<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 June 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 July 31, 1997, 503,713,329 shares of common stock were outstanding.
<PAGE> 2
AIRTOUCH COMMUNICATIONS, INC.
INDEX TO REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
<TABLE>
<S> <C>
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
</TABLE>
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 Six months ended
June 30 June 30
---------------------------------------------------
(Dollars in millions, except per share information) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 901 $ 481 $ 1,737 $ 930
- -------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of revenues 211 103 388 206
Selling and customer operations expenses 231 153 439 292
General, administrative, and other expenses 127 94 234 187
Depreciation and amortization expenses 133 68 269 133
- -------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 702 418 1,330 818
- -------------------------------------------------------------------------------------------------------------------------------
Operating income 199 63 407 112
Equity in net income (loss) of unconsolidated wireless systems:
U.S. 6 59 4 115
International 49 (10) 59 (17)
Minority interests in net (income) loss of consolidated wireless systems (32) (25) (71) (34)
Interest:
Expense (22) (9) (48) (17)
Income 4 2 9 6
Foreign exchange gain (loss) (4) - - 2
Miscellaneous income (expense) (3) 3 (4) 9
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and preferred dividends 197 83 356 176
Income taxes 78 22 160 63
- -------------------------------------------------------------------------------------------------------------------------------
Income before preferred dividends 119 61 196 113
Preferred dividends 13 - 26 -
- -------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 106 $ 61 $ 170 $ 113
===============================================================================================================================
Net income applicable to common stockholders - per share $ 0.21 $ 0.12 $ 0.34 $ 0.23
===============================================================================================================================
Weighted average shares outstanding (in thousands) 503,601 499,323 503,206 499,080
===============================================================================================================================
</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)
June 30 December 31
(Dollars in millions) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4 $ 28
Accounts receivable, (net of allowance for uncollectibles of
$71 and $61, respectively) 449 416
Inventories 61 55
Other receivables 21 33
Due from related parties 40 34
Other current assets 76 58
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 651 624
Property, plant, and equipment, net 2,339 2,322
Investments in unconsolidated wireless systems 1,925 1,992
Intangible assets, net 3,328 3,409
Deferred charges and other noncurrent assets 280 177
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 8,523 $ 8,524
===============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 131 $ 200
Short-term borrowings 23 53
Current portion of long-term debt 4 16
Other current liabilities 508 491
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 666 760
Long-term debt 1,562 1,637
Deferred income taxes 695 693
Deferred credits 65 104
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,988 3,194
- -------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interests in consolidated wireless systems 296 268
- -------------------------------------------------------------------------------------------------------------------------------
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, 503.5 million shares issued and 503.4 million shares outstanding at June 30, 1997,
502.4 million shares issued and 502.3 million shares outstanding at December 31, 1996) 4,029 3,987
Retained earnings 191 21
Cumulative translation adjustment (32) 3
Other 10 10
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,239 5,062
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 8,523 $ 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)
Six months ended
June 30
--------------------
(Dollars in millions) 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Income before preferred dividends $ 196 $ 113
Adjustments to reconcile income before preferred dividends
for items currently not affecting operating cash flows:
Depreciation, amortization, and other non cash charges 274 133
Distributions received from equity investees 189 86
Minority interests in net income (loss) of consolidated wireless systems 71 34
Deferred income tax (benefit) expense (10) (12)
Equity in net (income) loss of unconsolidated wireless systems (63) (98)
Loss (gain) on sale of assets and telecommunications interests - (6)
Changes in assets and liabilities:
Accounts receivable, net (43) 5
Other current assets and receivables (17) (10)
Deferred charges and other noncurrent assets 12 25
Accounts payable and other current liabilities (16) (121)
Deferred credits and other liabilities (14) 8
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities 579 157
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investments in unconsolidated wireless systems (202) (262)
Additions to property, plant, and equipment (306) (118)
Purchase of CCI options pursuant to merger agreement - (108)
Other investing activities 17 8
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities (491) (480)
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuing long-term debt and commercial paper 307 1,057
Retirement of long-term debt and commercial paper (373) (853)
Distributions to minority interests of consolidated wireless systems (36) (18)
Payment of preferred stock dividends (27) -
Other financing activities 22 62
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities (107) 248
- ------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (5) (1)
- ------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (24) (76)
Beginning cash and cash equivalents 28 83
- ------------------------------------------------------------------------------------------------------------
Ending cash and cash equivalents $ 4 $ 7
=============================================================================================================
</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 six-month periods ended June 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 August 7, 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 June 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
6
<PAGE> 7
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Dollar amounts in millions, unless otherwise noted)
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.
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
shareholders' 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. 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>
===================================================
June 30 December 31
1997 1996
- ----------------------------------------------------
<S> <C> <C>
Investments at equity $1,825 $1,920
Investments at cost 100 72
- ----------------------------------------------------
$1,925 $1,992
====================================================
</TABLE>
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 $86 and $97
for the three months ended June 30, 1997 and 1996, and $161 and $179 for the six
months ended June 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 Six Months Ended
June 30 June 30
---------------------------------------------------
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mannesmann Mobilfunk GmbH
Operating revenues $ 750 $ 656 $1,490 $1,210
Operating income $ 284 $ 196 $ 536 $ 344
Net income $ 121 $ 79 $ 229 $ 146
CMT Partners
Operating revenues $ 150 $ 134 $ 289 $ 259
Operating income $ 61 $ 45 $ 114 $ 91
Net income $ 72 $ 51 $ 129 $ 104
=====================================================================================
</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 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.
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. 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.
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 June 30, 1997, the
Company's proportionate share under such arrangements was $276 million. The
Company
8
<PAGE> 9
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Dollar amounts in millions, unless otherwise noted)
believes it is remote that it will be required to pay under these various
arrangements.
9
<PAGE> 10
AirTouch Communications, Inc. and Subsidiaries
(Dollar amounts in millions, unless otherwise noted)
SELECTED PROPORTIONATE FINANCIAL DATA (UNAUDITED)(1)
<TABLE>
<CAPTION>
========================================================================================================================
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------------------------------
1997 1996(2) 1997 1996(2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL COMPANY
Service and other revenues $1,198 $ 917 $2,311 $1,755
Operating expenses before
depreciation and amortization expenses(3) 772 635 1,472 1,234
Depreciation and amortization expenses 190 139 378 271
- ------------------------------------------------------------------------------------------------------------------------
Operating income $ 236 $ 143 $ 461 $ 250
========================================================================================================================
Net income applicable to common stockholders $ 106 $ 61 $ 170 $ 113
Operating cash flow(4) $ 426 $ 282 $ 839 $ 521
Operating cash flow margin(5) 35.6% 30.8% 36.3% 29.7%
- ------------------------------------------------------------------------------------------------------------------------
U.S. CELLULAR OPERATIONS
Service and other revenues $ 604 $ 471 $1,166 $ 905
Cost of revenues 61 52 118 102
Selling and customer operations expenses(3) 209 178 406 343
General, administrative, and other expenses 38 38 74 70
Depreciation and amortization expenses 96 60 191 119
- ------------------------------------------------------------------------------------------------------------------------
Operating income $ 200 $ 143 $ 377 $ 271
========================================================================================================================
Operating cash flow(4) $ 296 $ 203 $ 568 $ 390
Operating cash flow margin(5) 49.0% 43.1% 48.7% 43.1%
- ------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL OPERATIONS
Service and other revenues $ 507 $ 373 $ 977 $ 705
Operating expenses before
depreciation and amortization expenses(3) 357 298 678 580
Depreciation and amortization expenses 67 59 131 114
- ------------------------------------------------------------------------------------------------------------------------
Operating income $ 83 $ 16 $ 168 $ 11
========================================================================================================================
Operating cash flow(4) $ 150 $ 75 $ 299 $ 125
Operating cash flow margin(5) 29.6% 20.1% 30.6% 17.7%
- ------------------------------------------------------------------------------------------------------------------------
U.S. PAGING OPERATIONS(6)
Service and other revenues(7) $ 81 $ 73 $ 160 $ 144
Operating expenses before
depreciation and amortization expenses 53 50 107 99
Depreciation and amortization expenses 19 16 37 31
- ------------------------------------------------------------------------------------------------------------------------
Operating income $ 9 $ 7 $ 16 $ 14
========================================================================================================================
Operating cash flow(4) $ 28 $ 23 $ 53 $ 45
Operating cash flow margin(5) 34.6% 31.5% 33.1% 31.3%
========================================================================================================================
</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 positive margin on equipment sales.
11
<PAGE> 12
AirTouch Communications, Inc. and Subsidiaries
(Dollar amounts in millions, unless otherwise noted)
SELECTED PROPORTIONATE OPERATING DATA (UNAUDITED)(1)
<TABLE>
<CAPTION>
==========================================================================================================================
Three Months Ended Six Months Ended
June 30 June 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) 178,071 166,788 178,071 166,788
Cellular and PCS subscribers(3) 6,033 3,716 6,033 3,716
Cellular and PCS subscriber net adds in period,
excluding acquisitions (3)(4) 546 363 887 651
Paging units in service 3,031 2,631 3,031 2,631
Capital expenditures and capital calls,
excluding acquisitions(5) $ 267 $ 153 $ 431 $ 355
- --------------------------------------------------------------------------------------------------------------------------
U.S. CELLULAR OPERATIONS
Cellular POPs (2) 43,364 37,798 43,364 37,798
Cellular subscribers 3,745 2,550 3,745 2,550
Cellular subscriber net adds in period,
excluding acquisitions (4) 195 158 342 288
Monthly average revenue per unit(4) $ 55 $ 64 $ 55 $ 63
Monthly cash cost per unit(4) $ 28 $ 36 $ 28 $ 36
Capital expenditures and capital calls,
excluding acquisitions(5) $ 122 $ 68 $ 182 $ 99
- --------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL OPERATIONS
Cellular POPs(2) 120,478 114,690 120,478 114,690
Cellular subscribers 2,241 1,166 2,241 1,166
Cellular subscriber net adds in period,
excluding acquisitions(4) 331 205 507 363
Monthly average revenue per unit(4) $ 82 $ 118 $ 84 $ 122
Monthly cash cost per unit(4) $ 58 $ 94 $ 58 $ 100
Capital expenditures and capital calls,
excluding acquisitions(5) $ 70 $ 20 $ 115 $ 142
- --------------------------------------------------------------------------------------------------------------------------
U.S. PAGING OPERATIONS(6)
Total paging units in service 2,992 2,612 2,992 2,612
Paging units in service net adds in period,
excluding acquisitions(4) 69 143 142 274
Capital expenditures and capital calls,
excluding acquisitions(5) $ 12 $ 19 $ 30 $ 46
- --------------------------------------------------------------------------------------------------------------------------
PRIMECO OPERATIONS(3)
PCS POPs(2) 14,229 14,300 14,229 14,300
PCS subscribers 47 - 47 -
===========================================================================================================================
</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 and six months ended June 30, respectively.
(5) Reflects GAAP-basis operating data, in millions, for the three and six
months ended June 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.
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
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 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 and six
months ended June 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 (properties in
Michigan and Ohio) 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.
COMPOSITION OF OPERATING REVENUES AND EXPENSES
Operating revenues include cellular and paging service revenues, as well as
equipment sales. Cellular service
13
<PAGE> 14
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
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
six months ended June 30, 1997 to the three and six months ended June 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 six months
ended June 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 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 change in estimates based
on the Company's assessment of various tax positions.
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, 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 48% and 47% for
the three and six months ended June 30, 1997, respectively, and 52% and 46% for
the three and six months ended June 30, 1996, respectively. The decrease in
effective tax rates during the three months ended June 30, 1997, as compared to
the three months ended June 30, 1996, was primarily attributable to differences
between book and tax related to the disposition of certain telecommunications
interests.
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
inability of computerized information systems to properly recognize and process
date sensitive information as the year 2000 approaches. The Company is currently
working to address and resolve this issue with respect to its computerized
information systems, but has not yet assessed the total cost. 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.
U.S. CELLULAR OPERATIONS
<TABLE>
<CAPTION>
===============================================================================================================
U.S. Cellular Operating Results
- ---------------------------------------------------------------------------------------------------------------
(GAAP-Basis) Three Months Ended Six Months Ended
June 30 June 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 $ 599 $ 331 $ 521 $ 1,156 $ 642 $ 1,000
Equipment sales 30 13 21 58 24 40
- --------------------------------------------------------------------------------------------------------------
Operating revenues 629 344 542 1,214 666 1,040
- --------------------------------------------------------------------------------------------------------------
Operating expenses before depreciation
and amortization expenses 343 211 308 659 413 606
Depreciation and amortization expenses 93 39 84 187 78 167
- --------------------------------------------------------------------------------------------------------------
Operating income 193 94 150 368 175 267
Equity in net income (loss) of unconsolidated
wireless systems 36 68 26 65 130 55
Minority interests in net (income) loss of
consolidated wireless systems (20) (19) (19) (44) (35) (35)
Other (income) expense included in equity
income and minority interests(a) (9) - (8) (12) 1 (14)
- --------------------------------------------------------------------------------------------------------------
U.S. cellular operating contribution
to net income(b) $ 200 $ 143 $ 149 $ 377 $ 271 $ 273
==============================================================================================================
</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 six months ended June 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 six months
ended June 30, 1996 and in consolidated results at 100% during the three and six
months ended June 30, 1997. Since the actual results of operations for each
period are not comparable, pro forma results for the three and six months ended
June 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 six
months ended June 30, 1997 to the pro forma results for the three and six months
ended June 30, 1996.
15
<PAGE> 16
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
The improvements in U.S. cellular consolidated operating revenues during the
three and six months ended June 30, 1997, were due to an approximate 30%
increase in minutes of usage attributable primarily to a 28% increase in
subscribers, partially offset by an approximate 14% decline in average revenue
per minute of usage. The average revenue per customer declined approximately 12%
during both the three and six months ended June 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 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.
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 six months ended June 30, 1997, as compared to the
corresponding periods of the prior year. The Company expects the shift toward
consumer markets 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
six months ended June 30, 1996, respectively, to 31% and 30% during the three
and six months ended June 30, 1997, respectively. Operating cash flow margins
(operating margins excluding the effect of depreciation and amortization
expenses) increased from 43% and 42% during the three and six months ended June
30, 1996, respectively, to 46% during the three and six months ended June 30,
1997. Improvements in operating margins despite declining average revenues per
customer and average revenues per minute of usage resulted from more significant
15% and 18% declines in the average cash cost per customer (including the loss
on equipment sales) during the three and six months ended June 30, 1997,
respectively. The average cash costs per minute of usage (including the loss on
equipment sales) declined 17% and 18% during the three and six months ended June
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,
declines in handset costs and reductions in handset subsidies offered to
customers, 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 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 11% and 12%
during the three and six months ended June 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 Six Months Ended
June 30 June 30
-------------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service and other revenues $ 604 $ 471 $1,166 $ 905
- ----------------------------------------------------------------------------------
Cost of revenues 61 52 118 102
Selling and customer operations expenses(a) 209 178 406 343
General, administrative, and other expenses 38 38 74 70
Depreciation and amortization expenses 96 60 191 119
- ----------------------------------------------------------------------------------
Operating income $ 200 $ 143 $ 377 $ 271
==================================================================================
Operating cash flow(b) $ 296 $ 203 $ 568 $ 390
Operating cash flow margin(c) 49.0% 43.1% 48.7% 43.1%
==================================================================================
</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 Six Months Ended
June 30 June 30
--------------------------------------
1997 1996 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service and other revenues $ 81 $ 72 $160 $141
Equipment sales 9 12 18 25
-------------------------------------------------------------------------------
Operating revenues 90 84 178 166
-------------------------------------------------------------------------------
Operating expenses before depreciation
and amortization expenses 62 61 125 121
Depreciation and amortization expenses 19 16 37 31
-------------------------------------------------------------------------------
Operating income $ 9 $ 7 $ 16 $ 14
===============================================================================
Operating cash flow(a) $ 28 $ 23 $ 53 $ 45
Operating cash flow margin(b) 31.1% 27.4% 29.8% 27.1%
===============================================================================
</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 six month
periods ended June 30, 1997, due primarily to a 15% increase in paging units in
service, partially offset by an approximate 5% decline in the average revenue
per unit in service during three and six months ended June 30, 1997. Increased
revenues
17
<PAGE> 18
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
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 27% during the three and six months ended June 30,
1996 to 31% and 30% during the three and six months ended June 30, 1997,
respectively. The increase in operating cash flow margins resulted primarily
from increased service and other revenues and lower cost 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 Six Months Ended
June 30 June 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 $ 164 $ 48 $ 128 $ 315 $ 87 $ 239
Equipment sales 18 5 16 30 10 26
------------------------------------------------------------------------------------------------------
Operating revenues 182 53 144 345 97 265
------------------------------------------------------------------------------------------------------
Operating expenses before depreciation
and amortization expenses 137 66 122 241 124 233
Depreciation and amortization expenses 20 10 17 41 18 32
------------------------------------------------------------------------------------------------------
Operating income (loss) 25 (23) 5 63 (45) -
Equity in net income (loss) of unconsolidated
wireless systems 49 (10) (18) 59 (17) (30)
Minority interests in net (income) loss of
consolidated wireless systems (12) (7) (14) (27) 1 (10)
Other (income) expense included in equity
income and minority interests(a) 21 56 45 73 72 52
------------------------------------------------------------------------------------------------------
International cellular operating contribution
to net income(b) $ 83 $ 16 $ 18 $ 168 $ 11 $ 12
======================================================================================================
</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 six months ended June 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
interest 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 six months ended June 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 six months ended June 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 six
months ended June 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 six months ended
June 30, 1997 to the pro forma results for the three and six months ended June
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
4% and 0% during the three and six months ended June 30, 1996, respectively, to
14% and 18% during the three and six months ended June 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
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 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, India, 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 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 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 Six Months Ended
June 30 June 30
-------------------------------------
1997 1996 1997 1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service and other revenues(a) $507 $373 $977 $705
----------------------------------------------------------------------------------------
Operating expenses before
depreciation and amortization expenses(b) 357 298 678 580
Depreciation and amortization expenses 67 59 131 114
Operating income $ 83 $ 16 $168 $ 11
=========================================================================================
Operating cash flow(a)(c) $150 $ 75 $299 $125
Operating cash flow margin(d) 29.6% 20.1% 30.6% 17.7%
=========================================================================================
</TABLE>
(a) If amounts presented for 1996 were translated using 1997 foreign currency
exchange rates, service and other revenues for the three and six months
ended June 30, 1996 would have been $332 and $618, repsectively, and
operating cash flow for the three and six months ended June 30, 1996 would
have been $66 and $106, 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 1997, the Company incurred capital expenditures of $306 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 $202 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 and paid $27 in preferred dividends during the six months ended June
30, 1997.
FUNDING OF 1997 CAPITAL EXPENDITURES, CAPITAL CALLS AND DEBT SERVICE
Cash flows from operations of $579 were sufficient to fund capital requirements
and preferred dividend obligations. The retirement of $179 in long-term debt was
funded primarily using proceeds from the net issuance of $101 in commercial
paper and cash flows from operations. The Company also received $24 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 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 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. cellular 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 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.
At June 30, 1997, the Company was committed to spend approximately $98 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 $453 during 1997 to increase the capacity of its
existing wireless networks and to continue deployment of CDMA digital
technology. At June 30, 1997, the Company had also committed to spend
approximately $170 for the purchase of cellular handsets, pagers, and other
items.
Unconsolidated Wireless Systems. As of June 30, 1997, the Company was committed
to make capital contributions of approximately $35 to its unconsolidated
wireless systems. In addition to these commitments, the Company plans to make
additional capital contributions of approximately $235 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.
The Company continually
20
<PAGE> 21
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
(Dollar amounts in millions, unless otherwise noted)
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 June 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 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.
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 June 30, 1997 and the
related Consolidated Statements of Income and of Cash Flows for the three-month
and six-month periods ended June 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
six-month periods ended June 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
August 7, 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
On May 19, 1997, the Company held its Annual Meeting of Stockholders. Four
matters were considered and the results are as follows:
- Proposal 1 to elect four directors, constituting Class III of the
Company's Board of Directors, to serve a three-year term: 400,963,960
shares voted for Michael J. Boskin, and 7,748,159 shares withheld;
400,749,832 shares voted for Arthur Rock, and 7,962,287 shares withheld;
400,862,620 shares voted for Arun Sarin, and 7,849,499 shares withheld;
391,488,348 shares voted for George P. Shultz, and 17,223,771 shares
withheld.
- Proposal 2 to ratify the appointment of Price Waterhouse LLP as the
Company's independent accountants for 1997: 405,193,587 shares voted for
this proposal, 1,627,253 shares voted against, and 1,891,279 shares
abstained.
- Proposal 3 to approve the Company's amended and restated 1993 Long-Term
Stock Incentive Plan: 349,946,663 shares voted for this proposal,
45,553,852 shares voted against, and 13,211,604 shares abstained.
- Proposal 4 to approve the Company's amended and restated Short-Term
Incentive Plan: 373,944,293 shares voted for this proposal, 21,481,614
shares voted against, and 13,286,212 shares abstained.
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>
10.1 AirTouch Communications, Inc. Amended and Restated 1993
Long-Term Stock Incentive Plan.
15.1 Letter of Price Waterhouse LLP Re: Unaudited Interim
Financial Information
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
Date of Report: April 17, 1997
Item 5. Other Events and Item 7. Exhibits
Date of Report: May 16, 1997
Item 5. Other Events and Item 7. Exhibit
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: August 7, 1997
24
<PAGE> 1
EXHIBIT 10.1
AIRTOUCH COMMUNICATIONS, INC.
1993 LONG-TERM STOCK INCENTIVE PLAN
(Amendment and Restatement Effective as of December 12, 1996)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1. INTRODUCTION........................................................1
ARTICLE 2. ADMINISTRATION......................................................1
2.1 Committee Composition.............................................1
2.2 Committee Responsibilities........................................1
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.........................................2
3.1 Basic Limitation..................................................2
3.2 Additional Shares.................................................2
3.3 Dividend Equivalents..............................................2
ARTICLE 4. ELIGIBILITY.........................................................2
4.1 General Rules.....................................................2
4.2 Outside Directors.................................................2
4.3 Incentive Stock Options...........................................3
ARTICLE 5. OPTIONS 3
5.1 Stock Option Agreement............................................3
5.2 Number of Shares..................................................4
5.3 Exercise Price....................................................4
5.4 Exercisability and Term...........................................4
5.5 Effect of Change in Control.......................................4
5.6 Modification or Assumption of Options.............................4
ARTICLE 6. PAYMENT FOR OPTION SHARES...........................................5
6.1 General Rule......................................................5
6.2 Surrender of Stock................................................5
6.3 Exercise/Sale.....................................................5
6.4 Exercise/Pledge...................................................5
6.5 Promissory Note...................................................5
6.6 Other Forms of Payment............................................5
ARTICLE 7. STOCK APPRECIATION RIGHTS...........................................5
7.1 SAR Agreement.....................................................5
7.2 Number of Shares..................................................6
7.3 Exercise Price....................................................6
7.4 Exercisability and Term...........................................6
7.5 Effect of Change in Control.......................................6
7.6 Exercise of SARs..................................................6
7.7 Modification or Assumption of SARs................................7
ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS...................................7
8.1 Time, Amount and Form of Awards...................................7
8.2 Payment for Awards................................................7
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
8.3 Vesting Conditions................................................7
8.4 Form and Time of Settlement of Stock Units........................7
8.5 Death of Recipient................................................8
8.6 Creditors' Rights.................................................8
ARTICLE 9. VOTING AND DIVIDEND RIGHTS..........................................8
9.1 Restricted Shares.................................................8
9.2 Stock Units.......................................................8
ARTICLE 10. PROTECTION AGAINST DILUTION........................................8
10.1 Adjustments......................................................8
10.2 Reorganizations..................................................9
ARTICLE 11. AWARDS UNDER OTHER PLANS...........................................9
ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES...........................9
12.1 Effective Date...................................................9
12.2 Elections to Receive NSOs or Stock Units.........................9
12.3 Number and Terms of NSOs.........................................9
12.4 Number and Terms of Stock Units..................................9
ARTICLE 13. LIMITATION ON RIGHTS..............................................10
13.1 Retention Rights................................................10
13.2 Stockholders' Rights............................................10
13.3 Regulatory Requirements.........................................10
ARTICLE 14. LIMITATION ON PAYMENTS............................................10
14.1 Basic Rule......................................................10
14.2 Reduction of Payments...........................................11
14.3 Overpayments and Underpayments..................................11
14.4 Related Corporations............................................11
ARTICLE 15. WITHHOLDING TAXES.................................................11
15.1 General.........................................................11
15.2 Share Withholding...............................................12
ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS..................................12
ARTICLE 17. FUTURE OF THE PLAN................................................12
17.1 Term of the Plan................................................12
17.2 Amendment or Termination........................................12
ARTICLE 18. DEFINITIONS.......................................................12
ARTICLE 19. EXECUTION.........................................................17
</TABLE>
ii
<PAGE> 4
AIRTOUCH COMMUNICATIONS, INC.
1993 LONG-TERM STOCK INCENTIVE PLAN
(Amendment and Restatement Effective as of December 12, 1996)
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the board of directors of the Company's
predecessor on June 25, 1993, and approved by the majority stockholder of the
Company's predecessor on February 16, 1994. The Plan was most recently amended
and restated on December 12, 1996, effective as of the same date.
The purpose of the Plan is to promote the long-term success of the
Company and the creation of stockholder value by (a) encouraging Key Employees
to focus on critical long-range objectives, (b) encouraging the attraction and
retention of Key Employees with exceptional qualifications and (c) linking Key
Employees directly to stockholder interests through increased stock ownership.
The Plan seeks to achieve this purpose by providing for Awards in the form of
Restricted Shares, Stock Units, Options (which may constitute incentive stock
options or nonstatutory stock options) or stock appreciation rights. The Plan
shall be governed by, and construed in accordance with, the laws of the State of
Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 Committee Composition. The Plan shall be administered by the
Committee. The Committee shall consist of two or more disinterested directors of
the Company, who shall be appointed by the Board. A member of the Board shall be
deemed to be "disinterested" only if he or she satisfies (a) such requirements
as the Securities and Exchange Commission may establish for non-employee
directors administering plans intended to qualify for exemption under Rule 16b-3
(or its successor) under the Exchange Act and (b) such requirements as the
Internal Revenue Service may establish for outside directors acting under plans
intended to qualify for exemption under section 162(m)(4)(C) of the Code. The
Board may also appoint one or more separate committees of the Board, each
composed of one or more directors of the Company who need not be disinterested,
who may administer the Plan with respect to Key Employees who are not considered
officers or directors of the Company under section 16 of the Exchange Act, may
grant Awards under the Plan to such Key Employees and may determine all terms of
such Awards.
2.2 Committee Responsibilities. The Committee shall (a) select the Key
Employees who are to receive Awards under the Plan, (b) determine the type,
number, vesting requirements and other features and conditions of such Awards,
(c) interpret the Plan and (d) make all other decisions relating to the
operation of the Plan. The Committee may adopt such rules or guidelines as it
deems appropriate to implement the Plan. The Committee's determinations under
the Plan shall be final and binding on all persons.
<PAGE> 5
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares. The aggregate number of
Restricted Shares, Stock Units, Options and SARs awarded under the Plan shall
not exceed 49,000,000. The limitation of this Section 3.1 shall be subject to
adjustment pursuant to Article 10.
3.2 Additional Shares. If Restricted Shares, Stock Units, Options or
SARs are forfeited or if Options or SARs terminate for any other reason before
being exercised, then the corresponding Common Shares shall again become
available for Awards under the Plan. If Stock Units are settled, then only the
number of Common Shares (if any) actually issued in settlement of such Stock
Units shall reduce the number available under Section 3.1 and the balance shall
again become available for Awards under the Plan. If SARs are exercised, then
only the number of Common Shares (if any) actually issued in settlement of such
SARs shall reduce the number available under Section 3.1 and the balance shall
again become available for Awards under the Plan. The foregoing notwithstanding,
the aggregate number of Common Shares that may be issued under the Plan upon the
exercise of ISOs shall not be increased when Restricted Shares are forfeited.
3.3 Dividend Equivalents. Any dividend equivalents distributed under
the Plan shall not be applied against the number of Restricted Shares, Stock
Units, Options or SARs available for Awards, whether or not such dividend
equivalents are converted into Stock Units.
ARTICLE 4. ELIGIBILITY.
4.1 General Rules. Only Key Employees (including, without limitation,
independent contractors who are not members of the Board) shall be eligible for
designation as Participants by the Committee. Key Employees who are Outside
Directors shall only be eligible for the grant of the NSOs described in Section
4.2 and for making an election described in Article 12.
4.2 Outside Directors. Any other provision of the Plan notwithstanding,
the participation of Outside Directors in the Plan shall be subject to the
following restrictions:
(a) Outside Directors shall receive no Awards except as described
in this Section 4.2 and Article 12.
(b) Each Outside Director who first becomes a member of the Board
on or after February 25, 1994, shall receive a one-time grant of an NSO covering
10,000 Common Shares (subject to adjustment under Article 10). Such NSO shall be
granted on the date when such Outside Director first joins the Board.
(c) Upon the conclusion of each regular annual meeting of the
Company's stockholders in 1995 and subsequent years, each Outside Director who
will continue serving as a member of the Board after such meeting shall receive
an NSO covering 1,000 Common Shares (subject to adjustment under Article 10).
The foregoing notwithstanding,
2
<PAGE> 6
an Outside Director shall not receive a grant under this Subsection (c) if he or
she has received a grant under Subsection (b) above earlier in the same calendar
year.
(d) All NSOs granted to an Outside Director under this Section 4.2
shall become exercisable in full on the first anniversary of the date of grant.
Such NSOs shall also become exercisable in full in the event of (i) the
termination of such Outside Director's service because of death or total and
permanent disability or (ii) a Change in Control with respect to the Company.
(e) The Exercise Price under all NSOs granted to an Outside
Director under this Section 4.2 shall be equal to 100% of the Fair Market Value
of a Common Share on the date of grant, payable in one of the forms described in
Sections 6.1, 6.2, 6.3 and 6.4.
(f) All NSOs granted to an Outside Director under this Section 4.2
shall terminate on the earliest of (i) the 10th anniversary of the date of
grant, (ii) the date three months after the termination of such Outside
Director's service for any reason other than death, total and permanent
disability or Retirement, (iii) the date 12 months after the termination of such
Outside Director's service because of death or (iv) the date 36 months after the
termination of such Outside Director's service because of total and permanent
disability or Retirement.
(g) NSOs granted under Subsection (b) above shall also terminate 30
days after the date of grant unless the Outside Director demonstrates to the
Company's satisfaction that he or she beneficially owned Common Shares with a
Fair Market Value of $100,000 or more on any date within 30 days after the date
of grant.
4.3 Incentive Stock Options. Only Key Employees who are common-law
employees of the Company, a Parent or a Subsidiary shall be eligible for the
grant of ISOs. In addition, a Key Employee who owns more than 10% of the total
combined voting power of all classes of outstanding stock of the Company or any
of its Parents or Subsidiaries shall not be eligible for the grant of an ISO
unless the requirements set forth in section 422(c)(6) of the Code are
satisfied.
ARTICLE 5. OPTIONS.
5.1 Stock Option Agreement. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms of the Plan and
may be subject to any other terms that are not inconsistent with the Plan. The
Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The
provisions of the various Stock Option Agreements entered into under the Plan
need not be identical. Options may be granted in consideration of a cash payment
or in consideration of a reduction in the Optionee's other compensation. A Stock
Option Agreement may provide that new Options will be granted automatically to
the Optionee when he or she exercises the prior Options.
3
<PAGE> 7
5.2 Number of Shares. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. In no event shall the
number of Common Shares subject to the Options granted to any Optionee in a
single calendar year exceed 0.75% of the Common Shares outstanding on December
12, 1996, subject to adjustment in accordance with Article 10 and subject to the
approval of the Company's stockholders at the 1997 regular annual meeting of
stockholders.
5.3 Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price under an ISO shall in no event
be less than 100% of the Fair Market Value of a Common Share on the date of
grant and the Exercise Price under an NSO shall in no event be less than the par
value of the Common Shares subject to such NSO. In the case of an NSO, a Stock
Option Agreement may specify an Exercise Price that varies in accordance with a
predetermined formula while the NSO is outstanding.
5.4 Exercisability and Term. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable. The
Stock Option Agreement shall also specify the term of the Option; provided that
the term of an ISO shall in no event exceed 10 years from the date of grant. A
Stock Option Agreement may provide for accelerated exercisability in the event
of the Optionee's death, disability or retirement or other events and may
provide for expiration prior to the end of its term in the event of the
termination of the Optionee's service. Options may be awarded in combination
with SARs, and such an Award may provide that the Options will not be
exercisable unless the related SARs are forfeited. NSOs may also be awarded in
combination with Restricted Shares or Stock Units, and such an Award may provide
that the NSOs will not be exercisable unless the related Restricted Shares or
Stock Units are forfeited.
5.5 Effect of Change in Control. The Committee may determine, at the
time of granting an Option or thereafter, that such Option shall become fully
exercisable as to all Common Shares subject to such Option in the event that a
Change in Control occurs with respect to the Company. If the Committee finds
that there is a reasonable possibility that, within the succeeding six months, a
Change in Control will occur with respect to the Company, then the Committee at
its sole discretion may determine that any or all outstanding Options shall
become fully exercisable as to all Common Shares subject to such Options.
5.6 Modification or Assumption of Options. Within the limitations of
the Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the Company
or by another issuer) in return for the grant of new options for the same or a
different number of shares and at the same or a different exercise price. The
foregoing notwithstanding, no modification of an Option shall, without the
consent of the Optionee, alter or impair his or her rights or obligations under
such Option.
4
<PAGE> 8
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 General Rule. The entire Exercise Price of Common Shares issued
upon exercise of Options shall be payable in cash at the time when such Common
Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment shall be
made only pursuant to the express provisions of the applicable Stock Option
Agreement. The Stock Option Agreement may specify that payment may be made in
any form(s) described in this Article 6.
(b) In the case of an NSO, the Committee may at any time accept
payment in any form(s) described in this Article 6.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which have already been owned by the Optionee for more than six
months. Such Common Shares shall be valued at their Fair Market Value on the
date when the new Common Shares are purchased under the Plan.
6.3 Exercise/Sale. To the extent that this Section 6.3 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to a securities broker approved by the Company to sell
Common Shares and to deliver all or part of the sales proceeds to the Company in
payment of all or part of the Exercise Price and any withholding taxes.
6.4 Exercise/Pledge. To the extent that this Section 6.4 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to pledge Common Shares to a securities broker or lender
approved by the Company, as security for a loan, and to deliver all or part of
the loan proceeds to the Company in payment of all or part of the Exercise Price
and any withholding taxes.
6.5 Promissory Note. To the extent that this Section 6.5 is applicable,
payment may be made with a full-recourse promissory note; provided that the par
value of the Common Shares shall be paid in cash.
6.6 Other Forms of Payment. To the extent that this Section 6.6 is
applicable, payment may be made in any other form that is consistent with
applicable laws, regulations and rules.
ARTICLE 7. STOCK APPRECIATION RIGHTS.
7.1 SAR Agreement. Each grant of an SAR under the Plan shall be
evidenced by an SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the
5
<PAGE> 9
Plan need not be identical. SARs may be granted in consideration of a reduction
in the Optionee's other compensation.
7.2 Number of Shares. Each SAR Agreement shall specify the number of
Common Shares to which the SAR pertains and shall provide for the adjustment of
such number in accordance with Article 10. In no event shall the number of
Common Shares subject to the SARs granted to any Optionee in a single calendar
year exceed 0.75% of the Common Shares outstanding on December 12, 1996, subject
to adjustment in accordance with Article 10 and subject to the approval of the
Company's stockholders at the 1997 regular annual meeting of stockholders.
7.3 Exercise Price. Each SAR Agreement shall specify the Exercise
Price. An SAR Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the SAR is outstanding.
7.4 Exercisability and Term. Each SAR Agreement shall specify the date
when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. An SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death, disability
or retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the Optionee's service. SARs may
also be awarded in combination with Options, Restricted Shares or Stock Units,
and such an Award may provide that the SARs will not be exercisable unless the
related Options, Restricted Shares or Stock Units are forfeited. An SAR may be
included in an ISO only at the time of grant but may be included in an NSO at
the time of grant or at any subsequent time. An SAR granted under the Plan may
provide that it will be exercisable only in the event of a Change in Control.
7.5 Effect of Change in Control. The Committee may determine, at the
time of granting an SAR or thereafter, that such SAR shall become fully
exercisable as to all Common Shares subject to such SAR in the event that a
Change in Control occurs with respect to the Company. If the Committee finds
that there is a reasonable possibility that, within the succeeding six months, a
Change in Control will occur with respect to the Company, then the Committee at
its sole discretion may determine that any or all outstanding SARs shall become
fully exercisable as to all Common Shares subject to such SARs.
7.6 Exercise of SARs. If, on the date when an SAR expires, the Exercise
Price under such SAR is less than the Fair Market Value on such date but any
portion of such SAR has not been exercised or surrendered, then such SAR shall
automatically be deemed to be exercised as of such date with respect to such
portion. Upon exercise of an SAR, the Optionee (or any person having the right
to exercise the SAR after his or her death) shall receive from the Company (a)
Common Shares, (b) cash or (c) a combination of Common Shares and cash, as the
Committee shall determine. The amount of cash and/or the Fair Market Value of
Common Shares received upon exercise of SARs shall, in the aggregate, be equal
to the amount by which the Fair Market Value (on the date of surrender) of the
Common Shares subject to the SARs exceeds the Exercise Price.
6
<PAGE> 10
7.7 Modification or Assumption of SARs. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding SARs or may accept
the cancellation of outstanding SARs (whether granted by the Company or by
another issuer) in return for the grant of new SARs for the same or a different
number of shares and at the same or a different exercise price. The foregoing
notwithstanding, no modification of an SAR shall, without the consent of the
Optionee, alter or impair his or her rights or obligations under such SAR.
ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS.
8.1 Time, Amount and Form of Awards. Awards under the Plan may be
granted in the form of Restricted Shares, in the form of Stock Units, or in any
combination of both. Restricted Shares or Stock Units may also be awarded in
combination with NSOs or SARs, and such an Award may provide that the Restricted
Shares or Stock Units will be forfeited in the event that the related NSOs or
SARs are exercised.
8.2 Payment for Awards. To the extent that an Award is granted in the
form of newly issued Restricted Shares, the Award recipient, as a condition to
the grant of such Award, shall be required to provide consideration to the
Company in the form of cash or services rendered in an amount equal to the par
value of such Restricted Shares. To the extent that an Award is granted in the
form of Restricted Shares from the Company's treasury or in the form of Stock
Units, no consideration shall be required of the Award recipients.
8.3 Vesting Conditions. Each Award of Restricted Shares or Stock Units
shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. Subject to the approval of
the Company's stockholders at the 1997 regular annual meeting of stockholders,
the Committee may include among such conditions the requirement that the
performance of the Company or a business unit of the Company (as determined by
the Company's independent auditors) for a specified period of one or more years
equal or exceed a target determined in advance by the Committee. Such target
shall be based on one or more of the financial, operational and marketing
criteria set forth in Schedule A. The Committee shall determine such target not
later than the 90th day of such period. In no event shall the number of
Restricted Shares or Stock Units which are subject to performance-based vesting
conditions and which are granted to any Participant in a single calendar year
exceed 0.75% of the Common Shares outstanding on December 12, 1996, subject to
adjustment in accordance with Article 10. A Stock Award Agreement may provide
for accelerated vesting in the event of the Participant's death, disability or
retirement or other events. The Committee may determine, at the time of making
an Award or thereafter, that such Award shall become fully vested in the event
that a Change in Control occurs with respect to the Company.
8.4 Form and Time of Settlement of Stock Units. Settlement of vested
Stock Units may be made in the form of (a) cash, (b) Common Shares or (c) any
combination of both. The actual number of Stock Units eligible for settlement
may be larger or smaller than the number included in the original Award, based
on predetermined performance factors. Methods of converting Stock Units into
cash may include (without limitation) a method based on the average Fair Market
Value of Common Shares over a series of trading days. Vested Stock Units may be
7
<PAGE> 11
settled in a lump sum or in installments. The distribution may occur or commence
when all vesting conditions applicable to the Stock Units have been satisfied or
have lapsed, or it may be deferred to any later date. The amount of a deferred
distribution may be increased by an interest factor or by dividend equivalents.
Until an Award of Stock Units is settled, the number of such Stock Units shall
be subject to adjustment pursuant to Article 10.
8.5 Death of Recipient. Any Stock Units Award that becomes payable
after the recipient's death shall be distributed to the recipient's beneficiary
or beneficiaries. Each recipient of a Stock Units Award under the Plan shall
designate one or more beneficiaries for this purpose by filing the prescribed
form with the Company. A beneficiary designation may be changed by filing the
prescribed form with the Company at any time before the Award recipient's death.
If no beneficiary was designated or if no designated beneficiary survives the
Award recipient, then any Stock Units Award that becomes payable after the
recipient's death shall be distributed to the recipient's estate.
8.6 Creditors' Rights. A holder of Stock Units shall have no rights
other than those of a general creditor of the Company. Stock Units represent an
unfunded and unsecured obligation of the Company, subject to the terms and
conditions of the applicable Stock Award Agreement.
ARTICLE 9. VOTING AND DIVIDEND RIGHTS.
9.1 Restricted Shares. The holders of Restricted Shares awarded under
the Plan shall have the same voting, dividend and other rights as the Company's
other stockholders. A Stock Award Agreement, however, may require that the
holders of Restricted Shares invest any cash dividends received in additional
Restricted Shares. Such additional Restricted Shares shall be subject to the
same conditions and restrictions as the Award with respect to which the
dividends were paid. Such additional Restricted Shares shall not reduce the
number of Common Shares available under Article 3.
9.2 Stock Units. The holders of Stock Units shall have no voting
rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan
may, at the Committee's discretion, carry with it a right to dividend
equivalents. Such right entitles the holder to be credited with an amount equal
to all cash dividends paid on one Common Share while the Stock Unit is
outstanding. Dividend equivalents may be converted into additional Stock Units.
Settlement of dividend equivalents may be made in the form of cash, in the form
of Common Shares, or in a combination of both. Prior to distribution, any
dividend equivalents which are not paid shall be subject to the same conditions
and restrictions as the Stock Units to which they attach.
ARTICLE 10. PROTECTION AGAINST DILUTION.
10.1 Adjustments. In the event of a subdivision of the outstanding
Common Shares, a declaration of a dividend payable in Common Shares, a
declaration of a dividend payable in a form other than Common Shares in an
amount that has a material effect on the price of Common Shares, a combination
or consolidation of the outstanding Common Shares
8
<PAGE> 12
(by reclassification or otherwise) into a lesser number of Common Shares, a
recapitalization, a spin-off or a similar occurrence, the Committee shall make
such adjustments as it, in its sole discretion, deems appropriate in one or more
of (a) the number of Options, SARs, Restricted Shares and Stock Units available
for future Awards under Article 3, (b) the limitations set forth in Sections
5.2, 7.2 and 8.3, (c) the number of NSOs to be granted to Outside Directors
under Section 4.2, (d) the number of Stock Units included in any prior Award
which has not yet been settled, (e) the number of Common Shares covered by each
outstanding Option and SAR or (f) the Exercise Price under each outstanding
Option and SAR. Except as provided in this Article 10, a Participant shall have
no rights by reason of any issue by the Company of stock of any class or
securities convertible into stock of any class, any subdivision or consolidation
of shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class.
10.2 Reorganizations. In the event that the Company is a party to a
merger or other reorganization, outstanding Options, SARs, Restricted Shares and
Stock Units shall be subject to the agreement of merger or reorganization. Such
agreement may provide, without limitation, for the assumption of outstanding
Awards by the surviving corporation or its parent, for their continuation by the
Company (if the Company is a surviving corporation), for accelerated vesting and
accelerated expiration, or for settlement in cash.
ARTICLE 11. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such awards
may be settled in the form of Common Shares issued under this Plan. Such Common
Shares shall be treated for all purposes under the Plan like Common Shares
issued in settlement of Stock Units and shall, when issued, reduce the number of
Common Shares available under Article 3.
ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.
12.1 Effective Date. No provision of this Article 12 shall be effective
unless and until the Board has determined to implement such provision.
12.2 Elections to Receive NSOs or Stock Units. An Outside Director may
elect to receive his or her annual retainer payments and meeting fees from the
Company in the form of cash, NSOs, Stock Units, or a combination thereof. Such
NSOs and Stock Units shall be issued under the Plan. An election under this
Article 12 shall be filed with the Company on the prescribed form. The election
may be amended or canceled by filing a new form with the Company.
12.3 Number and Terms of NSOs. The number of NSOs to be granted to
Outside Directors in lieu of annual retainers and meeting fees that would
otherwise be paid in cash shall be calculated in a manner determined by the
Board. The terms of such NSOs shall also be determined by the Board.
12.4 Number and Terms of Stock Units. The number of Stock Units to be
granted to Outside Directors shall be calculated by dividing the amount of the
annual retainer
9
<PAGE> 13
or the meeting fee that would otherwise be paid in cash by the arithmetic mean
of the Fair Market Values of a Common Share on the 10 consecutive trading days
ending with the date when such retainer or fee is payable. The terms of such
Stock Units shall be determined by the Board.
ARTICLE 13. LIMITATION ON RIGHTS.
13.1 Retention Rights. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an employee,
consultant or director of the Company, a Parent, a Subsidiary or an Affiliate.
The Company and its Parents and Subsidiaries reserve the right to terminate the
service of any employee, consultant or director at any time, with or without
cause, subject to applicable laws, the Company's certificate of incorporation
and by-laws and a written employment agreement (if any).
13.2 Stockholders' Rights. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the issuance of a stock certificate for
such Common Shares. No adjustment shall be made for cash dividends or other
rights for which the record date is prior to the date when such certificate is
issued, except as expressly provided in Articles 8, 9 and 10.
13.3 Regulatory Requirements. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.
ARTICLE 14. LIMITATION ON PAYMENTS.
14.1 Basic Rule. This Article 14 shall not apply to a Participant's
Award if (a) the Committee, at the time of making such Award or at any time
thereafter, specifies in writing that such Award shall not be subject to this
Article 14 or (b) a written employment agreement between the Company and such
Participant expressly provides that his or her Awards shall not be subject to
the limitation described in this Article 14. If this Article 14 applies to an
Award, it shall supersede any other provision of the Plan. In the event that the
independent auditors most recently selected by the Board (the "Auditors")
determine that any payment or transfer by the Company to or for the benefit of a
Participant, whether paid or payable (or transferred or transferable) pursuant
to the terms of this Plan or otherwise (a "Payment"), would be nondeductible by
the Company for federal income tax purposes because of the provisions concerning
"excess parachute payments" in section 280G of the Code, then the aggregate
present value of all Payments shall be reduced (but not below zero) to the
Reduced Amount. For purposes of this Article 14, the "Reduced Amount" shall be
the amount, expressed as a present value, which maximizes the aggregate present
value of the Payments without causing any Payment to be nondeductible by the
Company because of section 280G of the Code.
10
<PAGE> 14
14.2 Reduction of Payments. If the Auditors determine that any Payment
would be nondeductible by the Company because of section 280G of the Code, then
the Company shall promptly give the Participant notice to that effect and a copy
of the detailed calculation thereof and of the Reduced Amount, and the
Participant may then elect, in his or her sole discretion, which and how much of
the Payments shall be eliminated or reduced (as long as after such election the
aggregate present value of the Payments equals the Reduced Amount) and shall
advise the Company in writing of his or her election within 10 days of receipt
of notice. If no such election is made by the Participant within such 10-day
period, then the Company may elect which and how much of the Payments shall be
eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Article 14, present
value shall be determined in accordance with section 280G(d)(4) of the Code. All
determinations made by the Auditors under this Article 14 shall be binding upon
the Company and the Participant and shall be made within 60 days of the date
when a payment becomes payable or transferable. As promptly as practicable
following such determination and the elections hereunder, the Company shall pay
or transfer to or for the benefit of the Participant such amounts as are then
due to him or her under the Plan and shall promptly pay or transfer to or for
the benefit of the Participant in the future such amounts as become due to him
or her under the Plan.
14.3 Overpayments and Underpayments. As a result of uncertainty in the
application of section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in
section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Participant to the Company if and to the extent that such payment
would not reduce the amount which is subject to taxation under section 4999 of
the Code. In the event that the Auditors determine that an Underpayment has
occurred, such Underpayment shall promptly be paid or transferred by the Company
to or for the benefit of the Participant, together with interest at the
applicable federal rate provided in section 7872(f)(2) of the Code.
14.4 Related Corporations. For purposes of this Article 14, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with section 280G(d)(5) of the Code.
ARTICLE 15. WITHHOLDING TAXES.
15.1 General. To the extent required by applicable federal, state,
local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any withholding
tax obligations that arise in connection with the
11
<PAGE> 15
Plan. The Company shall not be required to issue any Common Shares or make any
cash payment under the Plan until such obligations are satisfied.
15.2 Share Withholding. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Common Shares that otherwise
would be issued to him or her or by surrendering all or a portion of any Common
Shares that he or she previously acquired. Such Common Shares shall be valued at
their Fair Market Value on the date when taxes otherwise would be withheld in
cash.
ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS.
An Award shall be transferable only as provided in the applicable Stock
Option Agreement, SAR Agreement or Stock Award Agreement. Such Agreement may
permit a transfer of the Award by beneficiary designation, will or intestate
succession. In the case of an Award other than an ISO, such Agreement may also
permit a transfer of the Award to (a) the Participant's spouse, children or
grandchildren, (b) to a trust established by the Participant for the benefit of
the Participant or the Participant's spouse, children or grandchildren or (c) to
a family partnership whose partners are the Participant, the Participant's
spouse, children or grandchildren, or such trust. The transferee of an Award
shall agree in writing on a form prescribed by the Company to be bound by all
provisions of the applicable Stock Option Agreement, SAR Agreement or Stock
Award Agreement.
ARTICLE 17. FUTURE OF THE PLAN.
17.1 Term of the Plan. The Plan, as set forth herein, shall become
effective on December 12, 1996. The Plan shall remain in effect until it is
terminated under Section 17.2, except that no ISOs shall be granted after
December 11, 2006.
17.2 Amendment or Termination. The Board may, at any time and for any
reason, amend or terminate the Plan. The Company's Vice President--Human
Resources, with the approval of the Senior Vice President--Legal and External
Affairs and Secretary, is authorized to make minor or administrative changes to
the Plan. An amendment of the Plan shall be subject to the approval of the
Company's stockholders only to the extent required by applicable laws,
regulations or rules. No Awards shall be granted under the Plan after the
termination thereof. The termination of the Plan, or any amendment thereof,
shall not affect any Award previously granted under the Plan.
ARTICLE 18. DEFINITIONS.
18.1 "Affiliate" means any entity other than a Subsidiary, if the
Company and/or one or more Subsidiaries own not less than 50% of such entity.
18.2 "Award" means any award of an Option, an SAR, a Restricted Share
or a Stock Unit under the Plan.
12
<PAGE> 16
18.3 "Board" means the Company's Board of Directors, as constituted
from time to time.
18.4 "Change in Control" means the occurrence of any of the following
events:
(a) Both:
(i) Any "person" (as defined below) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing at least 20% of the
total voting power represented by the Company's then outstanding voting
securities; and
(ii) The beneficial ownership by such person of securities
representing such percentage has not been approved by a majority of the
"continuing directors" (as defined below); or
(b) Any "person" (as defined below) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing at least 50% of the total
voting power represented by the Company's then outstanding voting securities; or
(c) A change in the composition of the Board occurs, as a result of
which fewer than two-thirds of the incumbent directors are directors who either:
(i) Had been directors of the Company on the "look-back
date" (as defined below) (the "original directors"); or
(ii) Were elected, or nominated for election, to the Board
with the affirmative votes of at least a majority of the aggregate of the
original directors who were still in office at the time of the election or
nomination and the directors whose election or nomination was previously so
approved (the "continuing directors"); or
(d) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, if such merger or
consolidation would result in the voting securities of the Company outstanding
immediately prior thereto representing (either by remaining outstanding or by
being converted into voting securities of the surviving entity) 50% or less of
the total voting power represented by the voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation; or
(e) The stockholders of the Company approve (i) a plan of complete
liquidation of the Company or (ii) an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets.
For purposes of Subsections (a) and (b) above, the term "person" shall
have the same meaning as when used in sections 13(d) and 14(d) of the Exchange
Act but shall exclude (i) a trustee or other fiduciary holding securities under
an employee benefit plan of the Company
13
<PAGE> 17
or of a Parent or Subsidiary and (ii) a corporation owned directly or indirectly
by the stockholders of the Company in substantially the same proportions as
their ownership of the common stock of the Company.
For purposes of Subsection (c) above, the term "look-back date" shall
mean the later of (i) April 1, 1994, or (ii) the date 24 months prior to the
date of the event that may constitute a Change in Control.
Any other provision of this Section 18.4 notwithstanding, the term
"Change in Control" shall not include either of the following events, if
undertaken at the election of the Company:
(i) A transaction, the sole purpose of which is to change the
state of the Company's incorporation; or
(ii) A transaction, the result of which is to sell all or
substantially all of the assets of the Company to another corporation (the
"surviving corporation"); provided that the surviving corporation is owned
directly or indirectly by the stockholders of the Company immediately following
such transaction in substantially the same proportions as their ownership of the
Company's common stock immediately preceding such transaction; and provided,
further, that the surviving corporation expressly assumes this Plan and all
outstanding Awards.
18.5 "Code" means the Internal Revenue Code of 1986, as amended.
18.6 "Committee" means a committee of the Board, as described in
Article 2.
18.7 "Common Share" means one share of the common stock of the Company.
18.8 "Company" means AirTouch Communications, Inc., a Delaware
corporation.
18.9 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
18.10 "Exercise Price," in the case of an Option, means the amount for
which one Common Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price," in the
case of an SAR, means an amount, as specified in the applicable SAR Agreement,
which is subtracted from the Fair Market Value of one Common Share in
determining the amount payable upon exercise of such SAR.
18.11 "Fair Market Value" means the market price of Common Shares,
determined by the Committee as follows:
14
<PAGE> 18
(a) If the Common Shares were traded over-the-counter on the
date in question and were traded on the Nasdaq system or The Nasdaq National
Market, then the Fair Market Value shall be equal to the last-transaction price
quoted for such date by the Nasdaq system or The Nasdaq National Market;
(b) If the Common Shares were traded on a stock exchange on the
date in question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite transactions report for such date; and
(c) If neither of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the
Committee shall be based on the prices reported in the Western Edition of The
Wall Street Journal. Such determination shall be conclusive and binding on all
persons.
18.12 "IPO" means the initial public offering of the Company's common
stock pursuant to a Registration Statement on Form S-1 that has been declared
effective by the Securities and Exchange Commission.
18.13 "ISO" means an incentive stock option described in section 422(b)
of the Code.
18.14 "Key Employee" means (a) a common-law employee of the Company, a
Parent, a Subsidiary or an Affiliate, (b) an Outside Director and (c) a
consultant or adviser who provides services to the Company, a Parent, a
Subsidiary or an Affiliate as an independent contractor. Service as an Outside
Director or as an independent contractor shall be considered employment for all
purposes of the Plan, except as provided in Sections 4.2 and 4.3.
18.15 "NSO" means an employee stock option not described in sections
422 or 423 of the Code.
18.16 "Option" means an ISO or NSO granted under the Plan and entitling
the holder to purchase one Common Share.
18.17 "Optionee" means an individual or estate who holds an Option or
SAR.
18.18 "Outside Director" shall mean a member of the Board who is not a
common-law employee of the Company, a Parent, a Subsidiary or an Affiliate.
18.19 "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the
15
<PAGE> 19
status of a Parent on a date after the adoption of the Plan shall be considered
a Parent commencing as of such date.
18.20 "Participant" means an individual or estate who holds an Award.
18.21 "Plan" means this AirTouch Communications, Inc. 1993 Long-Term
Stock Incentive Plan, as amended from time to time.
18.22 "Restricted Share" means a Common Share awarded under the Plan.
18.23 "Retirement" means that an Outside Director's service terminates
after he or she has served for three or more years as a member of the Board
and/or as a member of the board of directors of Pacific Telesis Group.
18.24 "SAR" means a stock appreciation right granted under the Plan.
18.25 "SAR Agreement" means the agreement between the Company and an
Optionee which contains the terms, conditions and restrictions pertaining to his
or her SAR.
18.26 "Stock Award Agreement" means the agreement between the Company
and the recipient of a Restricted Share or Stock Unit which contains the terms,
conditions and restrictions pertaining to such Restricted Share or Stock Unit.
18.27 "Stock Option Agreement" means the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her Option.
18.28 "Stock Unit" means a bookkeeping entry representing the
equivalent of one Common Share, as awarded under the Plan.
18.29 "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
16
<PAGE> 20
ARTICLE 19. EXECUTION.
To record the. amendment and restatement of the Plan by the Board, the
Company has caused its duly authorized officers to affix the corporate name and
seal hereto.
AIRTOUCH COMMUNICATIONS, INC.
By /s/ JOHN J. RIDING
----------------------------
John J. Riding
Vice President, Human Resources and
Corporate Services
17
<PAGE> 21
SCHEDULE A
PERFORMANCE CRITERIA
FINANCIAL Operating Cash Flow Net Income
Earnings per Share Free Cash Flow From Operations
Free Cash Flow Return on Assets
Return on Equity Economic Value Added
Revenue Growth
OPERATIONAL Costs per MOU Network Coverage
Network Efficiency New Licenses
MARKETING Net Adds Net to Gross Adds
Acquisition Cost per Gross Add Churn
Average Revenue per Unit Margins
Market Share Customer Satisfaction
18
<PAGE> 1
[PRICE WATERHOUSE LLP LETTERHEAD]
Exhibit 15.1
August 7, 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
August 7,1997 (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
June 30, 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
- ---------------------------
Price Waterhouse LLP
19
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