<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 March 31, 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 April 30, 1997, 503,099,669 shares of common stock were outstanding.
<PAGE> 2
AIRTOUCH COMMUNICATIONS, INC.
INDEX TO REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
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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 .......................... 9
Selected Proportionate Operating Data .......................... 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ....................... 11
REPORT OF INDEPENDENT ACCOUNTANTS ......................... 18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .......................................... 19
ITEM 2. CHANGES IN SECURITIES ...................................... 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ............................ 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........ 19
ITEM 5. OTHER INFORMATION .......................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................... 19
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income
AirTouch Communications, Inc. and Subsidiaries
<TABLE>
<CAPTION>
===================================================================================================
(Unaudited)
Three months ended
March 31
-----------------------
(Dollars in millions, except per share amounts) 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues $ 836 $ 449
Operating expenses:
Cost of revenues 177 103
Selling and customer operations expenses 208 139
General, administrative, and other expenses 107 93
Depreciation and amortization expenses 136 65
- ---------------------------------------------------------------------------------------------------
Total operating expenses 628 400
- ---------------------------------------------------------------------------------------------------
Operating income 208 49
Equity in net income (loss) of unconsolidated wireless systems 8 49
Minority interests in net (income) loss of consolidated wireless systems (39) (9)
Interest:
Expense (26) (8)
Income 5 4
Foreign exchange gain (loss) 4 2
Miscellaneous income (expense) (1) 6
- ---------------------------------------------------------------------------------------------------
Income before income taxes and preferred dividends 159 93
Income taxes 82 41
- ---------------------------------------------------------------------------------------------------
Income before preferred dividends 77 52
Preferred dividends 13 --
- ---------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 64 $ 52
===================================================================================================
Net income available to common stockholders - per share $ 0.13 $ 0.10
===================================================================================================
Weighted average shares outstanding (in thousands) 502,811 498,837
===================================================================================================
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
3
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Consolidated Balance Sheets
AirTouch Communications, Inc. and Subsidiaries
<TABLE>
<CAPTION>
==============================================================================================================
(Unaudited)
March 31 December 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63 $ 28
Accounts receivable (net of allowance for uncollectibles of
$66 and $61, respectively) 419 416
Inventories 63 55
Other receivables 22 33
Due from related parties 25 34
Other current assets 70 58
- --------------------------------------------------------------------------------------------------------------
Total current assets 662 624
Property, plant, and equipment, net 2,275 2,322
Investments in unconsolidated wireless systems 1,888 1,992
Intangible assets, net 3,358 3,409
Deferred charges and other noncurrent assets 303 177
- --------------------------------------------------------------------------------------------------------------
Total assets $ 8,486 $ 8,524
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 162 $ 200
Short-term borrowings 32 53
Current portion of long-term debt 15 16
Other current liabilities 497 491
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 706 760
Long-term debt 1,607 1,637
Deferred income taxes 687 693
Deferred credits 85 104
- --------------------------------------------------------------------------------------------------------------
Total liabilities 3,085 3,194
- --------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interests in consolidated wireless systems 287 268
- --------------------------------------------------------------------------------------------------------------
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, 503.0 million shares issued and 502.9 million shares outstanding
at March 31, 1997, 502.4 million shares issued and 502.3 million shares
outstanding at December 31, 1996) 4,010 3,987
Retained earnings 85 21
Cumulative translation adjustment (34) 3
Other 12 10
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,114 5,062
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 8,486 $ 8,524
==============================================================================================================
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
4
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Consolidated Statements of Cash Flows
AirTouch Communications, Inc. and Subsidiaries
<TABLE>
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(Unaudited)
Three months ended
March 31
---------------------
(Dollars in millions) 1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Income before preferred dividends $ 77 $ 52
Adjustments to reconcile income before preferred dividends
for items currently not affecting operating cash flows:
Depreciation, amortization, and other non cash charges 138 66
Distributions received from equity investees 106 27
Minority interests in net income (loss) of consolidated wireless systems 39 9
Deferred income tax (benefit) expense (10) 9
Equity in net (income) loss of unconsolidated wireless systems (8) (49)
Loss (gain) on sale of assets and telecommunications interests 1 (7)
Changes in assets and liabilities:
Accounts receivable, net (11) 10
Other current assets and receivables (3) 29
Deferred charges and other noncurrent assets (32) 20
Accounts payable and other current liabilities (21) (113)
Deferred credits and other liabilities 3 (1)
- -------------------------------------------------------------------------------------------------------
Cash flows from operating activities 279 52
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in unconsolidated wireless systems (75) (122)
Additions to property, plant, and equipment (140) (40)
Purchase of CCI options pursuant to merger agreement -- (108)
Other investing activities 9 (6)
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities (206) (276)
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuing long-term debt and commercial paper 240 970
Retirement of long-term debt and commercial paper (262) (805)
Distributions to minority interests of consolidated wireless systems (15) (5)
Payment of preferred stock dividends (13) --
Other financing activities 17 19
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities (33) 179
- -------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (5) --
- -------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 35 (45)
Beginning cash and cash equivalents 28 83
- -------------------------------------------------------------------------------------------------------
Ending cash and cash equivalents $ 63 $ 38
======================================================================================================
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
5
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AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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 it's 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-month periods ended March 31, 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 May 8, 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 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 March 31, 1997, Basic and Diluted EPS would be the same for both periods
as the EPS presented in the Company's Consolidated Statements of Income on
page 3.
C. INVESTMENTS IN UNCONSOLIDATED WIRELESS SYSTEMS
The Company's investments in unconsolidated wireless systems consist of the
following:
<TABLE>
<CAPTION>
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March 31 December 31
(Dollars in millions) 1997 1996
- ----------------------------------------------------
<S> <C> <C>
Investments at equity $ 1,816 $ 1,920
Investments at cost 72 72
- ----------------------------------------------------
$ 1,888 $ 1,992
====================================================
</TABLE>
For the three months ended March 31, 1997 and 1996, the Company's equity in net
income of significant equity investees (Mannesmann Mobilfunk GmbH and CMT
Partners in 1997 and Mannesmann Mobilfunk GmbH, CMT Partners, New Par, and
Cellular Communications, Inc. in 1996) was $75 million and $83 million,
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>
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Three Months Ended
March 31
---------------------
(Dollars in millions) 1997 1996
- -------------------------------------------------------
<S> <C> <C>
Mannesmann Mobilfunk GmbH
Operating revenues $740 $554
Operating income $252 $148
Net income $108 $ 67
CMT Partners
Operating revenues $139 $125
Operating income $ 53 $ 46
Net income $ 57 $ 53
=======================================================
</TABLE>
6
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AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
D. 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 alleges 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 seeks damages for the class "in a sum in
excess of $100,000,000." A similar suit filed in federal court and two similar
agent cases were settled for immaterial amounts. Trial has been set for July 7,
1997. The Company does not believe that this proceeding 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 U.S.
District Court for the Southern District of California, alleging that there is
circumstantial evidence that the Company and U S WEST, Inc. ("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. 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 Alameda County which, if
approved by the court, would resolve both cases. 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 March 31, 1997, the
Company's proportionate share under such arrangements was $283 million. The
Company believes it is remote that it will be required to pay under these
various arrangements.
E. SUBSEQUENT EVENTS
On April 17, 1997, the Company and U S WEST signed a letter of intent to merge
their respective U.S. cellular businesses. If consummated, the transaction would
replace the 1994 agreements between the Company and U S WEST that called for the
companies to combine their U.S. cellular businesses in a multi-phased
transaction. As a result of the proposed transaction the Company would obtain
ownership of U S WEST's domestic wireless businesses, assume up to $2.2 billion
of debt related to the acquired assets, and issue up to 93.3 million shares of
Company common stock to shareholders of U S WEST Media Group. Closing of the
proposed transaction is subject to the fulfillment of many conditions including
the signing of a definitive merger agreement, approval of the transaction and
related agreements by the Boards of Directors of the Company and U S WEST,
approval by shareholders of U S WEST Media Group and U S WEST Communications
Group, and the receipt of all necessary regulatory, judicial, and other
7
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AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
governmental approvals including the receipt of an advance letter ruling from
the Internal Revenue Service stating that the proposed merger would qualify as a
tax-free transaction. The Company believes this transaction will close in early
1998. However, certain legislation was introduced in Congress in April 1997
which if passed in its current form might result in the transaction not being
tax free. Should this transaction not be considered tax free, the companies
would continue with their existing July 1994 agreement.
8
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AirTouch Communications, Inc. and Subsidiaries
Selected Proportionate Financial Data (UNAUDITED) (1)
<TABLE>
<CAPTION>
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Three Months Ended
March 31
---------------------------
(Dollars in millions) 1997 1996(2)
- -------------------------------------------------------------------------------
<S> <C> <C>
TOTAL COMPANY
Service and other revenues $ 1,113 $ 838
Operating expenses before
depreciation and amortization(3) 700 599
Depreciation and amortization 188 132
- -------------------------------------------------------------------------------
Operating income $ 225 $ 107
===============================================================================
Net income $ 64 $ 52
Operating cash flow(4) $ 413 $ 239
Operating cash flow margin(5) 37.1% 28.5%
- -------------------------------------------------------------------------------
U.S. CELLULAR OPERATIONS
Service and other revenues $ 562 $ 434
Cost of revenues 57 50
Selling and customer operations(3) 197 165
General, administrative, and
other expenses 36 32
Depreciation and amortization 95 59
- -------------------------------------------------------------------------------
Operating income $ 177 $ 128
===============================================================================
Operating cash flow(4) $ 272 $ 187
Operating cash flow margin(5) 48.4% 43.1%
- -------------------------------------------------------------------------------
INTERNATIONAL OPERATIONS
Service and other revenues $ 470 $ 332
Operating expenses before
depreciation and amortization(3) 321 282
Depreciation and amortization 64 55
- -------------------------------------------------------------------------------
Operating income (loss) $ 85 $ (5)
===============================================================================
Operating cash flow(4) $ 149 $ 50
Operating cash flow margin(5) 31.7% 15.1%
- -------------------------------------------------------------------------------
U.S. PAGING OPERATIONS(6)
Service and other revenues(7) $ 79 $ 71
Operating expenses before
depreciation and amortization 54 49
Depreciation and amortization 18 15
- -------------------------------------------------------------------------------
Operating income $ 7 $ 7
===============================================================================
Operating cash flow(4) $ 25 $ 22
Operating cash flow margin(5) 31.6% 31.0%
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</TABLE>
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 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 positive margin on equipment sales.
9
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AirTouch Communications, Inc. and Subsidiaries
Selected Proportionate Operating Data(1)
<TABLE>
<CAPTION>
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March 31
--------------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
TOTAL COMPANY
Cellular and PCS POPs(2,3) 178,367 165,002
Cellular and PCS subscribers(3) 5,487 3,347
Cellular and PCS subscriber net adds
in period, excluding acquisitions(3,4) 341 288
Paging units in service 2,960 2,614
Capital expenditures and capital
calls, excluding acquisitions(5) $ 164 $ 202
- -------------------------------------------------------------------------------
U.S. CELLULAR OPERATIONS
Cellular POPs(2) 43,364 37,798
Cellular subscribers 3,550 2,392
Cellular subscriber net adds in period,
excluding acquisitions(4) 147 130
Monthly average revenue per unit(4) $ 54 $ 63
Monthly cash cost per unit(4) $ 28 $ 36
Capital expenditures and capital
calls, excluding acquisitions(5) $ 60 $ 31
- -------------------------------------------------------------------------------
INTERNATIONAL OPERATIONS
Cellular POPs(2) 120,774 112,904
Cellular subscribers 1,910 955
Cellular subscriber net adds in period,
excluding acquisitions(4) 176 158
Monthly average revenue per unit(4) $ 86 $ 127
Monthly cash cost per unit(4) $ 59 $ 108
Capital expenditures and capital
calls, excluding acquisitions(5) $ 45 $ 122
- -------------------------------------------------------------------------------
U.S. PAGING OPERATIONS(6)
Total paging units in service 2,923 2,468
Paging units in service net adds in
period, excluding acquisitions(4) 73 131
Capital expenditures and capital
calls, excluding acquisitions(5) $ 18 $ 27
- -------------------------------------------------------------------------------
PRIMECO OPERATIONS(3)
PCS POPs(2) 14,229 14,300
PCS subscribers 27 --
- -------------------------------------------------------------------------------
</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) For the three months ended March 31.
(5) Reflects GAAP-basis operating data, in millions, for the three months ended
March 31.
(6) U.S. Paging Operations are wholly owned by the Company; therefore,
proportionate information reflects 100% of the subsidiary's GAAP-basis
operating data.
10
<PAGE> 11
AirTouch Communications, Inc. and Subsidiaries
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
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 principally include seven U.S. cellular markets, all U.S.
paging markets, and Europolitan Holdings AB ("Europolitan"), the Company's
cellular operation 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 months ended March 31, 1997.
The seven U.S. cellular markets included in consolidated revenues and expenses
during 1997 were Los Angeles, Sacramento, Atlanta, San Diego, Great Lakes
(properties in Michigan and Ohio), Wichita, and Topeka. Consolidation of the
Company's Great Lakes market commenced on August 16, 1996, the date on which the
Company 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.
11
<PAGE> 12
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
Proportionate presentation is not required by GAAP, nor is it intended to
replace the consolidated operating results prepared and presented in accordance
with GAAP. However, since significant wireless systems are not consolidated,
proportionate information is provided as supplemental data to facilitate a more
detailed understanding and assessment of consolidated operating results prepared
and presented in accordance with GAAP.
COMPOSITION OF OPERATING REVENUES AND EXPENSES
Operating revenues include cellular and paging service revenues, as well as
equipment sales. Cellular service revenues primarily consist of 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, accessories, 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,
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 transmissions,
consists of per-minute usage fees charged by local exchange carriers for
cellular calls or paging transmissions 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, as well as 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 months
ended March 31, 1997 to the three months ended March 31, 1996. The operating
results of these periods are not necessarily indicative of operating results in
future periods. The following comparative information should be read in
conjunction with the Consolidated Financial Statements and accompanying Notes
for each period discussed, as well as the information presented in all other
sections of management's discussion and analysis.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated operating income increased $159 million or 324.5%, due primarily to
increases of $94 million and $59 million in operating income of U.S. cellular
and international operations, respectively. As indicated in the discussion of
U.S. cellular and international operations, a significant portion of the
increase in consolidated operating income resulted from the consolidation of the
Great Lakes market and Telecel.
Equity in net income (loss) of unconsolidated wireless services decreased $41
million due primarily to the 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. Such decreases were partially offset by significant improvements in
the operating results of international operations.
The increase 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 foreign equity in net income (loss) of unconsolidated
wireless systems, minority interest for consolidated foreign operations, and a
tax loss on the sale of certain foreign telecommunications interests during the
three months ended March 31, 1996, the Company's effective tax rate increased
from 49% to 50% due to an increase in non-deductible goodwill amortization.
12
<PAGE> 13
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
U.S. CELLULAR OPERATIONS
<TABLE>
<CAPTION>
U.S. Cellular Operating Results
=============================================================================
(GAAP-Basis) For the three months
ended March 31,
-----------------------------
Pro
Actual Forma
(Dollars in millions) 1997 1996 1996(c)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Service and other revenues $ 557 $ 311 $ 480
Equipment sales 28 11 19
- ------------------------------------------------------------------------------
Operating revenues 585 322 499
- ------------------------------------------------------------------------------
Operating expenses before
depreciation and
amortization expenses 316 202 298
Depreciation and
amortization expenses 94 39 83
- ------------------------------------------------------------------------------
Operating income 175 81 118
Equity in net income
(loss) of
unconsolidated wireless
systems 29 62 28
Minority interests in net
(income) loss of
consolidated wireless
systems (24) (17) (17)
Other (income) expense
included in equity
income and minority
interests (a) (3) 2 (5)
- ------------------------------------------------------------------------------
U.S. cellular operating
contribution to net
income (b) $ 177 $ 128 $ 124
==============================================================================
</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 14).
(c) Adjusted to present results as if the Great Lakes market had been wholly
owned and consolidated during the three months ended March 31, 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 months ended
March 31, 1996 and in consolidated results at one hundred percent during the
three months ended March 31, 1997. Since the actual results of operations for
each period are not comparable, pro forma results for the three months ended
March 31, 1996 are included in the preceding table to reflect results as if the
Great Lakes market had been wholly owned and consolidated during that period.
The following narrative discussion compares actual results for the three months
ended March 31, 1997 to the pro forma results for the three months ended March
31, 1996.
U.S. cellular consolidated operating revenues increased 17.2%, due primarily to
a 30.4% increase in minutes of usage resulting mainly from a 29.1% increase in
subscribers, partially offset by a 13.3% decrease in the average revenue per
customer. The average revenue per minute of usage declined 10.3%. 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, 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 success in
penetrating the consumer markets and to rate reductions and discounts associated
with competitive customer incentive programs and marketing promotions. 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. The
Company expects the shift toward consumer markets to continue, resulting in
continuing declines in average revenue per customer and average revenue per
minute of usage.
U.S. cellular operating income increased 48.3% and operating margins increased
from 23.6% to 29.9%. Operating cash flow margins (operating margins excluding
the effect of depreciation and amortization expenses) increased from 40.3% to
46%. Improvements in operating margins despite declining average revenues per
customer and average revenues per minute of usage resulted from a more
significant 18.8% decrease in the average cash cost per customer. The average
cash cost per minute of usage declined 18.5%. 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, declines in handset costs, a shift in customer acquisitions to
lower-cost direct sales channels, and a reduction in interconnection rates. The
Company has also reduced the rate at which customers discontinue service by
13
<PAGE> 14
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
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 13.3%, 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.
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 that proportionate
information facilitates a more detailed understanding of the Company's operating
results prepared and presented in accordance with GAAP.
<TABLE>
<CAPTION>
U.S. Cellular Operating Results
- --------------------------------------------------------------
(Proportionate-Basis) For the three months
ended March 31,
------------------------
(Dollars in millions) 1997 1996
- --------------------------------------------------------------
<S> <C> <C>
Service and other revenues $ 562 $ 434
- --------------------------------------------------------------
Operating expenses before
depreciation and
amortization (a) 290 247
Depreciation and
amortization expenses 95 59
- --------------------------------------------------------------
Operating income $ 177 $ 128
- --------------------------------------------------------------
Operating cash flow (b) $ 272 $ 187
Operating cash flow
margin (c) 48.4% 43.1%
- --------------------------------------------------------------
Operating data (In
thousands, except unit
data)
- --------------------------------------------------------------
Subscribers 3,550 2,392
Subscriber net adds in
period, excluding
acquisitions 147 130
Monthly average revenue
per unit $ 54 $ 63
Monthly cash cost per unit $ 28 $ 36
===============================================================
</TABLE>
(a) See Footnote 3 on page 9
(b) See Footnote 4 on page 9.
(c) See Footnote 5 on page 9.
Other Matters Affecting U.S. Cellular Operations
AirTouch/U S WEST Partnerships. On April 17, 1997, AirTouch and U S WEST, Inc.
("U S WEST") signed a letter of intent to merge their respective U.S. cellular
businesses. If consummated, the transaction proposed in the letter of intent
would replace the three-phase transaction described in the Company's 1996 Annual
Report on Form 10-K. In connection with the transaction described in the letter
of intent, the Company would assume up to $2.2 billion of debt, as well as other
liabilities, related to the U.S. cellular operations of U S WEST and issue up to
93.3 million shares of AirTouch common stock to U S WEST's shareholders. The
Company's preliminary estimates, which are subject to change depending on the
final purchase price and the final appraisal of the assets acquired and the
liabilities assumed, indicate that earnings per share will be diluted by
approximately $0.30 per share for the first full year following the merger. The
Company believes that the dilutive effects of the merger will decline
thereafter. See Note E, "Subsequent Events," 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) For the three months
ended March 31,
------------------------
(Dollars in millions) 1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Service and other revenues $ 79 $ 69
Equipment sales 9 13
- ---------------------------------------------------------------
Operating revenues 88 82
- ---------------------------------------------------------------
Operating expenses before
depreciation and
amortization expenses 63 60
Depreciation and
amortization expenses 18 15
- ---------------------------------------------------------------
Operating income $ 7 $ 7
- ---------------------------------------------------------------
Operating cash flow (a) $ 25 $ 22
Operating cash flow
margin (b) 28.4% 26.8%
- ---------------------------------------------------------------
Operating data (In
thousands)
- ---------------------------------------------------------------
Units in service 2,923 2,468
Units in service net adds
during period,
excluding acquisitions 73 131
===============================================================
</TABLE>
(a) See Footnote 4 on page 9
(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.
14
<PAGE> 15
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
Operating revenues increased 7.3%, due primarily to an 18.4% increase in paging
units in service in existing and start-up paging markets, partially offset by a
5.5% decline in the average revenue per unit in service and a decline in pager
sales attributable to the decrease in the number of units in service added.
Operating income remained flat and operating margins decreased slightly from
8.5% to 8%. Operating cash flow margins (operating margins excluding the effect
of depreciation and amortization), however, increased from 26.8% to 28.4%. The
increase in the operating cash flow margin resulted primarily from increased
service and other revenues. 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 first quarter of 1996.
INTERNATIONAL OPERATIONS
<TABLE>
<CAPTION>
International Operations Operating Results
- ---------------------------------------------------------------------------
(GAAP-Basis) For the three months ended
March 31,
-------------------------------
Pro
Actual Forma
(Dollars in millions) 1997 1996 1996(c)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Service and other revenues $ 151 $ 39 $ 111
Equipment sales 12 5 10
- ---------------------------------------------------------------------------
Operating revenues 163 44 121
- ---------------------------------------------------------------------------
Operating expenses before
depreciation and
amortization expenses 104 58 111
Depreciation and
amortization expenses 22 8 15
- ---------------------------------------------------------------------------
Operating income 37 (22) (5)
Equity in net income
(loss) of
unconsolidated wireless
systems 10 (7) (9)
Minority interests in net
(income) loss of
consolidated wireless
systems (15) 8 5
Other (income) expense
included in equity
income and minority
interests (a) 53 16 6
- ---------------------------------------------------------------------------
International operations
operating contribution
to net income (b) $ 85 $ (5) $ (3)
============================================================================
</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 16).
(c) Adjusted to present results as if Telecel had been consolidated and the
Company's ownership interest in Telecel had been 50.9% during the three
months ended March 31, 1996.
Actual consolidated international operating results presented in the preceding
table for the three months ended March 31, 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
months ended March 31, 1997 reflect the operations of both Telecel and
Europolitan. Operating results for other international markets are reflected in
equity in net income (loss) of unconsolidated wireless systems. Since the actual
results of operations for each period are not comparable, pro forma results for
the three months ended March 31, 1996 are included in the preceding table to
reflect results as if Telecel had been consolidated and the Company's ownership
in Telecel had been 50.9% during that period. The following narrative discussion
compares actual results for the three months ended March 31, 1997 to the pro
forma results for the three months ended March 31, 1996.
Operating revenues increased 34.7% due primarily to substantial subscriber
growth in both Portugal and Sweden, partially offset by unfavorable changes in
the related foreign exchange rates. Operating margins improved from negative
4.1% to positive 22.7%, due primarily to rapidly declining cash costs per
customer achieved as operations in Sweden and Portugal continued to gain scale.
Equity in net income (loss) of unconsolidated wireless systems improved 211.1%
due to improved operating results in Germany, Spain, Japan, and Belgium.
Improvements in these countries resulted primarily from increasing economies of
scale and continued subscriber growth, partially offset by overall declines in
the average revenue per customer. Such improvements were partially offset by
increased losses in Italy, South Korea, and Poland, which were attributable to
marketing and sales expenses associated with continued rapid subscriber growth
and other costs to launch and expand service.
Proportionate International Cellular 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 that proportionate
information
15
<PAGE> 16
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
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) For the three months
ended March 31,
-----------------------
(Dollars in millions) 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Service and other revenues (a) $ 470 $ 332
- ---------------------------------------------------------------------------
Operating expenses before
depreciation and
amortization (b) 321 282
Depreciation and
amortization expenses 64 55
- ---------------------------------------------------------------------------
Operating income $ 85 $ (5)
- ---------------------------------------------------------------------------
Operating cash flow (a,c) $ 149 $ 50
Operating cash flow
margin (d) 31.7% 15.1%
- ---------------------------------------------------------------------------
Operating data (In
thousands, except unit
data)
- ---------------------------------------------------------------------------
Subscribers 1,910 955
Subscriber net adds in
period, excluding
acquisitions 176 158
Monthly average revenue per
unit $ 86 $ 127
Monthly cash cost per unit $ 59 $ 108
============================================================================
</TABLE>
(a) If amounts presented for 1996 were translated using 1997 foreign currency
exchange rates, service and other revenues and operating cash flow would
have been $306 million and $45 million, respectively, for the three months
ended March 31, 1996.
(b) See Footnote 3 on page 9.
(c) See Footnote 4 on page 9.
(d) See Footnote 5 on page 9.
CONTINGENCIES
The Company is party to various legal proceedings, including certain antitrust
litigation. See Note D, "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 1997, the Company incurred capital expenditures of $140 million for
additions to property, plant, and equipment for its consolidated wireless
networks and other capital expenditures, primarily to increase cellular and
paging network capacity and to expand customer operations functions necessary to
support customer growth. The Company invested an additional $75 million in its
unconsolidated wireless systems to fund the expansion and build-out of cellular
and PCS networks and to increase its interest in certain systems. In addition to
capital funding, the Company elected to retire $179 million of long-term debt
prior to its maturity and paid $13 million in preferred dividends during the
three months ended March 31, 1997.
FUNDING OF 1997 CAPITAL EXPENDITURES, CAPITAL CALLS AND DEBT SERVICE
Cash flows from operations of $279 million were sufficient to fund capital
requirements and preferred dividend obligations. The retirement of $179 million
in long-term debt was funded primarily through the net issuance of $154 million
in commercial paper. In addition to cash flows from operations and debt
financing, the Company received $9 million in proceeds from the issuance of
capital stock.
FUTURE CAPITAL EXPENDITURES
The Company will continue to be required to make substantial expenditures in
connection with its efforts to expand its wireless business. 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 markets to expand its existing analog and Code
Division Multiple Access ("CDMA") digital wireless networks and to construct and
deploy new digital wireless networks. AirTouch plans to have CDMA digital
cellular service available in all of its managed U.S. markets by 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 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 who do not wish to purchase new
16
<PAGE> 17
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
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), dual-band (cellular/PCS)
phones in each of its U.S. digital markets to facilitate the greatest possible
roaming capabilities for its customers.
At March 31, 1997, the Company was committed to spend approximately $98 million
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 $620 million during 1997 to
increase the capacity of its existing wireless networks and to continue
deployment of CDMA digital technology. At March 31, 1997, the Company had also
committed to spend approximately $260 million for the purchase of cellular
handsets, pagers, and other items.
Unconsolidated Wireless Systems. As of March 31, 1997, the Company was committed
to make capital contributions of approximately $81 million to its unconsolidated
wireless systems. In addition to these commitments, the Company plans to make
additional capital contributions of approximately $285 million during 1997 to
certain of its U.S. and international unconsolidated wireless systems, including
contributions to PrimeCo for the continuing build-out of its PCS networks. The
Company continually evaluates opportunities to increase its ownership in its
existing international wireless systems, which could result in additional
capital commitments.
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 March 31, 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 million
in 7.125% Notes and $400 million 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
million 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 new investment opportunities 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.
17
<PAGE> 18
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 March 31, 1997 and the
related Consolidated Statements of Income and of Cash Flows for the three-month
periods ended March 31, 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 periods
ended March 31, 1997 and 1996 appearing on page 9 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
May 8, 1997
18
<PAGE> 19
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.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
15.1 Letter of Price Waterhouse LLP Re: Unaudited Interim
Financial Information
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None
19
<PAGE> 20
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: May 8, 1997
20
<PAGE> 1
Exhibit 15.1
May 8, 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
May 8, 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
March 31, 1997 which is incorporated by reference in the Registration Statements
on Form S-8 (Nos. 33-57083, 33-57077, 33-57081, 33-64553, 333-10389, and
333-17891), 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
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 63,000
<SECURITIES> 0
<RECEIVABLES> 485,000
<ALLOWANCES> 66,000
<INVENTORY> 63,000
<CURRENT-ASSETS> 662,000
<PP&E> 3,707,000
<DEPRECIATION> 1,432,000
<TOTAL-ASSETS> 8,486,000
<CURRENT-LIABILITIES> 706,000
<BONDS> 1,607,000
0
1,041,000
<COMMON> 4,010,000
<OTHER-SE> 63,000
<TOTAL-LIABILITY-AND-EQUITY> 8,486,000
<SALES> 49,000
<TOTAL-REVENUES> 836,000
<CGS> 73,000
<TOTAL-COSTS> 628,000
<OTHER-EXPENSES> 1,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,000
<INCOME-PRETAX> 159,000
<INCOME-TAX> 82,000
<INCOME-CONTINUING> 77,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,000
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
