------- ------ ------- -------
Operating income $ 125 $ 38 $ 293 $ 49
======= ======= ======= =======
Operating cash flow (4) $ 199 $ 101 $ 498 $ 226
Operating cash flow margin (5) 34.4% 22.3% 32.0% 19.5%
------- ------ ------- -------
U.S. PAGING OPERATIONS (6)
Service and other revenues (7) $ 84 $ 76 $ 244 $ 220
Operating expenses before
depreciation and amortization expenses 57 54 164 153
Depreciation and amortization expenses 18 16 55 47
------- ------ ------- -------
Operating income $ 9 $ 6 $ 25 $ 20
======= ======= ======= =======
Operating cash flow (4) $ 27 $ 22 $ 80 $ 67
Operating cash flow margin (5) 32.1% 28.9% 32.8% 30.5%
------- ------ ------- -------
PRIMECO OPERATIONS (8)
Service and other revenues $ 10 $ -- $ 19 $ --
======= ======= ======= =======
</TABLE>
10
<PAGE> 11
AirTouch Communications, Inc. and Subsidiaries
(Dollar amounts in millions, unless otherwise noted)
Footnotes:
(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 reported on a consolidated basis, the Company believes that
proportionate financial 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, exclusive of cost-based investments and certain
equity-method investments that are not material. For example, U.S. cellular
operations proportionate results present the Company's share -- its
percentage ownership -- for all significant U.S. cellular operations,
including those entities where the Company does not own more than 50%.
Similarly, Total Company proportionate results show the Company's share of
all its significant worldwide operations.
(2) Certain 1996 data has been reclassified and restated to conform to the
current year's presentation.
(3) Includes net losses on equipment sold to acquire and retain customers.
(4) 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.
(5) Operating cash flow margin is calculated by dividing "Operating cash flow"
by "Service and other revenues."
(6) U.S. Paging Operations are wholly owned by the Company; therefore,
proportionate information reflects 100% of the subsidiary's GAAP-basis
operating results.
(7) Includes any gain or loss on equipment sales.
(8) PrimeCo Operations began in the fourth quarter of 1996.
11
<PAGE> 12
AirTouch Communications, Inc. and Subsidiaries
(Dollar amounts in millions, unless otherwise noted)
<TABLE>
<CAPTION>
SELECTED PROPORTIONATE OPERATING DATA (UNAUDITED)(1)
==================================================================================================
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------
(Operating data in thousands, except per unit data) 1997 1996 1997 1996
---------- ------- ------- --------
<S> <C> <C> <C> <C>
TOTAL COMPANY
Cellular and PCS POPs (2)(3)(4) 178,071 172,024 178,071 172,024
Cellular and PCS subscribers (3)(4) 6,570 4,480 6,570 4,480
Cellular and PCS subscriber net adds in period,
excluding acquisitions (3) 537 393 1,424 1,044
Paging units in service(4) 3,099 2,756 3,099 2,756
Capital expenditures and capital calls,
excluding acquisitions (5) $ 232 $ 270 $ 663 $ 625
---------- ------- ------- -------
U.S. CELLULAR OPERATIONS
Cellular POPs (2)(4) 43,364 42,876 43,364 42,876
Cellular subscribers (4) 3,901 3,072 3,901 3,072
Cellular subscriber net adds in period,
excluding acquisitions 156 151 498 440
Monthly average revenue per unit $ 52.42 $ 61.83 $ 53.88 $ 62.71
Monthly cash cost per unit $ 26.65 $ 34.06 $ 27.55 $ 35.27
Capital expenditures and capital calls,
excluding acquisitions (5) $ 116 $ 66 $ 298 $ 165
---------- ------- ------- -------
INTERNATIONAL OPERATIONS
Cellular POPs (2)(4) 120,478 114,848 120,478 114,848
Cellular subscribers (4) 2,607 1,408 2,607 1,408
Cellular subscriber net adds in period,
excluding acquisitions 366 242 873 605
Monthly average revenue per unit $ 79.16 $117.16 $ 81.95 $120.11
Monthly cash cost per unit $ 51.91 $ 91.04 $ 55.70 $ 96.67
Capital expenditures and capital calls,
excluding acquisitions (5) $ 46 $ 138 $ 161 $ 280
---------- ------- ------- -------
U.S. PAGING OPERATIONS (6)
Total paging units in service (4) 3,058 2,735 3,058 2,735
Paging units in service net adds in period,
excluding acquisitions 61 123 203 397
Capital expenditures and capital calls,
excluding acquisitions (5) $ 17 $ 34 $ 47 $ 80
---------- ------- ------- -------
PRIMECO OPERATIONS (7)
PCS POPs (2)(3)(4) 14,229 14,300 14,229 14,300
PCS subscribers (3)(4) 62 -- 62 --
Monthly average revenue per unit $ 61.46 $ -- $ 57.81 $ --
========== ======= ======= =======
</TABLE>
Footnotes:
(1) Reflects operating data of systems and total units in service of 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.
(3) PCS data relates to PrimeCo Personal Communications, L.P. ("PrimeCo"), a
personal communications service ("PCS") business in which the Company has a
25% interest.
(4) As of the period ended.
(5) Reflects GAAP-basis operating data, in millions, for the three and nine
months ended September 30, respectively.
(6) U.S. Paging Operations are wholly owned by the Company; therefore,
proportionate information reflects 100% of the subsidiary's GAAP-basis
operating data.
(7) PrimeCo Operations began in the fourth quarter of 1996.
12
<PAGE> 13
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis is intended to assist in the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of AirTouch Communications, Inc., together
with its subsidiaries and partnerships (collectively, the "Company" or
"AirTouch"). This discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and accompanying Notes.
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 various
markets served by the Company's operations which would adversely affect the
level of demand for wireless services; greater-than-anticipated competitive
activity requiring new pricing and/or product offerings or resulting in higher
customer acquisition costs; greater-than-expected customer growth driving
increased investment in network capacity; the level of fraudulent activity; the
impact of new business opportunities requiring significant up-front investments;
the timing and manner of combination of the Company's and U S WEST, Inc.'s
cellular properties in the U.S.; the impact on capital spending from the
deployment of new technologies; and the risk that technologies will not perform
according to expectations. These and other risks and uncertainties related to
the business are described in detail in the Company's 1996 Annual Report on Form
10-K under the heading "Investment Considerations." 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.
BASIS OF PRESENTATION
CONSOLIDATION VS. THE EQUITY METHOD
In accordance with generally accepted accounting principles ("GAAP"), the
Company consolidates revenues and expenses of each subsidiary and partnership in
which the Company 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. Consolidated operating
revenues and expenses during 1997 and 1996 principally included six U.S.
cellular markets, all U.S. paging markets, and Europolitan Holdings AB
("Europolitan"), the Company's cellular system in Sweden (formerly NordicTel
Holdings AB or "NordicTel"). On December 31, 1996, AirTouch consolidated Telecel
Communicacoes Pessoais, S.A. ("Telecel"), its cellular system in Portugal,
subsequent to acquiring a controlling interest and, accordingly, the cellular
system's results were included in consolidated results during the three and nine
months ended September 30, 1997. The six U.S. cellular markets included in
consolidated revenues and expenses during 1997 and 1996 were Los Angeles,
Sacramento, Atlanta, San Diego, Wichita, and Topeka. In addition, the Company
began consolidating the results of its Great Lakes Market (cellular properties
in Michigan and Ohio, including Detroit, Cleveland and Columbus) on August 16,
1996, the date on which AirTouch completed its acquisition of the remaining
capital stock of Cellular Communications, Inc. ("CCI") that it did not already
own. For further information regarding the acquisition, see "Cellular
Communications, Inc. Merger."
GAAP VS. PROPORTIONATE PRESENTATION
Tables presenting results of operations on a proportionate basis are included as
supplementary information in the discussion and analysis of results of
operations for the Company's U.S. cellular and international operations.
Proportionate presentation is a pro rata consolidation which reflects the
Company's share of revenues and expenses in both its consolidated and
unconsolidated wireless systems, net of interests of minority and equity
partners. Proportionate results are calculated by multiplying the Company's
ownership interest in each wireless system by each system's total operating
results, whereas the presentation prepared in accordance with GAAP requires
consolidation of wireless systems controlled by the Company and the equity
method of accounting for wireless systems in which the Company has significant
influence, but not a controlling interest. Net income under either GAAP or
proportionate presentation is the same. Proportionate presentation is not
required by GAAP, nor is it intended to replace the consolidated operating
results prepared and presented in accordance with GAAP. However, since
significant wireless systems are not consolidated, proportionate information is
provided as supplemental data to facilitate a more detailed understanding and
assessment of consolidated operating results prepared and presented in
accordance with GAAP.
13
<PAGE> 14
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
COMPOSITION OF OPERATING REVENUES AND EXPENSES
Operating revenues include cellular and paging service revenues, as well as
equipment sales. Cellular service revenues primarily consist of 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, pagers, and accessories. Equipment sales are not a primary part of
the Company's cellular or paging businesses. Rather, the Company offers cellular
and paging equipment at competitive prices, which are often at or below cost, as
an incentive for its customers to subscribe to its cellular and paging services.
For purposes of proportionate presentation, the Company reflects the net loss on
sales of cellular telephones as a selling and customer operations expense.
Operating expenses include: cost of revenues; cost of equipment sales; selling
and customer operations expenses; general, administrative, and other expenses;
and depreciation and amortization expenses. Cost of revenues primarily consists
of cellular and paging network operating costs, interconnection fees assessed by
local exchange carriers, and costs of cellular roaming fraud. Interconnection
costs have fixed and variable components. The fixed component of interconnection
costs consists of monthly flat-rate fees for facilities leased from local
exchange carriers. The variable component of interconnection costs, which
fluctuates in relation to the level of cellular calls and paging messages,
consists of per-minute usage fees charged by local exchange carriers for
cellular calls or paging messages terminating on their networks. Selling and
customer operations expenses primarily consist of compensation to sales
channels; salaries, wages, and related benefits for sales and customer service
personnel; and billing, advertising, and promotional expenses. General,
administrative, and other expenses primarily consist of salaries, wages, and
related benefits for general and administrative personnel, international license
application costs, bad debt, and other overhead expenses. Depreciation and
amortization primarily consists of depreciation recorded for the Company's
cellular and paging networks and amortization of intangibles such as wireless
license costs, subscriber lists, and goodwill.
RESULTS OF OPERATIONS
The following discussions compare the results of operations for the three and
nine months ended September 30, 1997 to the three and nine months ended
September 30, 1996. The operating results of these periods are not necessarily
indicative of operating results in future periods. The following comparative
information should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes for each period discussed, as well as the
information presented in all other sections of management's discussion and
analysis.
CONSOLIDATED RESULTS OF OPERATIONS
Improvements in consolidated operating income during the three and nine months
ended September 30, 1997 resulted primarily from increases in the operating
income of U.S. cellular and international operations. As indicated in the
individual discussions of U.S. cellular and international operations, the
increase in consolidated operating income resulted from consolidation during
1997 of the Great Lakes market and Telecel, as well as substantial subscriber
growth in both U.S. and international cellular markets.
The decreases in U.S. equity in net income (loss) of unconsolidated wireless
systems were attributable to consolidation of the Great Lakes market beginning
August 16, 1996 (see "Cellular Communications, Inc. Merger") and increased
operating losses of PrimeCo Personal Communications, L.P. ("PrimeCo") associated
with the start-up phase of the personal communications services ("PCS")
business. Decreases in U.S. equity in net income (loss) of unconsolidated
wireless systems were partially offset by improved operating results of CMT
Partners, AirTouch's cellular joint venture operating primarily in the San
Francisco Bay Area. The improvements in international equity in net income
(loss) of unconsolidated wireless systems were due primarily to improved
profitability resulting from substantial growth in the subscriber base and,
secondarily, to a favorable adjustment resulting from a change in estimates
based on the Company's assessment of various tax positions recorded in the
second quarter of 1997.
The increases in interest expense resulted from higher debt balances and a
reduction in capitalized interest as the related assets under construction were
placed in service.
Excluding the effect of equity in net income (loss) of unconsolidated
international wireless systems, foreign income tax rate differences and minority
interest for consolidated foreign operations, and a reduction in the valuation
allowance related to consolidated international operations recognized during the
second quarter of 1996, the effective tax rates were 41% and 43% for the three
and nine months ended September 30, 1997, respectively, and 41% and 44% for the
three and nine months ended September 30, 1996, respectively.
14
<PAGE> 15
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue, which is common to most companies, concerns the
improper storage and manipulation of date fields within software applications,
systems, databases, and hardware. In order to safeguard against any risks
associated with this problem, the Company is currently examining its systems for
Year 2000 Compliance, and where appropriate, upgrading or modifying such systems
to be compliant. The total cost of this effort has not yet been fully assessed.
However, based on preliminary information available to the Company, such costs
are not currently expected to have a material adverse impact on the Company's
financial position or results of operations in future periods.
<TABLE>
<CAPTION>
U.S. CELLULAR OPERATIONS
=================================================================================================================
U.S. Cellular Operating Results
(GAAP-Basis) Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------
Actual Pro Forma(c) Actual Pro Forma(c)
----------------- ------------ ----------------- -----------
1997 1996 1996 1997 1996 1996
------- ------- ------------ ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Service and other revenues $ 601 $ 444 $ 544 $ 1,757 $ 1,086 $ 1,544
Equipment sales 32 15 20 90 39 60
------- ------- ------------ ------- ------- -----------
Operating revenues 633 459 564 1,847 1,125 1,604
------- ------- ------------ ------- ------- -----------
Operating expenses before depreciation
and amortization expenses 347 264 317 1,006 677 923
Depreciation and amortization expenses 97 70 91 284 148 258
------- ------- ------------ ------- ------- -----------
Operating income 189 125 156 557 300 423
Equity in net income (loss) of unconsolidated
wireless systems 35 48 27 100 177 82
Minority interests in net (income) loss of
consolidated wireless systems (20) (21) (21) (64) (56) (56)
Other (income) expense included in equity
income and minority interests (a) (7) 2 (5) (19) 4 (19)
------- ------- ------------ ------- ------- -----------
U.S. cellular operating contribution
to net income (b) $ 197 $ 154 $ 157 $ 574 $ 425 $ 430
======= ======= ========== ======= ======= =========
</TABLE>
(a) Represents income taxes and non-operating expenses or income included in
equity in net income (loss) of unconsolidated wireless systems and in
minority interests in net (income) loss of consolidated wireless systems.
(b) Represents the Company's share of combined operating income of consolidated
and unconsolidated U.S. cellular operations, net of the interests of
minority and equity partners (equal to proportionate operating income
presented on page 17).
(c) Adjusted to present results as if the Great Lakes market had been wholly
owned and consolidated during the three and nine months ended September 30,
1996.
Cellular Communications, Inc. Merger. Effective August 16, 1996, AirTouch
acquired the remaining 63% of CCI's capital stock that it did not already own.
As a result of the acquisition, AirTouch now owns 100% of CCI and New Par, the
equally owned partnership between the Company and CCI that operated cellular
properties in Michigan and Ohio prior to the merger. Accordingly, the operating
results of CCI and New Par (referred to elsewhere in management's discussion and
analysis as the "Great Lakes" market) are reflected in equity earnings at the
Company's ownership interest prior to the merger during the three and nine
months ended September 30, 1996 and in consolidated results at 100% during the
three and nine months ended September 30, 1997. Since the actual results of
operations for each period are not comparable, pro forma results for the three
and nine months ended September 30, 1996 are included in the preceding table to
reflect results as if the Great Lakes market had been wholly owned and
consolidated during those periods. The following narrative discussion compares
actual results for the three and nine months ended September 30, 1997 to the pro
forma results for the three and nine months ended September 30, 1996.
The improvements in U.S. cellular consolidated operating revenues during the
three and nine months ended
15
<PAGE> 16
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
September 30, 1997, were due to an approximate 30% increase in minutes of usage
attributable primarily to a 27% increase in subscribers, partially offset by an
approximate 14% decline in average revenue per minute of usage. The average
revenue per customer declined approximately 13% during both the three and nine
months ended September 30, 1997, as compared to the same periods of 1996. The
Company achieved customer growth in its consolidated markets through advertising
and by continuing to offer competitive incentive programs such as waived service
establishment charges, discounted monthly access fees, discounted cellular
handsets, discounted air time packages, promotional air time credits at the
beginning of service contracts, options to purchase bundled minutes at fixed
monthly rates, and reduced or fixed rates for off-peak usage and roaming. The
declines in average revenue per customer and average revenue per minute of usage
were primarily attributable to continued penetration of consumer markets and to
rate reductions and discounts offered to new and existing customers in response
to increasing competition. Consumer usage patterns contributed to declines in
average revenue per customer because consumers typically place and receive fewer
calls than commercial customers and often use their telephones more during
lower-rate, off-peak calling periods. Declines in average revenue per customer
and average revenue per minute of usage were partially offset by a slight
increase in minutes of usage per customer during the three and nine months ended
September 30, 1997, as compared to the corresponding periods of the prior year.
The Company expects the shift toward consumer markets and increasing competition
to continue to result in declines in average revenue per customer and average
revenue per minute of usage, possibly offset by increases in average minutes of
usage per customer.
U.S. cellular operating margins increased from 28% and 26% during the three and
nine months ended September 30, 1996, respectively, to 30% during the three and
nine months ended September 30, 1997. Operating cash flow margins (operating
margins excluding the effect of depreciation and amortization expenses)
increased from 44% and 43% during the three and nine months ended September 30,
1996, respectively, to 45% and 46% during the three and nine months ended
September 30, 1997, respectively. Improvements in operating margins despite
declining average revenues per customer and average revenues per minute of usage
resulted from more significant 17% and 18% declines in the average cash cost per
customer (including the loss on equipment sales) during the three and nine
months ended September 30, 1997, respectively. The average cash costs per minute
of usage (including the loss on equipment sales) declined 19% and 18% during the
three and nine months ended September 30, 1997, respectively. Declining cash
costs per customer and per minute of usage reflect the Company's continuing
efforts to reduce cash costs more rapidly than the related declines in average
revenue per customer and average revenue per minute of usage. Decreases in
average cash costs resulted from several factors, including increased economies
of scale, reductions in roaming fraud, a reduction in interconnection rates,
declines in handset costs and reductions in handset subsidies offered to
customers, and a shift in customer acquisitions to lower-cost direct sales
channels. The Company has also reduced the rate at which customers discontinue
service by continually improving customer service and increasing its focus on
customer incentive programs designed to retain existing customers, which is
significantly less expensive than replacing customers who discontinue service.
The aforementioned cost reductions were partially offset by moderate increases
in personnel, billing, facilities, and certain other costs necessary to serve
the expanded customer base. Depreciation and amortization increased 7% and 10%
during the three and nine months ended September 30, 1997, due primarily to
depreciation of significantly larger property, plant, and equipment balances
associated with analog network expansion and digital cellular deployment across
various consolidated markets.
The improvements in equity in net income (loss) of unconsolidated wireless
systems resulted from improved operating results of CMT Partners, the Company's
partnership which operates cellular properties primarily in the San Francisco
Bay Area. Consistent with the Company's consolidated U.S. markets, CMT Partners
achieved increased earnings through substantial customer growth and significant
reductions in the average cash cost per customer, partially offset by declines
in average revenue per customer and average revenue per minute of usage.
Proportionate U.S. Cellular Operating Results
Proportionate information for the Company's U.S. cellular operations is
presented as supplemental information only and is a pro rata consolidation of
the Company's share of all U.S. cellular operating revenues and expenses, net of
the interests of minority and equity partners. Since significant U.S. cellular
operations are not consolidated, the Company believes proportionate information
facilitates a more detailed understanding of the Company's operating results
prepared and presented in accordance with GAAP.
16
<PAGE> 17
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
<TABLE>
<CAPTION>
============================================================================================
U.S. Cellular Operating Results
============================================================================================
(Proportionate-Basis) Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------
1997 1996 1997 1996
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Service and other revenues $ 602 $ 521 $ 1,768 $ 1,426
--------- ------- -------- --------
Cost of revenues 57 57 175 159
Selling and customer operations expenses(a) 208 184 614 527
General, administrative, and other expenses 41 46 115 116
Depreciation and amortization expenses 99 80 290 199
--------- ------- -------- --------
Operating income $ 197 $ 154 $ 574 $ 425
========= ======= ======== =======
Operating cash flow(b) $ 296 $ 234 $ 864 $ 624
Operating cash flow margin(c) 49.2% 44.9% 48.9% 43.8%
========= ======= ======== =======
</TABLE>
(a) See Footnote 3 on page 11.
(b) See Footnote 4 on page 11.
(c) See Footnote 5 on page 11.
Other Matters Affecting U.S. Cellular Operations
AirTouch/U S WEST Partnerships. On May 16, 1997, the Company and U S WEST, Inc.
("U S WEST") entered into an agreement to merge U S WEST Media Group's domestic
wireless business, including U S WEST's interest in PrimeCo, into the Company
(the "1997 Agreement"). The 1997 Agreement was conditioned upon there being no
legislation imposing a material amount of income tax in connection with the
transaction. On August 5, 1997, such legislation was enacted and accordingly,
the parties terminated the 1997 Agreement. Under the terms of the 1997
Agreement, the parties will continue with their 1994 agreement as described in
the Company's Form 10-K for the year ended December 31, 1996 under
"Business--Joint Ventures--U S WEST Transaction". Under the terms of the 1997
Agreement, the parties agreed not to proceed to Phase II of their 1994
transaction until nine months after the termination of the 1997 Agreement. See
Note E, "AirTouch/U S WEST Partnership," to the Consolidated Financial
Statements.
U.S. PAGING OPERATIONS
All U.S. paging markets are wholly owned by the Company.
<TABLE>
<CAPTION>
======================================================================================
U.S. Paging Operating Results
======================================================================================
(GAAP-Basis) Three Months Ended Nine Months Ended
September 30 September 30
-----------------------------------------
1997 1996 1997 1996
------- ------ ------- ------
<S> <C> <C> <C> <C>
Service and other revenues $ 84 $ 75 $ 244 $ 216
Equipment sales 10 13 28 38
------- ------ ------- ------
Operating revenues 94 88 272 254
------- ------ ------- ------
Operating expenses before depreciation
and amortization expenses 67 66 192 187
Depreciation and amortization expenses 18 16 55 47
------- ------ ------- ------
Operating income $ 9 $ 6 $ 25 $ 20
======= ====== ======= ======
Operating cash flow (a) $ 27 $ 22 $ 80 $ 67
Operating cash flow margin (b) 28.7% 25.0% 29.4% 26.4%
======= ====== ======= ======
</TABLE>
(a) See Footnote 4 on page 11.
(b) Operating cash flow margins in the GAAP presentation above differ from the
same margins presented in "Selected Proportionate Financial Data" because
costs of equipment sales are included in operating expenses in this
presentation in accordance with GAAP, rather than being presented as a
reduction to service and other revenues as is done in the proportionate
presentation.
Operating revenues increased approximately 7% during the three and nine month
periods ended September 30, 1997, due primarily to a 12% increase in paging
units in service, partially offset by an approximate 4% decline in the average
revenue per unit in service during the three and nine months ended September 30,
1997. Increased
17
<PAGE> 18
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
revenues associated with subscriber growth were also offset by
declines in pager sales attributable to decreases in the number of units in
service added. Operating cash flow margins (operating margins excluding the
effect of depreciation and amortization) increased from 25% and 26% during the
three and nine months ended September 30, 1996, respectively, to 29% during the
three and nine months ended September 30, 1997. The increase in operating cash
flow margins resulted primarily from increased service and other revenues and
lower costs of paging equipment sales attributable to declines in units in
service added, partially offset by moderate increases in network operating costs
necessary to serve the expanded customer base. Increased depreciation and
amortization resulted from expansion of paging networks and higher depreciation
of more expensive leased alphanumeric pagers, which comprised a larger
percentage of leased pagers compared to the corresponding periods of 1996.
INTERNATIONAL OPERATIONS
<TABLE>
<CAPTION>
===============================================================================================================
International Operations Operating Results
===============================================================================================================
(GAAP-Basis) Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------
Actual Pro Forma(c) Actual Pro Forma(c)
---------------- ------------- ---------------- ------------
1997 1996 1996 1997 1996 1996
------- ----- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Service and other revenues $ 176 $ 49 $ 143 $ 491 $ 136 $ 382
Equipment sales 15 5 15 45 15 41
------- ----- ----- ------ ----- ------
Operating revenues 191 54 158 536 151 423
------- ----- ----- ------ ----- ------
Operating expenses before depreciation
and amortization expenses 132 49 127 373 173 360
Depreciation and amortization expenses 21 7 16 62 25 48
------- ----- ----- ------ ----- ------
Operating income (loss) 38 (2) 15 101 (47) 15
Equity in net income (loss) of unconsolidated
wireless systems 55 -- (3) 114 (17) (33)
Minority interests in net (income) loss of
consolidated wireless systems (14) -- (4) (41) 1 (14)
Other (income) expense included in equity
income and minority interests (a) 46 40 31 119 112 83
------- ----- ----- ------ ----- ------
International operating contribution
to net income (b) $ 125 $ 38 $ 39 $ 293 $ 49 $ 51
======= ===== ===== ===== ===== =====
</TABLE>
(a) Represents income taxes and non-operating expenses or income included in
equity in net income (loss) of unconsolidated wireless systems and in
minority interests in net (income) loss of consolidated wireless systems.
(b) Represents the Company's share of combined operating income of consolidated
and unconsolidated international operations, net of the interests of
minority and equity partners (equal to proportionate operating income
presented on page 19.)
(c) Adjusted to present results for the three and nine months ended September
30, 1996 as if (1) Telecel had been consolidated and the Company's
ownership interest in Telecel had been 50.9% and (2) the Company's 1997
ownership interests in its unconsolidated wireless systems had been the
ownership interests during the corresponding periods of 1996.
18
<PAGE> 19
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
Actual consolidated international operating results presented in the preceding
table for the three and nine months ended September 30, 1996 reflect the
operations of Europolitan, the Company's cellular system in Sweden. On December
31, 1996, the Company consolidated Telecel, its cellular system in Portugal,
subsequent to acquiring a 50.9% controlling interest and, accordingly,
consolidated international operating results presented in the preceding table
for the three and nine months ended September 30, 1997 reflect the operations of
both Telecel and Europolitan. Operating results for other international markets
are reflected in equity in net income (loss) of unconsolidated wireless systems
during all periods presented. In addition, the Company increased its ownership
interest in certain unconsolidated wireless systems. Since the actual results of
operations for each period are not comparable, pro forma results for the three
and nine months ended September 30, 1996 are included in the preceding table to
reflect results as described in footnote (c) to the preceding table. The
following narrative discussion compares actual results for the three and nine
months ended September 30, 1997 to the pro forma results for the three and nine
months ended September 30, 1996.
The increase in operating revenues resulted primarily from substantial
subscriber growth at Telecel and Europolitan, partially offset by unfavorable
changes in the related foreign exchange rates. Operating margins improved from
10% and 4% during the three and nine months ended September 30, 1996,
respectively, to 20% and 19% during the three and nine months ended September
30, 1997, respectively, due primarily to substantial subscriber growth and
rapidly declining cash costs per customer achieved as Telecel and Europolitan's
operations continued to gain operating scale.
Improvements in equity in net income (loss) of unconsolidated wireless systems
were due to improved operating results in the Company's wireless systems in
Germany, Italy, Spain, and Japan. Improved results in these wireless systems
resulted primarily from increasing economies of scale and continued subscriber
growth, partially offset by overall declines in the average revenue per
customer. In addition, the Company recognized a favorable adjustment during the
second quarter of 1997 resulting from change in estimates based on the Company's
assessment of various tax positions. Such improvements were partially offset by
increased losses in the Company's wireless systems in South Korea and Poland,
which were attributable to marketing and sales expenses associated with rapid
subscriber growth and other costs to launch and expand service.
Proportionate International Operating Results
Proportionate information for the Company's international operations is
presented as supplemental information only and is a pro rata consolidation of
the Company's share of all international operating revenues and expenses, net of
the interests of minority and equity partners. Since significant international
operations are not consolidated, the Company believes proportionate information
facilitates a more detailed understanding of the Company's operating results
prepared and presented in accordance with GAAP.
<TABLE>
<CAPTION>
==========================================================================================
International Operations Operating Results
==========================================================================================
(Proportionate-Basis) Three Months Ended Nine Months Ended
September 30 September 30
-----------------------------------------
1997 1996 1997 1996
------- ------- ------ ------
<S> <C> <C> <C> <C>
Service and other revenues (a) $ 578 $ 453 $1,555 $1,158
------- ------- ------ ------
Operating expenses before
depreciation and amortization expenses (b) 379 352 1,057 932
Depreciation and amortization expenses 74 63 205 177
------- ------- ------ ------
Operating income $ 125 $ 38 $ 293 $ 49
======= ======= ====== ======
Operating cash flow (a)(c) $ 199 $ 101 $ 498 $ 226
Operating cash flow margin (d) 34.4% 22.3% 32.0% 19.5%
======= ======= ====== ======
</TABLE>
(a) If amounts presented for 1996 were translated using 1997 foreign currency
exchange rates, service and other revenues for the three and nine months
ended September 30, 1996 would have been $385 and $984, respectively, and
operating cash flow for the three and nine months ended September 30, 1996
would have been $84 and $183, respectively.
(b) See Footnote 3 on page 11.
(c) See Footnote 4 on page 11.
(d) See Footnote 5 on page 11.
19
<PAGE> 20
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
CONTINGENCIES
The Company is party to various legal proceedings, including certain antitrust
litigation. See Note F, "Contingencies," to the Consolidated Financial
Statements.
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.
1997 CAPITAL EXPENDITURES, CAPITAL CALLS AND DEBT SERVICE
During the first nine months of 1997, the Company incurred capital expenditures
of $459 for additions to property, plant, and equipment for its consolidated
wireless networks and other capital expenditures, primarily to increase cellular
and paging network capacity and to expand customer operations functions
necessary to support customer growth. The Company invested an additional $260 in
its unconsolidated wireless systems to fund the expansion and build-out of
cellular and PCS networks and to increase its interest in certain systems. In
addition to capital funding, the Company elected to retire $179 of long-term
debt in the U.S. prior to its maturity. The Company also paid $40 in preferred
dividends and $29 to reduce its net commercial paper and long-term debt
positions.
FUNDING OF 1997 CAPITAL EXPENDITURES, CAPITAL CALLS AND DEBT SERVICE
Cash flows from operations of $947, combined with proceeds from the issuance of
common stock and from other investing and financing activities, were sufficient
to fund debt retirement, capital requirements, preferred dividend obligations,
and net distributions to minority partners.
FUTURE CAPITAL EXPENDITURES
The Company will continue to be required to make substantial expenditures in
connection with its efforts to expand its existing wireless business and,
potentially, to pursue opportunities to expand into new markets. U.S. and
international requirements for capital expenditures and contributions to
unconsolidated wireless systems during 1997 are expected to be approximately
$1.2 billion.
Consolidated Expenditures. The Company plans to incur significant capital
expenditures in its consolidated U.S. markets to expand its existing analog and
Code Division Multiple Access ("CDMA") digital wireless networks and to
construct and deploy new digital wireless networks to meet current and future
capacity requirements resulting from both subscriber growth and increased
network usage by existing customers. The Company plans to have CDMA digital
cellular service available in all of its managed U.S. cellular markets by
mid-1998.
The Company expects its future annual capital expenditures for digital
technology to continue to increase and, at some point, surpass its annual
capital expenditures for analog technology. Digital networks enable significant
increases in the Company's cellular network capacity and allow the Company to
offer additional services and features comparable to those available on digital
networks operating at PCS frequencies. Accordingly, the Company anticipates that
a significant portion of its future U.S. wireless network traffic will migrate
to digital service as customers take advantage of enhanced digital features such
as superior voice quality, longer handset battery life, and improved security.
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 who do not wish to purchase new digital handsets. With
respect to roaming capabilities, the Company believes that a significant portion
of its digital and analog customer base will continue to require access to
nationwide analog networks in the United States. Accordingly, the Company plans
to maintain and, as required, expand its analog networks and to offer dual-mode
(analog/CDMA digital), dual-band (cellular/PCS) phones in each of its U.S.
digital markets to facilitate the greatest possible roaming capabilities for its
customers.
In addition, the Federal Communications Commission ("FCC") has recently adopted
rules requiring carriers such as the Company to provide customers with number
portability, the ability for customers to retain their telephone numbers if they
choose to switch carriers. Providing this functionality will result in
additional capital requirements and operating expenses in future years. The
Company has not yet fully assessed the cost of complying with the FCC's number
portability rules.
At September 30, 1997, the Company was committed to spend approximately $86 for
the acquisition of property, plant, and equipment for its consolidated
operations. In addition to these commitments, the Company plans to make
additional capital expenditures of approximately $319 during 1997 to increase
the capacity of its existing wireless networks and to continue deployment of
CDMA digital technology. At September 30, 1997, the Company
20
<PAGE> 21
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
had also committed to spend approximately $247 for the purchase of cellular
handsets, pagers, and other items.
Unconsolidated Wireless Systems. As of September 30, 1997, the Company was
committed to make capital contributions of approximately $24 to its
unconsolidated wireless systems. In addition to these commitments, the Company
plans to make additional capital contributions of approximately $188 during 1997
to certain of its U.S. and international unconsolidated wireless systems,
including contributions to PrimeCo for the continuing build-out of its CDMA PCS
networks.
A consortium of which the Company is a member was recently awarded a cellular
license in Brazil. Pending the outcome of litigation challenging the award, the
Company may be required to make capital contributions to the consortium during
1997. In addition, the Company continually evaluates opportunities to increase
its ownership in its existing international wireless systems, which could also
result in additional capital commitments.
Other Requirements. In October 1997, the Company's Board of Directors authorized
the repurchase of up to $1 billion of AirTouch common and preferred stock. The
Company plans to buy shares on the open market from time to time, based on
market conditions.
FINANCING SOURCES
In March 1996, the Company initiated a commercial paper program consisting of
the sale of discounted notes that are exempt from registration under the
Securities Act of 1933. The Company's Board of Directors authorized the issuance
of commercial paper in amounts necessary to finance the Company's working
capital requirements, provided that the amount outstanding under the commercial
paper program, together with all indebtedness incurred under the Company's $2
billion long-term revolving credit facility (the "Facility"), does not in the
aggregate exceed $2 billion.
In addition to its Facility and commercial paper program, the Company may obtain
any required financing under its Registration Statement on Form S-3 (Reg. No.
33-62787), which registered $2 billion in various forms of debt and equity
securities (the "Shelf"). As of September 30, 1997, there have been three debt
issues pursuant to the Shelf which remain outstanding. On July 16, 1996, the
Company issued long-term debt pursuant to the Shelf in the form of $250 in
7.125% Notes and $400 in 7.50% Notes, maturing in July 2001 and July 2006,
respectively. Interest on the Notes is payable semi-annually on January 15 and
July 15, commencing in 1997. In addition, on October 2, 1996, the Company issued
additional long-term debt pursuant to the Shelf in the form of $250 in 7.00%
Notes, maturing in October 2003. The Notes require semi-annual interest payments
due on April 1 and October 1, commencing in 1997.
FUTURE CAPITAL FUNDING
The Company anticipates cash flows from operations to be its primary source of
funding for capital needs of existing operations, debt service, and preferred
dividends through the end of 1997. However, should additional funding be
required due to award of the cellular license in Brazil, new investment
opportunities, repurchase of AirTouch common or preferred stock, or other
unanticipated events, the Company may raise the required funds through
borrowings or public or private sales of debt or equity securities. Such funding
may be obtained through borrowings under the Facility; through the Company's
commercial paper program; from additional securities which may be issued from
time to time under the Shelf; through the issuance of securities in a
transaction exempt from registration under the Securities Act of 1933; or a
combination of one or more of the foregoing. The Company believes, in the event
of such requirements, it will be able to access the capital markets on terms and
in amounts adequate to meet its objectives. However, given the possibility of
changes in market conditions or other occurrences, there can be no certainty
that such funding will be available in quantities or on terms favorable to the
Company.
21
<PAGE> 22
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, 1997 and
the related Consolidated Statements of Income and of Cash Flows for the
three-month and nine-month periods ended September 30, 1997 and 1996. These
Consolidated Financial Statements are the responsibility of the Company's
management.
We conducted our reviews 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 reviews, 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 reviews were 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, 1997 and 1996 appearing on page 10 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 reviews,
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, 1996, 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
25, 1997 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, 1996, 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 6, 1997
22
<PAGE> 23
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Footnote F, "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 Interim Financial
Information
27 Financial Data Schedule
(b) Reports on Form 8-K:
Date of Report: July 28, 1997
Item 5. Other Events
23
<PAGE> 24
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
Date: November 6, 1997
24
<PAGE> 1
EXHIBIT 15.1
November 6, 1997
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 6, 1997 (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, 1997 which is incorporated by reference in the Registration
Statements on Form S-8 (Nos. 33-57077, 33-57081, 33-64553, 333-10389, 333-17891,
and 333-36339), 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
25
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