<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, 1998
[ ] 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, 1998, 573,866,115 shares of common stock were outstanding.
<PAGE> 2
AIRTOUCH COMMUNICATIONS, INC.
INDEX TO REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Statements of Income................................... 3
Consolidated Balance Sheets......................................... 4
Consolidated Statements of Cash Flows............................... 5
Notes to Consolidated Financial Statements.......................... 6
Selected Proportionate Financial Data .............................. 11
Selected Proportionate Operating Data .............................. 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............................... 15
REPORT OF INDEPENDENT ACCOUNTANTS .................................. 26
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .................................................. 27
ITEM 2. CHANGES IN SECURITIES .............................................. 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .................................... 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................ 27
ITEM 5. OTHER INFORMATION .................................................. 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................... 27
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
------------------------- -------------------------
<S> <C> <C> <C> <C>
(Dollars in millions, except per share information) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 1,348 $ 901 $ 2,306 $ 1,737
- ------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of revenues 269 211 470 388
Selling and customer operations expenses 379 231 640 439
General, administrative, and other expenses 161 127 279 234
Depreciation and amortization expenses 253 133 397 269
- ------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,062 702 1,786 1,330
- ------------------------------------------------------------------------------------------------------------------------------
Operating income 286 199 520 407
Equity in net income (loss) of unconsolidated wireless systems:
U. S. (13) 6 (17) 4
International 98 49 179 59
Minority interests in net (income) loss of consolidated
wireless systems (45) (32) (87) (71)
Interest:
Expense (42) (22) (61) (48)
Income 9 4 15 9
Miscellaneous income (expense) 3 (7) (7) (4)
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and preferred dividends 296 197 542 356
Income taxes 116 78 195 160
- ------------------------------------------------------------------------------------------------------------------------------
Income before preferred dividends 180 119 347 196
Preferred dividends 33 13 47 26
- ------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 147 $ 106 $ 300 $ 170
==============================================================================================================================
Net income applicable to common stockholders - per share
Basic $ 0.26 $ 0.21 $ 0.56 $ 0.34
Diluted $ 0.25 $ 0.21 $ 0.55 $ 0.34
==============================================================================================================================
Weighted average shares outstanding (in thousands) 568,856 503,601 539,140 503,206
==============================================================================================================================
</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) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25 $ 1
Accounts receivable (net of allowance for uncollectibles of $68 and $44, respectively) 655 472
Inventories 102 106
Other receivables 91 44
Due from related parties 22 48
Other current assets 144 51
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 1,039 722
Property, plant, and equipment, net 3,703 2,539
Investments in unconsolidated wireless systems 3,303 2,068
Intangible assets, net 8,921 3,297
Deferred charges and other noncurrent assets 262 344
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 17,228 $ 8,970
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 321 $ 244
Short-term borrowings 19 --
Current portion of long-term debt 49 57
Other current liabilities 801 675
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,190 976
Long-term debt 2,958 1,362
Deferred income taxes 1,973 711
Deferred credits 139 86
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 6,260 3,135
- ----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interests in consolidated wireless systems 372 306
Redeemable preferred stock ($.01 par value; 1.7 million shares authorized,
1.65 million shares issued and outstanding; liquidation value of $1.65 billion) 1,573 --
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock and additional paid-in capital ($.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,
574.5 million shares issued and 573.5 million shares outstanding [net of 0.9 million treasury
shares at cost of $29] at June 30, 1998, 506.1 million shares issued and 505.5 million shares
outstanding [net of 0.5 million treasury shares at cost of $11] at December 31, 1997) 7,302 4,079
Retained earnings 715 415
Accumulated other comprehensive income 1 1
Deferred compensation (36) (7)
- ----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,023 5,529
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 17,228 $ 8,970
==================================================================================================================================
</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) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Income before preferred dividends $ 347 $ 196
Adjustments to reconcile income before preferred dividends
for items currently not affecting operating cash flows:
Depreciation, amortization, and other non cash items 387 274
Equity in net (income) loss of unconsolidated wireless systems (162) (63)
Distributions received from equity investees 22 189
Minority interests in net income (loss) of consolidated wireless systems 87 71
Deferred income tax (benefit) expense 23 (10)
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable, net (19) (43)
Other current assets and receivables 18 (17)
Deferred charges and other noncurrent assets (12) 12
Accounts payable and other current liabilities (26) (27)
Deferred credits and other liabilities 18 (13)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities 683 569
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investments in wireless systems (493) (202)
Additions to property, plant, and equipment (456) (306)
Proceeds from sale of property, plant, and equipment 8 9
Maturity of available-for-sale securities -- 8
Other investing activities 2 --
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities (939) (491)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuing long-term debt and commercial paper 2,378 312
Retirement of long-term debt and commercial paper (2,126) (373)
Distributions to minority interests of consolidated wireless systems (50) (36)
Contributions from minority interests of consolidated wireless systems 2 6
Proceeds from common shares issued 87 24
Increase (decrease) in short-term borrowings 19 --
Payment of preferred stock dividends (27) (27)
Other financing activities (4) (3)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities 279 (97)
- ---------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1 (5)
- ---------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 24 (24)
Beginning cash and cash equivalents 1 28
- ---------------------------------------------------------------------------------------------------------------
Ending cash and cash equivalents $ 25 $ 4
===============================================================================================================
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
5
<PAGE> 6
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
A. BASIS OF PRESENTATION
The unaudited Consolidated Financial Statements of AirTouch Communications, Inc.
and Subsidiaries (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 1997 Annual Report on Form 10-K.
With respect to the unaudited consolidated financial information of the Company
as of June 30, 1998 and for the three- and six-month periods ended June 30,
1998, and 1997 included herein, PricewaterhouseCoopers 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, 1998,
appearing herein, states that they did not audit and they do not express an
opinion on the unaudited consolidated financial information.
PricewaterhouseCoopers 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. PricewaterhouseCoopers 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
PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
B. CHANGES FROM DECEMBER 31, 1997
ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," consistent with
the required adoption period. For the Company, comprehensive income includes
income before preferred dividends, unrealized gain (loss) on available-for-sale
securities, cumulative translation adjustments, and minimum pension liability
adjustments. The Company's total comprehensive income was $187 million and $117
million for the three months ended June 30, 1998, and 1997, and $347 million and
$169 million for the six months ended June 30, 1998, and 1997, respectively. The
implementation of SFAS No. 130 did not have an impact on the Company's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires the recognition of all derivatives as
either assets or liabilities and the measurement of those instruments at fair
value. Consistent with the required adoption period, the Company intends to
adopt SFAS No. 133 effective with the issuance of its March 31, 2000, quarterly
financial statements. Based on the Company's current derivative instruments, the
implementation of SFAS No. 133 is not expected to have a material impact on the
Company's financial position or results of operations.
DEBT ISSUANCE
In April 1998, the Company issued $500 million of 6.65% notes due May 1, 2008.
In May 1998, the Company issued an additional $200 million of 6.35% notes due
June 1, 2005. The Company used the proceeds from the sale of the notes to retire
commercial paper issued in connection with the MediaOne Group merger.
MEDIAONE GROUP MERGER
On April 6, 1998, the Company completed the transaction to acquire the U.S.
cellular business and the 25% PrimeCo Personal Communications, L.P. ("PrimeCo")
interest (the "Acquired Businesses") of MediaOne Group, Inc. (formerly U S WEST
Media Group). The acquisition was structured as a tax-free merger in which the
subsidiaries of MediaOne Group, Inc. ("MediaOne Group") owning the Acquired
Businesses merged into the Company, which is the surviving corporation (the
"Merger"). In the Merger, the Company issued approximately 59.4 million shares
of common stock having a fair market value of about $2.9 billion and
approximately $1.6 billion of dividend-bearing preferred stock with a 5.143%
coupon. The Company also assumed approximately $1.4 billion of debt associated
with the Acquired Businesses. Additionally, the Company has granted MediaOne
Group registration rights with respect to
6
<PAGE> 7
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
the common stock and preferred stock issued in the Merger.
The Merger was accounted for under the purchase method of accounting.
Accordingly, the results of operations of the Acquired Businesses since April 6,
1998, have been included in the Company's results. The aggregate purchase price
has been preliminarily allocated to the assets acquired and liabilities assumed
based on their estimated fair value. The excess of the aggregate purchase price
over the estimated fair value of the net assets acquired including the
identifiable intangible assets of approximately $3 billion was recorded as
goodwill. A deferred income tax liability of approximately $1.2 billion was
recorded in purchase accounting. The identifiable intangible assets primarily
include Federal Communications Commission ("FCC") licenses of approximately $2.6
billion and customer lists of approximately $0.4 billion. These identifiable
intangible assets are amortized on a straight-line basis over their estimated
useful lives. Goodwill is amortized over 40 years. Changes to the allocation of
the aggregate purchase price may occur upon completion of the appraisal of the
net assets acquired. However, the Company does not anticipate that changes in
the allocations will have a material effect on its financial position or its
results of operations.
The following unaudited pro forma summary presents the Company's consolidated
results of operations as if the Merger occurred at the beginning of the
respective periods, after giving effect to certain adjustments including
amortization of goodwill and identifiable intangible assets, additional equity
in the losses of PrimeCo, increased interest expense for debt assumed in the
Merger, deduction for preferred stock dividends, and related income tax effects.
The pro forma results are not necessarily indicative of those that would have
actually occurred had the Merger taken place at the beginning of the periods
presented.
<TABLE>
<CAPTION>
===========================================================================================
(Unaudited)
Six Months Ended
June 30
-------------------------
(Dollars in millions) 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues $ 2,667 $ 2,432
Net income applicable to common stockholders $ 262 $ 95
Net income applicable to common stockholders -per share:
Basic $ 0.46 $ 0.17
Diluted $ 0.45 $ 0.17
===========================================================================================
</TABLE>
REDEEMABLE PREFERRED STOCK
The Company has authorized 850,000 shares of 5.143% Class D Cumulative Preferred
Stock, Series 1998 ("Class D Preferred Stock") and 850,000 shares of 5.143%
Class E Cumulative Preferred Stock, Series 1998 ("Class E Preferred Stock")
(together "Preferred Stock"). In connection with the Merger in April, 1998, the
Company issued 825,000 shares of the Class D Preferred Stock and 825,000 shares
of the Class E Preferred Stock. These shares do not have conversion rights into
any other class of the Company's shares.
The Preferred Stock accrues dividends at a rate of $51.43 per share per year.
The cumulative dividends are payable quarterly. Dividend payments on the
Preferred Stock rank on a parity with respect to the two series and with the
Company's 6.00% Class B Mandatorily Convertible Preferred Stock, Series 1996
("Class B Preferred Stock") and its 4.25% Class C Convertible Preferred Stock,
Series 1998 ("Class C Preferred Stock"). The holders of Preferred Stock have the
right to elect, together with any other series of preferred stock having similar
rights, two additional Directors to the Board if the dividends payable are in
arrears and unpaid in an amount equal to or exceeding the aggregate amount of
dividends payable thereon for six quarterly dividend periods. This right to
elect two Directors continues until all dividends in arrears on the Preferred
Stock have been paid in full.
The aggregate redemption value of the Preferred Stock is $1.65 billion. The
maturity date of the Class
7
<PAGE> 8
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
D Preferred Stock is April 6, 2020, and the Company may redeem in whole or in
part, the Class D Preferred Stock after April 6, 2018. The maturity date of the
Class E Preferred Stock is April 6, 2018, with no early redemption by the
Company. The redemption price for the Preferred Stock is $1,000 per share plus
accrued unpaid dividends. In the event of the liquidation, dissolution, or
winding up of the business of the Company, holders of the Preferred Stock are
entitled to receive $1,000 per share plus all accrued unpaid dividends to the
date of liquidation, dissolution or winding up of affairs.
The foregoing description of the Preferred Stock is qualified in its entirety by
the Certificates of Designation, Preferences and Rights of the Preferred Stock,
filed as Exhibits 3.1 and 3.2 of the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1998, incorporated herein by reference.
The Preferred Stock was reported on the Balance Sheet at the fair value on April
6, 1998, the closing date of the Merger. The difference between the fair value
at that date and the redemption value is approximately $77 million. This
difference will be amortized and reported as incremental preferred dividend,
using the interest method, over the maturity periods of each of Class D and
Class E Preferred Stock.
C. EARNINGS PER SHARE
Basic earnings per share is calculated based on net income available to common
stockholders divided by the weighted average common shares outstanding. Diluted
earnings per share is calculated based on net income available to common
stockholders divided by the sum of the weighted average common shares
outstanding and any common stock equivalents. Common stock equivalents ("CSEs")
related to stock options, determined using the treasury stock method, had a
dilutive impact on earnings per share for the three and six months ended June
30, 1998 and 1997. CSEs related to convertible Class B and Class C preferred
stock and convertible debt, determined using the "if converted" method, had an
anti-dilutive impact on earnings per share for the three and six months ended
June 30, 1998 and 1997 and therefore were not included in the calculation of
diluted earnings per share.
<TABLE>
<CAPTION>
====================================================================================================================================
(Unaudited) (Unaudited)
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
(Dollars in millions, except per share information; -------------------------------------- -------------------------------------
shares in thousands) Income Shares Per Share Income Shares Per Share
- -------------------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Net income applicable to common stockholders $ 147 568,856 $ 0.26 $ 106 503,601 $ 0.21
========= =========
Effect of Dilutive Securities
Stock Options 9,428 1,672
----------------------- -----------------------
Diluted Earnings Per Share
Net income applicable to common stockholders $ 147 578,284 $ 0.25 $ 106 505,273 $ 0.21
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
(Unaudited) (Unaudited)
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
(Dollars in millions, except per share information; -------------------------------------- -------------------------------------
shares in thousands) Income Shares Per Share Income Shares Per Share
- -------------------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Net income applicable to common stockholders $ 300 539,140 $ 0.56 $ 170 503,206 $ 0.34
========= =========
Effect of Dilutive Securities
Stock Options 8,247 1,599
----------------------- -----------------------
Diluted Earnings Per Share
Net income applicable to common stockholders $ 300 547,387 $ 0.55 $ 170 504,805 $ 0.34
====================================================================================================================================
</TABLE>
8
<PAGE> 9
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
D. INVESTMENTS IN UNCONSOLIDATED WIRELESS SYSTEMS
The Company's investments in unconsolidated wireless systems consist of the
following:
<TABLE>
<CAPTION>
=========================================================
June 30 December 31
(Dollars in millions) 1998 1997
- ---------------------------------------------------------
<S> <C> <C>
Investments at equity $3,187 $1,958
Investments at cost 116 110
- ---------------------------------------------------------
$3,303 $2,068
=========================================================
</TABLE>
The Company's equity in net income of significant equity investees (Mannesmann
Mobilfunk GmbH and CMT Partners) was $101 million and $86 million for the three
months ended June 30, 1998 and 1997, and $209 million and $161 million for the
six months ended June 30, 1998 and 1997, 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
---------------------- ----------------------
(Dollars in millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mannesmann Mobilfunk GmbH
Operating revenues $ 958 $ 750 $ 1,836 $ 1,490
Operating income $ 400 $ 284 $ 765 $ 536
Net income $ 173 $ 121 $ 330 $ 229
CMT Partners
Operating revenues $ 139 $ 150 $ 273 $ 289
Operating income $ 64 $ 61 $ 118 $ 114
Net income $ 73 $ 72 $ 131 $ 129
===================================================================================
</TABLE>
E. CONTINGENCIES
The Company has been a defendant in various antitrust lawsuits filed in both
state and federal courts. In 1993, a class action complaint was filed in Orange
County Superior Court alleging price fixing in the Los Angeles cellular market.
A parallel class action filed in Orange County Superior Court in 1994 was stayed
pending the resolution of the 1993 case. In 1997, a settlement of the 1993 case
was approved by the Court. The case is now on appeal. In 1994, two class action
complaints also alleging price fixing were filed against the Company, one in San
Diego County Superior Court and one in the U.S. District Court. The state case
was dismissed and a settlement of the federal case has been reached but has not
yet been approved by the Court. Also in 1994, a class action complaint was filed
against the Company in San Francisco County Superior Court alleging price
fixing. In 1996, an almost identical class action complaint was filed against
the Company in Alameda County Superior Court. The two cases were assigned to a
single judge for coordination. In 1998, a settlement of these cases was approved
by the Court. In the aggregate these settlements will not 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 Company's financial position or results of operations.
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, 1998, the
Company's share under such arrangements was $223 million. The Company believes
it is remote that it will be required to pay under these various arrangements.
9
<PAGE> 10
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
F. SUBSEQUENT EVENTS
In July 1998, the Company issued Deutsche Mark ("DEM") 400 million of 5.5% notes
due July 24, 2008 in an offering in Europe and received net proceeds of
approximately 397 million DEM ($223 million USD). The Company has utilized a
portion of the net proceeds from the notes to retire commercial paper
outstanding and intends to use the remainder for general corporate purposes.
On August 5, 1998, MediaOne Group issued approximately $1.5 billion of notes
that are mandatorily exchangeable into shares of the Company's common stock at
maturity. The Company's common stock underlying the exchangeable notes was
issued to MediaOne Group in the Merger and represents approximately one-half of
the common stock owned by MediaOne Group. The Company's common stock underlying
the exchangeable notes was registered under the Company's Registration Statement
on Form S-3 (Reg. No. 333-56645). The Company will not receive any proceeds from
this offering and the number of shares of the Company's common stock outstanding
did not change as a result of this transaction.
10
<PAGE> 11
AirTouch Communications, Inc. and Subsidiaries
SELECTED PROPORTIONATE FINANCIAL DATA (UNAUDITED) (1)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------- -----------------------
(Dollars in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL COMPANY
Service and other revenues $ 1,798 $ 1,198 $ 3,153 $ 2,311
Operating expenses before depreciation and amortization expenses (2) 1,090 772 1,898 1,472
Depreciation and amortization expenses 335 190 551 378
- -------------------------------------------------------------------------------------------------------------------------------
Operating income 373 236 704 461
Interest and other income (expenses) (33) (23) (67) (47)
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and preferred dividends 340 213 637 414
Income taxes 160 94 290 218
- -------------------------------------------------------------------------------------------------------------------------------
Income before preferred dividends 180 119 347 196
Preferred dividends 33 13 47 26
- -------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 147 $ 106 $ 300 $ 170
===============================================================================================================================
Operating cash flow (3) $ 708 $ 426 $ 1,255 $ 839
Operating cash flow margin (4) 39.4 % 35.6 % 39.8 % 36.3 %
===============================================================================================================================
U.S. CELLULAR OPERATIONS
Service and other revenues $ 945 $ 604 $ 1,566 $ 1,166
Cost of revenues 98 61 161 118
Selling and customer operations expenses (2) 331 209 556 406
General, administrative, and other expenses 60 38 96 74
Depreciation and amortization expenses 203 96 305 191
- -------------------------------------------------------------------------------------------------------------------------------
Operating income $ 253 $ 200 $ 448 $ 377
===============================================================================================================================
Operating cash flow (3) $ 456 $ 296 $ 753 $ 568
Operating cash flow margin (4) 48.3% 49.0% 48.1% 48.7%
===============================================================================================================================
INTERNATIONAL OPERATIONS
Service and other revenues $ 713 $ 507 $ 1,339 $ 977
Operating expenses before depreciation and amortization expenses (2) 436 357 806 678
Depreciation and amortization expenses 86 67 167 131
- -------------------------------------------------------------------------------------------------------------------------------
Operating income $ 191 $ 83 $ 366 $ 168
===============================================================================================================================
Operating cash flow (3) $ 277 $ 150 $ 533 $ 299
Operating cash flow margin (4) 38.8% 29.6% 39.8% 30.6%
===============================================================================================================================
U.S. PAGING OPERATIONS (5)
Service and other revenues (6) $ 92 $ 81 $ 181 $ 160
Operating expenses before depreciation and amortization expenses 62 53 121 107
Depreciation and amortization expenses 19 19 38 37
- -------------------------------------------------------------------------------------------------------------------------------
Operating income $ 11 $ 9 $ 22 $ 16
===============================================================================================================================
Operating cash flow (3) $ 30 $ 28 $ 60 $ 53
Operating cash flow margin (4) 32.6% 34.6% 33.1% 33.1%
===============================================================================================================================
U.S. PCS OPERATIONS (7)
Service and other revenues $ 47 $ 7 $ 66 $ 10
Operating expenses before depreciation and amortization expenses 71 28 109 53
Depreciation and amortization expenses 25 8 36 16
- -------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (49) $ (29) $ (79) $ (59)
===============================================================================================================================
Operating cash flow (3) $ (24) $ (21) $ (43) $ (43)
Operating cash flow margin (4) (51.1)% (300.0)% (65.2)% (430.0)%
===============================================================================================================================
</TABLE>
11
<PAGE> 12
AirTouch Communications, Inc. and Subsidiaries
Footnotes:
(1) This table is not required by generally accepted accounting principles
("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) Includes net losses on handsets sold.
(3) Operating cash flow is defined as operating income plus depreciation and
amortization and is not the same as cash flow from operating activities in
the Company's Consolidated Statements of Cash Flows. Proportionate operating
cash flow represents the Company's ownership interests in the respective
entities' operating cash flows. As such, proportionate operating cash flow
does not represent cash available to the Company.
(4) Operating cash flow margin is calculated by dividing "Operating cash flow"
by "Service and other revenues."
(5) U.S. Paging Operations, which are wholly owned by the Company, include
operations in Canada.
(6) Includes any gain or loss on equipment sales.
(7) PCS data relates to PrimeCo Personal Communications, L.P. ("PrimeCo"), a
U.S. personal communications service ("PCS") business in which the Company
had a 50% interest as of June 30, 1998 and a 25% interest at June 30, 1997.
Because PrimeCo does not own 100% of all its markets, the Company's
effective ownership is slightly less.
12
<PAGE> 13
AirTouch Communications, Inc. and Subsidiaries
SELECTED PROPORTIONATE OPERATING DATA (UNAUDITED)(1)
<TABLE>
<CAPTION>
=======================================================================================================
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in millions and operating --------------------------------------------------
data in thousands, except per unit data) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL COMPANY
Cellular and PCS POPs(2)(3)(4) 233,815 178,071 233,815 178,071
Cellular and PCS subscribers(2)(4) 11,734 6,033 11,734 6,033
Paging units in service(4)(5) 3,317 3,031 3,317 3,031
Total proportionate customers(4) 15,051 9,064 15,051 9,064
Cellular and PCS subscriber net adds in period,
excluding acquisitions(2) 870 546 1,524 887
Capital expenditures and capital calls,
excluding acquisitions(6) $ 323 $ 267 $ 588 $ 431
Proportionate capital expenditures(7) $ 378 $ 315 $ 692 $ 588
- -------------------------------------------------------------------------------------------------------
U.S. CELLULAR OPERATIONS
Cellular POPs(3)(4) 65,962 43,364 65,962 43,364
Cellular subscribers(4) 7,290 3,745 7,290 3,745
Cellular subscriber net adds in period,
excluding acquisitions 256 195 427 342
Monthly average revenue per unit $ 44.89 $ 55.33 $ 45.59 $ 54.66
Monthly cash cost per unit $ 23.23 $ 28.22 $ 23.67 $ 28.03
Proportionate capital expenditures(7) $ 157 $ 135 $ 277 $ 201
- -------------------------------------------------------------------------------------------------------
INTERNATIONAL OPERATIONS
Cellular POPs(3)(4) 138,658 120,478 138,658 120,478
Cellular subscribers(4) 4,162 2,241 4,162 2,241
Cellular subscriber net adds in period,
excluding acquisitions 573 331 1,027 507
Monthly average revenue per unit $ 61.42 $ 81.69 $ 61.72 $ 83.69
Monthly cash cost per unit $ 37.56 $ 57.52 $ 37.15 $ 58.08
Proportionate capital expenditures(7) $ 148 $ 158 $ 303 $ 316
- -------------------------------------------------------------------------------------------------------
U.S. PAGING OPERATIONS(8)
Total paging units in service(4) 3,228 2,992 3,228 2,992
Paging units in service net adds in period,
excluding acquisitions 88 69 127 142
Capital expenditures(6) $ 20 $ 12 $ 38 $ 30
- -------------------------------------------------------------------------------------------------------
U.S. PCS OPERATIONS(2)
PCS POPs(2)(3)(4) 29,195 14,229 29,195 14,229
PCS subscribers(2)(4) 282 47 282 47
PCS subscriber net adds in period,
excluding acquisitions(2) 41 20 70 38
Monthly average revenue per unit $ 59.73 $ 59.37 $ 59.77 $ 60.25
Monthly cash cost per unit $ 90.23 $ 237.47 $ 98.71 $ 319.34
=======================================================================================================
</TABLE>
13
<PAGE> 14
AirTouch Communications, Inc. and Subsidiaries
Footnotes:
(1) Reflects operating data of systems in which the Company owns an interest,
multiplied by the Company's ownership interest, exclusive of cost-based
investments and certain equity-based investments that are not material to
the information presented.
(2) PCS data relates to PrimeCo Personal Communications, L.P. ("PrimeCo"), a
U.S. personal communications service ("PCS") business in which the Company
had a 50% interest as of June 30, 1998 and a 25% interest at June 30, 1997.
Because PrimeCo does not own 100% of all its markets, the Company's
effective ownership is slightly less.
(3) 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.
(4) As of the period ended.
(5) Includes paging units in service in the U.S. and Internationally.
(6) Reflects GAAP-basis operating data, in millions, for the three months and
six months ended June 30.
(7) Proportionate capital expenditures are expenditures for property, plant, and
equipment of each system in which the Company owns an interest multiplied by
the Company's ownership interest.
(8) U.S. Paging Operations, which are wholly owned by the Company, include
operations in Canada.
14
<PAGE> 15
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis for AirTouch Communications, Inc.,
together with its subsidiaries and partnerships (collectively, the "Company" or
"AirTouch"), focuses on material changes in financial condition from December
31, 1997 and in results of operations with respect to the three-month and
six-month periods ended June 30, 1998, and the comparable periods of 1997. This
discussion and analysis should be read in conjunction with management's
discussion and analysis included in the Company's 1997 Annual Report on Form
10-K and with the Company's Consolidated Financial Statements and accompanying
Notes included herein.
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 forward-looking statements are often identified by the words
"estimate," "project," "intend," "plan," "expect," "believe," or similar
expressions. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially. Such factors include: a change in
economic conditions in the 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 reduced pricing and/or
new product offerings or resulting in higher customer selling costs; declining
average revenue per customer due to an increasing proportion of consumer
customers and declining rates; greater-than-expected growth in customers and
usage driving increased investment in network capacity; the level of fraudulent
activity; the impact of new business opportunities requiring significant
up-front investments; the impact on capital spending from the deployment of new
technologies; the possibility that technologies will not perform according to
expectations or that vendor performance will not meet requirements; and higher
than anticipated costs associated with correcting the year 2000 issue. These and
other factors related to the business are described in the Company's Securities
and Exchange Commission ("SEC") filings, included in its Form 10-K under
"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 results 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.
MEDIAONE GROUP MERGER
On April 6, 1998, the Company completed the transaction to acquire the U.S.
cellular business and the 25% PrimeCo Personal Communications, L.P. ("PrimeCo")
interest (the "Acquired Businesses") of MediaOne Group, Inc. (formerly U S WEST
Media Group). The acquisition was structured as a tax-free merger in which the
subsidiaries of MediaOne Group, Inc. ("MediaOne Group") owning the Acquired
Businesses merged into the Company, which is the surviving corporation (the
"Merger"). In the Merger, the Company issued approximately 59.4 million shares
of common stock having a fair market value of about $2.9 billion and
approximately $1.6 billion of dividend-bearing preferred stock with a 5.143%
coupon. The Company also assumed approximately $1.4 billion of debt associated
with the Acquired Businesses. Additionally, the Company has granted MediaOne
Group registration rights with respect to the common stock and preferred stock
issued in the Merger.
On August 5, 1998, MediaOne Group issued approximately $1.5 billion of notes
that are mandatorily exchangeable into shares of the Company's common stock at
maturity. The Company's common stock underlying the exchangeable notes was
issued to MediaOne Group in the Merger and represents approximately one-half of
the common stock owned by MediaOne Group. The Company's common stock underlying
the exchangeable notes was registered under the Company's Registration Statement
on Form S-3 (Reg. No. 333-56645). The Company will not receive any proceeds from
this offering and the number of shares of the Company's common stock outstanding
did not change as a result of this transaction.
The Company expects earnings per share dilution from the Merger to reach
approximately $0.40 per share in 1999 and to decline thereafter. This dilution
represents the net amount of amortization of acquisition intangibles, additional
equity in net loss from the increased ownership in PrimeCo, incremental interest
expense, preferred dividends, and common shares issued, as partially offset by
incremental earnings. The Company plans to pursue cost savings to mitigate this
dilution; however, there can be no assurance that such plans will ultimately be
successful in mitigating this dilution.
15
<PAGE> 16
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
For a more detailed discussion of the Merger and for pro forma financial
statements at December 31, 1997 and for the year then ended which present the
combined results of operations, including merger-related adjustments, as if the
Merger was effective on January 1, 1997, please see the Company's Current Report
on Form 8-K/A-1 dated April 6, 1998. Updated pro forma financial statements at
March 31, 1998, and for the three-month period then ended are filed on the
Company's Current Report on Form 8-K dated May 28, 1998.
RESULTS OF OPERATIONS
The following discussions compare the results of operations for the three-month
and six-month periods ended June 30, 1998, to the comparable periods of 1997.
The operating results of the periods discussed below are not necessarily
indicative of operating results in future periods.
Consolidated Operations
For the second quarter of 1998, the Company continued its strong operating
performance. This strong performance was driven by increased demand for wireless
services, continued growth in the Company's U.S. cellular wireless operations,
significant growth in the Company's international operations, and the Company's
ongoing efforts to control costs.
On April 6, 1998, the Company began consolidating the operating revenues and
expenses of the Acquired Businesses. As a result, the three-month and six-month
periods ended June 30, 1998, are not comparable to the same periods of 1997.
Given the significance of the Merger, the Company believes it is more meaningful
to discuss the operating results on a pro forma basis, as if the Merger had been
effective at the beginning of each period presented, and accordingly the
following discussion is based on the pro forma results presented below. The pro
forma results of operations are not necessarily indicative of the future results
of operations of the combined Company or the results of operations of the
combined Company that would have actually occurred.
<TABLE>
<CAPTION>
Pro Forma Consolidated Results of Operations (GAAP Basis)
===================================================================================================================
Three Six
Months Ended Months Ended
June 30 June 30
------------------------------ ------------------------------
(Dollars in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 1,367 $ 1,263 $ 2,667 $ 2,432
- -------------------------------------------------------------------------------------------------------------------
Operating expenses:
Operating expenses before depreciation
and amortization expenses 821 785 1,602 1,475
Depreciation and amortization expenses 257 232 509 464
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,078 1,017 2,111 1,939
- -------------------------------------------------------------------------------------------------------------------
Operating income 289 246 556 493
Equity in net income (loss) of
unconsolidated wireless systems 85 23 126 (2)
Minority interests in net (income) loss
of consolidated wireless systems (45) (43) (97) (92)
Miscellaneous income (expense) (31) (44) (67) (80)
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes
and preferred dividends 298 182 518 319
Income taxes 116 77 186 155
- -------------------------------------------------------------------------------------------------------------------
Income before preferred dividends 182 105 332 164
Preferred dividends 35 34 70 69
- -------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 147 $ 71 $ 262 $ 95
===================================================================================================================
</TABLE>
Consolidated operating revenues during the three- and six-month periods ended
June 30, 1998, increased 8% and 10%, respectively, while consolidated operating
income rose 17% and 13% for the same periods. The increases were primarily the
result of substantial subscriber growth in the Company's U.S. and international
cellular markets.
Increases in equity in net income of unconsolidated wireless systems were
primarily attributable to improved profitability resulting from substantial
growth in the subscriber base by international wireless systems operated by the
Company's equity investees. These favorable results were partially offset by the
operating losses of PrimeCo, the Company's
16
<PAGE> 17
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
personal communications services ("PCS") partnership with Bell Atlantic
Corporation.
Excluding the effect of equity in net income of unconsolidated international
wireless systems and the effect of foreign consolidated entities, the effective
tax rates were approximately 47% and 48% for the three-month periods ended June
30, 1998 and 1997, and 45% and 47% for the six-month periods ended June 30, 1998
and 1997, respectively.
U.S. Cellular Operations
<TABLE>
<CAPTION>
U.S. Cellular Operating Results (GAAP Basis)
======================================================================================================================
Three Six
Months Ended Months Ended
June 30 June 30
------------------------------ ------------------------------
(Dollars in millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service and other revenues $ 956 $ 599 $ 1,573 $ 1,156
Equipment sales 45 30 75 58
- ----------------------------------------------------------------------------------------------------------------------
Operating revenues 1,001 629 1,648 1,214
- ----------------------------------------------------------------------------------------------------------------------
Operating expenses before depreciation
and amortization expenses 552 343 911 659
Depreciation and amortization expenses 204 93 302 187
- ----------------------------------------------------------------------------------------------------------------------
Operating income 245 193 435 368
Equity in net income (loss) of
unconsolidated wireless systems 38 37 68 66
Minority interests in net (income) loss
of consolidated wireless systems (22) (20) (43) (44)
Other income (expense) included in
equity income and minority interests (a) (8) (10) (12) (13)
- ----------------------------------------------------------------------------------------------------------------------
U.S. cellular operating contribution
to net income (b) $ 253 $ 200 $ 448 $ 377
======================================================================================================================
</TABLE>
(a) Represents amounts necessary to reconcile GAAP Basis and Proportionate
Basis results. The amounts represent 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 11).
As previously discussed, the Company believes it is more meaningful to discuss
U.S. cellular operating results on a pro forma basis, which assumes the Merger
had been effective at the beginning of each period presented. These pro forma
operating results and management's discussion and analysis thereon are presented
below.
17
<PAGE> 18
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
<TABLE>
<CAPTION>
Pro Forma U.S. Cellular Operating Results (GAAP Basis)
=====================================================================================================================
Three Six
Months Ended Months Ended
June 30 June 30
------------------------------ ------------------------------
(Dollars in millions ) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service and other revenues $ 975 $ 925 $ 1,908 $ 1,784
Equipment sales 46 66 101 126
- ---------------------------------------------------------------------------------------------------------------------
Operating revenues 1,021 991 2,009 1,910
- ---------------------------------------------------------------------------------------------------------------------
Operating expenses before depreciation
and amortization expenses 562 560 1,124 1,072
Depreciation and amortization expenses 210 192 414 383
- ---------------------------------------------------------------------------------------------------------------------
Operating income 249 239 471 455
Equity in net income (loss) of
unconsolidated wireless systems 38 38 69 67
Minority interests in net (income) loss
of consolidated wireless systems (22) (31) (53) (65)
Other income (expense) included in
equity income and minority interests (a) (8) (10) (12) (15)
- ---------------------------------------------------------------------------------------------------------------------
U.S. cellular operating contribution
to net income (b) $ 257 $ 236 $ 475 $ 442
=====================================================================================================================
</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 21).
The improvement in the Company's U.S. cellular operating revenues for the
three-month and six-month periods ended June 30, 1998, was primarily the result
of a 22% annual growth in subscribers. Continued customer growth in U.S.
cellular consolidated markets was primarily achieved through advertising and by
focusing on customer needs, which included 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 of use at fixed monthly rates, and reduced or fixed rates for off-peak
usage and roaming. The revenue improvements associated with the increase in
subscribers were partially offset by 16% and 15% declines in revenue per minute
of use from the three-month and six-month periods ended June 30, 1997. In
addition, average revenue per customer (excluding revenue from equipment sales)
declined 15% and 16% over the same periods. Declining revenue per minute and
average revenue per customer are primarily attributable to continued penetration
of consumer markets and to rate reductions and discounts offered to new and
existing customers in response to increasing competition. Consumer usage
patterns contributed to declines in average revenue per customer because
consumers typically use their telephones more during lower rate, off-peak
calling periods. The Company anticipates increasing competitive pressures to
result in continuing price declines and reduced customer growth rates in the
near term and possibly in future years, which could reduce revenues of its U.S.
cellular operations compared to current revenue levels. The Company expects the
shift toward consumer markets and such increasing competitive pressures to
continue to result in declines in average revenue per customer and revenue per
minute of use. However, the Company believes that, over time, declining prices
and other factors may lead to increases in per subscriber usage as customers
shift their calling from landline to wireless networks.
Despite the decline in revenue per minute and the average revenue per customer,
U.S. cellular operating margins remained relatively constant from 24% during the
three-month and six-month periods ended June 30, 1997, respectively, to 24% and
23% during the three- and six-month periods ended June 30, 1998, respectively.
Operating cash flow margins (operating margins excluding the effect of
depreciation and amortization expenses) improved from 44% during the three-month
period ended June 30, 1997, to 45% during the three-month period ended June 30,
1998. The comparable six-month periods were fairly constant. The stability in
operating margins resulted from a decline of 16% and 15% in the total cost per
minute of use for the three-month and six-month periods ended June 30, 1998.
Decreases in average revenue per customer were partially offset by decreases in
the average cash costs per customer (including the loss on equipment sales) of
13% and 19% for the same periods. Decreases in cash costs resulted from several
factors, including increased economies of scale,
18
<PAGE> 19
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
reductions in roaming fraud, reductions in interconnection rates, declines in
handset costs, and reductions in handset subsidies offered to customers. The
Company continues to focus on improving customer service and on its customer
incentive programs designed to retain existing customers. Retaining customers is
significantly less expensive than replacing customers who discontinue service.
Depreciation and amortization expenses increased 9% and 8% for the three-month
and six-month periods ended June 30,1998. The increase was primarily due to
depreciation of larger property, plant, and equipment balances associated with
the continued build-out of both digital and analog networks.
The equity in net income (loss) of unconsolidated wireless systems remained
constant and primarily reflects the operating results of CMT Partners, the
Company's partnership which operates cellular properties primarily in the San
Francisco Bay Area.
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 Six
Months Ended Months Ended
June 30 June 30
--------------------------- ---------------------------
(Dollars in millions) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service and other revenues $ 91 $ 81 $ 179 $ 160
Equipment sales 14 9 24 18
- ---------------------------------------------------------------------------------------------------------
Operating revenues 105 90 203 178
- ---------------------------------------------------------------------------------------------------------
Operating expenses before depreciation
and amortization expenses 75 62 143 125
Depreciation and amortization expenses 19 19 38 37
- ---------------------------------------------------------------------------------------------------------
Operating income $ 11 $ 9 $ 22 $ 16
=========================================================================================================
Operating cash flow (a) $ 30 $ 28 $ 60 $ 53
Operating cash flow margin (b) 28.6% 31.1% 29.6% 29.8%
=========================================================================================================
</TABLE>
(a) See Footnote 3 on page 12.
(b) See Footnote 4 on page 12.
Operating revenues increased 17% and 14% for the three-month and six-month
periods ended June 30, 1998, primarily due to an 8% annual growth in paging
units in service and a 2% increase in the average revenue per unit in service
for both periods. Operating cash flow margins (operating margins excluding the
effect of depreciation and amortization) decreased from 31% and 30% for the
three-month and six-month periods ended June 30, 1997 to 29% and 30% for the
three- and six-month periods ended June 30, 1998, due to increases in selling
expenses associated with the Company's strategy of shifting growth to the higher
revenue retail and direct channels away from the reseller channel.
19
<PAGE> 20
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
International Operations
<TABLE>
<CAPTION>
International Operating Results (GAAP Basis)
================================================================================================================
Three Six
Months Ended Months Ended
June 30 June 30
---------------------------- ----------------------------
(Dollars in millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service and other revenues $ 223 $ 164 $ 421 $ 315
Equipment sales 18 18 33 30
- ----------------------------------------------------------------------------------------------------------------
Operating revenues 241 182 454 345
- ----------------------------------------------------------------------------------------------------------------
Operating expenses before depreciation
and amortization expenses 153 137 287 241
Depreciation and amortization expenses 26 20 51 41
- ----------------------------------------------------------------------------------------------------------------
Operating income 62 25 116 63
Equity in net income (loss) of
unconsolidated wireless systems 98 49 179 59
Minority interests in net (income) loss
of consolidated wireless systems (22) (12) (44) (27)
Other income (expense) included in
equity income and minority interests (a) 53 21 115 73
- ----------------------------------------------------------------------------------------------------------------
International operating contribution
to net income (b) $ 191 $ 83 $ 366 $ 168
================================================================================================================
</TABLE>
(a) Represents amounts necessary to reconcile GAAP Basis and Proportionate
Basis results. The amounts represent 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 22).
International operating revenues increased 32% year over year for the
three-month and six-month periods ended June 30, 1998. The increase was
primarily due to a 93% annual growth in Europolitan's and Telecel's combined
subscribers. The increase in operating revenues associated with the increase in
subscribers was partially offset by a 32% and 35% decrease in Europolitan's and
Telecel's combined average revenue per customer for the three-month and
six-month periods ended June 30, 1998, respectively, and unfavorable changes in
foreign exchange rates compared to the U.S. Dollar. If foreign exchange rates
had remained constant, operating revenues would have increased by 39% and 42%
for the three-month and six-month periods ended June 30, 1998. Operating margins
improved 12 and 7 percentage points for the same periods, due to declines in
cash costs per customer of 44% for both periods, which exceeded declines in
average revenue per customer of 32% and 35% for these periods. The improvement
in operating margins was also due to increased economies of scale largely driven
by substantial subscriber growth at both Europolitan and Telecel.
The significant improvement in equity in net income of international
unconsolidated wireless systems was primarily due to strong operating results
achieved by the Company's equity investees in Europe. Improved results in these
wireless systems resulted primarily from strong subscriber growth and improved
profitability from reductions in cash costs per customer at a greater rate than
the decreasing average revenue per customer. Equity income increases were
partially offset by unfavorable movements in foreign currency exchange rates.
Proportionate Results of Operations
Proportionate basis operating results are included as supplementary information
only and are not prepared in accordance with generally accepted accounting
principles ("GAAP"). 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 in which the Company has a direct
controlling interest 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.
20
<PAGE> 21
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
Proportionate presentation is not required by GAAP, nor is it intended to
replace the consolidated operating results prepared and presented in accordance
with GAAP. However, since significant wireless systems are not consolidated,
proportionate information is provided as supplemental data to facilitate a more
detailed understanding and assessment of consolidated operating results prepared
and presented in accordance with GAAP. Due to the significant size of the
Merger, the following tables for Total Company and U.S. Cellular Proportionate
Operating Results are presented on a pro forma basis.
<TABLE>
<CAPTION>
Total Company Pro Forma Operating Results (Proportionate Basis)
=====================================================================================================================
Three Six
Months Ended Months Ended
June 30 June 30
------------------------------- -------------------------------
(Dollars in millions) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service and other revenues $ 1,815 $ 1,501 $ 3,479 $ 2,891
- ---------------------------------------------------------------------------------------------------------------------
Operating expenses before depreciation
and amortization expenses (a) 1,097 964 2,106 1,839
Depreciation and amortization expenses 342 296 673 589
- ---------------------------------------------------------------------------------------------------------------------
Operating income 376 241 700 463
Interest and other income (expenses) (33) (42) (90) (84)
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes and
preferred dividends 343 199 610 379
Income taxes 161 94 278 215
- ---------------------------------------------------------------------------------------------------------------------
Income before preferred dividends 182 105 332 164
Preferred dividends 35 34 70 69
- ---------------------------------------------------------------------------------------------------------------------
Net income applicable to common
stockholders $ 147 $ 71 $ 262 $ 95
=====================================================================================================================
Operating cash flow (b) $ 718 $ 537 $ 1,373 $ 1,052
Operating cash flow margin (c) 39.6% 35.8% 39.5% 36.4%
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
U.S. Cellular Pro Forma Operating Results (Proportionate Basis)
=====================================================================================================================
Three Six
Months Ended Months Ended
June 30 June 30
------------------------------- -------------------------------
(Dollars in millions) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service and other revenues $ 963 $ 900 $ 1,873 $ 1,736
- ---------------------------------------------------------------------------------------------------------------------
Cost of revenues 100 94 190 186
Selling and customer
operations expenses (a) 337 320 676 613
General, administrative, and
other expenses 61 58 119 114
Depreciation and amortization expenses 208 192 413 381
- ---------------------------------------------------------------------------------------------------------------------
Operating income $ 257 $ 236 $ 475 $ 442
=====================================================================================================================
Operating cash flow (b) $ 465 $ 428 $ 888 $ 823
Operating cash flow margin (c) 48.3% 47.6% 47.4% 47.4%
=====================================================================================================================
</TABLE>
21
<PAGE> 22
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
<TABLE>
<CAPTION>
International Operating Results (Proportionate Basis)
=====================================================================================================================
Three Six
Months Ended Months Ended
June 30 June 30
------------------------------- -------------------------------
(Dollars in millions) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service and other revenues (d) $ 713 $ 507 $ 1,339 $ 977
- ---------------------------------------------------------------------------------------------------------------------
Operating expenses before depreciation
and amortization expenses (a) 436 357 806 678
Depreciation and amortization expenses 86 67 167 131
- ---------------------------------------------------------------------------------------------------------------------
Operating income $ 191 $ 83 $ 366 $ 168
=====================================================================================================================
Operating cash flow (b)(d) $ 277 $ 150 $ 533 $ 299
Operating cash flow margin (c) 38.8% 29.6% 39.8% 30.6%
=====================================================================================================================
</TABLE>
(a) See Footnote 2 on page 12.
(b) See Footnote 3 on page 12.
(c) See Footnote 4 on page 12.
(d) If foreign exchange rates had remained constant, service and other
revenues and operating cash flow would have increased 50% and 92%, for
both the three- and six-month periods ended June 30, 1998.
CONTINGENCIES
The Company is party to various legal proceedings, including certain antitrust
litigation. See Note E, "Contingencies," to the Consolidated Financial
Statements.
Early Vesting of Restricted Shares
As previously disclosed in the Notes to the Company's Financial Statements
included in the Company's 1997 Annual Report on Form 10-K, the Company has
granted certain restricted stock awards to those employees not eligible to
receive stock options. These awards provide for early vesting if the Company
meets certain "stretch" targets for its common stock price or its operating cash
flows. Given the volatility of the stock market, it is difficult to estimate
when and if the common stock price target will be met. However, if the common
stock price target is met, the Company would need to accelerate the recognition
of compensation expense, which could be material to the results in the quarter
in which this occurs.
Year 2000 Compliance
Many of the Company's systems are affected by the year 2000 issue, which refers
to the inability of computerized systems to process dates beyond December 31,
1999. The Company has implemented a comprehensive plan to address the year 2000
issue in its mission critical systems. Mission critical systems are those whose
failure poses a risk of disruption to the Company's ability to provide wireless
services, to collect revenues, to meet safety standards, or to comply with legal
requirements. The Company's plan includes (i) the complete inventory of all
mission critical systems employed in the Company's consolidated markets and the
identification of the hardware and software affected by the year 2000 issue;
(ii) modification of the affected systems; and (iii) testing of the modified
systems, including testing of systems on an integrated basis. The Company is
using both internal and external sources to implement its plan. The Company has
generally completed the inventory of its consolidated mission critical systems
and is at various stages of modification and testing of these systems. In
addition, the Company is also monitoring unconsolidated subsidiaries and their
progress in addressing their mission critical systems.
Much of the Company's technology, including technology associated with its
mission critical systems, is purchased from third parties. The Company is
dependent on those third parties to assess the impact of the year 2000 issue on
the technology they have supplied and to take any necessary corrective action.
The Company is monitoring the progress of these third parties and selectively
conducting tests to determine whether they have accurately assessed the problem
and taken corrective action.
Based on its current assessments and its remediation plan, which are based in
part upon certain representations of third parties, the Company expects that it
will not experience a disruption of its operations as a result of the change to
the new millennium. However, there can be no assurance that the third parties
who have supplied technology used in the Company's mission critical systems will
be successful in taking corrective action in a timely manner. The Company is
developing contingency plans with respect to certain key technology used in its
mission critical systems, although there can be no assurance that these
contingency plans will successfully avoid service disruption. In addition, the
Company's systems are interconnected with public switch telecommunications
networks ("PSTNs") and the networks of other service providers who are
responsible for addressing the year 2000 issue in
22
<PAGE> 23
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
their own systems. The ability of the Company's systems to operate is dependent
upon such PSTNs and other networks being year 2000 compliant, as to which there
can be no assurance.
While costs incurred to date to address the year 2000 issue have not been
material, the Company expects to incur incremental consolidated pre-tax expenses
of approximately $75 million through the end of 1999 to implement its plan for
its consolidated mission critical systems. In addition, the Company has
redeployed internal resources to address the problem. The substantial majority
of these expenses will be incurred in the second half of 1998 and the first half
of 1999. Additionally, the Company will incur capitalized costs that represent
ongoing investment in new systems and system upgrades, the timing of which is
being accelerated in order to facilitate year 2000 compliance and which is not
expected to have a material impact on the Company's financial position or
results of operations. This estimate assumes that third party suppliers have
accurately assessed the compliance of their products and that they will
successfully correct the issue in non-compliant products. Because of the
complexity of correcting the year 2000 issue, actual costs may vary from this
estimate.
If the Company is unsuccessful in its efforts to correct or cause to be
corrected its mission critical systems or if third parties with whom the
Company's systems interconnect do not correct their systems, the Company could
experience significant disruption to its operations, including disruption of its
ability to provide certain wireless services and to correctly bill customers
resulting in potential revenue loss and increased costs that could have a
material adverse effect on the Company's financial condition or results of
operations.
Management believes that the original manufacturers of handsets and pagers are
primarily liable for failures of such products. However, in the event of such
product failures, the Company could experience service revenue loss and be
required to incur additional costs to furnish customers with replacement
equipment on a temporary or permanent basis to prevent further service revenue
loss.
Market Risk
Please see the Company's 1997 Annual Report on Form 10-K for a complete
discussion and analysis of the Company's market risks. These risks include
unfavorable movements in interest rates, foreign currency exchange rates, and
equity prices. The changes to the market risks as of June 30, 1998, related to
the additional debt incurred in conjunction with the Merger are described in the
following paragraphs; otherwise, there have been no additional material changes
to the market risks described at December 31, 1997. Additionally, the Company
does not anticipate any near-term changes in the nature of its market risk
exposures or in management's objectives and strategies with respect to managing
such exposures.
Interest and Foreign Exchange Rate Risks
As of June 30, 1998, the Company's financial instruments that are subject to
interest and foreign currency exchange rate risks included long-term debt with
an aggregate fair value of $3.1 billion and forward contracts with an aggregate
positive market value of $69 million. This represents an increase in the total
aggregate value of approximately $1.7 billion from December 31, 1997, and
primarily represents the increase in long-term debt associated with the Merger.
The Company uses a statistical modeling technique known as "value-at-risk"
("VAR") to compute required disclosures of the maximum probable loss, within a
certain confidence level, in the fair value of its financial instruments subject
to interest and foreign currency exchange rate risks. With respect to foreign
exchange rate risk, the VAR for the Company's debt instruments and forward
contracts were $3 million and $70 million, respectively. With respect to
interest rate risk, the VAR for the Company's debt instruments and forward
contracts were $121 million and $33 million, respectively.
VAR amounts are statistical estimates representing the maximum probable loss in
fair value that the Company could incur given a certain confidence level (i.e.,
with 95% certainty, the value of the instruments included in the VAR model is
not likely to decline more than the VAR amounts shown above due to movements in
the relevant market rates). VAR amounts do not represent actual losses which
will be incurred by the Company. In addition, although changes in market rates
may adversely impact the fair value of the Company's debt instruments, market
rate changes will have an immaterial impact on earnings or cash flows since the
majority of the Company's existing debt bears interest at fixed rates. Further,
potential changes in the fair value of forward contracts will be offset by
changes in the fair value of the underlying asset hedged by the forward
contracts.
23
<PAGE> 24
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
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.
Capital Spending, Debt Service, Net Distribution, and Dividend Requirements for
the First Six Months of 1998
The Company spent $456 million during the first six months of 1998 for additions
to property, plant, and equipment primarily to increase its cellular and paging
network system capacity. The Company invested an additional $493 million during
the first six months of 1998 to expand and build-out the cellular and PCS
networks, to purchase interests in certain cellular systems, and to fund other
capital requirements related to its unconsolidated systems. Cash payments for
debt service during the first six months of 1998 amounted to approximately $52
million. The Company also paid $48 million in net distribution to holders of
minority interests of its consolidated wireless systems and $27 million for
preferred dividends during the first six months of 1998.
Funding of Capital Spending, Debt Service, Net Distribution, and Dividend
Requirements for the First Six Months of 1998
Cash flows from operating activities of $683 million, proceeds from the issuance
of commercial paper and short-term and long-term debt, and proceeds from the
exercise of stock options were the primary sources utilized to fund capital
requirements, debt service, preferred stock dividends, and net distributions to
holders of minority interests.
Future Funding Requirements
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. For the
remainder of 1998, U.S. and international requirements for capital expenditures
and contributions to existing wireless systems are expected to be approximately
$735 million.
Consolidated Expenditures
The Company plans to incur significant capital expenditures in its consolidated
U.S. markets for expansion of its analog and Code Division Multiple Access
("CDMA") digital wireless networks to meet current and future capacity
requirements resulting from both subscriber growth and increased network use.
The Company now offers CDMA digital cellular service in all of its
AirTouch-branded U.S. cellular markets. The Company expects its annual capital
expenditures for digital technology to continue to be greater than its annual
capital expenditures for analog technology for the foreseeable future.
The Company plans to maintain and, as required, expand its analog networks and
to offer dual-mode (analog/CDMA digital), dual-band (cellular/PCS frequencies)
handsets in each of its U.S. digital markets to facilitate the greatest possible
roaming capabilities for its customers.
The Company's existing U.S. and international operations were committed to spend
approximately $130 million at June 30, 1998 for the acquisition of property,
plant, and equipment. After these commitments have been satisfied, the Company
plans to make additional capital expenditures of approximately $430 million
during the remainder of 1998 to increase the capacity of its existing wireless
networks and to continue its expansion of CDMA digital technology. The Company
is also committed to spend approximately $145 million at June 30, 1998, for the
purchase of cellular handsets, pagers, and other items.
In addition, the Federal Communications Commission ("FCC") has adopted rules
requiring carriers such as the Company to provide customers in the U.S. with
local number portability, the ability for customers to retain their telephone
numbers if they choose to switch landline or wireless carriers. Providing this
functionality will result in additional capital requirements and operating
expenses in future years. FCC rules require the Company to provide certain local
number portability services by December 31, 1998, and to provide complete local
number portability services by June 30, 1999. The Company and certain wireless
industry groups have petitioned the FCC for a delay in the June 30, 1999
implementation date. The Company has not yet fully assessed the cost of
complying with the FCC's number portability rules; such costs could be material
to the Company's results of operations or financial position in future reporting
periods.
The Company will also be required to upgrade its wireless networks in the U.S.
to provide certain functionality to authorized law enforcement agencies. In this
regard, the FCC has adopted rules requiring wireless carriers to electronically
provide "Emergency 911" authorities with the physical location of wireless
callers requesting emergency assistance. In addition, new U.S. Federal laws
pursuant to the Communications Assistance Law Enforcement Act ("CALEA") will
require the Company to provide law enforcement agencies with certain network
24
<PAGE> 25
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
functionality and other assistance in criminal investigations, including digital
wiretapping capabilities. The FCC rules concerning "Emergency 911" services and
CALEA both require the responsible government agencies to reimburse the Company
for its costs incurred to upgrade its networks and to provide on-going
assistance to law enforcement agencies; however, the Company can provide no
assurance that all such costs will be recoverable.
Unconsolidated Wireless Systems
As of June 30, 1998, commitments for capital contributions to existing
unconsolidated wireless systems were not significant. However, the Company plans
to make additional capital contributions of approximately $175 million during
the remainder of 1998 to certain of its existing unconsolidated wireless
systems, including contributions to PrimeCo to fund its operating losses and the
continuing build-out of its CDMA PCS networks, and contributions to Misrfone,
the Company's Egyptian venture, to begin funding its start-up operations.
The Company continually evaluates opportunities to increase its ownership
interests in its existing international wireless systems and to acquire
interests in new international wireless licenses, either of which could result
in incremental capital commitments.
Other Requirements
In October 1997, the Company's Board of Directors authorized the repurchase of
up to $1 billion of AirTouch common and preferred stock. The Company plans to
continue to buy shares on the open market from time to time, based on market
conditions.
Financing Sources
The Company has a commercial paper program in place which consists 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.
Other financing sources available to the Company include various forms of debt
and equity securities which have been registered with the Securities and
Exchange Commission under Registration Statement on Form S-3 filed in June 11,
1998 (Reg. No. 333-56645). The total amount available under this Registration
Statement is $2.5 billion and, as of June 30, 1998, no debt or equity securities
had been issued. However, on August 5, 1998, MediaOne Group issued notes
exchangeable for a portion of the AirTouch common stock it received in
connection with the Merger. Since the AirTouch common stock was registered under
the Registration Statement, the total amount remaining for future debt and
equity issuances under the Registration Statement is expected to be
approximately $1 billion. However, if certain over-allotment options granted by
MediaOne Group to its underwriters are exercised in full, the remaining amount
would be approximately $760 million.
In addition to these sources, the Company also has access to international
capital markets. In July 1998, the Company issued 5.5% notes in Europe which
were denominated in Deutsche Marks ("DEM") and received net proceeds of
approximately 400 million DEM ($223 million USD). The Company has utilized a
portion of the net proceeds from the notes to retire commercial paper
outstanding and intends to use the remainder for general corporate purposes.
Funding of Future Requirements
The Company anticipates cash flows from operations to be its primary source of
funding for capital requirements of its existing operations, debt service, and
preferred dividends through the end of 1998, including the Company's incremental
debt service and preferred dividend obligations resulting from the Merger.
However, should additional funding be required due to the award of one or more
new international cellular licenses, new investment opportunities, other
unanticipated events, or the repurchase of AirTouch common or preferred stock,
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
Registration Statement; through the issuance of securities in a transaction
exempt from registration under the Securities Act of 1933; or a combination of
one or more of the foregoing. The Company believes, that 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.
25
<PAGE> 26
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, 1998 and the
related Consolidated Statements of Income and of Cash Flows for the three-month
and six-month periods ended June 30, 1998 and 1997. 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, 1998 and 1997 appearing on page 11 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, 1997, 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 March 2,
1998 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, 1997, is fairly stated
in all material respects in relation to the Consolidated Balance Sheet from
which it has been derived.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
August 7, 1998
26
<PAGE> 27
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Footnote E, "Contingencies", in the Notes to Consolidated Financial
Statements
ITEM 2. CHANGES IN SECURITIES
On April 6, 1998, the Company issued 59,446,902 shares of common stock,
825,000 shares of 5.143% Class D Cumulative Preferred Stock, Series 1998
and 825,000 shares of 5.143% Class E Cumulative Preferred Stock, Series
1998 to MediaOne Group, Inc. in the Merger, as described in Management's
Discussion and Analysis of Results of Operations. In addition, on the same
date the Company issued 235,553 shares of common stock to United States
Cellular Investment Company in exchange for a 25% limited partner interest
in Idaho RSA No. 1 Limited Partnership. Both issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 29, 1998, the Company held its Annual Meeting of Stockholders. Three
matters were considered and the results are as follows:
Proposal 1 to elect four directors, constituting Class I of
the Company's Board of Directors, to serve a three-year term:
436,376,185 shares voted for Donald G. Fisher, and 5,355,994
shares withheld; 436,505,666 shares voted for Sam Ginn, and
5,226,513 shares withheld; 436,556,173 shares voted for
Charles R. Schwab, and 5,176,006 shares withheld; 436,488,038
shares voted for Chang-Lin Tien, and 5,244,141 shares
withheld.
Proposal 2 to ratify the appointment of PricewaterhouseCoopers
LLP as the Company's independent accountants for 1998:
439,534,509 shares voted for this proposal, 1,061,235 shares
voted against, and 1,136,435 shares abstained.
Proposal 3 to approve an amendment to the Company's Employee
Stock Purchase Plan: 430,646,929 shares voted for this
proposal, 7,914,282 shares voted against, and 3,170,968 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>
3.1 Certificate of Designation, Rights and Preferences of 5.143%
Class D Cumulative Preferred Stock, Series 1998 (incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form
8-K, Date of Report: April 6, 1998, File No. 1-12342)
3.2 Certificate of Designation, Rights and Preferences of 5.143%
Class E Cumulative Preferred Stock, Series 1998 (incorporated by
reference to Exhibit 3.2 to the Company's Current Report on Form
8-K, Date of Report: April 6, 1998, File No. 1-12342)
10.1 Amended and Restated Investment Agreement dated as of April 6,
1998 between the Company and U S WEST, Inc. (incorporated by
reference to Exhibit 10 to the Company's Current Report on Form
8-K, Date of Report: April 6, 1998, File No. 1-12342)
15.1 Letter of PricewaterhouseCoopers LLP Re: Unaudited Interim
Financial Information
27 Financial Data Schedule
</TABLE>
27
<PAGE> 28
(b) Reports on Form 8-K:
Date of Report: April 6, 1998
Item 2. Acquisition or Disposition of Assets and Item 7. Financial
Statements and Exhibits
Date of Report: April 27, 1998
Item 5. Other Events and Item 7. Financial Statements and Exhibits
Date of Report: April 29, 1998
Item 5. Other Events and Item 7. Financial Statements and Exhibits
Date of Report: April 29, 1998, as filed on May 1, 1998
Item 7. Financial Statements and Exhibits
Date of Report: May 28, 1998
Item 7. Financial Statements and Exhibits
Date of Report: May 29, 1998
Item 7. Financial Statements and Exhibits
28
<PAGE> 29
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, 1998
29
<PAGE> 1
EXHIBIT 15.1
August 7, 1998
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, 1998 (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, 1998 which is incorporated by reference in the Registration Statements
on Form S-8 (Nos. 33-57077, 33-57081, 33-57083, 33-64553, 333-10389, 333-17891,
333-36339, and 333-50541) and the Prospectuses constituting part of the
Registration Statements on Form S-3 (Nos. 33-62787 and 333-56645). We are also
aware of our responsibilities under the Securities Act of 1933.
Yours very truly,
/s/ PRICEWATERHOUSECOOPERS LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 25,000
<SECURITIES> 0
<RECEIVABLES> 723,000
<ALLOWANCES> 68,000
<INVENTORY> 102,000
<CURRENT-ASSETS> 1,039,000
<PP&E> 6,264,000
<DEPRECIATION> 2,561,000
<TOTAL-ASSETS> 17,228,000
<CURRENT-LIABILITIES> 1,190,000
<BONDS> 2,958,000
1,573,000
1,041,000
<COMMON> 7,302,000
<OTHER-SE> 680,000
<TOTAL-LIABILITY-AND-EQUITY> 17,228,000
<SALES> 133,000
<TOTAL-REVENUES> 2,306,000
<CGS> 191,000
<TOTAL-COSTS> 470,000
<OTHER-EXPENSES> 640,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,000
<INCOME-PRETAX> 542,000
<INCOME-TAX> 195,000
<INCOME-CONTINUING> 347,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 300,000
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.55
</TABLE>
