<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report: July 22, 1998
AirTouch Communications, Inc.
Delaware 1-12342 94-3213132
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
One California Street, San Francisco, California 94111
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 658-2000
<PAGE>
Item 5. Other Events.
AirTouch Communications, Inc. ("AirTouch") announced second quarter
earnings on Wednesday, July 22, 1998 as described in the press release attached
as Exhibit 99.1 hereto.
Item 7. Exhibits.
Exhibit 99.1 Press Release dated July 22, 1998.
Exhibit 99.2 Risk Factors to the Prospectus dated July 22, 1998.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AIRTOUCH COMMUNICATIONS, INC.
By: /s/ MOHAN S. GYANI
-------------------------------------------
Mohan S. Gyani
Executive Vice President and
Chief Financial Officer
Date: July 23, 1998
<PAGE>
Exhibits Index
Exhibit 99.1 Press Release dated July 22, 1998.
Exhibit 99.2 Risk Factors to the Prospectus dated July 22, 1998.
<PAGE>
EXHIBIT 99.1
AIRTOUCH NET INCOME SOARS
COMPANY ADDS NEARLY ONE MILLION PROPORTIONATE CUSTOMERS
GLOBAL OPERATIONS IN TOTAL NOW REACH OVER 31 MILLION CUSTOMERS
PRO FORMA OPERATING CASH FLOW MARGINS HIT A RECORD 40 PERCENT
San Francisco - Demonstrating again the success of its global strategy,
AirTouch Communications (NYSE:ATI) today reported that second quarter pro
forma net income applicable to common stockholders rose 107 percent to $147
million ($0.25 per share) compared to pro forma net income of $71 million
($0.13) in the same period last year.
In order to better compare year-over-year growth, results in this discussion
have been presented on a pro forma basis as if the acquisition of MediaOne
Group's U.S. wireless interests had occurred on January 1, 1997.
During the quarter ended June 30, 1998, the company, based on its
proportionate ownership in its many ventures, added 955,000 worldwide
cellular, paging, and PCS customers, 32 percent more than the second quarter
1997. International cellular ventures added a record 573,000 proportionate
customers, contributing 60 percent of the company's new customers. AirTouch
serves 15.1 million proportionate worldwide customers, up 35 percent from the
same period last year.
"Once again we have produced an uninterrupted string of excellent results,
proving that execution counts," said Sam Ginn, AirTouch chairman and chief
executive officer. "We continue to demonstrate the importance of giving
customers the products and services they want at competitive prices, and as a
result, remain the world's largest wireless company based on over 31 million
total venture customers."
SECOND QUARTER TOTAL COMPANY PROPORTIONATE HIGHLIGHTS
(All changes compared to second quarter of 1997)
- - Cellular and PCS ventures added 866,000 customers, a 32-percent increase.
Worldwide the company's cellular and PCS ventures reached 11.7 million
customers, a 44-percent increase.
- - AirTouch paging operations added nearly 90,000 units in service, reaching
3.3 million, a 9-percent increase.
- - Service and other revenues increased 21 percent to $1.8 billion.
- - Operating cash flow (operating income plus depreciation and amortization)
was $718 million, a 34-percent rise.
- - Despite the strong subscriber growth, operating cash flow margins were a
record 40 percent compared to 36 percent.
- - Capital expenditures were flat at $379 million.
- - Acquisition amortization expense net of taxes and primarily related to the
amortization of intangibles associated with the MediaOne Group transaction
was about $68 million, without which EPS would have been $0.37.
PROPORTIONATE U.S. CELLULAR & PCS
By aggressively managing costs and leveraging scale, AirTouch's U.S. cellular
operations generated proportionate operating cash flow margins greater than
48 percent. Monthly cash cost per customer was down a significant 16 percent
over the year earlier quarter, due to the company's ability to lower customer
selling costs and keep churn at low levels. AirTouch met customer demand for
wireless services with innovative pricing plans backed by top-notch networks
and world-class customer care. The company added 253,000 proportionate
customers during the quarter, reaching 7.3 million proportionate U.S.
cellular customers, up 25 percent over the second quarter 1997.
As consumer awareness of the benefits of digital has increased so has demand
for AirTouch's digital offering. During the second quarter the company added
179,000 digital cellular customers, bringing its total CDMA/TDMA customers to
536,000, approximately 7 percent of its U.S. cellular customer base. More
important, around 30 percent of peak minutes of use are now digital.
Page 1
<PAGE>
AirTouch's PCS partnership, PrimeCo, continued on track. In total, PrimeCo
added almost 90,000 customers, reaching a customer base of nearly 600,000.
AirTouch's proportionate share of PrimeCo's total customers is 282,000.
PROPORTIONATE INTERNATIONAL CELLULAR
With lower-priced service plans driving increased penetration, wireless
demand in AirTouch's international ventures exploded. During the quarter,
the company added a record 573,000 proportionate international customers,
crossing the four million customer mark only six years after AirTouch's first
international venture, Mannesmann Mobilfunk, launched service in Germany.
The popularity of prepaid offerings, a pay-as-you-go cellular service now
available in all AirTouch European markets, accounted, on a proportionate
basis, for 47 percent of the quarter's total international gains and 25
percent of international customers.
Despite the customer growth, strong profitability continued due to increasing
scale, a focus on cost control, and proactive efforts that drove churn below
historically low levels. Proportionate operating cash flow for the quarter
rose to $277 million, 85 percent more than the second quarter 1997.
Proportionate operating cash flow margins were an impressive 39 percent,
compared to 30 percent in the same period last year.
AirTouch's share of distributions from its international ventures in Germany,
Sweden, and Portugal cumulative-to-date totaled $308 million.
U.S. PAGING
AirTouch's U.S. paging operations turned in strong second quarter results,
delivering both growth and profitability. A strategic focus on working with
select retailers paid off as the company added 88,000 units in service, up 28
percent over the year earlier quarter. Operating cash flow rose 7 percent to
$30 million compared to second quarter 1997. Increased economies of scale
resulting from sales teaming efforts between AirTouch's cellular and paging
operations contributed to the quarter's success. AirTouch Paging returned to
AirTouch Communications about $30 million in cash through the first half of
1998 and continues to be the only large paging company that is profitable and
free cash flow positive.
1998 OUTLOOK
"AirTouch has generated very strong performance in the first half of 1998,"
said Ginn. "Buoyed by what we see as a continuing strong demand for wireless
products and services and the ability of our international ventures to
continue to aggressively add customers, we expect to exceed our 1998 goal and
add more than 3 million proportionate global cellular and PCS customers.
Despite the strong growth, we still expect our total company proportionate
operating cash flow to grow about 25 percent over the prior year's pro forma
$2.1 billion. 1998 proportionate capital expenditures should be up about 5
percent over 1997 pro forma to $1.9 billion capital expenditures."
AirTouch is attaching a high priority to preparing the company's mission
critical systems for processing dates beyond December 31, 1999. The company
does not expect the Year 2000 issue to affect its 1998 guidance and is
currently estimating that incremental consolidated pre-tax expenses
associated with this issue to be incurred between now and the end of 1999
will be about $75 million.
AirTouch Communications, based in San Francisco, is the largest wireless
company in the world. AirTouch owns interests in cellular, paging, and
personal communications services in the United States, Belgium, Egypt,
Germany, India, Italy, Japan, Poland, Portugal, Romania, South Korea, Spain
and Sweden, as well as an interest in the Globalstar satellite system. Based
on its ownership share of its global ventures, the company serves 15 million
proportionate customers (over 31 million total venture customers) including
those acquired through the April 6 MediaOne Group transaction.
NOTE REGARDING PRO FORMA DATA:
The pro forma proportionate data included in the earnings release reflect the
MediaOne Group merger as if it had been effective on January 1, 1997, and
after giving effect to the purchase method of accounting and other
merger-related adjustments. These pro forma proportionate data 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. Given the significance of the merger, the Company
believes that it is more meaningful to show comparative results on such pro
forma basis.
Page 2
<PAGE>
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
Except for the historical information presented, the matters discussed in
this release are forward-looking statements and 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 problem. These
and other factors related to the business are described in the Company's SEC
filings, including in its 10-K under "Investment Considerations" and the
quarterly reports on Form 10-Q.
For a copy of this or other AirTouch press releases, please call
1-800-344-7531 or visit the AirTouch web site at www.airtouch.com.
Page 3
<PAGE>
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------
2nd QTR 2nd QTR
(Dollars in millions, except per share amounts) 1998 1997 CHANGE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues:
Wireless services and other revenues $1,270 $845 50.3 %
Cellular and paging equipment sales 78 56 39.3 %
- ---------------------------------------------------------------------------------------------------------
Total operating revenues 1,348 901 49.6 %
- ---------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of revenues 160 114 40.4 %
Cost of cellular and paging equipment sales 109 97 12.4 %
Selling and customer operations expenses 379 231 64.1 %
General, administrative, and other expenses 161 127 26.8 %
Depreciation and amortization expense 253 133 90.2 %
- ---------------------------------------------------------------------------------------------------------
Total operating expenses 1,062 702 51.3 %
- ---------------------------------------------------------------------------------------------------------
Operating income 286 199 43.7 %
Equity in net income (loss) of unconsolidated wireless systems:
U. S. (13) 6 (316.7)%
International 98 49 100.0 %
Minority interests in net (income) loss of consolidated
wireless systems (45) (32) (40.6)%
Interest:
Expense (42) (22) (90.9)%
Income 9 4 125.0 %
Miscellaneous income (expense) 3 (7) 142.9 %
- ---------------------------------------------------------------------------------------------------------
Income before income taxes and preferred dividends 296 197 50.3 %
Income taxes 116 78 48.7 %
- ---------------------------------------------------------------------------------------------------------
Income before preferred dividends 180 119 51.3 %
Preferred dividends 33 13 153.8 %
- ---------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $147 $106 38.7 %
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders - per share:
Basic $0.26 $0.21 23.8 %
Diluted $0.25 $0.21 19.0 %
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (in thousands) 568,856 503,601 13.0 %
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Page 4
<PAGE>
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------
Six Months Six Months
(Dollars in millions, except per share amounts) 1998 1997 CHANGE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues:
Wireless services and other revenues $2,173 $1,632 33.1 %
Cellular and paging equipment sales 133 105 26.7 %
- ---------------------------------------------------------------------------------------------------------
Total operating revenues 2,306 1,737 32.8 %
- ---------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of revenues 279 218 28.0 %
Cost of cellular and paging equipment sales 191 170 12.4 %
Selling and customer operations expenses 640 439 45.8 %
General, administrative, and other expenses 279 234 19.2 %
Depreciation and amortization expense 397 269 47.6 %
- ---------------------------------------------------------------------------------------------------------
Total operating expenses 1,786 1,330 34.3 %
- ---------------------------------------------------------------------------------------------------------
Operating income 520 407 27.8 %
Equity in net income (loss) of unconsolidated wireless systems:
U. S. (17) 4 (525.0)%
International 179 59 203.4 %
Minority interests in net (income) loss of consolidated
wireless systems (87) (71) (22.5)%
Interest:
Expense (61) (48) (27.1)%
Income 15 9 66.7 %
Miscellaneous income (expense) (7) (4) (75.0)%
- ---------------------------------------------------------------------------------------------------------
Income before income taxes and preferred dividends 542 356 52.2 %
Income taxes 195 160 21.9 %
- ---------------------------------------------------------------------------------------------------------
Income before preferred dividends 347 196 77.0 %
Preferred dividends 47 26 80.8 %
- ---------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $300 $170 76.5 %
- ---------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders - per share:
Basic $0.56 $0.34 64.7 %
Diluted $0.55 $0.34 61.8 %
- ---------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (in thousands) 539,140 503,206 7.1 %
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Page 5
<PAGE>
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------
(Dollars in millions) 6/30/98 12/31/97 CHANGE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $25 $1
Accounts receivable, net 655 472 38.8 %
Inventories 102 106 (3.8)%
Other receivables 91 44 106.8 %
Due from related parties 22 48 (54.2)%
Other current assets 144 51 182.4 %
- ----------------------------------------------------------------------------------------------------------
Total current assets 1,039 722 43.9 %
Property, plant, and equipment, net 3,703 2,539 45.8 %
Investments in unconsolidated wireless systems 3,303 2,068 59.7 %
Intangible assets, net 8,921 3,297 170.6 %
Deferred charges and other noncurrent assets 262 344 (23.8)%
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $17,228 $8,970 92.1 %
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable - trade $ 321 $ 244 31.6 %
Short-term borrowings 19
Current portion of long-term debt 49 57 (14.0)%
Other current liabilities 801 675 18.7 %
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 1,190 976 21.9 %
Long-term debt 2,958 1,362 117.2 %
Deferred income taxes 1,973 711 177.5 %
Deferred credits 139 86 61.6 %
- ----------------------------------------------------------------------------------------------------------
Total liabilities 6,260 3,135 99.7 %
- ----------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interests in consolidated wireless systems 372 306 21.6 %
Redeemable preferred stock 1,573
Stockholders' equity:
Preferred stock and additional paid-in capital 1,041 1,041 0.0 %
Common stock and additional paid-in capital, net of treasury
shares 7,302 4,079 79.0 %
Retained earnings 715 415 72.3 %
Other comprehensive income 1 1 0.0 %
Deferred compensation (36) (7) (414.3)%
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,023 5,529 63.2 %
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,228 $8,970 92.1 %
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Page 6
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (1)
<TABLE>
<CAPTION>
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------
2nd QTR 2nd QTR
(Dollars in millions, except per share amounts) 1998 1997 CHANGE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues 1,367 1,263 8.2 %
Operating expenses before depreciation and amortization expenses 821 785 4.6 %
Depreciation and amortization expenses 257 232 10.8 %
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 1,078 1,017 6.0 %
- ----------------------------------------------------------------------------------------------------------
Operating income 289 246 17.5 %
Equity in net income (loss) of unconsolidated wireless systems 85 23 269.6 %
Minority interests in net (income) loss of consolidated
wireless systems (45) (43) (4.7)%
Miscellaneous income (expense) (31) (44) 29.5 %
- ----------------------------------------------------------------------------------------------------------
Income before income taxes and preferred dividends 298 182 63.7 %
Income taxes 116 77 50.6 %
- ----------------------------------------------------------------------------------------------------------
Income before preferred dividends 182 105 73.3 %
Preferred dividends 35 34 2.9 %
- ----------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $147 $71 107.0 %
- ----------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders - per share:
Basic $0.26 $0.13 100.0 %
Diluted $0.25 $0.13 92.3 %
- ----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (in thousands) 572,159 563,048 1.6 %
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Page 7
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (1)
<TABLE>
<CAPTION>
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------
Six Months Six Months
(Dollars in millions, except per share amounts) 1998 1997 CHANGE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues 2,667 2,432 9.7 %
Operating expenses before depreciation and amortization expenses 1,602 1,475 8.6 %
Depreciation and amortization expenses 509 464 9.7 %
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 2,111 1,939 8.9 %
- ----------------------------------------------------------------------------------------------------------
Operating income 556 493 12.8 %
Equity in net income (loss) of unconsolidated wireless systems 126 (2)
Minority interests in net (income) loss of consolidated
wireless systems (97) (92) (5.4)%
Miscellaneous income (expense) (67) (80) 16.3 %
- ----------------------------------------------------------------------------------------------------------
Income before income taxes and preferred dividends 518 319 62.4 %
Income taxes 186 155 20.0 %
- ----------------------------------------------------------------------------------------------------------
Income before preferred dividends 332 164 102.4 %
Preferred dividends 70 69 1.4 %
- ----------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $262 $95 175.8 %
- ----------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders - per share:
Basic $0.46 $0.17 170.6 %
Diluted $0.45 $0.17 164.7 %
- ----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (in thousands) 570,515 562,653 1.4 %
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Page 8
<PAGE>
PRO FORMA PROPORTIONATE DATA (Unaudited) (1)(2)(3)
<TABLE>
<CAPTION>
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY
FINANCIAL DATA 2nd QTR 2nd QTR
(Dollars in millions except per share amounts; operating data in thousands) 1998 1997 CHANGE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service and other revenues (4) $1,815 $1,501 20.9 %
Operating expenses before depreciation and amortization expenses (5) 1,097 964 13.8 %
- -------------------------------------------------------------------------------------------------------------------------
Operating cash flow (6) 718 537 33.7 %
Depreciation and amortization expenses 342 296 15.5 %
- -------------------------------------------------------------------------------------------------------------------------
Operating income 376 241 56.0 %
Interest and other income (expenses) (33) (42) 21.4 %
Income taxes (161) (94) (71.3)%
- -------------------------------------------------------------------------------------------------------------------------
Income before preferred dividends 182 105 73.3 %
Preferred dividends 35 34 2.9 %
- -------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $147 $71 107.0 %
- -------------------------------------------------------------------------------------------------------------------------
Earnings per share applicable to common stockholders- basic $0.26 $0.13 100.0 %
Earnings per share applicable to common stockholders- diluted $0.25 $0.13 92.3 %
Acquisition amortization expense, net of applicable tax benefits (7) $68 $70 (2.9)%
Earnings per share before acquisition amortization - basic (7) $0.38 $0.25 52.0 %
Earnings per share before acquisition amortization - diluted (7) $0.37 $0.25 48.0 %
- -------------------------------------------------------------------------------------------------------------------------
Operating cash flow margin (8) 39.6 % 35.8 % 10.6 %
Capital expenditures and capital calls, excluding acquisitions (GAAP Basis) $315 $419 (24.8)%
Proportionate capital expenditures $379 $379 0.0 %
Cellular and PCS subscriber net adds in period, excluding acquisitions (9) 866 654 32.4 %
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Six Months
(Dollars in millions except per share amounts; operating data in thousands) 1998 1997 CHANGE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service and other revenues (4) $3,479 $2,891 20.3 %
Operating expenses before depreciation and amortization expenses (5) 2,106 1,839 14.5 %
- -------------------------------------------------------------------------------------------------------------------------
Operating cash flow (6) 1,373 1,052 30.5 %
Depreciation and amortization expenses 673 589 14.3 %
- -------------------------------------------------------------------------------------------------------------------------
Operating income 700 463 51.2 %
Interest and other income (expenses) (90) (84) (7.1)%
Income taxes (278) (215) (29.3)%
- -------------------------------------------------------------------------------------------------------------------------
Income before preferred dividends 332 164 102.4 %
Preferred dividends 70 69 1.4 %
- -------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $262 $95 175.8 %
- -------------------------------------------------------------------------------------------------------------------------
Earnings per share applicable to common stockholders- basic $0.46 $0.17 170.6 %
Earnings per share applicable to common stockholders- diluted $0.45 $0.17 164.7 %
Acquisition amortization expense, net of applicable tax benefits (7) $135 $141 (4.3)%
Earnings per share before acquisition amortization - basic (7) $0.70 $0.42 66.7 %
Earnings per share before acquisition amortization - diluted (7) $0.69 $0.42 64.3 %
- -------------------------------------------------------------------------------------------------------------------------
Operating cash flow margin (8) 39.5 % 36.4 % 8.5 %
Capital expenditures and capital calls, excluding acquisitions (GAAP Basis) $720 $648 11.1 %
Proportionate capital expenditures $773 $733 5.5 %
Cellular and PCS subscriber net adds in period, excluding acquisitions (9) 1,600 1,124 42.3 %
- -------------------------------------------------------------------------------------------------------------------------
OPERATING DATA (In thousands) 6/30/98 6/30/97 CHANGE
- -------------------------------------------------------------------------------------------------------------------------
Cellular and PCS POPs (9)(10) 233,815 212,730 9.9 %
Cellular and PCS subscribers (9) 11,734 8,153 43.9 %
Paging units in service (11) 3,317 3,031 9.4 %
Total proportionate customers 15,051 11,184 34.6 %
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See footnotes.
Page 9
<PAGE>
PRO FORMA PROPORTIONATE DATA (Unaudited) (1)(2)
<TABLE>
<CAPTION>
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------
U.S. CELLULAR OPERATIONS
FINANCIAL DATA 2nd QTR 2nd QTR
(Dollars in millions except per unit data; operating data in thousands) 1998 1997 CHANGE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Service and other revenues $963 $900 7.0 %
- -------------------------------------------------------------------------------------------------------------------------
Cost of revenues 100 94 6.4 %
Selling and customer operations expenses (5) 337 320 5.3 %
General, administrative, and other expenses 61 58 5.2 %
- -------------------------------------------------------------------------------------------------------------------------
Operating cash flow (6) 465 428 8.6 %
Depreciation and amortization expenses 208 192 8.3 %
- -------------------------------------------------------------------------------------------------------------------------
Operating income $257 $236 8.9 %
- -------------------------------------------------------------------------------------------------------------------------
Operating cash flow margin (8) 48.3 % 47.6 % 1.5 %
Proportionate capital expenditures $157 $193 (18.7)%
Cellular subscriber net adds in period, excluding acquisitions 253 284 (10.9)%
Monthly average revenue per unit $44.85 $52.90 (15.2)%
Monthly cash cost per unit $23.19 $27.74 (16.4)%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Six Months
(Dollars in millions except per unit data; operating data in thousands) 1998 1997 CHANGE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service and other revenues $1,873 $1,736 7.9 %
- -------------------------------------------------------------------------------------------------------------------------
Cost of revenues 190 186 2.2 %
Selling and customer operations expenses (5) 676 613 10.3 %
General, administrative, and other expenses 119 114 4.4 %
- -------------------------------------------------------------------------------------------------------------------------
Operating cash flow (6) 888 823 7.9 %
Depreciation and amortization expenses 413 381 8.4 %
- -------------------------------------------------------------------------------------------------------------------------
Operating income $475 $442 7.5 %
- -------------------------------------------------------------------------------------------------------------------------
Operating cash flow margin (8) 47.4 % 47.4 % 0.0 %
Proportionate capital expenditures $342 $310 10.3 %
Cellular subscriber net adds in period, excluding acquisitions 474 542 (12.5)%
Monthly average revenue per unit $44.64 $52.26 (14.6)%
Monthly cash cost per unit $23.48 $27.49 (14.6)%
- -------------------------------------------------------------------------------------------------------------------------
OPERATING DATA (In thousands) 6/30/98 6/30/97 CHANGE
- -------------------------------------------------------------------------------------------------------------------------
Cellular POPs (10) 65,962 63,794 3.4 %
Cellular subscribers 7,290 5,818 25.3 %
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See footnotes.
Page 10
<PAGE>
PRO FORMA PROPORTIONATE DATA (Unaudited) (1)(2)
<TABLE>
<CAPTION>
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------
U.S. PCS OPERATIONS (9)
FINANCIAL DATA 2nd QTR 2nd QTR
(Dollars in millions except per unit data; operating data in thousands) 1998 1997 CHANGE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service and other revenues $48 $14 242.9 %
Operating expenses before depreciation and amortization expenses (5) 71 56 26.8 %
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow (6) (23) (42) 45.2 %
Depreciation and amortization expenses 25 19 31.6 %
- ------------------------------------------------------------------------------------------------------------------------
Operating income (loss) ($48) ($61) 21.3 %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow margin (8) (47.9)% (300.0)% 84.0 %
PCS subscriber net adds in period, excluding acquisitions (9) 40 38 5.3 %
Monthly average revenue per unit $60.71 $59.37 2.3 %
Monthly cash cost per unit $89.80 $237.46 (62.2)%
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Six Months
(Dollars in millions except per unit data; operating data in thousands) 1998 1997 CHANGE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service and other revenues $86 $20 330.0 %
Operating expenses before depreciation and amortization expenses (5) 147 105 40.0 %
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow (6) (61) (85) 28.2 %
Depreciation and amortization expenses 49 37 32.4 %
- ------------------------------------------------------------------------------------------------------------------------
Operating income (loss) ($110) ($122) 9.8 %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow margin (8) (70.9)% (425.0)% 83.3 %
PCS subscriber net adds in period, excluding acquisitions (9) 98 74 32.4 %
Monthly average revenue per unit $60.31 $60.33 (0.0)%
Monthly cash cost per unit $103.08 $316.75 (67.5)%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
OPERATING DATA (In thousands) 6/30/98 6/30/97 CHANGE
- ------------------------------------------------------------------------------------------------------------------------
PCS POPs (9)(10) 29,195 28,458 2.6 %
PCS subscribers (9) 282 94 200.0 %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
See footnotes.
</TABLE>
Page 11
<PAGE>
PROPORTIONATE DATA (Unaudited) (2)
<TABLE>
<CAPTION>
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL OPERATIONS
FINANCIAL DATA 2nd QTR 2nd QTR
(Dollars in millions, except per unit data; operating data in thousands) 1998 1997 CHANGE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service and other revenues $713 $507 40.6 %
Operating expenses before depreciation and amortization expenses (5) 436 357 22.1 %
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow (6) 277 150 84.7 %
Depreciation and amortization expenses 86 67 28.4 %
- ------------------------------------------------------------------------------------------------------------------------
Operating income $191 $83 130.1 %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow margin (8) 38.8 % 29.6 % 31.1 %
Proportionate capital expenditures $148 $158 (6.3)%
Cellular subscriber net adds in period, excluding acquisitions 573 331 73.1 %
Monthly average revenue per unit $61.42 $81.69 (24.8)%
Monthly cash cost per unit $37.56 $57.52 (34.7)%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Six Months
(Dollars in millions, except per unit data; operating data in thousands) 1998 1997 CHANGE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service and other revenues $1,339 $977 37.1 %
Operating expenses before depreciation and amortization expenses (5) 806 678 18.9 %
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow (6) 533 299 78.3 %
Depreciation and amortization expenses 167 131 27.5 %
- ------------------------------------------------------------------------------------------------------------------------
Operating income $366 $168 117.9 %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow margin (8) 39.8 % 30.6 % 30.1 %
Proportionate capital expenditures $303 $316 (4.1)%
Cellular subscriber net adds in period, excluding acquisitions 1,027 507 102.6 %
Monthly average revenue per unit $61.72 $83.69 (26.3)%
Monthly cash cost per unit $37.15 $58.08 (36.0)%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
OPERATING DATA (In thousands) 6/30/98 6/30/97 CHANGE
- ------------------------------------------------------------------------------------------------------------------------
Cellular POPs (10) 138,658 120,478 15.1 %
Cellular subscribers 4,162 2,241 85.7 %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See footnotes.
Page 12
<PAGE>
PROPORTIONATE DATA (Unaudited) (2)
<TABLE>
<CAPTION>
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------
U.S. PAGING OPERATIONS (12)
FINANCIAL DATA 2nd QTR 2nd QTR
(Dollars in millions; operating data in thousands) 1998 1997 CHANGE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service and other revenues $91 $81 12.3 %
Equipment sales 14 9 55.6 %
Cost of equipment sales (13) (9) (44.4)%
- ------------------------------------------------------------------------------------------------------------------------
Net operating revenues (4) 92 81 13.6 %
Operating expenses before depreciation and amortization expenses 62 53 17.0 %
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow (6) 30 28 7.1 %
Depreciation and amortization expenses 19 19 0.0 %
- ------------------------------------------------------------------------------------------------------------------------
Operating income $11 $9 22.2 %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow margin (8) 32.6 % 34.6 % (5.8)%
Capital expenditures $20 $12 66.7 %
Units in service net adds in period, excluding acquisitions 88 69 27.5 %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Six Months
(Dollars in millions; operating data in thousands) 1998 1997 CHANGE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service and other revenues $179 $160 11.9 %
Equipment sales 24 18 33.3 %
Cost of equipment sales (22) (18) (22.2)%
- ------------------------------------------------------------------------------------------------------------------------
Net operating revenues (4) 181 160 13.1 %
Operating expenses before depreciation and amortization expenses 121 107 13.1 %
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow (6) 60 53 13.2 %
Depreciation and amortization expenses 38 37 2.7 %
- ------------------------------------------------------------------------------------------------------------------------
Operating income $22 $16 37.5 %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow margin (8) 33.1 % 33.1 % 0.0 %
Capital expenditures $38 $30 26.7 %
Units in service net adds in period, excluding acquisitions 127 142 (10.6)%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
OPERATING DATA (In thousands) 6/30/98 6/30/97 CHANGE
- ------------------------------------------------------------------------------------------------------------------------
Units in service 3,228 2,992 7.9 %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See footnotes.
Page 13
<PAGE>
OPERATING DATA (Unaudited)
<TABLE>
<CAPTION>
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
TOTAL ENTERPRISE DATA
6/30/98
---------------------------
2Q98 YTD
Total System Total System Total System Total System
(In thousands) POPs Customers Net Adds Net Adds
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. CELLULAR (1) 84,514 8,304 284 535
INTERNATIONAL CELLULAR
European Operations
Germany - 34.8% 81,870 >4,600 >600 >1,058
Portugal - 50.9% 9,920 981 138 236
Sweden - 51.1% 8,830 528 54 104
Belgium - 25.0% 10,130 >900 >115 >210
Italy - 15.5% 57,500 3,900 800 1,440
Spain - 21.7% 39,400 1,508 194 358
Poland - 19.3% 38,500 ~ 450 ~ 100 ~ 150
Romania - 10.0% 23,200 ~ 195 ~ 45 ~ 85
Asian Operations
Japan
Digital Phone Group - 13.0 % - 15.0% 77,215 2,672 299 407
Digital TU-KA Companies * - 4.5% 46,252 1,905 155 309
South Korea - 10.7% 45,600 1,537 359 413
India - 20.0% & 49.0% 79,357 29 3 5
African Operations
Egypt 54,500 0 0 0
----------------------------------------------------
TOTAL INTERNATIONAL 572,274 19,205 2,862 4,775
----------------------------------------------------
PRIMECO - 50.0% (9) 62,400 598 90 210
----------------------------------------------------
TOTAL CELLULAR AND PCS (1) 719,188 28,107 3,236 5,520
----------------------------------------------------
PAGING (11) N/A 3,438 89 130
----------------------------------------------------
TOTAL ENTERPRISE (1) 719,188 31,545 3,325 5,650
----------------------------------------------------
----------------------------------------------------
</TABLE>
* Cost based investments which are not included in proportionate results.
See footnotes.
Page 14
<PAGE>
FOOTNOTES:
(1) On April 6, 1998, the Company completed the transaction to acquire the U.S.
cellular business and the 25% PrimeCo Personal Communications, L.P.
interest of MediaOne Group, formerly U S WEST Media Group ("the merger").
These selected pro forma data reflect the merger as if it had been
effective at the beginning of each period presented, and after giving
effect to the purchase method of accounting and other merger-related
adjustments. Changes to these adjustments are expected as
valuation/appraisal of the acquired assets and liabilities are completed.
However, based on the preliminary results of such appraisals, such changes
are not expected to be material. Additionally, these selected pro forma
data are intended for informational purposes only and 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.
(2) Because significant assets of the Company are not consolidated, the Company
believes that proportionate financial and operating data facilitate the
understanding and assessment of its results. Unlike consolidation
accounting, proportionate accounting is not in accordance with generally
accepted accounting principles ("GAAP"). Proportionate accounting
reflects the relative weight of the Company's ownership interests in its
domestic and international systems, total subscribers of all cellular
systems, and total units in service of all paging systems, exclusive of
cost-based investments and certain equity-based investments that are not
material to the Consolidated Financial Statements taken as a whole.
(3) Pro forma proportionate debt on a Total Company basis, which includes both
consolidated and unconsolidated entities, was approximately $3.9 billion
and $3.7 billion for the quarters ended June 30, 1998 and 1997,
respectively. Actual proportionate debt on a Total Company basis was
approximately $3.9 billion and $2.3 billion for the same periods.
(4) Total Company "Service and other revenues" include "Net operating revenues"
of U.S. Paging Operations.
(5) Includes net losses on equipment sold to acquire and retain customers.
(6) "Operating cash flow" is defined as "Operating income" plus "Depreciation
and amortization expenses" 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
interest in the respective entities' operating cash flows. As such,
proportionate operating cash flow does not represent cash available to the
Company.
(7) "Acquisition amortization expense, net of applicable tax benefit" is
defined as amortization expense of intangibles related to the acquisition
of interest in wireless systems net of related tax benefits. "Earnings per
share before acquisition amortization" is calculated by adding back
"Acquisition amortization expense, net of applicable tax benefits", to "Net
income applicable to common stockholders" and dividing the results by the
"Weighted average shares outstanding". Such calculation is not in
accordance with GAAP and is shown here only to provide supplemental
financial information.
(8) "Operating cash flow margin" is calculated by dividing "Operating cash
flow" by "Service and other revenues" or in the case of U.S. Paging
Operations, dividing "Operating cash flow" by "Net operating revenues."
(9) 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 at 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. For the pro forma data, the
Company's ownership interest in PrimeCo is 50% for all periods presented.
(10) 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-basis investments not included in proportionate operating
results.
(11) Total Company "Paging units in service" include units in service in the
U.S. and Internationally.
(12) U.S. Paging Operations, which are wholly owned by the Company, include
operations in Canada.
Page 15
<PAGE>
EXHIBIT 99.2
RISK FACTORS
COMPETITION. The Company and its ventures face an increasing number of
competitors in each of their markets. In the United States, competition has been
steadily increasing since PCS providers first began offering service in late
1996. There can now be up to nine wireless competitors in each cellular and PCS
market in the United States. Germany and Sweden currently have four licensees
per market, and Italy, Spain, Poland, Portugal and Romania have three. A third
license is expected to be awarded in Belgium in 1998. South Korea has licensed a
total of five mobile operators and Japan a total of seven operators per market.
There are currently two licensees in Egypt and India. The Company also faces
intense competition in each of its paging markets.
Increased competition has led to declines in the prices the Company charges
for its wireless services and is expected to lead to further price declines in
the future. Price reductions have attracted an increasing number of consumer
customers, who tend to make calls during lower-rate, off-peak periods. As a
result of these factors, in recent years the Company's proportionate average
revenue per customer has declined at rates between 12% and 15% per year in the
United States to $53 for 1997 and between 20% and 30% per year, including the
impact of foreign exchange fluctuations, to $79 for 1997 in the Company's
international markets and is expected to continue to decline at similar rates in
1998. Historically the Company has been able to match or exceed declines in
average revenue per customer with reductions in operating cash costs per
customer. However, there can be no assurance that the Company will be able to
continue to do so. If it cannot, the Company may experience decreased
profitability.
Competition could also lead to a decrease in the rate at which the Company
adds new customers and even to a decrease in the size of the Company's customer
base as customers choose to receive wireless service from other providers.
Customer deactivations are measured by the Company's churn rate, which is the
number of subscribers in a given period who terminate their service or have
their service terminated by the Company divided by the average number of
customers for the same period, expressed as a percentage. Historically the
Company has experienced average churn rates in its United States and
international markets of approximately 2% per month. There can be no assurance
that the Company will not experience an increase in churn rates, particularly as
competition intensifies. An increase in churn rates could adversely affect
profitability because the Company would experience lower revenues and increased
selling costs to replace customers.
INCREASED RATE OF INVESTMENT IN NETWORKS AND NEW TECHNOLOGY. The Company
expects that it will be required to make substantial future investments in its
wireless networks due to customer growth, increased usage and the need to offer
new services and greater functionality. Accordingly, the rate of the Company's
capital expenditures in future years could materially exceed that experienced by
the Company in recent years. The operations of the Company and its ventures
depend in part upon the successful deployment of continuously evolving wireless
telecommunications technologies. The Company uses technologies from a number of
vendors and makes significant capital expenditures in connection with the
deployment of such
13
<PAGE>
technologies. There can be no assurance that technologies will be developed
according to anticipated schedules, that they will perform according to
expectations or that they will achieve commercial acceptance. The failure of
vendor performance or technology performance to meet the Company's expectations
or the failure of a technology to achieve commercial acceptance could result in
additional capital expenditures by the Company or a reduction in net income due
to the recognition of the impairment of assets.
LICENSE RENEWAL. The Company's international and U.S. wireless licenses are
granted for specific periods of time. The most significant U.S. cellular and
paging licenses are granted for a period of ten years. Based upon its prior
experience with expired licenses and upon FCC rules establishing a presumption
in favor of licensees that have substantially complied with their regulatory
obligations during the license period, the Company believes that each of its
U.S. licenses will be renewed as they expire. The terms of the licenses granted
to the Company's international ventures and conditions for license renewal vary
from country to country. In some countries, there is no specified mechanism for
license renewal and accordingly it is not certain what criteria will be used by
the governments of those countries to determine whether the licenses should be
renewed. There can be no assurance that any U.S. or international license will
be renewed.
EARNINGS DILUTION. The Company expects to experience start-up losses
associated with its recent investment in Egypt and continues to experience start
up losses associated with its Korean, Romanian and Indian ventures. In addition,
the Company expects to continue to experience losses associated with PrimeCo for
the next several years. The Company expects to continue to pursue selected new
opportunities in international markets. The Company expects the foregoing to
have a dilutive effect on the Company's earnings. In addition, the Company has
granted certain restricted stock awards which provide early vesting if the
Company meets certain targets for the Company's common stock and operating cash
flows. If this happens, the Company would need to accelerate the recognition of
compensation expense which could be material to the quarter in which the goal is
achieved.
On April 6, 1998, the Company acquired the U.S. cellular and PCS interests
of MediaOne Group, as described under "Business--Recent Developments." The
Company expects earnings per share dilution from the acquisition to reach
approximately $0.40 per share in the first full year following the transaction
and to decline thereafter. This dilution represents the net amount of
amortization of acquisition intangibles, incremental interest expense, preferred
dividends and common shares issued, as partially offset by incremental earnings.
ANTITRUST PROCEEDINGS. The Company believes that its cellular and paging
pricing and marketing practices were and are in compliance with antitrust laws.
However, the Company was and is a defendant in certain class action complaints
and complaints filed by individual agents with respect to its Los Angeles, San
Francisco and San Diego cellular operations which allege that the Company
conspired to fix retail and wholesale cellular prices. The Company has reached
settlements in each of the class action proceedings which in the aggregate will
not have a material adverse effect on the Company's financial condition or
results of operations. No assurance can be given, however, that any disposition
of the remaining proceedings, if adverse to the Company, might not have a
material adverse effect on the Company's results of operations in the year of
such disposition.
IMPLICATIONS OF LICENSEE OWNERSHIP STRUCTURE. The Company holds most of its
U.S. cellular properties and PCS properties through partnership interests, a
number of which are controlling interests. In addition, except for its interests
in Europolitan Holdings AB ("Europolitan"), the Company's cellular system in
Sweden, and Telecel Communicacoes Pessoais, S.A. ("Telecel"), its cellular
system in Portugal, the Company's interests in international wireless licenses
are held through foreign entities in which the Company is a significant but not
controlling owner. Under the governing documents for certain of these
partnerships and corporations, certain key matters such as the approval of
business plans and decisions as to the timing and amount of cash distributions
require the consent of the Company's partners or may be
14
<PAGE>
approved without the consent of the Company. Although the Company has not been
materially constrained by the nature of its wireless ownership interests from
pursuing its corporate objectives, no assurance can be given that it will not
experience difficulty in this regard in the future. The Company may enter into
similar arrangements as it participates in ventures formed to pursue additional
opportunities.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company has investments
in operations outside the United States and proportionate operating cash flow
from these investments represent a substantial portion of total Company
proportionate operating cash flow. Investments in international operations are
subject to risks and uncertainties which may include taxation, nationalization,
inflation, currency fluctuations, increased regulation and approval
requirements. Certain Asian countries are currently experiencing severe economic
turmoil, resulting in depressed business conditions, volatility in local
currencies and ongoing financial market dislocations. In addition to the
negative impact that such economic turmoil could have on usage of wireless
services, it could also have a negative effect on the ability of the Company's
partners to provide their share of the ventures' funding requirements. There can
be no assurance that the foregoing risks and uncertainties or that present or
future economic turmoil or dislocations will not have a material adverse effect
on the Company's business, operating results and financial condition.
EXCHANGE RATE FLUCTUATIONS. Foreign currency exchange rates may be material
to the Company's results of operations. The Company evaluates the risk of
significant exchange rate volatility and its ability to hedge against such
volatility as part of its decision whether to pursue an international
opportunity. A significant weakening against the dollar of the currency of a
country where the Company generates revenues or earnings may adversely affect
the Company's results, while any weakening of the dollar against such currency
could have an adverse effect if the Company is obligated to make significant
foreign currency denominated capital investments in such country. The Company
attempts to mitigate the effect of certain foreign currency fluctuations through
the use of foreign currency contracts and foreign currency denominated credit
arrangements. There can be no assurance that the Company will be successful in
its foreign currency hedging efforts.
FRAUD. The cellular industry continues to be subject to fraudulent
activity. The Company is working to reduce the negative impacts of fraud in its
U.S. markets through the deployment of new technologies and other measures
including Fraud Detection Profiler, RF Fingerprinting, authentication, roamer
verification and precision roaming. The cost of fraud, including the cost of
developing and deploying anti-fraud technologies, will have an impact on the
Company's operating results for the foreseeable future.
THE YEAR 2000 ISSUE. Many of the Company's systems are affected by the
year 2000 problem, which refers to the inability of information technology to
process dates beyond December 31, 1999. The Company has implemented a
comprehensive plan to address the year 2000 problem 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 problem; (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.
Much of the Company's information 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 problem 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 information 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 information
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
15
<PAGE>
responsible for addressing the year 2000 problem in 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 problem 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 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 are 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 problem,
actual costs may vary from this estimate. Subject to these assumptions, the
Company's guidance for 1998 as described under "Summary--Outlook for 1998"
includes the impact of the estimated costs for 1998.
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.
IMPACT OF THE PIES ON THE MARKET FOR THE COMMON STOCK. The price of the
shares of Common Stock could become more volatile and could be depressed by
investors' anticipation of the potential distribution into the market of
additional shares of Common Stock as a result of the delivery of shares of
Common Stock by MediaOne Group at the maturity of the PIES, by possible sales
of shares of Common Stock by investors who view the PIES as a more attractive
means of equity participation in the Company and by hedging or arbitrage
trading activity that may develop involving the PIES and the Common Stock.
The price of the Common Stock could also be impacted by investors'
anticipation of the distribution into the market by MediaOne Group of
additional shares of Common Stock otherwise than in connection with the PIES.
MediaOne Group currently owns a total of 59,313,621 shares of Common Stock
(constituting approximately 10.3% of the outstanding Common Stock), up to
shares of which may be delivered at the maturity of the PIES.
16
