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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
COMMISSION FILE NUMBER 1-12342
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AIRTOUCH COMMUNICATIONS, INC.
A DELAWARE CORPORATION I.R.S. EMPLOYER NUMBER 94-3213132
ONE CALIFORNIA STREET
SAN FRANCISCO, CA 94111
(415) 658-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF
THE ACT:
Title of each class Name of each exchange on which registered
COMMON STOCK, $.01 PAR VALUE, WITH NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS PACIFIC EXCHANGE
6.00% CLASS B MANDATORILY NEW YORK STOCK EXCHANGE
CONVERTIBLE PREFERRED STOCK,
SERIES 1996
4.25% CLASS C CONVERTIBLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, SERIES 1996
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based on the composite closing sales price on March 15, 1999, the aggregate
market value of all voting stock held by nonaffiliates was approximately $92.6
billion. At March 15, 1999, 575,120,827 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated Parts of this Form 10-K:
1998 Annual Report to Stockholders -Part II
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TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
ITEM 1 Business................................................................................
ITEM 2 Properties..............................................................................
ITEM 3 Legal Proceedings.......................................................................
ITEM 4 Submission of Matters to a Vote of Security Holders.....................................
Executive Officers of the Registrant....................................................
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters...................
ITEM 6 Selected Financial Data.................................................................
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk..............................
ITEM 8 Financial Statements and Supplementary Data.............................................
ITEM 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................................
PART III
ITEM 10 Directors and Executive Officers of the Registrant......................................
ITEM 11 Executive Compensation..................................................................
ITEM 12 Security Ownership of Certain Beneficial Owners and Management..........................
ITEM 13 Certain Relationships and Related Transactions..........................................
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 21
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Unless the context otherwise requires, references to "AirTouch" or the "Company"
include AirTouch Communications, Inc. and entities over which it has or shares
operational control.
CELLULAR AND PCS. "Cellular service" refers to wireless service operating at the
800 MHz band in the United States and South Korea and at the 900 MHz band in
Europe, and "broadband personal communication service" or "PCS" refers to
wireless service operating at the 1900 MHz band in the United States. The
Company considers the functionality of both services to be similar despite the
different bands at which they operate.
POPs. POPs means the population of a licensed market (based on population
estimates for such market) multiplied by the Company's ownership interest in a
licensee operating in such market as of the date specified and includes networks
under construction and markets of certain cost-based investments not included in
proportionate financial results.
PROPORTIONATE ACCOUNTING. The Company uses United States generally accepted
accounting principles ("GAAP") and includes supplemental information prepared
using proportionate accounting to present certain financial information.
Proportionate accounting reflects the Company's relative ownership interests in
customers and operating revenues and expenses for both its consolidated and
equity method entities. Proportionate financial and operating information is not
required by GAAP and is not intended to replace the consolidated financial
statements prepared in accordance with GAAP. Because significant assets of the
Company are not consolidated and because of the substantial effect of certain
entities on the year-to-year comparability of the Company's consolidated
financial results, the Company believes that proportionate financial and
operating data facilitate the understanding and assessment of its financial
results.
PRO FORMA INFORMATION. In April 1998, AirTouch acquired the U.S. cellular
business and 25% interest in PrimeCo Personal Communications, L.P. of MediaOne
Group, Inc. (formerly U S WEST Media Group, Inc.) Pro forma operating
information in this Form 10-K (including the Financial section of the 1998
Annual Report to stockholders incorporated by reference herein) reflects the
transaction as if it had been completed at the beginning of 1998.
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 flows 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.
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This Form 10-K includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are
sometimes, but not always, identified by words such as "estimate," "project,"
"intend," "believe," "expect," "plan," "goal," "target" and similar expressions.
By their nature, these statements are subject to risks and uncertainties that
could cause the Company's actual results and financial position to differ
materially. Such risks and uncertainties include, but are not limited to, those
described under "Risk Factors." 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 responsibility to publicly release the result
of any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PART I
ITEM 1. BUSINESS
GENERAL
AirTouch Communications, Inc. is one of the largest wireless
telecommunication services companies in the world based on the 40 million total
wireless customers served by the Company and its ventures as of December 31,
1998. Through its operations in the United States, Europe, Asia and North
Africa, the Company provides a full range of wireless telecommunications
services, including cellular, PCS and paging, and in the future will also
provide global satellite communications.
The Company's principal objective is to be the premier provider of
wireless telecommunication services worldwide. To achieve its objective the
Company focuses on profitable growth of its existing operations and pursues
other value-creating opportunities around the world, including new wireless
licenses and ownership increases in existing markets.
The cellular and PCS licenses of the Company and its ventures cover more
than 724 million people around the world in 13 countries on four continents.
Based on its ownership percentages, the Company's cellular and PCS interests
represented approximately 235.9 million POPs and, together with paging
customers, 17.6 million proportionate customers as of December 31, 1998.
BUSINESS STRATEGY
The Company's principal objective is to be the premier provider of
wireless telecommunication services worldwide. The Company believes that the
following elements of its business strategy will enable it to meet that
objective:
o Focus on Wireless. By concentrating on wireless telecommunication services,
the Company has invested its capital in a proven industry that is expected
to grow dramatically on a worldwide basis. The Company believes that the
knowledge and experience developed by its senior management team through
extensive involvement in the industry since its inception in 1983 give it
an advantage as an operator and in identifying and pursuing new
value-creating wireless opportunities.
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o Global Presence. With investments in the United States, Europe, Asia and
North Africa, the Company has a diverse global presence that limits its
risks from negative market conditions in any one region. Its global reach
also enables the Company to identify emerging trends and share best
practices across its many ventures.
o Scale Advantages. The Company and its ventures served a total of 40 million
customers as of December 31, 1998. The scale of the Company's operations
has contributed to cost savings and operational efficiencies that generate
competitive advantages. The Company is able to reduce its costs per
customer by spreading expenses over a large subscriber base and by
consolidating headquarters services and certain shared operational
functions. In addition, by purchasing infrastructure and handsets jointly
with its partners, the Company has been able to obtain favorable pricing
from manufacturers.
o Core Competencies. As competition increases worldwide, AirTouch's
advantages lie in the execution of the basic components of its business:
- World class customer care. The Company's focus on providing
customers with world class customer care gives AirTouch a
competitive advantage in subscriber retention. AirTouch uses a
variety of proactive outreach efforts designed to minimize churn
(customers leaving the system) in the face of growing
competition.
- Extensive distribution channels. As an early entrant into the
wireless market AirTouch has developed extensive direct and
indirect distribution channels to sell its services in its U.S.
and international markets. The Company's strategy is to increase
the proportion of its sales made through direct channels, where
the Company is better able to control and reduce selling costs.
- Quality products and services. The Company offers competitive
products and pricing plans. In the United States, its combined
analog and digital network and the availability of dual-mode
handsets provide the advantage of extensive coverage and
nationwide roaming capabilities. The Company offers analog and
digital products that appeal to different market segments.
- Network expertise. With operations throughout the world, the
Company has engineered cellular networks using every major
wireless technology, including different digital standards as
well as analog. AirTouch built the world's first commercial GSM
network, which commenced service in Germany in 1992, and was a
pioneer in the development of CDMA-digital technology. The
Company has also developed many patented tools for detecting and
preventing cellular fraud and for enhancing analog capacity.
- Profitable growth. The Company focuses on profitably attracting
new subscribers and retaining existing customers. Its cost
containment and efficiencies of scale have helped it to reduce
cash costs per customer faster than declines in the average
revenue per customer, resulting in total Company proportionate
operating cash flow margins of 37.4% (on a pro forma basis for
the MediaOne acquisition) for the year ended December 31, 1998.
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o Efficient Management Structure. In the United States, the Company's
efficient management structure makes AirTouch an agile competitor in an
increasingly competitive industry. Decisions about matters that immediately
impact customers, such as sales and customer service, are kept close to
customers, while decisions in areas where the Company can most realize the
benefits of the scale of its operations, such as purchasing, technology and
product development, are being increasingly centralized. Although the
Company generally has minority interests in its international ventures, it
plays an active role, with board representation and the right to appoint
key management positions and participate in key business decisions.
o Strict Financial Investment Criteria. The Company's strong financial
performance is due in part to its financial discipline and structured
approach to new opportunities and ventures. Each potential investment is
measured against a strict set of financial criteria to determine whether
the investment offers an opportunity for value creation.
RECENT DEVELOPMENTS
On January 15, 1999, AirTouch announced a definitive agreement to merge
with Vodafone Group Plc, which is also a leading international wireless
telecommunication services company. Under the terms of the definitive agreement,
which has been unanimously approved by each company's Board of Directors, owners
of AirTouch common stock will be entitled to receive five Vodafone ordinary
shares (in the form of 0.5 of a Vodafone American Depository Share) and $9 in
cash, without interest, for each share of AirTouch common stock held at closing,
subject to rebalancing between stock and cash under certain circumstances. The
Company believes that a combination with Vodafone is consistent with its
objective of being the world's premier international wireless communications
company.
The merger is subject to the approval of the stockholders of Vodafone
and AirTouch, customary government and regulatory authority approvals and the
receipt of opinions from tax counsel that the stock portion of the merger
consideration will be tax-free to the U.S. holders of AirTouch common stock. The
merger is expected to close in the third quarter of 1999. For more details of
the merger, please see the Company's Current Report on Form 8-K filed January
19, 1999.
DESCRIPTION OF PRINCIPAL BUSINESSES
The Company's operations are divided into three principal businesses:
U.S. Cellular and PCS, International Cellular and Paging:
U.S. CELLULAR AND PCS OPERATIONS
The Company is one of the largest providers of cellular and PCS services
in the United States. The Company's U.S. cellular and PCS interests represented
approximately 97 million POPs and over 8.3 million proportionate customers as of
December 31, 1998, and include some of the most attractive cellular markets
based upon population size and demographic characteristics.
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The Company controls or shares control over cellular and PCS systems
operating in 22 of the 30 largest metropolitan statistical areas in the United
States.
OVERVIEW OF UNITED STATES CELLULAR & PCS OPERATIONS
(ALL INFORMATION AS OF DECEMBER 31, 1998 UNLESS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
MSA(1) MSA POPULATION(1) PERCENT POPS
RANK CELLULAR MARKET STATE (000) OWNERSHIP (000) BRAND NAME
------ --------------- ----- ----------------- --------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
2 Los Angeles................. CA 15,116 82.30% 12,440 AirTouch Cellular
5 Detroit-Ann Arbor........... MI 4,654 100.00% 4,654 AirTouch Cellular
10 San Francisco-Oakland CA 3,989 47.00% 1,875 CellularOne
12 Atlanta..................... GA 3,405 100.00% 3,405 AirTouch Cellular
13 San Diego................... CA 2,758 100.00% 2,758 AirTouch Cellular
14 Minneapolis-St. Paul........ MN-WI 2,703 100.00% 2,703 AirTouch Cellular
15 Phoenix..................... AZ 2,693 100.00% 2,693 AirTouch Cellular
18 Seattle-Everett............. WA 2,219 99.13% 2,200 AirTouch Cellular
19 Denver-Boulder.............. CO 2,219 100.00% 2,219 AirTouch Cellular
23 Cleveland................... OH 1,829 100.00% 1,829 AirTouch Cellular
24 Portland.................... OR-WA 1,701 100.00% 1,701 AirTouch Cellular
25 San Jose.................... CA 1,636 47.00% 769 CellularOne
26 Kansas City................. MO-KS 1,564 50.00% 782 CellularOne
27 Cincinnati.................. OH-KY-IN 1,535 100.00% 1,535 AirTouch Cellular
28 Sacramento.................. CA 1,528 49.88% 762 AirTouch Cellular
Other....................... 37,078 25,235
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Total United States Cellular 86,627 67,560
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<TABLE>
<CAPTION>
MTA(2) MTA POPULATION(2) PERCENT POPS
RANK PCS MARKET (3) (000) OWNERSHIP (000) BRAND NAME
------ -------------- ----------------- --------- ----- ----------
<S> <C> <C> <C> <C> <C>
3 Chicago.................................. 12,700 50.00% 6,350 PrimeCo
7 Dallas(4)................................ 10,800 40.00% 4,320 PrimeCo
13 Tampa.................................... 6,200 50.00% 3,100 PrimeCo
14 Houston(4)............................... 5,900 40.00% 2,360 PrimeCo
15 Miami.................................... 5,900 50.00% 2,950 PrimeCo
17 New Orleans.............................. 5,300 50.00% 2,650 PrimeCo
20 Milwaukee................................ 4,800 50.00% 2,400 PrimeCo
23 Richmond................................. 4,100 50.00% 2,050 PrimeCo
33 San Antonio(4)........................... 3,600 40.00% 1,440 PrimeCo
37 Jacksonville............................. 2,600 50.00% 1,300 PrimeCo
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Total United States PCS.................. 61,900 28,920
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Total United States Wireless............. 148,527 96,480
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(1) MSA refers to metropolitan statistical area. There are 306 MSAs in the
United States, as determined by Rand McNally and adopted by the FCC to
establish cellular service areas. MSA 1997 population figures and rank are
from the 1998 Paul Kagan Associates, Inc. Cellular Telephone Atlas.
(2) MTS refers to metropolitan trading area. There are 51 MTAs in the United
States, as determined by Rand McNally and adopted by the FCC to establish
PCS service areas. MTA 1997 population figures and rank are from the Paul
Kagan Associates, Inc. 1998 Cellular/PCS POP Book.
(3) In January 1999, PrimeCo sold the Honolulu MTA license and system to
Sprintcom.
(4) PrimeCo's ownership percentage of Texas MTAs reflects its partnership with
Texas Utilities. Because PrimeCo does not own 100% of these markets, the
Company's proportionate share of these markets is 40%.
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RECENT DEVELOPMENTS IN U.S. CELLULAR AND PCS BUSINESS
On April 6, 1998, the Company completed its acquisition of MediaOne
Group's U.S. cellular and PCS interests. The Company acquired NewVector, which
held MediaOne Group's U.S. cellular business, including the Minneapolis,
Phoenix, Seattle, Denver and Portland cellular markets, and MediaOne Group's 25%
interest in PrimeCo. As a result of the transaction, the Company added 2.5
million proportionate U.S. wireless customers and 35 million proportionate POPs.
The total value of the transaction was approximately $5.9 billion. The Company
issued approximately 59.4 million shares of Common Stock valued at $2.9 billion
on the date of the transaction and $1.65 billion of preferred stock and assumed
$1.35 billion of debt.
U.S. CELLULAR OPERATIONS
Marketing
The Company markets its cellular services under the AirTouch Cellular
name, with the exception of its systems in the San Francisco Bay Area, Kansas
and Missouri, which market service under the CellularOne brand name. The Company
sells its service directly to customers through its own sales force,
telemarketing centers and the Internet and indirectly through arrangements with
independent agents such as consumer electronic stores, specialized cellular
stores, automobile dealers and department and other retail stores. In certain
markets, the Company's cellular service is sold through resellers who, pursuant
to FCC requirements, are allowed to purchase blocks of cellular telephone
numbers and to access cellular services at wholesale rates for resale to the
public. The Company's costs for attracting new customers (referred to as
"selling costs") primarily consist of advertising and marketing costs, costs of
direct distribution, including costs related to the Company's stores,
compensation paid to independent agents or to its own sales force and handset
subsidies. The Company has been taking steps to align selling costs with
revenues by emphasizing residual or account management payments to agents over
upfront commissions and by increasing the proportion of sales through
Company-controlled direct distribution channels, which have historically been
less costly. Average proportionate selling costs per new customer for the year
ended December 31, 1998 were about $308 on a pro forma basis for the MediaOne
acquisition.
Products and Services
The Company offers analog service in all of its markets and offers
digital service in most markets. In most of its markets the Company offers
custom calling services such as voice mail, call forwarding, call waiting, three
way calling, no answer and busy transfer. The Company also offers a variety of
other enhanced features, including display messaging, which allows a cellular
phone to receive and store voice mail messages, short alphanumeric messages and
pages even if the handset is in use or switched off, and enhanced directory
assistance, which enables callers to be connected to the party whose number was
requested without hanging up and redialing. In many markets, the Company has
introduced a prepaid cellular calling program with no monthly service charge, no
contract commitment, and no billings. The Company maintains a customer service
department in each of its managed cellular markets for billing and service
inquiries. The majority of the Company's customers elect to receive
long-distance service from the Company, which it offers as a
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reseller. Alternatively, customers can select a long-distance provider and be
billed directly by that carrier.
The Company has a variety of pricing plans that differ from market to
market. Certain pricing plans feature a fixed monthly access fee and per minute
charges while others offer a fixed monthly price for a bundle of minutes with
per minute charges for excess minutes. Most of the Company's new customers
select pricing plans that require them to sign a service contract for one or
more years. The Company believes that one of its competitive strengths lies in
its ability to offer customers choice through service and handset pricing that
appeal to different market segments. Customers seeking safety and convenience
are attracted to the low monthly access fees and inexpensive handsets generally
available with analog service. To meet the needs of higher volume users, the
Company offers digital service with rate plans that include higher monthly
access fees and bundles of lower-priced minutes. The Company believes that its
pricing plans are generally competitive with those being offered by other
providers in the markets in which they are applicable.
One recent trend in the U.S. wireless industry is to offer one rate
price plans, which include roaming and, in some plans, long distance at no extra
charge. In response to these programs, in 1998, in many of its markets the
Company has begun offering simplified pricing plans targeted at customers who
roam in which customers can pay a single rate for all roaming minutes or use
minutes included in their bundles for roaming. In some cases, the cost to the
Company of customer roaming is greater than the amount charged to the customer.
As the Company and other wireless operators seek to maintain the profitability
of these simplified pricing plans, it is likely that reciprocal roaming rates
between wireless operators will be negotiated down. Although lower roaming rates
will decrease the revenues the Company receives from customers roaming into its
markets, the expenses it pays for its customers who roam will also decrease. The
Company is focused on lowering the cost of roaming by proactively renegotiating
roaming agreements and maximizing roaming activity with its partners. In
addition, the Company expects that anticipated technological developments,
including handsets that can more easily be programmed with preferred roaming
carriers and tri-mode handsets that will allow roaming between the Company's
cellular and PCS networks, will help the Company manage its roaming costs.
Network
The Company offers analog service in all of its markets and offers
digital service in most markets. The Company's digital service is based on Code
Division Multiple Access ("CDMA") technology, except in the San Francisco Bay
Area, where it is based on Time Division Multiple Access ("TDMA") technology. In
the fourth quarter of 1998 greater than 40% of the Company's peak minutes were
carried on its digital networks. Because the Company offers dual-mode cellular
telephones capable of sending and receiving both analog and certain digital
transmissions, the Company's analog and digital cellular customers can roam to
virtually any cellular market in the United States.
The Company believes that digital cellular technology offers certain
advantages over analog technology, including substantially increased capacity,
greater call privacy, superior voice quality, enhanced services, reduced
susceptibility to fraud and the opportunity to provide improved data
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transmissions. However, the Company expects that analog and digital technologies
will continue to coexist for the foreseeable future due to continued demand for
analog service and the fact that analog networks provide the only common roaming
platform currently available throughout the United States. The Company expects
the majority of its capital expenditures in the future to be spent on its
digital networks.
Cost Structure
The Company's cash costs consist primarily of costs for attracting new
customers, as described above under "Marketing," customer service and billing
costs, fees paid to the local telephone service company for interconnection of
cellular networks with the wireline telephone network, the net cost of AirTouch
customers roaming to other networks, and general and administrative costs. The
Company attempts to decrease its cash costs per customer at a rate equal to or
greater than declines in average revenue per customer. The Company has taken the
following steps to decrease cash costs:
o increased the scale of its operations through acquisitions, allowing
the Company to consolidate common functions and spread costs over a
larger customer base;
o negotiated handset and infrastructure contracts jointly with
partners, resulting in lower prices;
o executed new interconnection agreements with the major local
carriers in its markets, resulting in significant savings on
interconnect costs; and
o managed churn and associated selling costs by taking proactive steps
to retain customers, including changing customer rate plans and
offering free handsets.
As a result of these and other cost saving efforts, the Company reduced
its average monthly pro forma proportionate cash cost per customer to $24.35 for
the year ended December 31, 1998, a 13.9% decline from 1997.
In addition, ongoing investments by the Company in its networks are
necessary in order to increase coverage and capacity. These expenditures are
reflected as depreciation expense. In the future, the Company believes the
majority of such expenditures will be directed towards increasing digital
coverage and capacity.
Joint Ventures
CMT Partners. In September 1993, the Company and AT&T Wireless (at the
time, McCaw Cellular Communications Inc.) formed CMT Partners, an equally owned
partnership that holds interests in cellular systems operating in San Francisco,
San Jose, Dallas/Ft. Worth, Kansas City and certain adjacent suburban areas. In
a related transaction, the Company purchased McCaw's Wichita and Topeka systems.
CMT Partners is governed by a four-person committee consisting of two members
from each company. CMT Partners has a 15 year term, ending in 2008, which may be
extended by either partner or shortened under certain circumstances. Upon
dissolution of CMT Partners its assets will be sold unless either the Company or
AT&T Wireless elects to have the assets distributed in kind to the partners.
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TOMCOM. The Company and Bell Atlantic are partners in TOMCOM, L.P., a
partnership formed to develop technical and service standards for the partners'
wireless properties, pursue national marketing strategies, develop information
technology, create a national distribution strategy and implement joint
purchasing arrangements. TOMCOM is governed by a board composed of three members
from AirTouch and three members from Bell Atlantic.
U.S. PCS OPERATIONS
The Company and Bell Atlantic Mobile are equal partners in PrimeCo
Personal Communications, L.P., which owns ten 30 MHz PCS licenses covering
approximately 62 million POPs in the Chicago, Dallas, Tampa, Houston, Miami, New
Orleans, Milwaukee, Richmond, San Antonio, and Jacksonville MTAs. In January
1999, PrimeCo sold its Honolulu MTA market to Sprintcom, Inc. The PrimeCo
markets complement the existing U.S. cellular franchises of the partners.
PrimeCo began providing service in November 1996 and as of December 31, 1998,
PrimeCo had over 902,000 customers and provided service in more than 20 major
cities. The Company expects to continue to make significant capital
contributions to PrimeCo and to experience operating losses associated with the
start-up phase of the PCS business.
PrimeCo's success as a competitor depends on the same factors as that of
the Company's United States cellular operations. PrimeCo's operations are
structured in a manner similar to those of the Company's United States cellular
businesses with respect to marketing, products and services and cost structure.
PrimeCo initiated service in late 1996 and has not yet achieved the critical
size to enable it to achieve all of the economies of scale that the Company's
cellular business currently enjoys. PrimeCo, a 100% CDMA digital network, has
recently introduced dual-mode handsets that enable customers to roam on a
nationwide basis on analog cellular networks.
Either the Company or Bell Atlantic may cause PrimeCo to be dissolved on
October 20, 2001, and if dissolution occurs the PrimeCo properties will be
allocated between them according to agreed criteria. In addition, if AirTouch's
merger with Vodafone is completed, Bell Atlantic will have the right to cause
the early dissolution of PrimeCo. Bell Atlantic is subject to certain standstill
restrictions with respect to the Company through October 20, 2001, unless such
restrictions are earlier terminated or suspended.
On July 28, 1998, Bell Atlantic and GTE Corp. announced that they had
entered into an agreement to merge. Both the TOMCOM and PrimeCo partnership
agreements contain a number of restrictions on the partners' activities outside
the partnerships. One restriction prohibits either partner from acquiring a
cellular, ESMR or PCS system in a service area where the other partner has an
interest and requires that the acquiring partner dispose of the conflicting
property within six months. GTE currently owns interests in several wireless
markets that overlap with markets in which the Company has ownership interests,
including markets owned by PrimeCo. Both the TOMCOM and PrimeCo agreements
contain restrictions on transfer of partnership interests and prohibit partners
from withdrawing from the partnerships. In January 1999, Bell Atlantic sued
AirTouch in federal court seeking preliminary and injunctive relief from the
provisions of the agreement limiting the partners' competitive activities. The
Company has filed a counterclaim
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against Bell Atlantic for violations of the partnership agreements. See "Item 3.
Legal Proceedings" for a description of the litigation.
INTERNATIONAL CELLULAR OPERATIONS
The Company has ownership interests, with board representation and
significant operating influence, in diverse markets throughout the world. The
Company's international cellular interests represented 139 million POPs and 5.7
million proportionate customers as of December 31, 1998.
OVERVIEW OF INTERNATIONAL CELLULAR VENTURES
(ALL INFORMATION AS OF DECEMBER 31, 1998 UNLESS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
MARKET SERVICE TOTAL TOTAL
POPULATION INITIATION VENTURE AIRTOUCH LICENSEES IN
COUNTRY/SERVICE NAME (MILLIONS)(1) DATE CUSTOMERS INTEREST(2) MARKET
- -------------------- ------------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
European Operations:
Germany/D2 Privat........... 81.3 6/92 ~6,000,000 34.8% 4
Italy/Omnitel............... 57.5 10/95 6,190,000 15.5%(3) 3
Spain/Airtel................ 39.4 10/95 2,157,000 21.7% 3
Portugal/Telecel............ 9.9 10/92 1,370,000 50.9% 3
Belgium/Proximus............ 10.1 1/94 1,238,000 25.0% 3
Sweden/Europolitan.......... 8.8 9/92 624,000 51.1% 4
Poland/Plus GSM............. 38.5 10/96 ~800,000 19.3% 3
Romania/Connex.............. 23.2 4/97 325,000 10.0%(4) 2
Asian and Other Operations:
Japan:......................
J-Phone(5)............... 77.2 4/94-7/94 3,475,000 13.0-15.0% 7
Digital TU-KA(6)......... 48.9 1/96-2/97 2,140,000 4.5% 7
South Korea/Shinsegi........ 45.6 4/96 2,142,000 10.7% 5
India.......................
Madhya Pradesh/RPG Cellular 72.7 2/97 * 49.0% 2
Madras/RPG Cellular...... 6.7 9/95 * 20.58% 2
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34,000
Egypt/Click GSM............. 54.5 12/98 38,000 30.0% 2
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Total.................... 574.3 26,533,000
===== ==========
</TABLE>
- -----------
* Not disclosed
(1) Population estimates are as of December 31, 1997 and are from Kagan World
Media, Ltd. International Cellular, May 29, 1998, except Japan, which is
from Japan Statistical Yearbook-1995, Statistical Bureau of Management and
Coordination Agency.
(2) Exclusive of any options, warrants or other rights to increase ownership.
(3) Indirect ownership interest through Pronto-Italia S.p.A. In January 1999
the Company exercised an option to increase its ownership interest from
15.5% to 17.8%. The Company has an additional option which, if exercised,
would bring its interest to 21.7%.
(4) The Company holds an option to purchase an additional 10%.
(5) Includes the Tokyo, Kansai and Central Japan Digital Phone Companies.
(6) Includes Kyushu, Chugoku, Tohoku, Hokkaido, Hokuriku and Shikoku regions.
Customers are not included in proportionate customer numbers because the
Company accounts for these investments on a cost basis.
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Operations
The Company's international ventures rely on the same core competencies
for success as its United States business: high quality networks with extensive
roaming capabilities, well-established direct and indirect distribution
channels, and innovative products and services that appeal to various customer
segments. In 1998, a number of the Company's international ventures were less
mature than its United States cellular ventures and accordingly had not yet
achieved the critical size that will provide economies of scale from cost
reductions and operating efficiencies. However, because the markets were
generally less penetrated, they on average experienced stronger customer growth
in 1998 than in the United States.
In addition to being driven by strong overall demand for wireless
service, the growth in wireless usage in the Company's international markets is
attributable to two factors not present in the United States. The first is known
as calling party pays. In most countries, calls received by wireless customers
are paid for by the calling party, thereby encouraging customers to distribute
their mobile phone numbers widely. The second factor is the popularity of
prepaid pricing plans, which allow customers to have wireless service without
minimum monthly access or service charges. The combination of these two factors
has enabled a large segment of the population who would otherwise be unable to
afford wireless service to more fully use the service. Prepaid customers
accounted for about 30% of the Company's proportionate international customer
base as of December 31, 1998.
Due to strong customer growth and usage, ventures in eight of the twelve
countries where the Company has international investments currently generate
positive operating cash flow. Since its initial investment, the Company has
received $537 million of distributions from its German venture, $12 million from
its Swedish venture and $17 million from its Portuguese venture.
Ownership Rights and Obligations
The ownership of the Company's international cellular ventures typically
includes majority local ownership at the time of the award of a license,
necessitated as a result of political, legal, and economic factors. This
frequently changes over time. In structuring its international investments, the
Company attempts to obtain operating influence through board representation, the
right to appoint certain key members of management and consent rights for
significant matters such as capital contributions, incurrence of recourse debt
and fundamental corporate transactions. In addition, the Company tries to ensure
its ability to maintain a position of influence in its ventures by obtaining
rights of first refusal on future sales by other partners and issuances of new
equity by the venture. The particular governance rights of the Company vary from
venture to venture and are often dependent upon the size of the Company's
investment relative to other investors. The Company currently has the majority
interest in its Portuguese and Swedish ventures, the largest ownership interest
in its Spanish venture, the second largest ownership interest in three of its
Japanese ventures, and the third largest ownership interest in its Korean and
Italian ventures. It also shares the largest ownership interest in its Egyptian
venture. In Germany, the Company is the only shareholder other than the majority
shareholder, Mannesmann A.G., and in Belgium the Company is the only other
partner in a joint venture with Belgacom.
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Technological Expertise
Lead Technological Partner. The Company usually plays the lead role in
the design, construction, operation and maintenance of the cellular networks for
the ventures in which it has ownership interests. For example, the Company has
taken the technical lead in the development of the digital systems in Belgium,
Germany, India (Madras and Madhya Pradesh), Italy, Poland, Portugal, Romania,
South Korea and Spain, and was integrally involved in the design and
construction of three of the systems in Japan. In almost all of those markets,
the Company has appointed the chief technical officer, who is responsible for
network construction and technical operations.
GSM. The Company's cellular systems in Europe, Egypt and India conform
to the GSM digital cellular standard. Developed by a standards body within the
European Telecommunications Standards Institute with substantial input from the
Company's engineers, the GSM standard is a wide-band TDMA standard substantially
different from United States TDMA technology and has been adopted in more than
110 countries worldwide, including all European union member countries,
Australia, New Zealand, Singapore, Hong Kong and South Africa. The Company's
German venture, Mannesmann Mobilfunk GmbH, was the first GSM system to offer
commercial service.
Japan Digital Cellular Standard. The technology utilized by the
Company's Japanese ventures represents Japan's entry into second-generation
cellular communications. The Japan Digital Cellular standard uses a narrowband
Japanese TDMA standard that allows enhanced roaming and expanded supplementary
services potential. To provide service to customers away from their home
regions, all of the Company's Japanese ventures have implemented automatic
roaming throughout their combined coverage areas. Customers of any of the
companies are able to initiate and receive calls anywhere within the combined
coverage area.
Korean CDMA. The Company's cellular venture in South Korea employs a
CDMA technology standard developed by Samsung, Lucent and Hyundai under a
license from QUALCOMM, Inc.
New Opportunities
The Company constantly evaluates opportunities to increase its ownership
in its existing international ventures, especially where contractual rights of
first refusal provide the Company with favorable opportunities. The Company also
plans to continue pursuing selected opportunities to acquire new interests in
wireless systems throughout the world. The Company believes that its proven
technical, operating and marketing expertise makes it a highly desired
participant in ventures formed to pursue new international opportunities and
that such expertise has been a significant factor in the success of the
subsequent license applications by its ventures.
The Company measures each international investment against a strict set
of criteria in determining whether the investment offers an opportunity for
value creation. These criteria include the country's demographic factors, the
degree of economic, political and regulatory stability, the
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quality of local partners and the degree to which the Company would control or
meaningfully participate in management. Until recently, the Company's primary
focus in pursuing licenses has been Europe and Asia; however, the Company has
increasingly been considering opportunities in other parts of the world, as
demonstrated by its recent investment in Egypt.
The pursuit of new international wireless telecommunications
opportunities is expected to remain highly competitive and may introduce a
greater degree of political, economic and currency risk as new opportunities are
concentrated in developing economies. The trend toward awarding new licenses on
the basis of an auction rather than on merit-based selection criteria may limit
the Company's ability to win new licenses, particularly if competing bidders
place a higher value on the license or have less stringent return requirements
than the Company.
PAGING
The Company offers local, regional, statewide, and nationwide paging
services under the AirTouch Paging brand name in 32 states and the District of
Columbia. As of December 31 1998, the Company had approximately 3.4 million
paging units in service in the United States. Based upon industry surveys, the
Company is among the largest providers of paging services in the United States
and the only large paging company in the United States to achieve and maintain
positive net income and net funding back to AirTouch. The Company's growth
strategy is to offer new services, to provide superior customer service, to
refine its distribution channels, and to expand into new geographic markets
through start-ups or acquisitions.
OTHER SERVICES
The Company believes that its focus on wireless services offers the best
opportunity for value creation. However, in light of the continuing evolution of
telecommunications technology and customer requirements, the Company
continuously evaluates the possibility of expanding its operations into lines of
business beyond its historical base of high mobility wireless services where
such expansion would enhance or complement existing wireless services. Some
areas of possible expansion could include: wireless local loop (the construction
and operation of dedicated wireless networks designed to compete directly with
or substitute for wireline networks); international long-distance service for
the Company's wireless subscribers; and international wireline long-distance
services that complement the Company's wireless properties. Any decision by the
Company to enter any of these lines of business will depend on the Company's
evaluation of its ability to create value by employing the assets or expertise
of its wireless operations, including networks and customer bases, as well as
the standalone attractiveness of the opportunity.
ARCOR
The Company owns a 3.4% indirect interest in Mannesmann Arcor K.G.
("Arcor"), Germany's second largest wireline telecommunications company. The
interest is owned through a consortium, led by Mannesmann A.G., that has a 74.9%
interest in Arcor. Deutsche Bahn, the German national railway company, holds the
other 25.1% of Arcor. The Company has an option to increase its 4.5% interest in
the consortium to 9% by 2000. The Company and Mannesmann A.G. currently jointly
own Mannesmann Mobilfunk GmbH ("MMO"),
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Germany's leading cellular operator, which operates under the name D2 Privat. In
1998, MMO began reselling Arcor long distance service and Arcor has began
reselling MMO's cellular service.
GLOBALSTAR
The Company holds a 5.2% interest in Globalstar, L.P. ("Globalstar"), a
limited partnership led by Loral Space & Communications Corporation Ltd.
("Loral") and QUALCOMM, Inc. ("QUALCOMM") that will construct and operate a 48
satellite low earth orbit constellation utilizing CDMA technology designed to
offer wireless communications services in virtually every populated area of the
world. Commercial service is expected to begin by the end of 1999. The Company
has the exclusive right to provide Globalstar services in the United States, the
Caribbean and eastern Asia (Indonesia, Japan, Malaysia) and, through
partnerships with Loral, in Canada and Mexico.
EMPLOYEES
As of March 15, 1999, the Company and its wholly-owned subsidiaries had
approximately 13,000 employees. None of the Company's employees are represented
by a labor organization, although employees of certain international
subsidiaries and joint ventures are represented by labor or trade organizations.
Management considers its relations with the Company's employees to be good.
REGULATION
UNITED STATES
The Company's U. S. cellular, paging and PCS licenses are issued and
regulated by the Federal Communications Commission ("FCC"). In addition, the
Company's U.S. wireless operations are subject to public utility regulation in
the states in which service is provided and to local regulations. States are
preempted from regulating cellular, PCS and paging rates and market entry but
may regulate certain other terms and conditions of service. The Company does not
anticipate that state regulation will interfere with the efficient operation of
its wireless businesses. The location and construction of wireless service
facilities are also often subject to state or local zoning, land use and other
local regulation and fees.
The FCC has adopted rules requiring carriers such as the Company to
provide customers in the U.S. with local number portability by November 24,
2002. Local number portability is the ability for customers to retain their
telephone numbers should they choose to switch landline or wireless carriers.
Providing this functionality will result in additional capital requirements and
operating expenses in future years. The Company does not expect these costs to
have a material impact on its results of operations or liquidity.
The Company will be required to upgrade its cellular and PCS networks in
the U.S. to provide certain functionality to authorized government agencies. 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, the
15
<PAGE> 16
Communications Assistance Law Enforcement Act ("CALEA") will require the Company
to provide law enforcement agencies with certain network 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 of
its costs will be recoverable.
INTERNATIONAL
The Company's international cellular and paging operations provide
services pursuant to the terms of licenses granted by the telecommunications
agency or similar supervisory authority in the various countries. Such agencies
typically also promulgate and enforce regulations regarding the construction and
operation of network equipment. Other regulations commonly encountered in
international markets include legal restrictions on the percentage ownership of
telecommunications licensees by foreign entities such as the Company and
transfer restrictions or governmental approval requirements regarding changes in
the ownership of such licensees.
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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 Belgium, Italy, Spain, Poland and Portugal have three. 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. As a result, in recent years the Company's proportionate
average revenue per cellular customer has declined at rates between 12% and 15%
per year in the United States to $44 for 1998 (on a pro forma basis for the
MediaOne acquisition) and between 20% and 25% per year, including the impact of
foreign exchange fluctuations, to $61 for 1998 in the Company's international
markets and is expected to continue to decline at similar rates in 1999. These
trends could reduce the Company's revenues compared to current levels.
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. The Company has experienced
an increase in monthly churn rates in its United States markets in recent months
as a result of increased competition, with the Company experiencing
proportionate churn in the United States of 2.15% for the year ended December
31, 1998 on a pro forma basis for the MediaOne acquisition and 2.5% for the
fourth quarter of 1998. There can be no assurance that the Company will not
experience further increases in churn rates in both its United States and
international markets, 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 technologies.
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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.
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, Sacramento 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 or cash flows. 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, the Company's cellular system in Sweden, and Telecel
Communicacoes Pessoais, S.A., 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. In others, these matters may be 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 represents a substantial portion of total
Company proportionate operating cash flow. Investments in
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international operations are subject to risks and uncertainties which may
include taxation, nationalization, inflation, currency fluctuations, and
increased regulation. Certain Asian countries have recently experienced 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.
RISK OF RATINGS CHANGE. The Company has received a rating of BBB+ from
Standard & Poor's and a rating of Baa2 from Moody's for its senior unsecured
long term debt. The Company's 6.00% Class B Mandatorily Convertible Preferred
Stock, Series 1996 and its 4.25% Class C Convertible Preferred Stock, Series
1996 have been rated BBB- by Standard & Poor's and Baa3 by Moody's. Subsequent
to the announcement of the proposed merger with Vodafone, both Standard & Poor's
and Moody's have placed their credit ratings for AirTouch on review for possible
upgrade. The Company's ratings may be revoked or revised by the rating agencies
at any time, and there can be no assurance that the Company will continue to
maintain such ratings.
YEAR 2000 READINESS.
Issues for AirTouch
Many of the Company's systems are affected by the year 2000 issue, which
refers to the inability of computerized systems and embedded technology to
process dates or operate beyond December 31, 1999. The Company has implemented a
comprehensive plan to address the year 2000 issue in the mission critical
systems of its consolidated markets. 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. These include, among others, systems that constitute the Company's
wireless networks, billing systems, and customer care systems.
State of Readiness
The Company's plan to address the year 2000 issue consists of five
phases: (1) the complete inventory of all mission critical systems employed in
the Company's consolidated markets and
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the identification of hardware, software, and embedded technology that are
affected by the year 2000 issue; (2) analysis and design of (or interaction with
third party suppliers regarding) modifications for each affected component; (3)
creation and testing of the modifications; (4) implementation of the
modifications on a company-wide basis; and (5) testing of the interface between
systems. The Company's plan addresses both information technology ("IT") and
technology embedded in equipment and other infrastructure.
The plan is being implemented under the oversight of an executive
steering committee that includes the Company's President and Chief Operating
Officer and Executive Vice President and Chief Financial Officer. The Company
currently employs over 200 full-time contractors and employees implementing the
plan. The Company's executive steering committee is regularly updated by an
independent consultant who reviews the adequacy of the Company's processes and
methodologies for assessing the costs and risks associated with the year 2000
issue and by the Company's internal audit group that independently verifies the
project status.
The Company has completed phases one and two of its plan. It has
completed approximately three-quarters of phases three and four and is on target
to have them substantially completed by mid-1999. The Company is also conducting
phase five work and is on target for substantial completion by mid-1999. If the
Company discovers that certain components have not been sufficiently modified,
then it will have to repeat phases two through five with respect to such
components.
Based on the current progress of the Company's year 2000 efforts and on
the assumption that third parties will meet their commitments, the Company
believes that it can prevent serious disruption to the mission critical systems
of its consolidated markets.
The Company is also monitoring the progress of its significant
unconsolidated ventures in addressing their mission critical systems through its
positions on the governing boards of such entities and, in some cases, through
review of the subsidiary's remediation plans.
Dependence on Third Parties
Much of the technology employed in the Company's mission critical
systems was purchased from third parties. The Company is dependent on those
third parties to assess the impact of the year 2000 on their technology and to
take any necessary corrective action. The Company is monitoring the progress of
these third parties and, in selected cases, has reviewed their modification and
test plans. The Company has received information for all of its supplied
products regarding the impact of the year 2000 issue and the vendors' plans to
correct them. The Company is selectively conducting tests to determine whether
certain suppliers have accurately assessed and addressed the impact of the year
2000 on their products.
The ability of the Company to complete its remediation plan and avoid
disruption of its service is dependent on its suppliers delivering the necessary
modifications to their products by the projected delivery dates.
Management believes that the original manufacturers of handsets and
pagers are primarily liable for failures of such products. Based on
representations made by such manufacturers, the
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Company does not expect significant disruption to its customers as a result of
handset or pager failure. However, in the event of such product failures, the
Company could experience service revenue loss and incur additional costs to
furnish customers with temporary or permanent replacement equipment to prevent
further service revenue loss.
The Company's systems are interconnected with numerous networks and
systems operated by third parties, including landline telecommunications
networks, long-distance networks, the networks of other wireless service
providers, and networks operated by utilities. The operators of these networks
are responsible for addressing the year 2000 issue in their own systems. The
ability of the Company's systems to operate, including the ability of the
Company to provide wireless service, is dependent upon these third party
networks and systems being year 2000 compliant. Of this, there can be no
assurance.
The Company has taken an active role with industry groups to develop
procedures to test the interconnection among different wireless networks and
between certain wireless networks and landline telecommunications networks. A
set of successful tests led by the Cellular Telecommunications Industry
Association took place at the end of 1998. Additional testing is being conducted
during the first half of 1999.
Costs
The Company incurred approximately $30 million in incremental
consolidated pre-tax expenses through the end of 1998 for the year 2000 program.
Prior to 1999, the Company did not comprehensively track non-incremental costs,
which consist primarily of time spent on year 2000 efforts by employees not
dedicated to the year 2000 project. The Company plans to incur approximately $50
million in total pre-tax expenses in 1999, including incremental and
non-incremental costs, for its remediation and testing of its consolidated
mission critical systems. The majority of the remaining expenses will be
incurred in the first half of 1999. Additionally, the Company will incur
capitalized costs that represent ongoing investments in new systems and system
upgrades, the timing of which is being accelerated in order to facilitate year
2000 compliance. These capitalized costs are not expected to have a material
impact on the Company's financial position or results of operations. The
Company's cost estimate assumes that the Company and its third party suppliers
have accurately assessed the compliance of the components and systems for which
they are responsible and that they will successfully remediate non-compliant
components and systems. Because of the complexity of year 2000 remediation,
actual costs may vary from this estimate.
The Company redeployed employees to address the year 2000 issue,
resulting in delays of other non-critical IT projects. The costs expected to be
incurred in 1999 for these employees are included in the estimated costs. The
Company does not expect the delay in these non-critical IT projects to have an
adverse effect on its results of operations or financial condition.
Business Continuity Plans
The Company's business continuity plan is currently under development
for year 2000 issues. The first phase is to analyze mission critical business
functions, such as billing and customer care systems, and determine the risks of
failure based on the number and complexity of the year 2000 modifications to the
systems supporting those functions. The second phase is to prepare and implement
alternatives for those business functions that are most susceptible to
disruption and
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the final phase will be to test these alternatives. The Company is currently
completing phases one and two and will be in a better position to assess the
most reasonably likely worst case scenario and the potential cost of the
Company's business continuity plan at the end of these phases, targeted for
mid-1999. The Company is also developing processes intended to quickly identify
the cause of any disruptions to its mission critical systems in the year 2000.
There can be no assurance that these plans will successfully avoid service
disruption.
Risks
If the Company or its suppliers are unsuccessful in their efforts to
correct the Company's mission critical systems or if third parties with whom the
Company's systems interconnect do not correct their systems, the Company may
experience significant disruption to its operations. This could include the
disruption of the Company's ability to provide wireless service and to correctly
bill customers, resulting in potential revenue loss and increased costs. Such an
outcome could have a material adverse impact on the Company's financial
condition or results of operations.
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ITEM 3. PROPERTIES.
For each market served by the Company's cellular operations, the Company
or its venture maintains at least one sales or administrative office and many
transmitter and antenna sites. Some of the facilities are leased and some are
owned. The Company also maintains both owned and leased sales and administrative
facilities for its paging services. The Company believes that its facilities are
suitable for its current business and that additional facilities are expected to
be available to satisfy its foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is 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. The plaintiffs are alleging price fixing in the Los
Angeles cellular market. In 1994, a parallel class action complaint, filed in
Orange County Superior Court, was stayed pending the resolution of the 1993
case. In 1997, the Court approved a settlement of the 1993 case. Three
plaintiffs have filed an appeal challenging the adequacy of the settlement.
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. A settlement of the federal
court case was approved on November 28, 1998. 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
consolidated and the court approved a settlement of the case in 1998. One
plaintiff has filed an appeal. The Company believes that the ultimate outcome of
these matters, in the aggregate, will not have a material adverse impact on its
financial position or results of operations.
In July 1998, customers filed a complaint in Sacramento County Superior
Court against the Company and other cellular and PCS carriers challenging the
legality of certain billing practices and claiming that the practices are not
adequately disclosed in the California markets. This case was subsequently
dismissed with prejudice. The plaintiffs have filed a notice of appeal. In
August 1998, a complaint was filed against PrimeCo, an unconsolidated subsidiary
of the Company, in the Cook County Chancery Court. Plaintiffs are challenging
the legality of certain billing practices and claiming that the practices are
not adequately disclosed. The plaintiffs are seeking an unspecified amount of
monetary damages and revisions of PrimeCo's billing practices. Also, in August
1998, a second complaint was filed against PrimeCo in the Cook County Chancery
Court alleging certain deficiencies in PrimeCo's network performance. The
plaintiffs are seeking an unspecified amount of monetary damages. These cases
are in the preliminary phase. The Company is not currently able to assess the
impact, if any, of these cases on its financial position or results of
operations.
In December 1998, a complaint was filed against the Company and other
cellular service providers in the Sacramento County Superior Court on behalf of
all individuals subscribing to service in the Sacramento area. Plaintiffs claim
that the defendants conspired to fix prices for cellular services. The
plaintiffs are seeking injunctive relief and damages in excess of $100
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million. This case is in the preliminary phase and the Company is not currently
able to assess the impact, if any, of this case on its financial position or
results of operations.
On January 6, 1999, a class action was filed against the Company in the
Federal District Court for the Central District of California alleging claims
under Section 10(b) and 20(a) of the Securities Exchange Act, 15 U.S.C. 78j and
78t and Rule 10b-5. The action was filed on behalf of individuals who sold
AirTouch common stock or call options or purchased put options on January 4,
1999. Plaintiffs claim the Company's press release of January 3, 1999, was false
and misleading because it confirmed the Company was in merger discussions with
Bell Atlantic but did not disclose that it was in discussions with Vodafone.
This case is in the preliminary phase and the Company is not currently able to
assess the impact, if any, on its financial position or results of operations.
Bell Atlantic filed an action against the Company on January 15, 1999,
in the Federal District Court for the Northern District of California seeking an
injunction to void clauses of the TOMCOM, L.P. and PrimeCo partnership
agreements which restrict the partners' ability to compete against the
partnerships. The Company has filed a counterclaim against Bell Atlantic for
violations of the partnership agreements. The case is in the preliminary phase
and the Company is not currently able to assess the impact, if any, on its
financial position or results of operations.
The Company is party to various other legal proceedings in the ordinary
course of business. The Company believes that the ultimate outcome of these
matters will not have a material adverse impact on its financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1998.
24
<PAGE> 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") and the Pacific Exchange. Below are the high and low sales prices of
the Common Stock as reported on the NYSE for the periods shown.
<TABLE>
1997 High Low
----------------------------------------------------------- ---- ---
<S> <C> <C>
First Quarter 29-1/2 22-7/8
Second Quarter 29-1/4 22
Third Quarter 38-1/8 26-15/16
Fourth Quarter 42 33
1998 High Low
----------------------------------------------------------- ---- ---
First Quarter 50-7/8 40-5/16
Second Quarter 58-15/16 46-1/4
Third Quarter 65-5/8 51-3/4
Fourth Quarter 75 42-1/4
</TABLE>
The number of holders of record of the Company's Common Stock as of
March 15, 1999 was 496,417.
The Company currently intends to retain future earnings for the
development of its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. The Company's future dividend policy
will be determined by its Board of Directors on the basis of various factors,
including the Company's results of operation, financial condition, capital
requirements and investment opportunities.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is set forth in the Company's 1998
Annual Report to Stockholders under "Selected Financial Data," which portions
are incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this Item is set forth in the Company's 1998
Annual Report to Stockholders under "Management's Discussion and Analysis,"
which portions are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this Item is set forth in the Company's 1998
Annual Report
25
<PAGE> 26
to Stockholders under "Management's Discussion and Analysis - Market Risk,"
which portions are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The audited financial statements for the year ended December 31, 1998,
as required by this Item, are set forth in the Company's 1998 Annual Report to
Stockholders which portions are incorporated herein by reference in Part IV
of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No disagreements with accountants on any accounting or financial
disclosure occurred during the Company's two most recent fiscal years or any
subsequent interim period.
26
<PAGE> 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item will be incorporated by reference
to the Company's Proxy Statement for 1999 or will be set forth in an amendment
to this Form 10-K as permitted by General Instruction G(3) to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item will be incorporated by reference
to the Company's Proxy Statement for 1999 or will be set forth in an amendment
to this Form 10-K as permitted by General Instruction G(3) to Form 10-K
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item will be incorporated by reference
to the Company's Proxy Statement for 1999 or will be set forth in an amendment
to this Form 10-K as permitted by General Instruction G(3) to Form 10-K
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be incorporated by reference
to the Company's Proxy Statement for 1999 or will be set forth in an amendment
to this Form 10-K as permitted by General Instruction G(3) to Form 10-K
27
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements:
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
The audited financial statements for the year ended December
31, 1998, as required by this Item, are set forth in the
Company's 1998 Annual Report to Stockholders, which portions
are incorporated herein by reference.
CMT PARTNERS
The financial statements required by this Item are
incorporated by reference to the Company's Annual Report on
Form 10-K for the period ended December 31, 1997, pages S-2
to S-14, File No. 1-12342.
MANNESMANN MOBILFUNK GMBH
Independent Auditors' Report
Balance Sheets - December 31, 1998 and 1997
Statements of Income - Years ended December 31, 1998, 1997 and
1996
Statements of Capital Subscribers' Equity - Years ended
December 31, 1998, 1997 and 1996 Statements of Cash Flows -
Years ended December 31, 1998, 1997 and 1996 Notes to
Financial Statements
2. Financial Statement Schedules:
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Accounts (PricewaterhouseCoopers LLP)
Schedule II -- Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above are omitted because
they are either not required or not applicable, or the
required information is presented in the Consolidated
Financial Statements or in the other financial statements
listed under Item 14(a)(1) above.
28
<PAGE> 29
3. Exhibits.
Exhibits identified in parentheses below, on file with the Commission,
are incorporated by reference as exhibits hereto.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger among US WEST Media Group, Inc.,
US WEST NewVector Group, Inc. and the Company dated as of
January 29, 1998 (Exhibit 2.1 to the Company's Current Report
on Form 8-K - Date of Report: January 29, 1998, File No.
1-12342)
2.2 Agreement and Plan of Merger among Vodafone Group Plc,
AirTouch Communications, Inc. and Apollo Merger Sub, Inc.
dated as of January 15, 1999 (Exhibit 2.1 to the Company's
Current Report on Form 8-K - Date of Report: January 19, 1999,
File No. 1-12342)
3.1 Certificate of Incorporation of the Company, as filed with the
Secretary of State of the State of Delaware on September 19,
1994 (Exhibit 3.1 to the Company's Current Report on Form 8-K
Date of Report: December 15, 1994, File No. 1-12342)
3.2 Designation, Preferences and Rights of Series A Participating
Preferred Stock of the Company, as filed with the Secretary of
State of the State of Delaware on December 15, 1994 (Exhibit
3.2 to the Company's Form 8-B, File No. 1-12342, filed January
27, 1995)
3.3 Amended By-laws of the Company as of June 13, 1996 (Exhibit 3
to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1996, File No. 1-12342)
3.4 Certificate of Designation, Preferences and Rights of Class B
Preferred Stock, Series 1996 (Exhibit 4.3 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996, File No. 1-12342)
3.5 Certificate of Designation, Preferences and Rights of Class C
Preferred Stock, Series 1996 (Exhibit 4.4 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996, File No. 1-12342)
3.6 Certificate of Designation, Preferences and Rights of Class D
Preferred Stock, Series 1998 (Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1998, File No. 1-12342)
3.7 Certificate of Designation, Preferences and Rights of Class E
Preferred Stock, Series 1998 (Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1998, File No. 1-12342)
4.1 Form of Common Stock certificate (Exhibit 4.1 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1994, File No. 1-12342)
4.2 Rights Agreement between the Company and The Bank of New York,
Rights Agent, dated as of September 19, 1994 (Exhibit 4 to the
Company's Current Report on Form 8-K - Date of Report:
December 15, 1994, File No. 1-12342)
4.3 Amendment No. 1 to Rights Agreement between the Company and
The Bank of New York, Rights Agent, dated as of January 29,
1998 (Exhibit 4.3 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, File No. 1-12342)
4.4 Indenture dated as of July 16, 1996 between the Company and
The First National Bank of Chicago, as trustee (Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1996, File No. 1-12342)
4.5 First Supplemental Indenture dated as of July 16, 1996 between
the Company and The First National Bank of Chicago, as trustee
(Exhibit 4.1 to the Company's Current Report on Form 8-K, Date
of Report: July 3, 1996, File No. 1-12342)
4.6 Second Supplemental Indenture dated as of July 16, 1996
between the Company and The First National Bank of Chicago, as
trustee (Exhibit 4.1 to the Company's Current Report on Form
8-K, Date of Report: July 11, 1996, File No. 1-12342)
4.7 Third Supplemental Indenture dated as of October 7, 1996
between the Company and The First
29
<PAGE> 30
National Bank of Chicago, as trustee (Exhibit 4.1 to the
Company's Current Report on Form 8-K: Date of Report: October
2, 1996, File No. 1-12342)
10.1 Agreement of Limited Partnership dated as of October 20, 1994
between CELLCO Partnership and WMC Partners, L.P. (Exhibit
10.1 to the Company's Current Report on Form 8-K - Date of
Report:
October 20, 1994, File No. 1-12342)
10.2 Agreement of Limited Partnership dated as of October 20, 1994
of PrimeCo, L.P. (Exhibit 10.2 to the Company's Current Report
on Form 8-K - Date of Report: October 20, 1994, File No.
1-12342)
10.3 Standstill Agreement dated as of October 20, 1994 between
AirTouch Communications, Inc. and Bell Atlantic Corporation
(Exhibit 10.3 to the Company's Current Report on Form 8-K -
Date of Report: October 20, 1994, File No. 1-12342)
10.4 Standstill Agreement dated as of October 20, 1994 between
AirTouch Communications and CELLCO Partnership (Exhibit 10.5
to the Company's Current Report on Form 8-K - Date of Report:
October 20, 1994, File No. 1-12342)
10.5 Credit Agreement between the Company, Bank of America National
Trust and Savings Association and The Other Financial
Institutions Party Thereto dated July 20, 1995 (Exhibit 10 to
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1995, File No. 1-12342)
10.6 Amended and Restated Partnership Agreement dated as of
September 1, 1993 by and between Members of the PacTel Group
and Members of the McCaw Group (Exhibit 28(a) to McCaw
Cellular Communications, Inc. Current Report on Form 8-K for
the period ended October 1, 1991, File No.
0-16051)
10.7 Representative Employment Agreement for Messrs. Sarin, Gyani,
Jones and Farrill and Mrs. Gill (Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended September
30, 1998, File No. 1-12342)
10.8 Representative Employment Agreement for other officers of the
Company (Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1998, File No.
1-12342)
10.9 Form of Indemnity Agreement between the Company and each of
its directors and certain officers (Exhibit 10.24 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994, File No. 1-12342)
10.10 Trust Agreementfor AirTouch Communications, Inc. Executive
Benefits (Second Amendment and Restatement Effective as of
October 31, 1994)
10.11 AirTouch Communications Deferred Compensation Plan (Exhibit
10.26 to the Company's Form 10-K for the year ended December
31, 1994, File No. 1-12342)
10.12 AirTouch Communications Deferred Compensation Plan for
Nonemployee Directors (Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1998,
File No.
1-12342)
10.13 Trust Agreement for AirTouch Communications Deferred
Compensation Plan (Amended and Restated Effective as of
December 1, 1994)
10.14 AirTouch Communications Supplemental Executive Pension Plan -
Second Amendment and Restatement Effective as of April 1, 1994
(Exhibit 10.32 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, File No. 1-12342)
10.15 Amendment No. 1 to the AirTouch Communications, Inc.
Supplemental Executive Pension Plan Second Amendment and
Restatement Effective as of April 1, 1994 (Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998, File No. 1-12342)
10.16 AirTouch Communications Executive Life Insurance Plan 10
(Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1998, File No. 1-12342)
10.17 AirTouch Communications Executive Long-Term Disability Plan
(Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1998, File No. 1-12342)
10.18 AirTouch Communications Estate Deferral Program (Exhibit 10.8
to the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1998, File No. 1-12342)
10.19 AirTouch Communications Incentive Plan (Amended and Restated
Effective as of January 1, 1998)
30
<PAGE> 31
10.20 Description of the Company's Business Travel Accident
Insurance for Non-Employee Directors (Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994, File No. 1-12342)
10.21 AirTouch Communications, Inc. 1993 Long-Term Stock Incentive
Plan - Amendment and Restatement Effective as of December 12,
1996 (Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997, File No. 1-12342)
10.22 Description of the Executive Financial Counseling Program
(Exhibit 10.34 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, File No. 1-12342)
10.23 Consulting Agreement with Executive Officer (Exhibit 10.38 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12342)
10.24 Employment Agreement between the Company and Mr. Ginn (Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1998, File No. 1-12342)
10.25 Amended and Restated Investment Agreement dated April 6, 1998
between the Company and U S WEST, Inc. (Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1998, File No. 1-12342)
13 1998 Annual Report to Stockholders - Financial Section
21 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG Deutsche Treuhand-Gesellschaft (Mannesmann
Mobilfunk GmbH)
23.3 Consent of Arthur Andersen LLP (Kansas Combined Cellular)
24 Power of Attorney
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
Item 7. Financial Statements and Exhibits
31
<PAGE> 32
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: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE
- ---------- -----
Sam Ginn * Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Mohan S. Gyani * Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
Arun Sarin * President and Chief Operating Officer and Director
C. Lee Cox * Director
Carol Bartz * Director
Michael D. Boskin* Director
Paul Hazen * Director
Donald G. Fisher * Director
Arthur Rock * Director
Charles R. Schwab * Director
George P. Shultz * Director
Chang Lin Tien * Director
* By: /s/ MOHAN S. GYANI
--------------------------------
Mohan S. Gyani, Attorney-in-fact
Executive Vice President and Chief Financial Officer
Date: March 29, 1999
32
<PAGE> 33
MANNESMANN MOBILFUNK GMBH
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ S-2
Balance Sheets as of December 31, 1998 and 1997............. S-3
Statements of Income for the Years ended December 31, 1998,
1997 and 1996............................................. S-4
Statements of Capital Subscribers' Equity and Comprehensive
Income for the Years ended December 31, 1998, 1997 and
1996...................................................... S-5
Statements of Cash Flows for the Years ended December 31,
1998, 1997 and 1996....................................... S-6
Notes to Financial Statements............................... S-7
</TABLE>
S-1
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Capital Subscribers
Mannesmann Mobilfunk GmbH
We have audited the accompanying balance sheets of Mannesmann Mobilfunk GmbH as
of December 31, 1998 and 1997, and the related statements of income, capital
subscribers' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted German auditing
standards which, in all material respects, are similar to auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mannesmann Mobilfunk GmbH at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
Dusseldorf, Germany,
February 16, 1999
KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
Scheffler Haas
Wirtschaftsprufer Wirtschaftsprufer
S-2
<PAGE> 35
MANNESMANN MOBILFUNK GMBH
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1998 1998 1997
------------ ---------- ----------
U.S. DOLLARS DEUTSCH- DEUTSCH-
(NOTE 1) MARKS MARKS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents (note 2)................... 10,977 18,254 11,948
Accounts receivable, less allowance for doubtful
accounts of DM 102,398 in 1998 and DM 73,942 in
1997.............................................. 584,984 972,829 781,018
Due from affiliated companies (note 3)............... 147,034 244,518 24,104
Inventories of products, parts and related supplies
(note 4).......................................... 42,266 70,288 70,713
Prepaid expenses..................................... 12,675 21,078 28,643
Other current assets................................. 16,194 26,931 19,947
---------- ---------- ----------
Total current assets......................... 814,130 1,353,898 936,373
---------- ---------- ----------
Property, plant and equipment:
Telecommunications equipment......................... 3,031,867 5,041,995 4,234,522
Equipment in course of construction.................. 71,112 118,259 89,539
Other equipment...................................... 153,172 254,726 192,656
---------- ---------- ----------
3,256,151 5,414,980 4,516,717
Less accumulated depreciation........................ (1,322,285) (2,198,960) (1,615,972)
---------- ---------- ----------
Net property, plant, and equipment..................... 1,933,866 3,216,020 2,900,745
Other assets, at cost, less accumulated amortization of
DM 30,966 in 1998 and DM 59,195 in 1997.............. 14,826 24,655 40,671
---------- ---------- ----------
2,762,822 4,594,573 3,877,789
========== ========== ==========
LIABILITIES AND CAPITAL SUBSCRIBERS' EQUITY
Current liabilities:
Accounts payable..................................... 533,808 887,723 615,126
Income taxes payable................................. 179,763 298,946 227,044
Accrued expenses..................................... 125,492 208,693 169,773
Due to affiliated companies (note 3)................. 3,499 5,819 96,642
---------- ---------- ----------
Total current liabilities.................... 842,562 1,401,181 1,108,585
Pension liabilities (note 6)........................... 11,729 19,506 13,995
Other non-current liabilities (note 7)................. 50,330 83,698 54,625
Deferred income taxes (note 8)......................... 426,884 709,908 577,492
---------- ---------- ----------
Total liabilities............................ 1,331,505 2,214,293 1,754,697
---------- ---------- ----------
Commitments (note 9)
Capital subscribers' equity:
Subscribed capital (note 10)......................... 243,536 405,000 405,000
Additional capital................................... 730,607 1,215,000 1,215,000
Retained earnings (note 11).......................... 457,562 760,925 503,092
Accumulated other comprehensive income............... (388) (645) --
---------- ---------- ----------
Total capital subscribers' equity............ 1,431,317 2,380,280 2,123,092
---------- ---------- ----------
2,762,822 4,594,573 3,877,789
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
S-3
<PAGE> 36
MANNESMANN MOBILFUNK GMBH
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1998 1997 1996
------------ ---------- ---------- ---------
U.S. DOLLARS DEUTSCH- DEUTSCH- DEUTSCH-
(NOTE 1) MARKS MARKS MARKS
<S> <C> <C> <C> <C>
Net revenues............................... 4,387,900 7,297,077 5,587,918 4,208,796
--------- ---------- ---------- ---------
Operating costs and expenses:
Cost of services and products, including
DM 24,811, DM 2,791 and DM 3,508 with
related parties in 1998, 1997 and 1996
respectively (note 3)................. 1,389,216 2,310,266 1,666,037 1,231,311
Selling, general and administrative
expenses, including DM 45,518, DM
57,488 and DM 95,305 with related
parties in 1998, 1997 and 1996
respectively (note 3)................. 924,868 1,538,055 1,302,821 1,277,337
Depreciation and amortization.............. 379,976 631,900 479,941 390,775
--------- ---------- ---------- ---------
Operating income......................... 1,693,840 2,816,856 2,139,119 1,309,373
Other income (expense):
Interest income, including DM 17,211, DM
7,078 and DM -- with related parties
in 1998, 1997 and 1996 respectively--- 14,065 23,390 15,609 4,059
Interest expense, including DM 1,112, DM
1,216 and DM 2,510 with related
parties in 1998, 1997 and 1996
respectively.......................... (1,600) (2,661) (5,159) (5,335)
Other, net............................... 21,506 35,765 23,983 21,253
--------- ---------- ---------- ---------
33,971 56,494 34,433 19,977
--------- ---------- ---------- ---------
Income before income taxes............... 1,727,811 2,873,350 2,173,552 1,329,350
Income taxes (note 8)...................... (821,116) (1,365,517) (1,012,840) (691,316)
--------- ---------- ---------- ---------
Net income............................... 906,695 1,507,833 1,160,712 638,034
========= ========== ========== =========
</TABLE>
See accompanying notes to financial statements.
S-4
<PAGE> 37
MANNESMANN MOBILFUNK GMBH
STATEMENTS OF CAPITAL SUBSCRIBERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER CAPITAL
SUBSCRIBED ADDITIONAL COMPREHENSIVE RETAINED SUBSCRIBERS'
CAPITAL CAPITAL INCOME EARNINGS EQUITY
---------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995........ DM 405,000 1,215,000 -- 80,535 1,700,535
Comprehensive income
Net income......................... -- -- -- 638,034 638,034
------- --------- ---- ---------- ----------
Balances at December 31, 1996........ 405,000 1,215,000 -- 718,569 2,338,569
Comprehensive income
Net income......................... -- -- -- 1,160,712 1,160,712
Dividends declared................... -- -- -- (1,376,189) (1,376,189)
------- --------- ---- ---------- ----------
Balances at December 31, 1997........ 405,000 1,215,000 -- 503,092 2,123,092
Comprehensive income
Net income......................... -- -- -- 1,507,833 1,507,833
Minimum pension liability
adjustment, net of tax of
DM 852.......................... -- -- (645) -- (645)
----------
Total comprehensive
income................... 1,507,188
----------
Dividends declared................... -- -- -- (1,250,000) (1,250,000)
------- --------- ---- ---------- ----------
Balances at December 31, 1998........ DM 405,000 1,215,000 (645) 760,925 2,380,280
======= ========= ==== ========== ==========
Balances at December 31, 1998 (note $
1)................................. 243,536 730,607 (388) 457,562 1,431,317
======= ========= ==== ========== ==========
</TABLE>
See accompanying notes to financial statements.
S-5
<PAGE> 38
MANNESMANN MOBILFUNK GMBH
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1998 1997 1996
------------ ---------- ---------- ---------
U.S. DOLLARS DEUTSCH- DEUTSCH- DEUTSCH-
(NOTE 1) MARKS MARKS MARKS
<S> <C> <C> <C> <C>
Net cash provided by operating activities (note
15)............................................ 1,327,679 2,207,930 2,353,574 1,104,778
--------- ---------- ---------- ---------
Cash flows from investing activities:
Proceeds from sale of equipment and other
assets...................................... 9,375 15,590 8,023 5,207
Capital expenditures, including interest
capitalized................................. (581,646) (967,277) (885,273) (779,808)
(Increase) decrease in employee loans.......... 38 63 (28) (195)
--------- ---------- ---------- ---------
Net cash used in investing activities............ (572,233) (951,624) (877,278) (774,796)
--------- ---------- ---------- ---------
Cash flows from financing activities:
Increase (decrease) in due to affiliated
company..................................... -- -- (101,165) (235,483)
Increase (decrease) in due to banks............ -- -- (45,000) (90,500)
Dividends paid................................. (751,654) (1,250,000) (1,376,189) --
--------- ---------- ---------- ---------
Net cash used for financing activities........... (751,654) (1,250,000) (1,522,354) (325,983)
--------- ---------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... 3,792 6,306 (46,058) 3,999
Cash and cash equivalents at beginning of year... 7,185 11,948 58,006 54,007
--------- ---------- ---------- ---------
Cash and cash equivalents at end of year......... 10,977 18,254 11,948 58,006
========= ========== ========== =========
</TABLE>
See accompanying notes to financial statements.
S-6
<PAGE> 39
MANNESMANN MOBILFUNK GMBH
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(ALL AMOUNTS IN THOUSANDS OF DEUTSCHMARKS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Mannesmann Mobilfunk GmbH was incorporated on September 11, 1989. At
December 31, 1998 Mannesmann AG, held a controlling interest of 65.23%, and
AirTouch (Europe) B.V. & Co. Dienstleistungs-und Beteiligungs-KG held an
interest of 34.77%.
The Company's primary business is the construction, manufacture and
operation of a private mobile cellular network ("D2") within Germany. It is
conducted under a license agreement with the Federal Postal and
Telecommunications Ministry expiring at the end of 2009.
Commercial activities commenced in mid 1992 and by the end of 1998 the
Company had about 5,900,000 subscribers.
(b) BASIS OF PRESENTATION
In order to conform with accounting principles generally accepted in the
United States, certain adjustments are reflected in the financial statements
which are not recorded in the German books of account. These adjustments relate
primarily to capitalization of own payroll and related costs associated with the
design and construction of telecommunications equipment, depreciation and
amortization, pension liabilities and accounting for income taxes.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid monetary instruments with original
maturities of three months or less to be cash equivalents.
(d) INVENTORIES
Inventories are stated at the lower of average cost or market.
(e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
calculated on both the straight-line and declining balance methods over the
estimated useful lives of the assets as follows :
<TABLE>
<CAPTION>
YEARS PERCENTAGE METHOD
----- ---------- ------
<S> <C> <C> <C>
Telecommunications equipment:
D2 infrastructure center............................. 10 10% straight-line
Switching locations.................................. 15 6.67% straight-line
Base station equipment
-- poles.......................................... 10 30% declining balance
-- components..................................... 20 5% straight-line
Transmission and message switching technology........ 10 10% straight-line
Other equipment:
Data processing equipment............................ 3 - 4 33.33% straight-line
30% declining balance
Office equipment..................................... 10 30% declining balance
Measuring instruments................................ 5 30% declining balance
Vehicles............................................. 5 30% declining balance
</TABLE>
S-7
<PAGE> 40
Certain equipment installed at third party locations for rental periods
less than the above useful lives are depreciated over the corresponding terms of
the agreements.
(f) OTHER ASSETS
Other assets are stated at cost. They consist mainly of computer software,
patents, rights and concessions which are being amortized over periods ranging
from three to eight years on a straight-line basis.
(g) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(h) PENSION PLANS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 132, Employers' Disclosures about Pension and Other
Postretirement Benefits. SFAS No. 132 revises employer's disclosures about
pension and other postretirement benefit plans. SFAS No. 132 does not change the
method of accounting for such plans.
The Company has defined benefit plans limited to its management group. The
benefits are based on years of service and recent compensation. The accumulated
benefit obligation is determined based on annual actuarial calculations and
recorded as a liability in the balance sheet with a corresponding charge to
income. The liability is not funded but represented by the Company's assets.
(i) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and a minimum
pension liability adjustment and is presented in the statements of capital
subscribers' equity and comprehensive income. The Statement requires only
additional disclosures in the financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
(j) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage its foreign
exchange risk for firm commitments. They are not used for trading but are
strictly for hedging purposes.
(k) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
S-8
<PAGE> 41
(L) FINANCIAL STATEMENT TRANSLATION
The financial statements are expressed in Deutschmarks and, solely for the
convenience of the reader, have been translated into United States dollars at
the rate of DM 1.6630 to U.S. $1, the closing rate quotation on December 31,
1998.
(2) CASH AND CASH EQUIVALENTS
This caption includes cash equivalents representing time deposits for
amounts maturing within periods of between one day and three months.
(3) RELATED PARTY TRANSACTIONS
The Company has significant business transactions with its capital
subscribers, Mannesmann AG and AirTouch (Europe) B.V. & Co. Dienstleistungs- und
Beteiligungs-KG and their respective group companies. Such transactions are
normally concluded within a range of terms similar to those made with
non-related parties.
The significant balances and transactions with these related parties are
shown separately in the balance sheets and statements of income. In addition,
purchases of property, plant and equipment from related parties during the years
stated are shown below:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ -----
<S> <C> <C> <C> <C>
Purchases included under property plant and
equipment...................................... DM 8,130 10,828 3,802
===== ====== =====
</TABLE>
(4) INVENTORIES
This caption includes stocks of products, parts and related supplies. The
balances at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C> <C>
Mobile telephones................................ DM 59,303 52,096
Subscriber identification module cards........... -- 10,103
Spare parts...................................... 9,251 7,691
Other trade goods................................ 1,734 823
------ ------
DM 70,288 70,713
====== ======
</TABLE>
(5) INTEREST COST
The Company capitalizes interest related to the continuing expansion of the
infrastructure for its private mobile cellular network. The following is a
summary of interest cost incurred during 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C> <C>
Interest cost capitalized........................ DM -- 1,752 3,336
Interest cost charged to income.................. 2,661 5,159 5,335
----- ----- -----
Total interest cost incurred..................... DM 2,661 6,911 8,671
===== ===== =====
</TABLE>
Interest capitalized has been included in the telecommunications equipment
component of property, plant and equipment.
(6) PENSION PLANS
The Company has a defined benefit pension plan covering all of its 76
current and former member management group (1997 -- 74 members and 1996 -- 75
members).
Of the remaining employees, at the end of 1998 7,174 (1997 -- 5,693), 2,839
(1997 - 2,839) are covered by a defined contribution plan funded externally with
an insurance company, and 4,335 (1997 -- 2,854) are
S-9
<PAGE> 42
not presently covered by such plans. All personnel are covered by a German state
pension scheme under a defined contribution plan funded equally by the employer
and the employee.
In addition to the foregoing plans, the Company introduced in 1997 a
deferred compensation plan for senior employees. This is equivalent to a defined
contribution plan under which the employees may elect to defer part of their
current compensation until retirement age in return for a lump sum or a pension
payment. The Company accrues its obligation for such deferred compensation, and
related simple interest at a fixed rate of 6%, as part of its pension cost.
Under a continuing tax deductible scheme, the Company also accrues a
nominal amount payable upon death in service to all its employees, other than
those covered by separate arrangements under the management group plan.
The pension liabilities and costs of the defined benefit plan referred to
above result directly from independent actuarial calculations based on the
situation at the end of each year.
For the years ending December 31, 1998 and 1997, such valuations were made
on the basis of accounting principles generally accepted in the United States.
Up to and including December 31, 1996, they were made on the basis of German tax
and commercial rules, because the Company considered, given the small number of
employees covered together with the short periods of prior service, that the
differences in the bases would not be material in terms of potential adjustments
or disclosures.
The following table sets forth the changes in benefit obligation and funded
status of the defined benefit plan, for which there are no plan assets at fair
value as such, because they are deemed to be represented by the Company's assets
in general:
<TABLE>
<CAPTION>
PENSION BENEFITS
------------------
1998 1997
------- -------
<S> <C> <C> <C>
Benefit obligation at beginning of year..................... DM 12,696 11,298
Service cost................................................ 909 926
Interest cost............................................... 824 733
Transfers-in, -out, net..................................... (3) (284)
Actuarial loss.............................................. 3,540 65
Benefits paid............................................... (88) (42)
------- -------
Benefit obligation at end of year........................... 17,878 12,696
------- -------
Fair value of plan assets................................... -- --
------- -------
Funded status............................................... (17,878) (12,696)
Unrecognized actuarial loss................................. 3,605 65
------- -------
Net amount recognized....................................... DM (14,273) (12,631)
======= =======
Amounts recognized in the balance sheets consist of
Accrued benefit liability................................. (15,770) (12,631)
Accumulated other comprehensive income.................... 1,497 --
------- -------
Net amount recognized....................................... DM (14,273) (12,631)
======= =======
Weighted-average assumptions at end of year
Discount rate............................................... 6.5% 6.5%
Expected return on plan assets.............................. -- --
Rate of compensation increase............................... 2.5% 2.5%
Rate of benefits increase................................... 1.5% 1.5%
</TABLE>
The pension liabilities for the deferred compensation plan and death in
service are similarly unfunded.
S-10
<PAGE> 43
The combined accrued liabilities for all plans per the balance sheets at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C> <C>
Defined benefit plan, as above.............................. DM 15,770 12,631
Deferred compensation plan.................................. 2,596 572
Death in service plan....................................... 977 792
Other pension related insurance costs....................... 163 --
------ ------
DM 19,506 13,995
====== ======
</TABLE>
The net periodic benefit cost recognized for the deferred benefit plan for
the years ended December 31, 1998, 1997 and, based on a German basis of
accounting, 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C> <C>
Components of net periodic benefit cost
Service cost.............................................. DM 909 926 1,181
Interest cost............................................. 824 733 507
Adjustment to recognize the cumulative effect of restating
the pension liability from the German to the United
States basis of accounting at the beginning of 1997.... -- 1,938 --
----- ----- -----
DM 1,733 3,597 1,688
===== ===== =====
</TABLE>
The combined pension cost for all plans charged to income for the years
ended December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C> <C>
Defined benefit plan, as above.............................. DM 1,733 3,597 1,688
Defined contribution plan................................... 2,711 2,195 1,323
Deferred compensation plan.................................. 2,078 579 --
Death in service plan....................................... 185 166 196
Other pension related insurance costs....................... 163 -- --
----- ----- -----
DM 6,870 6,537 3,207
===== ===== =====
</TABLE>
(7) OTHER NON-CURRENT LIABILITIES
This represents a provision for site restoration costs expected to be
incurred upon expiration of the respective leases.
(8) INCOME TAXES
Total income taxes for the years ended December 31, 1998, 1997 and 1996 of
DM 1,365,517, DM 1,012,840 and DM 691,316 respectively were allocated entirely
to income from continuing operations.
S-11
<PAGE> 44
Income tax expense attributable to income for the years ended December 31,
1998, 1997 and 1996 consists of various types of taxes as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- -------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
German trade tax.................................. DM 474,600 42,136 516,736
German corporate tax.............................. 718,152 86,379 804,531
German solidarity surcharge tax................... 39,498 4,752 44,250
--------- ------- ---------
DM 1,232,250 133,267 1,365,517
========= ======= =========
Year ended December 31, 1997
German trade tax.................................. 350,700 37,952 388,652
German corporate tax.............................. 504,282 77,804 582,086
German solidarity surcharge tax................... 37,821 4,281 42,102
--------- ------- ---------
DM 892,803 120,037 1,012,840
========= ======= =========
Year ended December 31, 1996
German trade tax.................................. DM 139,500 107,210 246,710
German corporate tax.............................. 189,221 224,354 413,575
German solidarity surcharge tax................... 14,192 16,839 31,031
--------- ------- ---------
DM 342,913 348,403 691,316
========= ======= =========
</TABLE>
Income tax expense attributable to income was DM 1,365,517, DM 1,012,840
and DM 691,316 for the years ended December 31, 1998, 1997 and 1996,
respectively, and differed from the amount computed by applying the above
combined German income tax rate of 56.93% for 1998, 57.67% for 1997 and 57.52%
for 1996 to pretax income as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C> <C>
Computed "expected" tax expense..................... DM 1,635,798 1,253,487 764,642
Adjustment to reflect net effect of lower German
corporate tax rate and solidarity surcharge
applicable to the declared and proposed dividend
distribution...................................... (316,500) (230,357) (86,658)
Adjustment to deferred tax liability for the enacted
reduction in the solidarity surcharge tax rate and
the higher average trade tax rate................. -- (4,692) --
Adjustments to reflect expected additional tax
risks............................................. 49,015 -- --
Adjustments to German book basis income for net
effect of permanent differences attributable to
certain non taxable income and non deductible
expense in computing the German fiscal basis
income............................................ (2,796) (5,598) 13,332
--------- --------- -------
DM 1,365,517 1,012,840 691,316
========= ========= =======
</TABLE>
The significant components of the income tax expense attributable to the
income for the years ended December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C> <C>
Current German fiscal basis tax expense............. DM 1,232,250 892,803 342,913
Deferred tax expense attributable to the realization
of the benefit of net operating loss
carryforwards..................................... -- -- 152,391
Tax effect of the temporary differences between the
financial statement carrying amounts of existing
assets and liabilities and their respective tax
bases............................................. 133,267 120,037 196,012
--------- --------- -------
Net tax expense..................................... DM 1,365,517 1,012,840 691,316
========= ========= =======
</TABLE>
S-12
<PAGE> 45
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities at December 31, 1998 and 1997 are
presented below:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C> <C>
Deferred tax liabilities:
Property, plant and equipment due to differences in
capitalization and related depreciation................ DM 710,277 578,595
Pension liabilities due to adoption of United States basis
of accounting.......................................... (369) (1,103)
------- -------
Total deferred tax liabilities.................... DM 709,908 577,492
======= =======
</TABLE>
(9) LEASE COMMITMENTS
The Company is obligated under various noncancelable operating leases,
primarily of a long-term nature, for the main administrative building, base
stations and sales offices. The rental expense charged to income during 1998,
1997 and 1996 was DM 171,372, DM 128,793 and DM 88,059, respectively.
Future minimum lease payments under noncancelable leases (with initial or
remaining lease terms in excess of one year) are:
<TABLE>
<S> <C> <C>
Year ending December 31:
1999.............................................. DM 74,707
2000.............................................. 68,186
2001.............................................. 60,384
2002.............................................. 57,937
2003.............................................. 39,300
2004 and beyond................................... 82,519
-------
Total minimum lease payments.............. DM 383,033
=======
</TABLE>
(10) SUBSCRIBED CAPITAL
Subscribed capital is represented by whole sum subscription amounts on a
proportional basis to the investing parties. The respective amounts of
proportional subscriptions directly reflect the percentage of respective
ownership and related voting and dividend rights.
(11) RESTRICTIONS ON RETAINED EARNINGS
The payment of dividends from retained earnings is restricted to the extent
of available retained earnings per the German books of account. At December 31,
1998 there are retained earnings of DM 169,492 per the German books of account,
after payment of dividends during the year aggregating DM 1,250,000.
(12) DERIVATIVE FINANCIAL INSTRUMENTS
At December 31, 1998, the Company was a party to several foreign currency
forward contracts with due dates ranging from January 15, 1999 to May 15, 2001.
The contracts entitle the Company to receive from Mannesmann AG a total of USD
56,999 in exchange for a total of DM 91,397.
No other derivative financial instruments are used by the Company.
At December 31, 1997, the Company had no derivative financial instruments.
The fair value of the foreign currency forward contracts, based on forward
rates at December 31, 1998 in relation to the various due dates, was an
unrealized gain of DM 2,718.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of all the Company's financial instruments recorded on the
balance sheet at December 31, 1998 and 1997 approximate the carrying amounts
because of the short-term maturity of these instruments.
S-13
<PAGE> 46
(14) ADVERTISING COSTS
The advertising costs directly charged to income during 1998, 1997 and 1996
were DM 93,353, DM 71,448 and DM 65,824 respectively.
(15) RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The reconciliation of net income to net cash provided by operating
activities for the years ended December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1998 1997 1996
U.S. DOLLARS DEUTSCH- DEUTSCH- DEUTSCH-
(NOTE 1) MARKS MARKS MARKS
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... 906,695 1,507,833 1,160,712 638,034
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes....................... 80,137 133,267 120,037 348,403
Depreciation and amortization............... 379,976 631,900 479,941 390,775
Allowance for doubtful accounts............. 17,111 28,456 21,520 24,762
Loss on sale of equipment................... 12,307 20,466 3,475 3,290
Provision for pension costs................. 2,501 4,159 4,345 1,885
Provision for other costs................... 17,482 29,073 16,225 26,855
Changes in operating assets and liabilities:
Accounts receivable...................... (132,452) (220,267) (163,210) (249,804)
Due from affiliated companies............ (132,540) (220,414) 195,300 (212,671)
Inventories.............................. 256 425 (30,874) (3,404)
Prepaid expenses......................... 4,549 7,565 (2,594) (4,304)
Other current assets..................... (4,200) (6,984) 10,110 (20,122)
Accounts payable......................... 163,919 272,597 203,779 64,553
Income taxes payable..................... 43,236 71,902 189,562 37,482
Accrued expenses......................... 23,403 38,920 54,614 59,509
Due to affiliated companies.............. (54,614) (90,823) 90,835 385
Pension liabilities...................... (87) (145) (203) (850)
--------- --------- --------- ---------
Net cash provided by operating activities.......... 1,327,679 2,207,930 2,353,574 1,104,778
========= ========= ========= =========
</TABLE>
The Company paid DM 2,622, DM 2,161 and DM 4,836 for interest (net of
amounts capitalized) and DM 1,175,920, DM 703,241 and DM 305,431 for income
taxes in 1998, 1997 and 1996 respectively.
The above provision for pension costs excludes the additional minimum
liability of DM 1,497 and the amount for deferred income taxes excludes the
related tax effect of DM 852, recognized on a net-basis as DM 645 directly in
equity as other comprehensive income.
S-14
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of AirTouch Communications, Inc.
Our audits of the consolidated financial statements referred to in our report
dated March 1, 1999, appearing on page 35 of the 1998 Annual Report to
Stockholders of AirTouch Communications, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the Financial Statement Schedule listed in Item
14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 1, 1999
X-1
<PAGE> 48
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------- --------- ------------------- ---------- -----------
BALANCE CHARGED CHARGED BALANCE
AT TO TO OTHER AT
DESCRIPTION JANUARY 1 EXPENSE ACCOUNTS DEDUCTIONS DECEMBER 31
- ----------------------------------- --------- ------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful
accounts...................... $44 $ 93 $33(a) $105(b) $65
Deferred tax valuation
allowance..................... $ 7 $ 4(c) $ 3
Other loss reserves and
allowances.................... $20 $ 12 $ 5(a) $ 16 $21
Year ended December 31, 1997:
Allowance for doubtful
accounts...................... $61 $114 $(5)(d) $126(b) $44
Deferred tax valuation
allowance..................... $ 2 $ 5 $ 7
Other loss reserves and
allowances.................... $21 $ 28 $ 29 $20
Year ended December 31, 1996:
Allowance for doubtful
accounts...................... $21 $ 62 $37(a) $ 59(b) $61
Deferred tax valuation
allowance..................... $26 $ 6 $ 30(c) $ 2
Other loss reserves and
allowances.................... $40 $ 18 $ 2(a) $ 39 $21
</TABLE>
- ---------------
(a) Amounts reflect allowances acquired through acquisitions, net of
disposition.
(b) Amounts reflect items written-off, net of recoveries.
(c) Amounts reflect realization of tax benefit.
(d) Represent foreign currency exchange gains or (losses) recorded in the
"Cumulative translation adjustment" account, a component of "Accumulated
other comprehensive income" in Stockholders' Equity.
X-2
<PAGE> 1
EXHIBIT 10.10
TRUST AGREEMENT
FOR
AIRTOUCH COMMUNICATIONS
EXECUTIVE BENEFITS
(SECOND AMENDMENT AND RESTATEMENT EFFECTIVE
AS OF OCTOBER 31, 1994)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Establishment of Trust............................................... 2
Section 2. Payments to Plan Participants and Their Beneficiaries................ 3
Section 3. Trustee Responsibility Regarding Payments to Trust
Beneficiaries When a Company is Insolvent............................ 4
Section 4. Payments to the Company.............................................. 6
Section 5. Investment Authority................................................. 6
Section 6. Disposition of Income................................................ 9
Section 7. Accounting by Trustee................................................ 9
Section 8. Responsibilities and Authorities of the Trustee and Investment
Manager.............................................................. 10
Section 9. Compensation and Expenses of Trustee................................. 12
Section 10. Resignation or Removal of the Trustee................................ 13
Section 11. Appointment of Successor............................................. 13
Section 12. Amendment or Termination............................................. 14
Section 13. Miscellaneous........................................................ 15
Section 14. Effective Date....................................................... 16
APPENDIX A......................................................................... 17
</TABLE>
<PAGE> 3
TRUST AGREEMENT
FOR
AIRTOUCH COMMUNICATIONS
EXECUTIVE BENEFITS
(SECOND AMENDMENT AND RESTATEMENT EFFECTIVE
AS OF OCTOBER 31, 1994)
This Trust Agreement is made as of the thirty-first day of October,
1994, by and between AirTouch Communications, Inc., a Delaware Corporation
("ATC"), and Wells Fargo Bank, N.A (the "Trustee").
Any affiliate of ATC which participates in the executive compensation
plans subject to this Trust Agreement may become a party to this Trust Agreement
by indicating its acceptance, in writing, to ATC and the Trustee. The term
"Company" as used in this Trust Agreement shall include ATC and any affiliate of
ATC which participates in this Trust Agreement unless the context requires
otherwise. In the event of a merger, consolidation or liquidation of a Company
into or with any other corporation, or the sale or other transfer of all or
substantially all of a Company's operating assets, the resulting successor or
purchaser corporation shall automatically be substituted for such Company under
this Trust Agreement if such successor or purchaser corporation is an affiliate
of ATC, participates in any of the executive compensation plans related to this
Trust Agreement and indicates its agreement to participate in this Trust
Agreement in writing to ATC and the Trustee. A successor or purchaser
corporation that is not affiliated with ATC or does not choose to participate in
this Trust Agreement shall be known as a "Former Company." "Former Company" also
means a Company which is designated by ATC as a Former Company for purposes of
withdrawal by such Company from the Trust and disposition of the percentage
interest of such Company from the Trust.
WHEREAS, ATC has adopted the executive benefit plans listed in Appendix
A (the "Plans"); and
WHEREAS, ATC wishes to establish a trust (hereinafter called the
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of the Company's creditors in the event of the Company's
Insolvency, as herein defined, until
<PAGE> 4
paid to Plan participants and their beneficiaries in such manner and at such
times as specified in the Plans; and
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plans
as unfunded plans maintained for the purpose of providing deferred compensation
for a select group of management or highly compensated employees for purposes of
Title I of the Employee Retirement Income Security Act of 1974; and
WHEREAS, it is the intention of the Company to make contributions to the
Trust to provide itself with a source of funds to assist it in the meeting of
its liabilities under the Plans;
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
SECTION 1. ESTABLISHMENT OF TRUST.
(a) The Company hereby deposits with the Trustee in trust one thousand
dollars ($1000.00), which shall become the principal of the Trust to be held,
administered and disposed of by the Trustee as provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which the Company is
the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust and any earnings thereon shall be held
separate and apart from other funds of the Company and shall be used exclusively
for the uses and purposes of Plan participants and general creditors as herein
set forth. Plan participants and their beneficiaries shall have no preferred
claim on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Plans and this Trust Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against their
Company. Any
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assets held by the Trust will be subject to the claims of that Company's general
creditors under federal and state law in the event of that Company's Insolvency,
as defined in Section 3(a) herein.
(e) Upon a Change of Control, each Company shall, as soon as possible,
but in no event longer than 60 days following the Change of Control, as defined
herein, make an irrevocable contribution to the Trust in an amount that is
sufficient to pay each Plan participant or beneficiary the benefits to which
Plan participants or their beneficiaries would be entitled from such Company
pursuant to the terms of the Plans as of the date on which the Change of Control
occurred.
(f) For purposes of this Trust Agreement, each Company shall be deemed
to have a "percentage interest" in the Trust assets. The percentage interest
shall be equal to a fraction, the numerator of which shall equal that Company's
contributions and income thereon, less payments and expenses of the Trust
charged to that Company, and the denominator of which shall be the total amount
of Trust assets. The Trustee's determination with respect to the percentage
interest of each Company shall be conclusive and binding upon each Company. The
money or other property attributable to the percentage interest of any Company
shall not be available to satisfy the claims of any other Company's creditors or
the Plan participants of any other Company or their beneficiaries, unless such
Company consents to the use of the money or other property attributable to its
percentage interest in the Trust to pay the claims of the Plan participants of
another Company and their beneficiaries.
(g) Not later than 90 days following the end of each Plan year, each
Company shall be required to make an irrevocable contribution to the Trust in an
amount sufficient to pay each Plan participant or beneficiary the benefits to
which the Plan participant or beneficiary would be entitled from such Company
pursuant to the terms of the Plan as of the close of such Plan year. If a
Company fails to make such contribution for a Plan year, the principal and
income of the Trust shall in no event be used to pay any benefits to which Plan
participants or beneficiaries become entitled from such Company pursuant to the
terms of the Plans after the close of such Plan year until such contribution has
been made.
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(h) For purposes of Section 1(e) and Section 1(g), the amount of the
benefit to which a participant or beneficiary would be entitled as of the
specified date shall be determined by applying the terms of the applicable Plan
as if the participant's employment with the Company had terminated on such date.
SECTION 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES.
(a) ATC shall deliver to the Trustee a schedule (the "Payment Schedule")
that indicates the amounts payable in respect of each Plan participant (and his
or her beneficiaries), that provides a formula or other instructions acceptable
to the Trustee for determining the amounts so payable, the form in which such
amount is to be paid (as provided for or available under the Plans) and the time
of commencement for payment of such amounts. Except as otherwise provided
herein, the Trustee shall make payments to the Plan participants and their
beneficiaries in accordance with such Payment Schedule. The Trustee shall make
provision for the reporting and withholding of any federal, state or local taxes
that may be required to be withheld with respect to the payment of benefits
pursuant to the terms of the Plans and shall pay amounts withheld to the
appropriate taxing authorities or determine that such amounts have been
reported, withheld and paid by the Company.
(b) Except in the event of a Change of Control and for the 3-year period
following such Change of Control, the Trustee may rely upon, and shall be under
no duty to verify, the formula and other instructions contained in the Payment
Schedule delivered to the Trustee by ATC in accordance with Section 2(a), and
may determine that any federal, state or local taxes that may be required to be
withheld with respect to the payment of benefits pursuant to the terms of the
Plans have been reported, withheld and paid by the Company by receipt of a
certification to that effect from the Company.
(c) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plans shall be determined by ATC or such party as it shall
designate under the Plans, and any claim for such benefits shall be considered
and reviewed under the procedures set out in the Plans.
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(d) The Company may make payment of benefits directly to Plan
participants or their beneficiaries as they become due under the terms of the
Plans. The Company shall notify the Trustee of its decision to make payment of
benefits directly prior to the time amounts are payable to participants or their
beneficiaries. In addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in accordance with the
terms of the Plans, the Company shall make the balance of each such payment as
it falls due. The Trustee shall notify the Company where principal and earnings
are not sufficient.
(e) In the event the Company makes payment of benefits as permitted in
Section 2(d), the Company shall provide the Trustee with a schedule of all
benefits, and taxes attributable thereto, that have been paid by the Company
within 15 days after the end of the quarter in which such payments have been
made.
SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARIES WHEN
A COMPANY IS INSOLVENT.
(a) The Trustee shall cease payment of benefits to Plan participants and
their beneficiaries if their Company is Insolvent. A Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to
pay its debts as they become due, or (ii) the Company is subject to a pending
proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of the Company under federal and state law as set
forth below.
(1) The Board of Directors and the Chief Executive Officer of the
Company shall have the duty to inform the Trustee in writing of the
Company's Insolvency. If a person claiming to be a creditor of the
Company alleges in writing to the Trustee that the Company has become
Insolvent, the Trustee shall determine whether the Company is Insolvent
and, pending such determination, the Trustee shall discontinue payment
of benefits to the Plan participants or their beneficiaries.
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(2) Unless the Trustee has actual knowledge of a Company's
Insolvency, or has received notice from the Company or a person claiming
to be a creditor alleging that the Company is Insolvent, the Trustee
shall have no duty to inquire whether the Company is Insolvent. The
Trustee may in all events rely on such evidence concerning the Company's
solvency as may be furnished to the Trustee and that provides the
Trustee with a reasonable basis for making a determination concerning
the Company's solvency.
(3) If at any time the Trustee has determined that a Company is
Insolvent, the Trustee shall discontinue payments to Plan participants
or their beneficiaries and shall hold the assets of the Trust for the
benefit of the Company's general creditors. Nothing in this Trust
Agreement shall in any way diminish any rights of Plan participants or
their beneficiaries to pursue their rights as general creditors of the
Company with respect to benefits due under the Plans or otherwise.
(4) The Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section 2 of this
Trust Agreement only after the Trustee has determined that the Company
is not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plans for the period
of such discontinuance, less the aggregate amount of any payments made to Plan
participants or their beneficiaries by any Company in lieu of the payments
provided for hereunder during any such period of discontinuance.
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SECTION 4. PAYMENTS TO THE COMPANY.
Except as provided in Sections 3 and 12 hereof, no Company shall have
the right or power to direct the Trustee to return to the Company or to divert
to others any of the Trust assets before all payments of benefits have been made
to Plan participants and their beneficiaries pursuant to the terms of the Plans.
SECTION 5. INVESTMENT AUTHORITY.
(a) ATC may appoint an individual or organization to invest and reinvest
assets of the Trust (an "Investment Manager"). ATC shall notify the Trustee of
the appointment of any Investment Manager and identify the Trust assets
allocated to such Investment Manager for purposes of investment and
reinvestment. The terms and conditions of appointment, authority and retention
shall be the sole responsibility of ATC. ATC shall cause each Investment Manager
to furnish the Trustee with the names and signatures of those persons authorized
to direct the Trustee on its behalf. The Trustee shall have the right to assume,
in the absence of written notice to the contrary, that no event constituting a
change in the authority of any such person has occurred. ATC may also direct the
Trustee to divide the assets of the Trust into separate parts for investment
purposes and shall have the power, from time to time, to modify or terminate any
existing investment arrangement as it shall deem appropriate.
(b) The Trust shall be invested and reinvested without distinction
between income and principal. ATC may allocate and reallocate investment
responsibility with respect to any assets of the Trust among ATC, any Investment
Manager and the Trustee. Any such allocations shall be made by ATC in a written
instrument delivered to the Trustee and, if appropriate, the affected Investment
Manager, and shall continue in force and effect until revoked by ATC in a
writing delivered to the Trustee. Any Investment Manager acting hereunder shall
have sole authority and responsibility for the management, investment and
reinvestment of the Trust assets allocated to such Investment Manager. The
portion of the Trust over which ATC or an Investment Manager shall have
investment responsibility is hereinafter referred to as a "Directed Fund." The
Trustee shall be under no duty or obligation to review or to question any
direction of ATC or an Investment Manager, or to review securities or any other
property held in any Directed Fund with respect to prudence or proper
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<PAGE> 10
diversification or compliance with any limitation on the Investment Manager's
authority under the terms of any agreement entered into between ATC and the
Investment Manager or imposed by applicable law, or to make any suggestions or
recommendations to ATC or an Investment Manager with respect to the retention or
investment of any assets of any Directed Fund, and shall have no authority to
take any action or to refrain from taking any action with respect to any asset
of a Directed Fund unless and until it is directed to do so by ATC or an
Investment Manager.
(c) The assets of this Trust may be invested and reinvested in such
personal property investments and insurance and annuity contracts as the
individual or organization having investment responsibility, in its sole
discretion, may deem appropriate and consistent with the investment directions
communicated by ATC, including without limiting the generality of the foregoing:
common and preferred stocks; trusts and participation certificates; bonds;
debentures; covered call options; notes secured by personal property;
obligations of governmental bodies, both domestic and foreign; notes, commercial
paper and other evidences of indebtedness, secured or unsecured, including
variable amount notes; convertible securities of all types and kinds; mutual
fund shares; interest-bearing savings or deposit accounts with any
federally-insured bank (including the Trustee) or savings and loan association;
contracts for the immediate or future delivery of financial instruments of any
issuer or of any other property; all forms of options in any combination;
investments commonly known as "synthetic securities" or "derivative securities"
(including, without limitation, investments referred to as asset swaps,
collateralized asset swaps, equity swaps, fixed income swaps, "pure" and
"participating" synthetic securities, and similar arrangements as may now exist
or may be developed in the future); and any other personal property permitted as
investments under applicable law. The Trustee shall not be responsible under
this Agreement, or otherwise, in any way for the form, terms, payment provisions
or issuer of any insurance contract which it is directed to purchase and/or hold
as contractholder, or for performing any functions under any such insurance
contract (other than the execution of documents incidental thereto and the
transfer or receipt of funds thereunder), on the directions of an Investment
Manager or, except in the event of a Change of Control and for the 3-year period
following such Change of Control, on the directions of ATC.
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<PAGE> 11
(d) The assets of this Trust may be invested and reinvested in such
forms of collective investments as may be consistent with the investment
policies developed and communicated by ATC to the Trustee or the appropriate
Investment Manager. To the extent that the Trust is invested in a common or
collective trust, the terms of the agreement or declaration of trust
establishing such common or collective trust fund shall become a part of this
Trust as if set forth in full herein, to the extent of the allocable share of
the Trust therein.
(e) The Trustee may invest in securities (including stock or rights to
acquire stock) or obligations issued by ATC.
(f) The Trustee may acquire securities issued by ATC directly from ATC
or from any third party, in such manner and upon such terms as the Trustee deems
appropriate and advisable in the Trustee's sole discretion. There shall be no
limitation on the amount or percentage of Trust assets that may be held in the
form of ATC securities. To the extent the Trustee is directed by ATC or an
Investment Manager to invest in ATC securities, the Trustee shall have no duty
or obligation to sell any portion of the assets of the Trust invested in ATC
securities for the purpose of establishing a mixed, balanced or diversified
portfolio of investments and the Trustee shall not be liable for any loss
attributable to the investment of Trust assets in ATC securities.
(g) All rights associated with assets of the Trust shall be exercised by
the Trustee or the person designated by the Trustee, and shall in no event be
exercisable by or rest with Plan participants, except that voting rights with
respect to ATC securities will be exercised by ATC.
(h) To the extent any assets of the Trust are held in a Directed Fund,
the Trustee shall exercise the rights associated with such assets only as
directed by ATC or an Investment Manager, as the case may be. Notwithstanding
the preceding sentence of this Section 5(h) and the provisions of Section 5(g),
in the event of a Change of Control and for the 3-year period following such
Change of Control, the Trustee shall exercise voting rights with respect to ATC
securities.
(i) ATC shall have the right at any time, and from time to time in its
sole discretion, to substitute assets of equal fair market value for any asset
held by the Trust. This right is
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exercisable by ATC in a non-fiduciary capacity without the approval or consent
of any person in a fiduciary capacity.
(j) Except in the event of a Change of Control and for the 3-year period
following such Change of Control, the Trustee shall be under no duty or
obligation to review or to question any direction of any Company pursuant to
Section 5(i), or to review securities so substituted or any other property so
held with respect to prudence or proper diversification, or to make any
suggestions or recommendations to such Company with respect to the retention or
investment of any such substituted assets and shall have no authority to take
any action with respect to such substituted assets unless and until it is
directed to do so by ATC.
(k) The Trustee shall have the following discretionary powers and
authority in the investment of the Trust with respect to the assets of the Trust
under its management and control and, with respect to a Directed Fund, ATC or
the Investment Manager, as the case may be, shall exercise such powers and
authority:
(1) to purchase, sell, exchange, convey, transfer or otherwise
acquire or dispose of any property, by private contract or at public
auction; and
(2) to give general or special proxies or powers of attorney with
or without power of substitution; to exercise any conversion privileges,
subscription rights or other options and to make any payments incidental
thereto; to consent to or otherwise participate in corporate
reorganizations or other changes affecting corporate securities and to
delegate discretionary powers and pay any assessments or charges in
connection therewith; and generally to exercise any of the powers of an
owner with respect to securities or other property held in the Trust;
and
(3) to make, execute, acknowledge and deliver any and all
documents of transfer and conveyance and any and all other instruments
that may be necessary or appropriate to carry out the powers herein
granted.
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SECTION 6. DISPOSITION OF INCOME.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
SECTION 7. ACCOUNTING BY TRUSTEE.
The Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such records as shall be necessary to determine each Company's
percentage interest in the Trust and such other specific records as shall be
agreed upon in writing between ATC and the Trustee. The Trustee shall submit to
ATC and each Company such interim valuations, reports or other information as
ATC and the Trustee shall mutually agree. Within 60 days following the close of
each calendar year and within 60 days after the removal or resignation of the
Trustee, the Trustee shall deliver to ATC a written account of its
administration of the Trust during such year or during the period from the close
of the last preceding year to the date of such removal or resignation, setting
forth all investments, receipts, disbursements and other transactions effected
by it, including a description of all securities and investments purchased and
sold with the cost or net proceeds of such purchases or sales (accrued interest
paid or receivable being shown separately), and showing all cash, securities and
other property held in the Trust at the end of such year or as of the date of
such removal or resignation, as the case may be. ATC shall review each such
accounting provided by the Trustee and within a reasonable period shall advise
the Trustee in writing of any corrections or specific objections to any
transaction reported; provided, however, that nothing in the preceding clause
shall prevent ATC from advising the Trustee of any corrections later discovered
to be necessary for accurate Trust records and accounting.
SECTION 8. RESPONSIBILITIES AND AUTHORITIES OF THE TRUSTEE AND INVESTMENT
MANAGER.
(a) The Trustee and each Investment Manager appointed pursuant to
Section 5 shall act with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in like capacity and
familiar with such
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matters would use in the conduct of an enterprise of a like character and with
like aims; provided, however, that the Trustee shall incur no liability to any
person for any action taken pursuant to a written direction, request or approval
given by the Company or an Investment Manager which is contemplated by, and in
conformity with, the terms of this Trust Agreement or anything omitted to be
done in the absence of such direction, request or approval with respect to a
Directed Fund, except that any liability of the Trustee for fraud, gross
negligence or willful misconduct shall continue. In the event of a dispute
between a Company and any party, including any other Company respecting assets
in the Trust, the Trustee may apply to a court of competent jurisdiction to
resolve the dispute.
(b) In the absence of fraud, gross negligence or misconduct on the part
of the Trustee, ATC hereby agrees to indemnify the Trustee for, and hold it
harmless against, any and all liabilities, losses, claims, damages, actions,
costs and expenses (including reasonable counsel fees) which may be incurred by
or assessed against it as a direct or indirect result of anything done in good
faith, or alleged to have been done, by or on behalf of the Trustee, in reliance
upon the written directions of ATC, a Company or an Investment Manager appointed
by ATC, or anything omitted to be done in good faith, or alleged to have been
omitted, in the absence of such directions.
(c) If the Trustee undertakes or defends any litigation arising in
connection with this Trust, ATC agrees to indemnify the Trustee against the
Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If ATC does not pay such costs, expenses and liabilities in a
reasonably timely manner, the Trustee may charge such expenses against the
Trust.
(d) If at any time the Trustee determines (as a result of notice from
the participants or beneficiaries or otherwise) that the Trust assets and
earnings thereon are insufficient to make benefit payments to participants or
beneficiaries that have become due, and if the Trustee has no reasonable
expectation that the Trustee will be able within 30 days to cause all past due
Plan benefits to be paid from Trust assets, and no reasonable expectation that
the Company responsible for such past due benefits will within 30 days cause all
past due Plan benefit payments to be made, and no reasonable expectation that
all past
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<PAGE> 15
due Plan benefit payments will within 30 days be paid by a combination of
Company payments and payments from Trust assets, the Trustee shall bring an
action or proceeding in a court of competent jurisdiction against the Company
responsible for such past due benefit payments under the Plan to compel such
responsible Company to make contributions to the Trust as necessary to enable
the Trustee to pay all past due Plan benefits and to make Plan benefit payments
as they become due. The Trustee shall determine whether benefit payments are
past due with reference to the provisions for payment set forth in Section 2
hereof. The Trustee shall also be authorized to apply to a court of competent
jurisdiction for direction at any time it determines (as a result of notice from
the participants or beneficiaries or otherwise) that it has insufficient
information to determine the amounts of benefit payments that would be
consistent with the provisions of the Plans. The Company hereby agrees to pay
all attorneys' fees and expenses incurred by the Trustee in bringing such a
cause of action regardless of its outcome. If the Company does not pay such
attorney's fees and expenses in a reasonably timely manner, the Trustee may
charge such payment against the Trust.
(e) The Trustee may consult with legal counsel (who may also be counsel
for any Company generally) with respect to any of its duties or obligations
hereunder.
(f) The Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder. If the Company does not
pay the fees of such professionals in a reasonably timely manner, the Trustee
may charge such payment against the Trust.
(g) The Trustee shall have, without exclusion, all powers conferred on
trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the Trust,
the Trustee shall have no power to name a beneficiary of the policy other than
the Trust, to assign the policy (as distinct from conversion of the policy to a
different form) other than to a successor Trustee, or to loan to any person the
proceeds of any borrowing against such policy.
(h) However, notwithstanding the provisions of Section 8(g) above, the
Trustee shall be obligated to follow the written
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directions of ATC with respect to (1) the payment of premiums for life insurance
policies held as an asset of the Trust, (2) the borrowing of part or all of the
cash value, or increase in cash value, of any life insurance policy held as an
asset of the Trust, and (3) except in the event of a Change of Control and for
the 3-year period following such Change of Control, the lending to the Company
of the proceeds of any borrowing against an insurance policy held as an asset of
the Trust.
(i) The Trustee may register any securities held in the Trust in its own
name or in the name of a nominee and hold any securities in bearer form, and
combine certificates representing such securities with securities of the same
issue held by the Trustee in other fiduciary or representative capacities or as
agents for customers, or deposit or arrange for the deposit of such securities
in any qualified central depository even though when so deposited, such
securities may be merged and held in bulk in the name of the nominee of such
depository with other securities deposited therein by other depositors, or
deposit or arrange for the deposit of any securities issued by the United States
Government, or any agency or instrumentality thereof, with a Federal Reserve
Bank, but the books and records of the Trustee shall at all times show that all
such investments are part of the Trust Fund.
(j) With the consent of ATC, the Trustee may compromise, compound,
submit to arbitration or settle any debt or obligation owing to or from or
otherwise adjust all claims in favor of or against the Trust. In the event of a
Change of Control and for the 3-year period following such Change of Control,
the Trustee may exercise the powers set forth in this Section 8(j) with or
without the consent of ATC.
(k) Notwithstanding any powers granted to the Trustee pursuant to this
Trust Agreement or to applicable law, the Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
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SECTION 9. COMPENSATION AND EXPENSES OF TRUSTEE.
The Trustee shall be entitled to reasonable compensation for its
services and shall be reimbursed for all reasonable expenses incurred by it in
performing its duties hereunder including, but not limited to, legal and
accounting expenses. Such compensation shall be set forth in a separate
schedule. Such schedule may be modified from time to time as agreed by ATC, or
its successor, and the Trustee. All such compensation and expenses shall be paid
by the Company; provided, however, that such compensation and expenses shall
constitute a charge upon the Trust, and may be withdrawn by the Trustee from the
Trust upon prior written notice to the Company if not otherwise paid by the
Company within 60 days of such prior written notice. Upon written direction to
the Trustee from a Company, any costs or expenses that are chargeable to the
Trust but which for administrative convenience and efficiency are paid or
incurred by a Company shall be fully reimbursed by the Trust to that Company
upon presentation to the Trustee of a copy of the invoice of the service
provider and a certification by the Company that the invoice has been paid, or,
if services are provided by a Company, upon presentation to the Trustee of an
accounting of such costs and expenses incurred with respect to such services,
including any costs and expenses incurred by a Company in connection with
administrative activities for the Plans. In all cases the Trustee shall be
entitled to rely on the Company's statements and directions concerning the
payment of any such expenses and shall be fully protected in making such
payments pursuant to the directions of the Company.
SECTION 10. RESIGNATION OR REMOVAL OF THE TRUSTEE.
(a) The Trustee may resign at any time by written notice to ATC, which
shall be effective 60 days after receipt of such notice unless ATC and the
Trustee agree otherwise.
(b) The Trustee may be removed by ATC, or its successor, on 60 days
notice or upon shorter notice accepted by the Trustee.
(c) Upon a Change of Control, as defined herein, the Trustee may not be
removed by ATC for 3 years.
(d) If the Trustee resigns within 3 years after a Change of Control, as
defined herein, the Trustee shall select a successor Trustee in accordance with
the provisions of Section 11(b) hereof prior to the effective date of the
Trustee's resignation.
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(e) Upon resignation or removal of the Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the successor
Trustee. The transfer shall be completed within 90 days after receipt of the
notice of resignation, removal or transfer, unless ATC extends the time limit.
(f) If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal under paragraphs (a) or (b) of this section. If no such
appointment has been made, the Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All expenses of
the Trustee in connection with the proceeding shall be allowed as administrative
expenses of the Trust.
SECTION 11. APPOINTMENT OF SUCCESSOR.
(a) If the Trustee resigns or is removed in accordance with Section
10(a) or (b) hereof, ATC, or its successor may appoint a bank trust department
or other party that may be granted corporate trustee powers under state law, as
a successor Trustee to replace Trustee upon resignation or removal. The
appointment of a successor Trustee shall be effective when accepted in writing
by the new Trustee, who shall have all of the rights and powers of the former
Trustee, including ownership rights in the Trust assets. The former Trustee
shall execute any instrument necessary or reasonably requested by ATC or the
successor Trustee to evidence the transfer.
(b) If the Trustee resigns pursuant to the provisions of Section 10(d)
hereof and selects a successor Trustee, the Trustee may appoint any third party
such as a bank trust department or other party that may be granted corporate
trustee powers under state law. The appointment of a successor Trustee shall be
effective when accepted in writing by the new Trustee. The new Trustee shall
have all the rights and powers of the former Trustee, including ownership rights
in the Trust assets. The former Trustee shall execute any instrument necessary
or reasonably requested by the successor Trustee to evidence the transfer.
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(c) Upon the appointment of any successor Trustee pursuant to this
Section 11 and acceptance of the appointment by such successor Trustee, the
Trustee shall have no responsibility to the Trust for the acts of such successor
Trustee. In addition, the Trustee shall have no responsibility for assets of the
Trust or for acts taken with respect to assets of the Trust following their
transfer to such successor Trustee.
SECTION 12. AMENDMENT OR TERMINATION.
(a) This Trust Agreement may be amended by a written instrument executed
by the Trustee and ATC, or its successor. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Plans or shall make the Trust
revocable after it has become irrevocable in accordance with Section 1(b)
hereof.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plans. Upon termination of the Trust any assets remaining in
the Trust shall be returned to the Company.
(c) Notwithstanding any other provision of this Trust, upon written
approval of two-thirds (2/3) of the Participants entitled to payment of benefits
pursuant to the terms of the Plans, ATC may terminate this Trust prior to the
time all benefit payments under the Plans have been made.
(d) Upon termination of the Trust pursuant to Section 12(b) or Section
12(c), at the direction of ATC all assets in the Trust at termination shall be
returned to the Companies in proportion to their respective percentage
interests.
(e) Notwithstanding any other provision of this Trust, in the event that
a Company becomes a Former Company, the Trustee shall follow the written
directions of ATC with respect to the disposition of such Former Company's
percentage interest in the Trust.
(f) Sections 1(e), 1(g), 2(b), 5(c), 5(h), 5(j), 8(d), 8(h), 8(j),
10(c), 10(d) and 12 of this Trust Agreement may not be amended by ATC, or its
successor, for 3 years following a Change of Control, as defined herein.
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SECTION 13. MISCELLANEOUS.
(a) Any provisions of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(d) For purposes of this Trust Agreement, "Change of Control" shall have
the meaning of the term "Change in Control" that is set forth in the AirTouch
Communications, Inc. 1993 Long-Term Stock Incentive Plan or its successor.
(e) The provisions of this Trust Agreement are binding upon ATC (and any
Company and Former Company) and any successor or purchaser corporation.
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<PAGE> 21
SECTION 14. EFFECTIVE DATE.
The effective date of this Trust Agreement shall be October 31, 1994.
ATC and the Trustee have caused this Trust Agreement to be executed by
their respective duly authorized officers on the dates set forth below:
AIRTOUCH COMMUNICATIONS, INC.
Dated: 12/29/98 By: /s/ MOHAN S. GYANI
--------------- ---------------------------------
As Its: Executive Vice President
and Chief Financial Officer
WELLS FARGO BANK, N.A.
Dated: 12/29/98 By: /s/ KATHRYN R. REID
--------------- ---------------------------------
As Its: Assistant Vice President
and Trust Officer
19
<PAGE> 22
APPENDIX A
EXECUTIVE BENEFIT PLANS
AirTouch Communications Supplemental Executive Pension Plan
AirTouch Communications Estate Deferral Program
(effective as of December 11, 1997)
20
<PAGE> 1
EXHIBIT 10.13
TRUST AGREEMENT
FOR
AIRTOUCH COMMUNICATIONS
DEFERRED COMPENSATION PLAN
(EFFECTIVE AS OF DECEMBER 1, 1994)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Establishment of Trust.................................................. 2
Section 2. Payments to Plan Participants and Their Beneficiaries................... 3
Section 3. Trustee Responsibility Regarding Payments to Trust
Beneficiaries When a Company is Insolvent............................... 4
Section 4. Payments to the Company................................................. 6
Section 5. Investment Authority.................................................... 6
Section 6. Disposition of Income................................................... 9
Section 7. Accounting by Trustee................................................... 9
Section 8. Responsibilities and Authorities of the Trustee and Investment Manager.. 10
Section 9. Compensation and Expenses of Trustee.................................... 12
Section 10. Resignation or Removal of the Trustee................................... 12
Section 11. Appointment of Successor................................................ 13
Section 12. Amendment or Termination................................................ 14
Section 13. Miscellaneous........................................................... 15
Section 14. Effective Date.......................................................... 17
APPENDIX A .......................................................................... 18
</TABLE>
i
<PAGE> 3
TRUST AGREEMENT
FOR
AIRTOUCH COMMUNICATIONS
DEFERRED COMPENSATION PLAN
(EFFECTIVE AS OF DECEMBER 1, 1994)
This Trust Agreement is made as of the first day of December, 1995, by
and between AIRTOUCH COMMUNICATIONS, INC., a Delaware corporation ("ATC"), and
THE NORTHERN TRUST COMPANY, an Illinois corporation (the "Trustee").
Any affiliate of ATC which participates in the executive compensation
plans subject to this Trust Agreement may become a party to this Trust Agreement
by indicating its acceptance, in writing, to ATC and the Trustee. The term
"Company" as used in this Trust Agreement shall include ATC and any affiliate of
ATC which participates in this Trust Agreement, unless the context requires
otherwise. In the event of a merger, consolidation or liquidation of a Company
into or with any other corporation, or the sale or other transfer of all or
substantially all of a Company's operating assets, the resulting successor or
purchaser corporation shall automatically be substituted for such Company under
this Trust Agreement if such successor or purchaser corporation is an affiliate
of ATC, participates in any of the executive compensation plans related to this
Trust Agreement and indicates its agreement to participate in this Trust
Agreement in writing to ATC and the Trustee. A successor or purchaser
corporation that is not affiliated with ATC or does not choose to participate in
this Trust Agreement shall be known as a "Former Company." "Former Company" also
means a Company which is designated by ATC as a Former Company for purposes of
withdrawal by such Company from the Trust.
WHEREAS, ATC has adopted the executive benefit plans listed in Appendix
A (the "Plans"); and
WHEREAS, ATC wishes to establish a trust (hereinafter called the
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of the Company's creditors in the event of the Company's
Insolvency, as herein defined, until paid to Plan participants and their
beneficiaries in such manner and at such times as specified in the Plans; and
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plans
as unfunded plans maintained for the purpose of providing deferred compensation
for a select group of
1
<PAGE> 4
management or highly compensated employees for purposes of Title I of the
Employee Retirement Income Security Act of 1974; and
WHEREAS, it is the intention of the Company to make contributions to the
Trust to provide itself with a source of funds to assist it in the meeting of
its liabilities under the Plans;
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
SECTION 1. ESTABLISHMENT OF TRUST.
(a) The Company hereby deposits with the Trustee in trust one thousand
dollars ($1,000.00), which shall become the principal of the Trust to be held,
administered and disposed of by the Trustee as provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which the Company is
the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust and any earnings thereon shall be held
separate and apart from other funds of the Company and shall be used exclusively
for the uses and purposes of Plan participants and general creditors as herein
set forth. Plan participants and their beneficiaries shall have no preferred
claim on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Plans and this Trust Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against the
Company. Any assets held by the Trust will be subject to the claims of the
Company's general creditors under federal and state law in the event of the
Company's Insolvency, as defined in Section 3(a) herein.
(e) For purposes of Sections 1(d) and 3, each Company shall be deemed to
have a pro rata interest in the Trust assets. A Company's pro rata interest
shall be equal to a fraction. The numerator of such fraction shall be equal to
that Company's contributions, adjusted for income, gains and losses thereon,
less payments and expenses of the Trust charged to that Company. The denominator
of such fraction shall be the total amount of Trust assets. ATC's determination
with respect to the pro rata interest of each Company shall be conclusive and
binding upon each Company. The money or other property attributable to the pro
rata interest of any Company shall not be available to satisfy the
2
<PAGE> 5
claims of any other Company's creditors or the Plan participants employed by any
other Company or their beneficiaries. Sections 1(d) and 3 shall be applied
separately to each Company, its pro rata interest in Trust assets and the Plan
participants in its employ (or formerly in its employ). A Company's Insolvency
shall have no effect on any other Company, such other Company's pro rata
interest in Trust assets or the Plan participants in such other Company's employ
(or formerly in its employ).
(f) Upon a Change of Control, each Company shall, as soon as possible,
but in no event longer than 60 days following the Change of Control, as defined
herein, make an irrevocable contribution to the Trust in an amount that is
sufficient to pay each Plan participant or beneficiary the benefits to which
Plan participants or their beneficiaries would be entitled from such Company
pursuant to the terms of the Plans as of the date on which the Change of Control
occurred.
(g) For purposes of Section 1(f), the amount of the benefit to which a
participant or beneficiary would be entitled as of the specified date shall be
determined by applying the terms of the applicable Plan as if the participant's
employment with the Company had terminated on such date.
SECTION 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES.
(a) ATC shall deliver to the Trustee a schedule (the "Payment Schedule")
that indicates the amounts payable in respect of each Plan participant (and his
or her beneficiaries), that provides a formula or other instructions acceptable
to the Trustee for determining the amounts so payable, the form in which such
amount is to be paid (as provided for or available under the Plans) and the time
of commencement for payment of such amounts. Except as otherwise provided
herein, the Trustee shall make payments to the Plan participants and their
beneficiaries in accordance with such Payment Schedule. The Trustee shall make
provision for the reporting and withholding of any federal, state or local taxes
that may be required to be withheld with respect to the payment of benefits
pursuant to the terms of the Plans and shall pay amounts withheld to the
appropriate taxing authorities or determine that such amounts have been
reported, withheld and paid by the Company. ATC shall give timely directions to
the Trustee with respect to the reporting, withholding and payment of taxes and
the Trustee shall not be required to report, withhold or pay taxes in the
absence of such directions.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plans shall be determined by ATC or such party as it shall
designate under the Plans, and any claim for such benefits shall be considered
and reviewed under the procedures set out in the Plans.
3
<PAGE> 6
(c) The Company may make payment of benefits directly to Plan
participants or their beneficiaries as they become due under the terms of the
Plans. The Company shall notify the Trustee of its decision to make payment of
benefits directly prior to the time amounts are payable to participants or their
beneficiaries. In addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in accordance with the
terms of the Plans, the Company shall make the balance of each such payment as
it falls due. The Trustee shall notify the Company where principal and earnings
are not sufficient to make a payment then due under the Payment Schedule.
(d) This Section 2(d) shall apply only after the contribution described
in Section 1(f) has been made. In the event the Company makes payment of
benefits as permitted in Section 2(c), the Company shall provide the Trustee
with a schedule of all benefits, and taxes attributable thereto, that have been
paid by the Company within 15 days after the end of the quarter in which such
payments have been made.
SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARIES WHEN
A COMPANY IS INSOLVENT.
(a) The Trustee shall cease payment of benefits to Plan participants and
their beneficiaries if the Company is Insolvent. A Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to
pay its debts as they become due, or (ii) the Company is subject to a pending
proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of the Company under federal and state law as set
forth below.
(1) The Board of Directors and the Chief Executive Officer of the
Company shall have the duty to inform the Trustee in writing of the
Company's Insolvency. If a person claiming to be a creditor of the
Company alleges in writing to the Trustee that the Company has become
Insolvent, the Trustee shall determine whether the Company is Insolvent
and, pending such determination, the Trustee shall discontinue payment
of benefits to the Plan participants or their beneficiaries. The Trustee
need not act on such written allegation unless it has been made to the
trust department of the Trustee.
4
<PAGE> 7
(2) Unless the Trustee has actual knowledge of a Company's
Insolvency, or has received notice from the Company or a person claiming
to be a creditor alleging that the Company is Insolvent, the Trustee
shall have no duty to inquire whether the Company is Insolvent. The
Trustee may in all events rely on such evidence concerning the Company's
solvency as may be furnished to the Trustee and that provides the
Trustee with a reasonable basis for making a determination concerning
the Company's solvency. In no event shall "actual knowledge" be deemed
to include knowledge of a Company's credit status held by banking
officers or banking employees of The Northern Trust Company or any other
knowledge which is not actually possessed by the trust department of the
Trustee. The Trustee may appoint an independent accounting firm to make
any determination of Insolvency required under this Section 3. In such
event, the Trustee may conclusively rely upon the determination of
Insolvency by such accounting firm and shall be responsible only for the
prudent selection of such accounting firm.
(3) If at any time the Trustee has determined that the Company is
Insolvent, the Trustee shall discontinue payments to Plan participants
or their beneficiaries and shall hold the assets of the Trust for the
benefit of the Company's general creditors. Nothing in this Trust
Agreement shall in any way diminish any rights of Plan participants or
their beneficiaries to pursue their rights as general creditors of the
Company with respect to benefits due under the Plans or otherwise.
(4) The Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section 2 of this
Trust Agreement only after the Trustee has determined that the Company
is not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plans for the period
of such discontinuance, less the aggregate amount of any payments made to Plan
participants or their beneficiaries by any Company in lieu of the payments
provided for hereunder during any such period of discontinuance. All payments by
the Trustee under this Section 3(c) shall be made in accordance with the Payment
Schedule, which shall be modified as necessary by ATC.
5
<PAGE> 8
SECTION 4. PAYMENTS TO THE COMPANY.
Except as provided in Sections 3 and 12 hereof, a Company shall have no
right or power to direct the Trustee to return to the Company or to divert to
others any of the Trust assets before all payments of benefits have been made to
Plan participants and their beneficiaries pursuant to the terms of the Plans.
SECTION 5. INVESTMENT AUTHORITY.
(a) ATC may appoint an individual or organization to invest and reinvest
assets of the Trust (an "Investment Manager"). ATC shall notify the Trustee of
the appointment of any Investment Manager and identify the Trust assets
allocated to such Investment Manager for purposes of investment and
reinvestment. The terms and conditions of appointment, authority and retention
shall be the sole responsibility of ATC. ATC shall cause each Investment Manager
to furnish the Trustee with the names and signatures of those persons authorized
to direct the Trustee on its behalf. The Trustee shall have the right to assume,
in the absence of written notice to the contrary, that no event constituting a
change in the authority of any such person has occurred. ATC may also direct the
Trustee to divide the assets of the Trust into separate parts for investment
purposes and shall have the power, from time to time, to modify or terminate any
existing investment arrangement as it shall deem appropriate.
(b) The Trust shall be invested and reinvested without distinction
between income and principal. ATC may allocate and reallocate investment
responsibility with respect to any assets of the Trust among ATC, any Investment
Manager and the Trustee. Any such allocations shall be made by ATC in a written
instrument delivered to the Trustee and, if appropriate, the affected Investment
Manager and shall continue in force and effect until revoked by ATC in a writing
delivered to the Trustee. Any Investment Manager acting hereunder shall have
sole authority and responsibility for the management, investment and
reinvestment of the Trust assets allocated to such Investment Manager. The
portion of the Trust over which ATC or an Investment Manager shall have
investment responsibility is hereinafter referred to as a "Directed Fund." The
Trustee shall be under no duty or obligation to review or to question any
direction of ATC or an Investment Manager, or to review securities or any other
property held in any Directed Fund with respect to prudence or proper
diversification or compliance with any limitation on the Investment Manager's
authority under the terms of any agreement entered into between ATC and the
Investment Manager or imposed by applicable law, or to make any suggestions or
recommendations to ATC or an Investment Manager with respect to the retention or
investment of any assets of any Directed Fund, and shall have no authority to
take any action or to refrain from taking any action with
6
<PAGE> 9
respect to any asset of a Directed Fund unless and until it is directed to do so
by ATC or an Investment Manager.
(c) The assets of this Trust may be invested and reinvested in such
personal property investments and insurance and annuity contracts as the
individual or organization having investment responsibility, in its sole
discretion, may deem appropriate and, in the event that a person other than ATC
has such investment responsibility, consistent with such investment guidelines
as may be communicated to it by ATC from time to time, including, without
limiting the generality of the foregoing: common and preferred stocks; trusts
and participation certificates; bonds; debentures; covered call options; notes
secured by personal property; obligations of governmental bodies, both domestic
and foreign; notes, commercial paper and other evidences of indebtedness,
secured or unsecured, including variable amount notes; convertible securities of
all types and kinds; mutual fund shares; interest-bearing savings or deposit
accounts with any federally-insured bank (including the Trustee) or savings and
loan association; contracts for the immediate or future delivery of financial
instruments of any issuer or of any other property; all forms of options in any
combination; investments commonly known as "synthetic securities" or "derivative
securities" (including, without limitation, investments referred to as asset
swaps, collateralized asset swaps, equity swaps, fixed-income swaps, "pure" and
"participating" synthetic securities, and similar arrangements as may now exist
or may be developed in the future); and any other personal property permitted as
investments under applicable law. With respect to margin payments to brokers or
third-party safekeeping banks from the assets of a Directed Fund, the Trustee
shall make such payments, and enter into agreements with such brokers or
safekeeping banks, only as directed by the person or entity with investment
responsibility for the Directed Fund and shall have no responsibility for any
assets so transferred to such brokers or safekeeping banks, except as otherwise
provided by applicable law. The Trustee shall not be responsible, under this
Agreement or otherwise, in any way for the form, terms, payment provisions or
issuer of any insurance contract which it is directed to purchase and/or hold as
contractholder, or for performing any functions under any such insurance
contract (other than the execution of documents incidental thereto and the
transfer or receipt of funds thereunder), on the directions of an Investment
Manager or of ATC, if it has investment responsibility for any such insurance
contract (subject to Section 8(h) hereof).
7
<PAGE> 10
(d) The assets of this Trust may be invested and reinvested in such
forms of collective investments as may be consistent with the investment
policies developed and communicated by ATC to the Trustee or the appropriate
Investment Manager. To the extent that the Trust is invested in a common or
collective trust, the terms of the agreement or declaration of trust
establishing such common or collective trust fund shall become a part of this
Trust as if set forth in full herein, to the extent of the allocable share of
the Trust therein.
(e) The Trustee may invest in securities (including stock or rights to
acquire stock) or obligations issued by ATC. All rights associated with assets
of the Trust shall be exercised by the Trustee or the person designated by the
Trustee, and shall in no event be exercisable by or rest with Plan participants,
except that voting rights with respect to ATC securities will be exercised by
ATC.
(f) To the extent any assets of the Trust are held in a Directed Fund,
the Trustee shall exercise the rights associated with such assets only as
directed by ATC or an Investment Manager, as the case may be. Notwithstanding
the preceding sentence of this Section 5(f) and the provisions of Section 5(e),
in the event of a Change of Control and for the 3-year period following such
Change of Control, the Trustee shall exercise voting rights with respect to ATC
securities.
(g) The Trustee may acquire securities issued by ATC directly from ATC
or from any third party, in such manner and upon such terms as the Trustee deems
appropriate and advisable in the Trustee's sole discretion. There shall be no
limitation on the amount or percentage of Trust assets that may be held in the
form of ATC securities. To the extent the Trustee is directed by ATC or an
Investment Manager to invest in ATC securities, the Trustee shall have no duty
or obligation to sell any portion of the assets of the Trust invested in ATC
securities for the purpose of establishing a mixed, balanced or diversified
portfolio of investments and the Trustee shall not be liable for any loss
attributable to the investment of Trust assets in ATC securities.
(h) Except in the event of a Change of Control and for the 3-year period
following such Change of Control, ATC shall have the right at any time, and from
time to time in its sole discretion, to substitute assets of equal fair market
value for any asset held by the Trust. This right is exercisable by ATC in a
non-fiduciary capacity without the approval or consent of any person in a
fiduciary capacity.
8
<PAGE> 11
(i) The Trustee shall be under no duty or obligation to review or to
question any direction of any Company pursuant to Section 5(h), or to review
securities so substituted or any other property so held with respect to prudence
or proper diversification, or to make any suggestions or recommendations to such
Company with respect to the retention or investment of any such substituted
assets and shall have no authority to take any action with respect to such
substituted assets unless and until it is directed to do so by ATC.
(j) The Trustee shall have the following discretionary powers and
authority in the investment of the Trust with respect to the assets of the Trust
under its management and control and, with respect to a Directed Fund, ATC or
the Investment Manager, as the case may be, shall exercise such powers and
authority:
(1) to purchase, sell, exchange, convey, transfer or otherwise
acquire or dispose of any property, by private contract or at public
auction; and
(2) to give general or special proxies or powers of attorney with
or without power of substitution; to exercise any conversion privileges,
subscription rights or other options and to make any payments incidental
thereto; to consent to or otherwise participate in corporate
reorganizations or other changes affecting corporate securities and to
delegate discretionary powers and pay any assessments or charges in
connection therewith; and generally to exercise any of the powers of an
owner with respect to securities or other property held in the Trust;
and
(3) to make, execute, acknowledge and deliver any and all
documents of transfer and conveyance and any and all other instruments
that may be necessary or appropriate to carry out the powers herein
granted.
SECTION 6. DISPOSITION OF INCOME.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
SECTION 7. ACCOUNTING BY TRUSTEE.
The Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such records as shall be necessary to determine each Company's
percentage interest in the Trust and such other specific records as shall be
agreed upon in writing between ATC and the Trustee. The Trustee shall submit to
ATC and each Company such interim valuations, reports or other information as
ATC and the Trustee shall mutually agree. Within 60 days
9
<PAGE> 12
following the close of each calendar year and within 60 days after the removal
or resignation of the Trustee, the Trustee shall deliver to ATC a written
account of its administration of the Trust during such year or during the period
from the close of the last preceding year to the date of such removal or
resignation, setting forth all investments, receipts, disbursements and other
transactions effected by it, including a description of all securities and
investments purchased and sold with the cost or net proceeds of such purchases
or sales (accrued interest paid or receivable being shown separately), and
showing all cash, securities and other property held in the Trust at the end of
such year or as of the date of such removal or resignation, as the case may be.
ATC shall review each such accounting provided by the Trustee and within a
reasonable period shall advise the Trustee in writing of any corrections or
specific objections to any transaction reported; provided, however, that nothing
in the preceding clause shall prevent ATC from advising the Trustee of any
corrections later discovered to be necessary for accurate Trust records and
accounting.
10
<PAGE> 13
SECTION 8. RESPONSIBILITIES AND AUTHORITIES OF THE TRUSTEE AND INVESTMENT
MANAGER.
(a) The Trustee and each Investment Manager appointed pursuant to
Section 5 shall act with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in like capacity and
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims; provided, however, that the Trustee shall incur no
liability to any person for any action taken pursuant to a written direction,
request or approval given by a Company or an Investment Manager which is
contemplated by, and in conformity with, the terms of this Trust Agreement or
anything omitted to be done in the absence of such direction, request or
approval with respect to a Directed Fund, except that any liability of the
Trustee for fraud, gross negligence or willful misconduct shall continue. In the
event of a dispute between a Company and any party, including any other Company,
respecting assets in the Trust, the Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
(b) In the absence of fraud, gross negligence or misconduct on the part
of the Trustee, ATC hereby agrees to indemnify the Trustee for, and hold it
harmless against, any and all liabilities, losses, claims, damages, actions,
costs and expenses (including reasonable counsel fees) which may be incurred by
or assessed against it as a direct or indirect result of anything done in good
faith, or alleged to have been done, by or on behalf of the Trustee under this
Trust Agreement or anything omitted to be done in good faith, or alleged to have
been omitted, by or on behalf of the Trustee under this Trust Agreement.
(c) If the Trustee undertakes or defends any litigation arising in
connection with this Trust, ATC agrees to indemnify the Trustee against the
Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If ATC does not pay such costs, expenses and liabilities in a
reasonably timely manner, the Trustee may charge such expenses against the
Trust.
(d) If at any time the Trust assets are insufficient to make any payment
then due under the Payment Schedule and the Company has not notified the Trustee
pursuant to Section 2(d) that such payment will be or has been made directly by
the Company, then the Trustee shall bring an action or proceeding in a court of
competent jurisdiction against the Company to compel the Company to make such
payment. The Company hereby agrees to pay all reasonable attorneys' fees and
expenses that the Trustee anticipates will be incurred by it in bringing such a
cause of action, regardless of its outcome, and the Trustee may charge any such
fees and expenses not paid in advance by the Company
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<PAGE> 14
against the Trust. The Trustee shall be obligated to act under this Section 8(d)
only to the extent that all such fees and expenses are paid in advance by the
Company or from the Trust and shall in no event be required to advance any of
its own funds.
(e) The Trustee may consult with legal counsel (who may also be counsel
for a Company generally) with respect to any of its duties or obligations
hereunder.
(f) The Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder. If the Company does not
pay the fees of such professionals in a reasonably timely manner, the Trustee
may charge such payment against the Trust.
(g) The Trustee shall have, without exclusion, all powers conferred on
trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the Trust,
the Trustee shall have no power to name a beneficiary of the policy other than
the Trust, to assign the policy (as distinct from conversion of the policy to a
different form) other than to a successor Trustee, or to loan to any person the
proceeds of any borrowing against such policy.
(h) However, with respect to any policies for which ATC has investment
responsibility, notwithstanding the provisions of Section 8(g) above, the
Trustee shall be obligated to follow the written directions of ATC with respect
to (1) the payment of premiums for life insurance policies held as an asset of
the Trust, (2) the borrowing of part or all of the cash value, or increase in
cash value, of any life insurance policy held as an asset of the Trust, and (3)
except in the event of a Change of Control and for the 3-year period following
such Change of Control, the lending to the Company of the proceeds of any
borrowing against an insurance policy held as an asset of the Trust.
(i) The Trustee may register any securities held in the Trust in its own
name or in the name of a nominee and hold any securities in bearer form, and
combine certificates representing such securities with securities of the same
issue held by the Trustee in other fiduciary or representative capacities or as
agents for customers, or deposit or arrange for the deposit of such securities
in any qualified central depository even though when so deposited, such
securities may be merged and held in bulk in the name of the nominee of such
depository with other securities deposited therein by other depositors, or
deposit or arrange for the deposit of any securities issued by the United States
Government, or any agency or instrumentality thereof, with a Federal Reserve
Bank, but the books and records of the Trustee shall at all times show that all
such investments are part of the Trust Fund.
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<PAGE> 15
(j) With the consent of ATC, the Trustee may compromise, compound,
submit to arbitration or settle any debt or obligation owing to or from or
otherwise adjust all claims in favor of or against the Trust. In the event of a
Change of Control and for the 3-year period following such Change of Control,
the Trustee may exercise the powers set forth in this Section 8(j) with or
without the consent of ATC.
(k) Notwithstanding any powers granted to the Trustee pursuant to this
Trust Agreement or to applicable law, the Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
SECTION 9. COMPENSATION AND EXPENSES OF TRUSTEE.
The Trustee shall be entitled to reasonable compensation for its
services and shall be reimbursed for all reasonable expenses incurred by it in
performing its duties hereunder including, but not limited to, legal and
accounting expenses. Such compensation shall be set forth in a separate
schedule. Such schedule may be modified from time to time as agreed by ATC and
the Trustee. All such compensation and expenses shall be paid by the Company;
provided, however, that such compensation and expenses shall constitute a charge
upon the Trust, and may be withdrawn by the Trustee from the Trust upon prior
written notice to the Company if not otherwise paid by the Company within 60
days of such prior written notice. Upon written direction to the Trustee from a
Company, any costs or expenses that are chargeable to the Trust but which for
administrative convenience and efficiency are paid or incurred by a Company
shall be fully reimbursed by the Trust to that Company upon presentation to the
Trustee of a copy of the invoice of the service provider and a certification by
the Company that the invoice has been paid, or, if services are provided by a
Company, upon presentation to the Trustee of an accounting of such costs and
expenses incurred with respect to such services, including any costs and
expenses incurred by a Company in connection with administrative activities for
the Plans. In all cases the Trustee shall be entitled to rely on the Company's
statements and directions concerning the payment of any such expenses and shall
be fully protected in making such payments pursuant to the directions of the
Company.
SECTION 10. RESIGNATION OR REMOVAL OF THE TRUSTEE.
(a) The Trustee may resign at any time by written notice to ATC, which
shall be effective 60 days after receipt of such notice, unless ATC and the
Trustee agree otherwise.
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(b) The Trustee may be removed by ATC on 60 days' notice or upon shorter
notice accepted by the Trustee.
(c) Upon a Change of Control, as defined herein, the Trustee may not be
removed by ATC for 3 years.
(d) If the Trustee resigns within 3 years after a Change of Control, as
defined herein, the Trustee shall select a successor Trustee in accordance with
the provisions of Section 11(b) hereof prior to the effective date of the
Trustee's resignation.
(e) Upon resignation or removal of the Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the successor
Trustee. The transfer shall be completed within 90 days after receipt of the
notice of resignation, removal or transfer, unless ATC extends the time limit.
(f) If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal under paragraphs (a) or (b) of this section. If no such
appointment has been made, the Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All expenses of
the Trustee in connection with the proceeding shall be allowed as administrative
expenses of the Trust.
SECTION 11. APPOINTMENT OF SUCCESSOR.
(a) If the Trustee resigns or is removed in accordance with Section
10(a) or (b) hereof, ATC may appoint a bank trust department or other party that
may be granted corporate trustee powers under state law, as a successor Trustee
to replace Trustee upon resignation or removal. The appointment of a successor
Trustee shall be effective when accepted in writing by the new Trustee, who
shall have all of the rights and powers of the former Trustee, including
ownership rights in the Trust assets. The former Trustee shall execute any
instrument necessary or reasonably requested by ATC or the successor Trustee to
evidence the transfer.
(b) If the Trustee resigns pursuant to the provisions of Section 10(d)
hereof and selects a successor Trustee, the Trustee may appoint any third party
such as a bank trust department or other party that may be granted corporate
trustee powers under state law. The appointment of a successor Trustee shall be
effective when accepted in writing by the new Trustee. The new Trustee shall
have all the rights and powers of the former Trustee, including ownership rights
in the Trust assets. The former Trustee shall execute any instrument necessary
or reasonably requested by the successor Trustee to evidence the
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transfer. The Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions whenever the Trustee is required
to appoint a successor under this Trust Agreement.
(c) Upon the appointment of any successor Trustee pursuant to this
Section 11 and acceptance of the appointment by such successor Trustee, the
Trustee shall have no responsibility to the Trust for the acts of such successor
Trustee. In addition, the Trustee shall have no responsibility for assets of the
Trust or for acts taken with respect to assets of the Trust following their
transfer to such successor Trustee.
SECTION 12. AMENDMENT OR TERMINATION.
(a) This Trust Agreement may be amended by a written instrument executed
by the Trustee and ATC. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plans or shall make the Trust revocable after it
has become irrevocable in accordance with Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plans. Upon termination of the Trust any assets remaining in
the Trust shall be returned to the Company.
(c) Notwithstanding any other provision of this Trust, upon written
approval of two-thirds (2/3) of the Participants entitled to payment of benefits
pursuant to the terms of the Plans, ATC may terminate this Trust prior to the
time all benefit payments under the Plans have been made.
(d) Upon termination of the Trust pursuant to Section 12(b) or Section
12(c), at the direction of ATC all assets in the Trust at termination shall be
returned to the Companies in proportion to their respective percentage
interests.
(e) Notwithstanding any other provision of this Trust, in the event that
a Company becomes a Former Company, the Trustee shall follow the written
directions of ATC with respect to the disposition of such Former Company's
percentage interest in the Trust.
(f) Sections 1(f), 5(f), 5(h), 8(d), 8(h), 8(j), 10(c), 10(d) and 12 of
this Trust Agreement may not be amended by ATC for 3 years following a Change of
Control, as defined herein.
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SECTION 13. MISCELLANEOUS.
(a) Any provisions of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
(d) For purposes of this Trust Agreement, "Change of Control" shall mean
the occurrence of any of the following events:
(1) Both:
(A) Any "person" (as defined below) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended), directly or indirectly, of
securities of ATC representing at least 20 percent of the total
voting power represented by ATC's then outstanding voting
securities; and
(B) The beneficial ownership by such person of securities
representing such percentage has not been approved by a majority
of the "continuing directors" (as defined below); or
(2) Any "person" (as defined below) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange Act of
1934, as amended), directly or indirectly, of securities of ATC
representing at least 50 percent of the total voting power represented
by ATC's then outstanding voting securities; or
(3) A change in the composition of ATC's Board of Directors
occurs, as a result of which fewer than two-thirds of the incumbent
directors are directors (the "continuing directors") who either:
(A) Had been directors of ATC on the "look-back date" (as
defined below) (the "original directors"); or
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(B) Were elected, or nominated for election, to such Board
with the affirmative votes of at least a majority of the
aggregate of the original directors who were still in office at
the time of the election or nomination and the directors whose
election or nomination was previously so approved; or
(4) The shareholders of ATC approve a merger or consolidation of
ATC with any other corporation, if such merger or consolidation would
result in the voting securities of ATC outstanding immediately prior
thereto representing (either by remaining outstanding or by being
converted into voting securities of the surviving entity) 50 percent or
less of the total voting power represented by the voting securities of
ATC or such surviving entity outstanding immediately after such merger
or consolidation; or
(5) The shareholders of ATC approve (A) a plan of complete
liquidation of ATC or (B) an agreement for the sale or disposition by
ATC of all or substantially all of ATC's assets.
For purposes of Paragraphs (1) and (2) above, the term "person" shall
have the same meaning as when used in sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended, but shall exclude (A) a trustee or other
fiduciary holding securities under an employee benefit plan of ATC or of a
parent or subsidiary of ATC and (B) a corporation owned directly or indirectly
by the shareholders of ATC in substantially the same proportions as their
ownership of the common stock of ATC.
For purposes of Paragraph (3) above, the term "look-back date" shall
mean the later of (A) April 1, 1994, or (B) the date 24 months prior to the date
of the event that may constitute a Change of Control.
Any other provision of this Subsection (d) notwithstanding, the term
"Change of Control" shall not include either of the following events, if
undertaken at the election of ATC:
(A) A transaction, the sole purpose of which is to change the
state of ATC's incorporation; or
(B) A transaction, the result of which is to sell all or
substantially all of the assets of ATC to another corporation (the
"surviving corporation"); provided that the surviving corporation is
owned directly or indirectly by the shareholders of ATC immediately
following such transaction in substantially the same proportions
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<PAGE> 20
as their ownership of ATC's common stock immediately preceding such
transaction; and provided, further, that the surviving corporation
expressly assumes this Trust Agreement.
The Chief Executive Officer of ATC shall notify the Trustee in writing
immediately upon a Change of Control. In the event that the Trustee receives
written notice from a Participant that a Change of Control has taken place, it
shall appoint a law firm or other third party ("Expert") to determine whether a
Change of Control has taken place. The Trustee may conclusively rely upon the
notice from the Chief Executive Officer of ATC or the determination of the
Expert but shall be responsible for the prudent selection of the Expert (if an
Expert has been appointed).
SECTION 14. EFFECTIVE DATE.
The effective date of this Trust Agreement shall be as of December 1,
1994.
ATC and the Trustee have caused this Trust Agreement to be executed by
their respective duly authorized officers on the dates set forth below:
AIRTOUCH COMMUNICATIONS, INC.
Dated: 12/29/98 By: /s/ MOHAN S. GYANI
---------------- ------------------------------------
Executive Vice President and
As Its: Chief Financial Officer
-----------------------------
THE NORTHERN TRUST COMPANY
Dated: 9/16/98 By: /s/ Tim Burdick
---------------- ------------------------------------
As Its: Second Vice President
------------------------------------
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APPENDIX A
EXECUTIVE BENEFIT PLANS
AirTouch Communications Deferred Compensation Plan
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EXHIBIT 10.19
AIRTOUCH COMMUNICATIONS
INCENTIVE PLAN
(AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1998)
SECTION 1. ESTABLISHMENT AND PURPOSE OF THE PLAN
The Corporation originally established the Plan effective January 1,
1994, as the AirTouch Communications Short-Term Incentive Plan. The Plan was
most recently amended and restated effective as of January 1, 1998, and now
includes the LTIP component as well as the STIP component. The purpose of the
STIP is to provide for the payment of annual awards to Eligible Employees based
on the achievement of performance criteria established by the Corporation. The
purposes of the LTIP are (a) to provide the SMG with incentives to meet or
exceed the Corporation's long-term financial goals, (b) to reduce the reliance
on stock-based incentives to retain key executives and (c) to provide the SMG
with above-average cash compensation if the Corporation's long-term goals are
achieved or exceeded.
SECTION 2. ELIGIBILITY AND PARTICIPATION
(a) STIP. STIP Awards under the Plan are earned with respect to
performance during a STIP Award Period. An Employee is an Eligible Employee
entitled to receive a STIP Award with respect to a STIP Award Period only if he
or she:
(i) Is in Active Service and on the payroll of a Participating
Entity on the last day of such STIP Award Period; or
(ii) Terminated employment during such STIP Award Period on
account of death, Retirement or Severance.
An individual's status as an Eligible Employee for purposes of the STIP shall be
determined by the Corporation, and such determination shall be conclusive and
binding on all persons.
(b) LTIP. LTIP Awards under the Plan are earned with respect to
performance during an LTIP Award Period. An Employee is an Eligible Employee
entitled to receive an LTIP Award with respect to an LTIP Award Period only if
he or she:
(i) Is in Active Service on the last day of such LTIP Award
Period;
(ii) During such LTIP Award Period separated from employment on
account of death, Retirement or Disability; or
(iii) During such LTIP Award Period was subject to an
involuntary termination of employment without Cause; or
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(iv) During such LTIP Award Period separated from employment
with Change in Control severance benefits under his or her employment
agreement.
In no event shall an individual be entitled to receive an LTIP Award with
respect to an LTIP Award Period if, during such LTIP Award Period, he or she was
terminated for Cause or resigned. An individual's status as an Eligible Employee
for purposes of the LTIP shall be determined by the C&P Committee, and such
determination shall be conclusive and binding on all persons.
SECTION 3. AMOUNT AND PAYMENT OF STIP AWARDS
(a) Performance Criteria. With respect to each STIP Award
Period, the C&P Committee shall adopt performance criteria for each
Participating Entity. The C&P Committee may also adopt different performance
criteria for different job classifications. In order to ensure the incentive
features of the Plan and to avoid distortion in its operation, the C&P Committee
may, in its sole discretion, revise any performance criteria to the extent the
C&P Committee deems appropriate to compensate for or reflect any extraordinary
changes occurring during the STIP Award Period that significantly alter the
basis upon which the performance criteria were established. Any such revisions
may be made before, during or after the STIP Award Period and, once adopted by
the C&P Committee, shall be conclusive and binding on all persons.
(b) STIP Award Target. STIP Award targets for each STIP Award
Period are determined by the C&P Committee and may be expressed as a percentage
of Base Pay, a dollar amount or any other form specified by the C&P Committee.
The C&P Committee may designate different STIP Award targets for different job
classifications and Participating Entities.
(c) Performance Levels. The C&P Committee shall annually
designate levels of minimum, maximum and target achievement of performance
criteria and shall establish percentages of STIP Award targets to be given for
achievement of each such performance level. Different performance levels and
associated percentages of STIP Award targets may be established for different
Participating Entities. The C&P Committee also has the discretion to increase or
decrease STIP Awards. In no event shall the percentage of the STIP Award target
actually paid exceed 200%. No STIP Award shall be paid for performance below the
minimum level of achievement of performance criteria designated by the C&P
Committee.
(d) Accrued STIP Awards. As of the end of the STIP Award Period,
the C&P Committee shall determine STIP Award amounts based on the STIP Award
targets and performance criteria for each Participating Entity and job
classification, as described in Subsections (a), (b) and (c) above. STIP Award
amounts so determined (and adjusted, if applicable) are referred to as Accrued
STIP Awards.
(e) Proration of Accrued STIP Awards. Accrued STIP Awards shall
be prorated as follows:
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(i) The Accrued STIP Award of an Eligible Employee who has less
than 12 months of Active Service with respect to a 12-month STIP Award
Period shall be prorated by multiplying his or her Accrued STIP Award by
a fraction, the denominator of which is 365 and the numerator of which
is equal to the number of days of such Eligible Employee's Active
Service for such STIP Award Period. The Accrued STIP Award of an
Eligible Employee who has less than six months of Active Service with
respect to a six-month STIP Award Period shall be prorated by
multiplying his or her Accrued STIP Award by a fraction, the denominator
of which is 182.5 and the numerator of which is equal to the number of
days of such Eligible Employee's Active Service for such STIP Award
Period. The foregoing notwithstanding, for purposes of this Paragraph
(i) only, up to 30 days of a period of approved leave of absence or
sickness disability absence may be counted as Active Service if such
period does not begin within 13 weeks of the end of a previous period of
leave of absence or sickness disability absence occurring in the current
or preceding calendar year.
(ii) The Accrued STIP Award of an Eligible Employee who has
Active Service at more than one rate of Base Pay with respect to a
12-month or six-month STIP Award Period (because of job transfer,
performance increase or similar reason) shall be determined as follows.
First, for each such rate of Base Pay, an Accrued STIP Award shall be
determined as if the Eligible Employee had 12 months or six months (as
the case may be) of Active Service at that Base Pay. Next, each such
Accrued STIP Award amount shall be prorated by multiplying it by a
fraction, the denominator of which is 365 or 182.5 (as the case may be)
and the numerator of which is the number of days of such Eligible
Employee's Active Service at such rate of Base Pay for that STIP Award
Period. Finally, the prorated Accrued STIP Awards shall be added
together to determine the Eligible Employee's total Accrued STIP Award.
(iii) The Accrued STIP Award of an Eligible Employee who has
Active Service at more than one STIP Award target level with respect to
a 12-month or six-month STIP Award Period (because of job transfer,
temporary or permanent promotion or similar reason) shall be determined
as follows. First, for each such STIP Award target level, an Accrued
STIP Award shall be determined as if the Eligible Employee had 12 months
or six months (as the case may be) of Active Service at that STIP Award
target level. Next, each such Accrued STIP Award amount shall be
prorated by multiplying it by a fraction, the denominator of which is
365 or 182.5 (as the case may be) and the numerator of which is the
number of days of such Eligible Employee's Active Service at such STIP
Award target level for that STIP Award Period. Finally, the prorated
Accrued STIP Awards shall be added together to determine the Eligible
Employee's total Accrued STIP Award.
(f) Payment of STIP Awards. STIP Awards may be expressed in
dollars or any other medium specified by the C&P Committee including, without
limitation, shares of stock of the Corporation. The C&P Committee shall also
specify a medium of payment (such as dollars, shares of stock of the Corporation
or other medium) of Accrued STIP Awards, which medium may be different from the
medium in which the STIP Award was expressed under
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Subsection (b) above. Accrued STIP Awards paid in the form of dollars shall be
rounded to the nearest whole dollar (rounding up at $0.50), and Accrued STIP
Awards paid in the form of shares of stock shall be rounded to the nearest whole
share (rounding up at 1/2). Accrued STIP Awards shall be paid as soon as
administratively practicable following the STIP Award Period with respect to
which the Accrued STIP Awards are earned. In the event of any Eligible
Employee's death before payment of an Accrued STIP Award, payment shall be made
to the Eligible Employee's Beneficiary or, if there is no living at the time of
such payment, to the Eligible Employee's estate. Accrued STIP Award payments
shall be subject to income tax and employment tax withholding as required by
applicable law but shall not be subject to Eligible Employees' payroll deduction
elections for personal obligations, such as U.S. Savings Bonds, charitable
giving, political action committee contributions and credit union or bank
payments.
(g) Change in Control. Any other provision of this Section 3
notwithstanding, if an Eligible Employee (other than a member of the SMG)
terminates employment with the Controlled Group under circumstances that entitle
him or her to Severance, then his or her Accrued STIP Award for such STIP Award
Period shall be calculated on the basis of 100% of the STIP Award target. The
amount so calculated shall then be prorated pursuant to Subsection (e),
Paragraph (i), above, based on the Eligible Employee's period of Active Service
prior to his or separation from employment. Any prorated Accrued STIP Award
payable pursuant to this SubSection (g) is payable at the same time as the
Eligible Employee's Severance is paid.
SECTION 4. AMOUNT AND PAYMENT OF LTIP AWARDS
(a) Performance Criteria. With respect to each LTIP Award
Period, the C&P Committee shall adopt performance criteria. The C&P Committee
may also adopt different performance criteria for different members of the SMG.
In order to ensure the incentive features of the Plan and to avoid distortion in
its operation, the C&P Committee may, in its sole discretion, revise any
performance criteria to the extent the C&P Committee deems appropriate to
compensate for or reflect any extraordinary changes occurring during the LTIP
Award Period that significantly alter the basis upon which the performance
criteria were established. Any such revisions may be made before, during or
after the LTIP Award Period and, once adopted by the C&P Committee, shall be
conclusive and binding on all persons.
(b) LTIP Award Target. LTIP Award targets for each LTIP Award
Period are determined by the C&P Committee and shall be expressed as a
percentage of Base Pay, at the rate in effect at the close of such LTIP Award
Period. The C&P Committee may designate different LTIP Award targets for
different members of the SMG.
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(c) Performance Levels. The C&P Committee shall designate levels
of minimum, maximum and target achievement of performance criteria for each LTIP
Award Period and shall establish percentages of LTIP Award targets to be given
for achievement of each such performance level. Different performance levels and
associated percentages of LTIP Award targets may be established for different
members of the SMG. The C&P Committee also has the discretion to increase or
decrease LTIP Awards. In no event shall the percentage of the LTIP Award target
actually paid exceed 200%. No LTIP Award shall be paid for performance below the
minimum level of achievement of performance criteria designated by the C&P
Committee.
(d) Accrued LTIP Awards. As of the end of the LTIP Award Period,
the C&P Committee shall determine LTIP Award amounts based on the LTIP Award
targets and performance criteria for each member of the SMG, as described in
Subsections (a), (b) and (c) above. LTIP Award amounts so determined (and
adjusted, if applicable) are referred to as Accrued LTIP Awards.
(e) Proration of Accrued LTIP Awards. The Accrued LTIP Award of
an Eligible Employee who has less than 36 months of Active Service as an SMG
member with respect to an LTIP Award Period shall be prorated by multiplying his
or her Accrued LTIP Award by a fraction, the denominator of which is 1,095 and
the numerator of which is equal to the number of days of such Eligible
Employee's Active Service as an SMG member for such LTIP Award Period. The
foregoing notwithstanding, for purposes of this Subsection (e) only, up to 30
days of a period of approved leave of absence or sickness disability absence may
be counted as Active Service if such period does not begin within 13 weeks of
the end of a previous period of leave of absence or sickness disability absence
occurring in the current or preceding calendar year.
(f) Payment of LTIP Awards. Accrued LTIP Awards shall be paid in
the form of dollars and shall be rounded to the nearest whole dollar (rounding
up at $0.50). Unless an Eligible Employee has made a valid election to defer
receipt of his or her Accrued LTIP Award pursuant to the AirTouch Communications
Deferred Compensation Plan, as amended from time to time, the Accrued LTIP Award
shall be paid as follows:
(i) If the Eligible Employee was in Active Service on the last
day of the LTIP Award Period with respect to which the Accrued LTIP
Award was earned, then the Accrued LTIP Award shall be paid within the
first calendar quarter following such LTIP Award Period.
(ii) If the Eligible Employee terminated employment during an
LTIP Award Period but is eligible under Section 2(b)(ii) to receive an
LTIP Award with respect to such LTIP Award Period, then the Accrued LTIP
Award shall be paid within the first calendar quarter following the
quarter in which he or she terminated employment. The calculation of the
Accrued LTIP Award shall be based on estimated performance, determined
as of the close of the calendar quarter in which the Eligible Employee
terminated employment. The amount of the Accrued LTIP Award shall be
prorated under Subsection (e) above.
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(iv) If the Eligible Employee terminated employment during an
LTIP Award Period but is eligible under Section 2(b)(iii) to receive an
LTIP Award with respect to such LTIP Award Period, then the Accrued LTIP
Award shall be paid within the first calendar quarter following the
quarter in which he or she terminated employment. The Accrued LTIP Award
shall be based on 100% of the LTIP Award target, prorated under
Subsection (e) above.
In the event of any Eligible Employee's death before payment of an Accrued LTIP
Award, payment shall be made to the Eligible Employee's Beneficiary or, if there
is no Beneficiary living at the time of such payment, to the Eligible Employee's
estate. Accrued LTIP Award payments shall be subject to income tax and
employment tax withholding as required by applicable law but shall not be
subject to Eligible Employees' payroll deduction elections for personal
obligations, such as U.S. Savings Bonds, charitable giving, political action
committee contributions and credit union or bank payments.
(g) Change in Control. Any other provision of this Section 4
notwithstanding, and except to the extent otherwise required by a binding
agreement between the Corporation and a merger partner, if an Eligible Employee
receives a severance benefit under his or her employment agreement on account of
a Change in Control, then the amount of his or her Accrued LTIP Award for such
LTIP Award Period shall be equal to the sum of the following:
(i) The portion of the LTIP Award attributable to the period
prior to the Change in Control shall be calculated on the basis of 100%
of the LTIP Award target. The amount so calculated shall then be
prorated pursuant to Subsection (e) above, based on the Eligible
Employee's period of Active Service prior to his or her separation from
employment.
(ii) The portion of the LTIP Award attributable to the period
after the Change in Control shall be calculated on the basis of 100% of
the LTIP Award target. The amount so calculated shall be prorated
pursuant to Subsection (e) above, based on the remainder of the LTIP
Award Period after the Eligible Employee's separation from employment.
The amount so calculated shall then be multiplied by 50%.
Any prorated Accrued LTIP Award payable pursuant to this subsection (g) is
payable at the same time as the Eligible Employee's severance is paid. This
Subsection (g) shall also apply if the Plan is terminated within three years
after a Change in Control.
SECTION 5. AWARDS FOR CERTAIN EMPLOYEES
Notwithstanding any other provision of the Plan to the contrary, the
Accrued STIP Awards and the Accrued LTIP Awards of any Eligible Employee who, as
of the end of a 12-month STIP Award Period, is a Covered Employee shall be
determined as follows:
(a) The sum of (i) the STIP Awards for such STIP Award Period
and (ii) the LTIP Awards for the LTIP Award Period ending with such STIP Award
Period, payable in each
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case to all Covered Employees, shall be equal to 0.6% of the Corporation's
proportionate operating cash flow for such STIP Award Period;
(b) The aggregate amount determined pursuant to Subsection (a)
above shall be allocated among all Covered Employees pro rata based on each
Covered Employee's Base Pay at the beginning of such STIP Award Period; and
(c) The C&P Committee shall have the discretion to reduce the
STIP Award or LTIP Award, or both, for any Covered Employee based on financial
performance criteria, individual performance criteria or any other criteria the
C&P Committee deems appropriate.
SECTION 6. ADMINISTRATION
The Plan shall be administered by the C&P Committee. The C&P Committee
in its sole discretion shall make such rules, interpretations and computations
as it may deem appropriate. Any decision of the C&P Committee with respect to
the Plan, including (without limitation) any determination of eligibility to
receive a STIP Award or LTIP Award and any calculation of the amount of a STIP
Award or LTIP Award, shall be conclusive and binding on all persons.
SECTION 7. AMENDMENT AND TERMINATION
The C&P Committee may amend or terminate the Plan at any time, to be
effective at such date as the C&P Committee designates. Any amendment or
termination may affect present and future Eligible Employees. The Corporation's
Vice President--Human Resources & Corporate Services, with the approval of the
Senior Vice President--Legal and External Affairs and Secretary, shall be
authorized to make minor or administrative changes to the Plan.
SECTION 8. GENERAL PROVISIONS
(a) Reorganizations. In the event of any change in the
outstanding shares of capital stock of the Corporation by reason of any stock
dividend or split, recapitalization, merger, reorganization, acquisition, sale
of assets, spin-off, consolidation, combination or exchange of shares or any
similar event, the C&P Committee may make such adjustments as it deems
appropriate to the performance criteria for any STIP Award Period or LTIP Award
Period not yet completed. Any such adjustments, once adopted by the C&P
Committee, shall be conclusive and binding on all persons.
(b) No Employment Rights. Nothing in the Plan shall be deemed to
give any individual any right to remain in the employ of the Corporation or any
Participating Entity. The Corporation and Participating Entities reserve the
right to terminate any individual's employment at any time, with or without
Cause.
(c) Choice of Law. The validity, interpretation, construction
and performance of the Plan shall be governed under the laws of the State of
California (without regard to their choice-of-law provisions).
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SECTION 9. DEFINITIONS
(a) "Accrued LTIP Award" means the amount of an LTIP Award that
has been determined and is payable.
(b) "Accrued STIP Award" means the amount of a STIP Award that
has been determined and is payable.
(c) "Active Service" means each day on which an individual is
actively at work as a common-law employee of the Corporation, a Participating
Entity or any member of the Corporation's Controlled Group and each day on which
such individual is absent from such active work but is entitled to payment on
account of paid leave of absence, vacation, holiday or jury duty.
(d) "Base Pay" means an Eligible Employee's base rate of annual
salary or wages, without reduction for deferrals made under any plans or
programs of the Controlled Group.
(e) "Beneficiary" means one or more persons designated by the
Eligible Employee in writing on the form prescribed by the Corporation for this
purpose. A beneficiary designation may be replaced or withdrawn at any time. No
beneficiary designation shall be valid unless it has been signed and received by
the Corporation on the prescribed form prior to the Eligible Employee's death.
(f) "Board" means the Board of Directors of the Corporation.
(g) "C&P Committee" means the Compensation and Personnel
Committee of the Board.
(h) "Cause" means (1) a willful failure by the Eligible Employee
to substantially perform the Eligible Employee's duties under any written
agreement governing his or her employment (an "employment agreement') with a
Participating Entity, other than a failure resulting from the Eligible
Employee's complete or partial incapacity due to physical or mental illness or
impairment, (2) a willful act by the Eligible Employee that constitutes gross
misconduct and that is injurious to a Participating Entity, (3) a willful breach
by the Eligible Employee of a material provision of his or her employment
agreement (if any) or (4) a material and willful violation of a federal and
state law or regulation applicable to the business of a Participating Entity. No
act, or failure to act, by the Eligible Employee shall be considered "willful"
unless committed without good faith and without a reasonable belief that the act
or omission was in the Participating Entity's best interest.
(i) "Change in Control" shall have the meaning given to such
term in the AirTouch Communications, Inc. 1993 Long-Term Stock Incentive Plan,
as amended from time to time.
(j) "Code" means the Internal Revenue Code of 1986, as amended.
-8-
<PAGE> 9
(k) "Controlled Group" means the group of corporations and
unincorporated trades or businesses, each member of which is at least 80% owned,
directly or indirectly, by the Corporation.
(l) "Corporation" means AirTouch Communications, Inc., a
Delaware corporation.
(m) "Covered Employee" means any individual who, on the last day
of the taxable year, is the Chief Executive Officer of the Corporation or is
acting in such capacity or who is among the four highest compensated officers of
the Corporation (other than the Chief Executive Officer), as defined in Treasury
Regulations Section 1.162-27(c)(2).
(n) "Disability" means total and permanent disability, as
defined under the terms of the long-term disability plan of the applicable
Participating Entity.
(o) "Eligible Employee" is defined in Section 2.
(p) "Employee" means an individual who is classified by a
Participating Entity as a regular full-time or part-time employee of the
Participating Entity and who is not:
(i) A commissioned salesperson employed by AirTouch Paging;
(ii) Included in a unit of employees covered by a collective
bargaining agreement under which the Employee is not eligible to
participate in the Plan; or
(iii) A nonresident alien with respect to the United States;
provided that this Paragraph (iii) shall not apply to an Employee whom
the C&P Committee has designated in writing as an Eligible Employee.
An individual's status as an Employee shall be determined by the C&P Committee,
and such determination shall be conclusive and binding on all persons.
(q) "LTIP" means the component of the Plan described in
Section 4.
(r) "LTIP Award" means an award under the LTIP.
(s) "LTIP Award Period" means a period of three consecutive
calendar years or, if different, three consecutive fiscal years of the
Corporation. Two or three overlapping LTIP Award Periods may be in effect at the
same time.
(t) "Participating Entity" means the Corporation and each of its
subsidiaries and affiliates that elects to participate in the Plan. In addition,
a particular division or separate operating unit of the Corporation or any of
its subsidiaries or affiliates may be designated as a separate Participating
Entity by the corporation of which it is a part.
(u) "Plan" means this AirTouch Communications Incentive Plan,
which includes the LTIP and the STIP.
-9-
<PAGE> 10
(v) "Retirement" means a termination of employment (i) from a
Participating Entity at an age and with employment service that would entitle
the individual to a Service Pension under the AirTouch Communications Employees
Pension Plan if the individual were a participant in such Pension Plan or (ii)
under circumstances designated as a Retirement by the C&P Committee at its sole
discretion.
(w) "Severance" means a termination of employment with severance
benefits under the AirTouch Communications Severance Plan or Change in Control
Severance Plan (i) within two years following a Change in Control or (ii) under
circumstances designated as a Severance by the Vice President - Human Resources
and Corporate Services (or his or her successor) at his or her sole discretion.
(x) "SMG" means the Senior Management Group of the Corporation,
as determined by the C&P Committee from time to time, provided that a member of
such Senior Management Group who is seconded to (or employed by) a joint venture
in which a member of the Controlled Group participates shall not be considered a
member of the SMG for purposes of the Plan.
(y) "STIP" means the component of the Plan described in
Section 3.
(z) "STIP Award" means an award under the STIP.
(aa) "STIP Award Period" means the calendar year or, if
different, the Corporation's fiscal year, provided that the C&P Committee may
determine that "STIP Award Period" shall mean each of the first and second
halves of the calendar year or, if different, the first and second halves of the
Corporation's fiscal year. The C&P Committee may make such a determination with
respect to all Eligible Employees or certain groups of Eligible Employees.
SECTION 10. EXECUTION
To record the amendment and restatement of the Plan, effective as of
January 1, 1998, the Corporation has caused its duly authorized officer to affix
the corporate name hereto.
AIRTOUCH COMMUNICATIONS, INC.
By: /s/ TERRY KRAMER
---------------------------------
Vice President Human Resources
Its: and Corporate Services
---------------------------------
-10-
<PAGE> 1
<TABLE>
<S> <C>
- ---------------------------------------------------------
2 SELECTED FINANCIAL DATA
- ---------------------------------------------------------
2 Selected Five-Year Consolidated Data
- ---------------------------------------------------------
5 Selected Five-Year Proportionate Data
- ---------------------------------------------------------
- ---------------------------------------------------------
9 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS
- ---------------------------------------------------------
- ---------------------------------------------------------
25 CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------
25 Report of Management
- ---------------------------------------------------------
26 Report of Independent Accountants
- ---------------------------------------------------------
27 Consolidated Statements of Income for the years
ended December 31, 1998, 1997, and 1996
- ---------------------------------------------------------
28 Consolidated Balance Sheets as of December 31,
1998 and 1997
- ---------------------------------------------------------
29 Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997, and
1996
- ---------------------------------------------------------
30 Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997, and 1996
- ---------------------------------------------------------
31 Notes to Consolidated Financial Statements
- ---------------------------------------------------------
53 Selected Proportionate Financial Data
</TABLE>
-1-
<PAGE> 2
SELECTED FINANCIAL DATA
SELECTED FIVE-YEAR CONSOLIDATED DATA
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31
-------------------------------------------------------------------
Pro Forma (a) Historical
------------------ ----------------------------------------------
OPERATING RESULTS 1998 1997 1998(a) 1997(b) 1996(b) 1995 1994(c)
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 5,542 $ 5,034 $5,181 $3,594 $2,252 $1,619 $1,247
Operating income $ 982 $ 843 $ 946 $ 706 $ 281 $ 113 $ 73
Equity in net income of unconsolidated wireless
systems $ 357 $ 81 $ 393 $ 200 $ 133 $ 152 $ 110
Interest:
Expense $ (168) $ (174) $ (145) $ (90) $ (52) $ (13) $ (10)
Income $ 23 $ 18 $ 23 $ 18 $ 14 $ 35 $ 55
Income before preferred dividends $ 710 $ 365 $ 725 $ 448 $ 199 $ 132 $ 98
Preferred dividends $ 140 $ 139 $ 117 $ 54 $ 20 $ -- $ --
Net income applicable to common stockholders $ 570 $ 226 $ 608 $ 394 $ 179 $ 132 $ 98
Per share data:
Income before preferred dividends
Basic $ 1.24 $ 0.65 $ 1.30 $ 0.89 $ 0.40 $ 0.27 $ 0.20
Diluted $ 1.22 $ 0.65 $ 1.28 $ 0.89 $ 0.40 $ 0.27 $ 0.20
Net income applicable to common stockholders
Basic $ 1.00 $ 0.40 $ 1.09 $ 0.78 $ 0.36 $ 0.27 $ 0.20
Diluted $ 0.98 $ 0.40 $ 1.07 $ 0.78 $ 0.36 $ 0.27 $ 0.20
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year Ended December 31
----------------------------------------------
CASH FLOW DATA 1998(a) 1997(b) 1996(b) 1995 1994(c)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities $ 1,856 $ 1,335 $ 775 $ 322 $ 118
Cash flows from investing activities $(1,656) $(1,097) $(1,175) $(1,362) $ (472)
Cash flows from financing activities $ (159) $ (260) $ 346 $ 694 $ 132
</TABLE>
<TABLE>
<CAPTION>
December 31
----------------------------------------------
BALANCE SHEET DATA 1998(a) 1997 1996(b) 1995 1994(c)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Investments in unconsolidated wireless systems $ 3,491 $ 2,068 $ 1,992 $ 3,076 $1,698
Intangible assets, net $ 8,513 $ 3,297 $ 3,409 $ 606 $ 471
Total assets $17,553 $ 8,970 $ 8,524 $ 5,648 $4,488
Long-term debt, including current portion $ 2,746 $ 1,419 $ 1,669 $ 906 $ 130
Redeemable preferred stock $ 1,574 $ -- $ -- $ -- $ --
Total stockholders' equity $ 9,325 $ 5,529 $ 5,062 $ 3,751 $3,459
Working capital (deficit) $ (220) $ (254) $ (120) $ 19 $ 736
Capital expenditures and capital calls, excluding
acquisitions (d) $ 1,398 $ 1,023 $ 903 $ 665 $ 443
</TABLE>
- --------------------------------------------------------------------------------
-2-
<PAGE> 3
SELECTED FINANCIAL DATA
(Dollars in millions)
<TABLE>
<CAPTION>
U.S. CELLULAR OPERATIONS
For the Year Ended December 31
-------------------------------------------------------------------
Pro Forma (a) Historical
------------------ ----------------------------------------------
GAAP FINANCIAL DATA 1998 1997 1998(a) 1997 1996(b) 1995 1994(c)
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Service and other revenues $ 3,874 $ 3,621 $3,538 $2,351 $1,634 $1,145 $ 875
Equipment sales 224 295 198 125 60 44 46
- ----------------------------------------------------------------------------------------------------------------------------
Operating revenues 4,098 3,916 3,736 2,476 1,694 1,189 921
- ----------------------------------------------------------------------------------------------------------------------------
Operating expenses before
depreciation and amortization 2,398 2,360 2,185 1,452 1,055 771 584
Depreciation and amortization expenses 860 780 748 381 240 128 130
- ----------------------------------------------------------------------------------------------------------------------------
Operating income $ 840 $ 776 $ 803 $ 643 $ 399 $ 290 $ 207
============================================================================================================================
Equity in net income (loss) of
unconsolidated wireless systems (e) $ (77) $ (125) $ (41) $ 1 $ 151 $ 188 $ 125
- ----------------------------------------------------------------------------------------------------------------------------
Distributions received from equity investees $ 133 $ 105 $ 140 $ 104 $ 80
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL OPERATIONS
For the Year Ended December 31
----------------------------------------------
GAAP FINANCIAL DATA 1998 1997(b) 1996(b) 1995 1994(c)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Service and other revenues $ 935 $ 685 $ 190 $ 133 $ 76
Equipment sales 89 66 22 19 7
- ----------------------------------------------------------------------------------------------------------------------------
Operating revenues 1,024 751 212 152 83
- ----------------------------------------------------------------------------------------------------------------------------
Operating expenses before
depreciation and amortization expenses 674 551 239 214 140
Depreciation and amortization expenses 112 85 34 27 22
- ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 238 $ 115 $ (61) $ (89) $ (79)
============================================================================================================================
Equity in net income (loss) of
unconsolidated wireless systems $ 434 $ 199 $ (18) $ (36) $ (15)
- ----------------------------------------------------------------------------------------------------------------------------
Distributions received from equity
investees $ 258 $ 279 $ -- $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. PAGING OPERATIONS
For the Year Ended December 31
----------------------------------------------
GAAP FINANCIAL DATA 1998 1997 1996 1995 1994(c)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Service and other revenues $ 371 $ 330 $ 293 $ 220 $ 184
Equipment sales 48 39 50 45 43
- ----------------------------------------------------------------------------------------------------------------------------
Operating revenues 419 369 343 265 227
- ----------------------------------------------------------------------------------------------------------------------------
Operating expenses before
depreciation and amortization expenses 296 261 255 190 160
Depreciation and amortization expenses 80 74 64 43 37
- ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 43 $ 34 $ 24 $ 32 $ 30
============================================================================================================================
</TABLE>
- ---------------
(a) In April 1998, AirTouch Communications, Inc. and its subsidiaries (the
"Company"), completed its acquisition of the U.S. cellular business and the
25% PrimeCo Personal Communications, L.P. ("PrimeCo") interest of MediaOne
Group, Inc. (formerly U S WEST Media Group). The selected pro forma
consolidated 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. The selected pro
forma consolidated data is intended for informational purposes only and is
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. See Note G, "Partnerships and Acquisitions,"
to the Consolidated Financial Statements for further information.
(b) In December 1996, the Company obtained a controlling interest in Telecel
Communicacoes Pessoias, S.A. ("Telecel"). The Company consolidated Telecel's
Balance Sheet as of December 31, 1996, and began consolidating Telecel's
results of operations on January 1, 1997. In August 1996, the Company
completed its acquisition of Cellular Communications, Inc. See Note G,
"Partnerships and Acquisitions," to the Consolidated Financial Statements
for further information.
(c) Prior to April 1, 1994, the Company was an 86.1% owned subsidiary of Pacific
Telesis Group ("Telesis") (now SBC Communications). On April 1, 1994, the
Company spun off from Telesis. Prior to December 3, 1993, the Company was
100% owned by Telesis.
(d) For the year ended December 31. These amounts do not include the cost of
acquiring licenses.
(e) U.S. Cellular Operations include equity losses in PrimeCo.
-3-
<PAGE> 4
SELECTED FINANCIAL DATA
(Dollars in millions)
<TABLE>
<CAPTION>
FINANCIAL INFORMATION FOR UNCONSOLIDATED WIRELESS SYSTEMS UNDER THE
EQUITY METHOD (a)
For the Year Ended December 31
----------------------------------------------
UNITED STATES 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Operating revenues or equity in net
income of partnership $ 1,211 $ 899 $ 1,168 $ 1,281 $1,166
Operating income (loss) $ (125) $ (232) $ 190 $ 420 $ 298
============================================================================================================================
Net income (loss) $ (130) $ (238) $ 205 $ 411 $ 285
Other partners' and stockholders' share of net income (loss) (99) (243) 59 213 154
- ----------------------------------------------------------------------------------------------------------------------------
Company's share of net income (loss) (31) 5 146 198 131
Amortization of intangibles and other adjustments (10) (4) 5 (10) (6)
- ----------------------------------------------------------------------------------------------------------------------------
Equity in net income (loss) of unconsolidated wireless systems $ (41) $ 1 $ 151 $ 188 $ 125
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31
----------------------------------------------
INTERNATIONAL 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Operating revenues or equity in net
income of partnership $13,471 $ 8,886 $ 7,419 $ 3,684 $1,401
Operating income (loss) $ 2,638 $ 1,225 $ (251) $ (497) $ (251)
============================================================================================================================
Net income (loss) $ 1,364 $ 330 $ (760) $ (539) $ (155)
Other partners' and stockholders' share of net income (loss) 900 107 (764) (519) 144
- ----------------------------------------------------------------------------------------------------------------------------
Company's share of net income (loss) 464 223 4 (20) (11)
Amortization of intangibles and other adjustments (30) (24) (22) (16) (4)
- ----------------------------------------------------------------------------------------------------------------------------
Equity in net income (loss) of unconsolidated wireless systems $ 434 $ 199 $ (18) $ (36) $ (15)
============================================================================================================================
</TABLE>
(a) The results reflect a 50% interest in PrimeCo beginning in April 1998, due
to the MediaOne Group acquisition and a 25% interest for results prior to
that date. Telecel results are included in 1996, only, as the Company began
consolidating Telecel's results of operations in January 1997. The results
also include operations of CCI and New Par through August 15, 1996.
-4-
<PAGE> 5
SELECTED FINANCIAL DATA
SELECTED FIVE-YEAR PROPORTIONATE DATA
- --------------------------------------------------------------------------------
NON GAAP SUPPLEMENTAL PROPORTIONATE FINANCIAL DATA
The following table is presented on a proportionate basis. Proportionate
presentation is not permitted by generally accepted accounting principles
("GAAP") and is not intended to replace the consolidated operating results
prepared and presented in accordance with GAAP. However, since significant
wireless systems in which the Company has an interest 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.
GAAP requires consolidation of wireless systems controlled by the Company
and the equity method of accounting for wireless systems in which the Company
has significant influence but not a controlling interest. 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. Proportionate results are calculated by multiplying the Company's
ownership interest in each wireless system by each system's total operating
results, and accordingly should not be compared with GAAP consolidated results
of any company.
Net income under either GAAP or proportionate presentation is the same.
Proportionately reported amounts include results from the Company's equity
investees, which the Company does not control. The Company does not have
control over the revenues, expenses or cash flows of its equity investees that
are reported in proportionate results and is only entitled to cash from
dividends received from these entities. The Company does not own the underlying
assets of its equity investees.
A list of the Company's equity investments and its ownership interests is
set forth in Note F, "Investments in Unconsolidated Wireless Systems," to the
Company's Consolidated Financial Statements for the year ended December 31,
1998. In the United States, the Company is a joint and equal owner with AT&T in
CMT Partners and with Bell Atlantic in PrimeCo, the Company's most significant
U.S. equity investments. Internationally, the degree of control of the
Company's equity investees varies from venture to venture. Although the Company
generally has significant contractual governance rights over these entities, it
does not control them. No person owns a majority of any of the Company's
international equity investees, with the exception of its investment in Germany,
where Mannesmann AG is the majority owner; Italy, where Omnitel Sistemi
Radiocellulari Italiani is the indirect majority owner; Belgium, where Belgacom
is the majority owner; Romania, where Telesystem International Wireless is the
majority owner; and India, where RPG Enterprises is the majority owner. In each
of those investees, the Company, or in the case of Italy, the Company's
majority-owned venture, has significant contractual rights regarding approval of
the business plan, which governs capital investments and use of cash flows.
-5-
<PAGE> 6
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
TOTAL COMPANY (1)
(Dollars in millions and operating data in thousands) For the Year Ended December 31
----------------------------------------------------------------
Pro Forma (2) Historical
--------------- ----------------------------------------------
PROPORTIONATE FINANCIAL DATA 1998 1997 1998 1997 1996 1995 1994
---------------------------- ------ ------ ------ ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Service and other revenues.................................. $7,530 $6,094 $7,204 $4,907 $3,925 $2,679 $1,799
Operating expenses before depreciation and amortization
expenses (3).............................................. 4,714 3,958 4,506 3,171 2,801 1,976 1,293
------ ------ ------ ------ ------- ------ -----
Operating cash flow (4)..................................... 2,816 2,136 2,698 1,736 1,124 703 506
Depreciation and amortization expenses...................... 1,441 1,218 1,319 789 603 406 334
----------------------------------------------------------------
Operating income............................................ 1,375 918 1,379 947 521 297 172
Interest and other income (expenses)........................ (162) (184) (139) (106) (21) 8 26
Income taxes................................................ (503) (369) (515) (393) (301) (173) (100)
----------------------------------------------------------------
Income before preferred dividends........................... 710 365 725 448 199 132 98
Preferred dividends......................................... 140 139 117 54 20 -- --
----------------------------------------------------------------
Net income applicable to common stockholders................ $ 570 $ 226 $ 608 $ 394 $ 179 $ 132 $ 98
================================================================
Operating cash flow margin (5).............................. 37.4% 35.1% 37.5% 35.4% 28.6% 26.2% 28.1%
</TABLE>
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------
Pro Forma (2) Historical
----------------- ----------------------------------------------
PROPORTIONATE OPERATING DATA 1998 1997 1998 1997 1996 1995 1994
---------------------------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Cellular and PCS POPs (6) (7)........................... 235,857 214,691 235,857 180,032 178,317 164,908 99,508
Cellular and PCS subscribers (6)........................ 14,072 10,002 14,072 7,536 5,146 3,059 1,948
Paging units in service (8)............................. 3,504 3,188 3,504 3,188 2,886 2,474 1,647
Total proportionate customers................... 17,576 13,190 17,576 10,724 8,032 5,533 3,595
Cellular and PCS subscriber net adds in period,
excluding acquisitions (6)............................ 3,970 2,921 3,895 2,336 1,625 974 713
Paging units in service net adds in period excluding
acquisitions (8)...................................... 315 297 315 297 535 477 378
Proportionate capital expenditures...................... 1,785 1,718 1,705 1,366 N/A N/A N/A
</TABLE>
U.S. CELLULAR OPERATIONS(1)
<TABLE>
<CAPTION>
For the Year Ended December 31
(Dollars in millions, except per unit data and -------------------------------------------------------------------
operating data in thousands) Pro Forma (2) Historical
----------------- -----------------------------------------------
PROPORTIONATE FINANCIAL DATA 1998 1997 1998 1997 1996 1995 1994
---------------------------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Service and other revenues---------------------------------- $3,831 $3,516 $3,524 $2,363 $1,984 $1,523 $1,160
------------------------------------------------------------------
Cost of revenues-------------------------------------------- 393 349 364 236 222 188 136
Selling and customer operations expenses (3)---------------- 1,461 1,377 1,341 902 781 591 423
General, administrative, and other expenses----------------- 261 255 238 169 160 139 122
------------------------------------------------------------------
Operating cash flow (4)------------------------------------- 1,716 1,535 1,581 1,056 821 605 479
Depreciation and amortization expenses---------------------- 855 775 747 388 292 189 186
------------------------------------------------------------------
Operating income-------------------------------------------- $ 861 $ 760 $ 834 $ 668 $ 529 $ 416 $ 293
==================================================================
Operating cash flow margin (5)------------------------------ 44.8% 43.7% 44.9% 44.7% 41.4% 39.7% 41.3%
</TABLE>
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------
Pro Forma (2) Historical
----------------- -----------------------------------------------
PROPORTIONATE OPERATING DATA 1998 1997 1998 1997 1996 1995 1994
---------------------------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Cellular POPs (7)-------------------------------------- 67,560 63,794 67,560 43,364 43,364 37,739 35,390
Cellular subscribers----------------------------------- 7,915 6,683 7,915 4,309 3,403 2,262 1,560
Cellular subscriber net adds in period, excluding
acquisitions----------------------------------------- 1,129 1,408 1,082 906 770 591 514
Monthly average revenue per unit----------------------- $ 44.11 $ 50.20 $ 44.47 $ 52.58 $ 61.42 $ 69.76 $ 77.96
Monthly cash cost per unit----------------------------- $ 24.35 $ 28.29 $ 24.52 $ 29.08 $ 36.00 $ 42.05 $ 45.77
Proportionate capital expenditures--------------------- $ 784 $ 723 $ 719 $ 488 $ 408 $ 475 $ 297
</TABLE>
See footnotes on page 8.
-6-
<PAGE> 7
SELECTED FINANCIAL DATA
U.S. PCS OPERATIONS(1) (6) (9)
<TABLE>
<CAPTION>
For the Year Ended December 31
(Dollars in millions, except per unit data and -------------------------------------------------------------
operating data in thousands) Pro Forma (2) Historical
----------------- -----------------------------------------
PROPORTIONATE FINANCIAL DATA 1998 1997 1998 1997 1996 1995 1994
---------------------------- ------ -------- ------ -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Service and other revenues.................................. $ 197 $ 68 $ 177 $ 34 $ 1 $ -- $ --
Operating expenses before depreciation and amortization
expenses(3)............................................... 297 228 259 114 41 -- --
-------------------------------------------------------------
Operating cash flow (4)..................................... (100) (160) (82) (80) (40) -- --
Depreciation and amortization expenses...................... 107 78 94 35 6 -- --
-------------------------------------------------------------
Operating income............................................ $(207) $ (238) $(176) $ (115) $(46) $ -- $ --
=============================================================
Operating cash flow margin (5) (50.8%) (235.3%) (46.3%) (235.3%) N.M -- --
</TABLE>
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------
Pro Forma (2) Historical
----------------- -------------------------------------------
PROPORTIONATE OPERATING DATA 1998 1997 1998 1997 1996 1995 1994
---------------------------- ------- ------- ------- ------- ------ ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
PCS POPs (6)(7)............................................ 29,520 28,458 29,520 14,229 14,229 14,300 --
PCS subscribers (6)........................................ 422 184 422 92 9 -- --
PCS subscriber net adds in period, excluding acquisitions
(6)...................................................... 241 166 213 83 9 -- --
Monthly average revenue per unit $ 58.05 $ 61.97 $ 57.47 $ 61.97 N.M $ -- $--
Monthly cash cost per unit $ 87.52 $207.79 $ 84.09 $207.79 N.M $ -- $--
</TABLE>
INTERNATIONAL OPERATIONS(1)
<TABLE>
<CAPTION>
(Dollars in millions, except per unit data and For the Year Ended December 31
operating data in thousands) ------------------------------------------------
1998 1997 1996 1995 1994
PROPORTIONATE FINANCIAL DATA -------- -------- -------- ------ ------
----------------------------
<S> <C> <C> <C> <C> <C>
Service and other revenues............................... $3,128 $2,181 $1,640 $918 $435
Operating expenses before depreciation and amortization
expenses(3)............................................ 1,926 1,452 1,319 794 405
------ ------ ------ ---- ----
Operating cash flow (4).................................. 1,202 729 321 124 30
Depreciation and amortization expenses................... 386 283 226 154 96
----------------------------------------------
Operating income (loss).................................. $ 816 $ 446 $ 95 $(30) $(66)
====== ====== ====== ==== ====
Operating cash flow margin (5)........................... 38.4% 33.4% 19.6% 13.5% 6.9%
------ ------ ------ ---- ----
</TABLE>
<TABLE>
<CAPTION>
December 31
---------------------------------------------------
PROPORTIONATE OPERATING DATA 1998 1997 1996 1995 1994
---------------------------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Cellular POPs (7)............................ 138,777 122,439 120,724 112,869 64,118
Cellular subscribers......................... 5,735 3,135 1,734 797 388
Cellular subscriber net adds in period,
excluding acquisitions..................... 2,600 1,347 846 383 199
Monthly average revenue per unit............. $ 61.22 $ 79.45 $ 114.81 $ 138.72 $152.08
Monthly cash cost per unit................... $ 37.70 $ 52.90 $ 92.34 $ 119.99 $141.59
Proportionate capital expenditures........... $ 680 $ 680 N/A N/A N/A
-------- -------- -------- -------- -------
</TABLE>
- ---------------
See footnotes on page 8.
-7-
<PAGE> 8
SELECTED FINANCIAL DATA
U.S. PAGING OPERATIONS (10)
<TABLE>
<CAPTION>
(Dollars in millions, except per unit For the Year Ended December 31
data and operating data in thousands) -------------------------------------
1998 1997 1996 1995 1994
FINANCIAL DATA ----- ----- ----- ----- -----
--------------
<S> <C> <C> <C> <C> <C>
Service and other revenues (11)............................. $373 $330 $297 $226 $189
Operating expenses before depreciation and amortization
expenses.................................................. 250 222 209 151 122
---- ---- ---- ---- ----
Operating cash flow (4)..................................... 123 108 88 75 67
Depreciation and amortization expenses...................... 80 74 64 43 37
---- ---- ---- ---- ----
Operating income............................................ $ 43 $ 34 $ 24 $ 32 $ 30
==== ==== ==== ==== ====
Operating cash flow margin (5).............................. 33.0% 32.7% 29.6% 33.2% 35.4%
</TABLE>
<TABLE>
<CAPTION>
December 31
------------------------------------------
OPERATING DATA 1998 1997 1996 1995 1994
-------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Paging units in service............................... 3,422 3,101 2,850 2,338 1,525
Paging units in service net adds in period, excluding
acquisitions........................................ 321 246 512 463 358
Monthly average revenue per unit...................... $ 9.62 $ 9.22 $ 9.38 $10.34 $11.40
Monthly cash cost per unit............................ $ 6.45 $ 6.20 $ 6.82 $ 7.38 $ 7.87
Capital expenditures.................................. $ 82 $ 67 $ 98 $ 72 $ 61
------ ------ ------ ------ ------
</TABLE>
- ---------------
Footnotes:
N/A Information not available.
N.M. Information not meaningful.
(1) Reflects financial and operating data of systems in which AirTouch
Communications, Inc. and its subsidiaries (the "Company") own 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) In April 1998, the Company completed its acquisition of the U.S. cellular
business and the 25% PrimeCo Personal Communications, L.P. ("PrimeCo")
interest of MediaOne Group, Inc. (formerly U S WEST Media Group). The
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. The
selected pro forma data is intended for informational purposes only and is
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. See Note G, "Partnerships and Acquisitions,"
to the Consolidated Financial Statements for further information.
(3) Includes net losses on handsets sold.
(4) "Operating cash flow" is "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
interests in the respective entities' operating cash flows. As such,
proportionate operating cash flow does not represent cash available to the
Company.
(5) "Operating cash flow margin" is calculated by dividing "Operating cash flow"
by "Service and other revenues."
(6) PCS data relates to PrimeCo, a U.S. personal communications services ("PCS")
business in which the Company had a 50% interest at December 31, 1998 and a
25% interest at December 31, 1997, 1996, 1995, and 1994. For the pro forma
data, the Company's ownership interest in PrimeCo is 50% for all periods
presented. Because PrimeCo does not own 100% of all its markets, the
Company's share of PrimeCo's operating results is slightly less than its
ownership interest.
(7) POPs are the estimated market population multiplied by the Company's
ownership interest in a licensee operating in that market and includes
markets of certain cost-based and equity-based investments not included in
proportionate operating results.
(8) Includes both U.S. and International paging units in service.
(9) Operations began in the fourth quarter of 1996.
(10) U.S. Paging Operations are wholly owned by the Company and include
operations in Canada, which are not material to the information presented.
(11) Includes gains and losses on equipment sales.
-8-
<PAGE> 9
MANAGEMENT'S DISCUSSION & ANALYSIS
GENERAL
Management's Discussion and Analysis is intended to assist in the
understanding and assessment of the significant changes and trends related to
the results of operations and financial condition of AirTouch Communications,
Inc., together with its subsidiaries and partnerships (collectively, the
"Company" or "AirTouch"). This discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements and
accompanying Notes.
Private Securities Litigation Reform Act Safe Harbor Statement. In addition
to historical information, this Management's Discussion and Analysis includes
certain forward-looking statements regarding events and financial trends that
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. These
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; intensified
competitive activity requiring reduced pricing or new product offerings or
resulting in an increased rate of customers terminating service ("churn"),
slower customer growth as customers choose to receive service from other
providers, and higher customer selling costs; declining average revenue per
customer due to declining rates; growth in customers and usage driving increased
investment in network capacity; 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, including its Form
10-K under "Investment Considerations." Readers are cautioned not to place undue
reliance on these forward-looking statements, which are valid as of the date of
this filing. The Company has no obligation to publicly release the results of
any revisions to these forward-looking statements to reflect events or
circumstances after the date of this filing.
VODAFONE MERGER
On January 15, 1999, AirTouch Communications and Vodafone Group Plc
("Vodafone") announced a definitive agreement to merge. Under the terms of the
definitive agreement, which has been unanimously approved by each company's
Board of Directors, owners of AirTouch common stock will be entitled to receive
five Vodafone ordinary shares in the form 0.5 of a Vodafone American Depository
share and $9 in cash, without interest, for each share of AirTouch common stock
held at closing, subject to rebalancing between stock and cash under certain
circumstances.
The merger is subject to the approval of the stockholders of Vodafone and
AirTouch, customary government and regulatory authority approvals, and the
receipt of opinions from tax counsel that the stock portion of the merger
consideration will be tax-free to the U.S. holders of AirTouch common stock. The
merger is expected to close in the third quarter of 1999. For more details of
the merger, please see the Company's Current Report on Form 8-K filed January
19, 1999.
MEDIAONE GROUP MERGER
In April 1998, the Company acquired the U.S. cellular business and the 25%
PrimeCo Personal Communications, L.P. ("PrimeCo") interest of MediaOne Group,
Inc. (formerly U S WEST Media Group). The Company issued approximately 59.4
million shares of common stock having a fair market value of $2.9 billion on the
date of issuance, approximately $1.6 billion of dividend-bearing redeemable
preferred stock with a 5.143% coupon, and assumed approximately $1.4 billion of
debt associated with the acquired businesses. The Company also granted MediaOne
Group, Inc. registration rights with respect to the common stock and preferred
stock issued.
In September 1998, MediaOne Group, Inc. returned approximately 0.1 million
shares of common stock as a purchase price adjustment.
For a more detailed discussion of the MediaOne transaction, please see the
Company's Current Report on Form 8-K/A-1 dated April 6, 1998, and Note G,
"Partnerships and Acquisitions," to the Consolidated Financial Statements.
-9-
<PAGE> 10
MANAGEMENT'S DISCUSSION & ANALYSIS
BASIS OF PRESENTATION
CONSOLIDATION VS. THE EQUITY METHOD
In accordance with generally accepted accounting principles ("GAAP"), the
Company consolidates the revenues and expenses of its controlled subsidiaries
and partnerships. The Company uses the equity method to record the operating
results of entities in which it has significant influence, but does not have a
controlling interest. Consolidated operating revenues and expenses in 1998
included results of all of the Company's major U.S. partnerships (with the
exception of CMT Partners and PrimeCo), all U.S. paging markets, Europolitan
Holdings AB ("Europolitan"), the Company's cellular system in Sweden, and
Telecel Communicacoes Pessoais, S.A. ("Telecel"), its wireless system in
Portugal. In April 1998, the Company began consolidating the operating revenues
and expenses of its cellular businesses acquired from MediaOne Group.
In December 1996, the Company consolidated Telecel's balance sheet,
subsequent to acquiring a controlling interest. Telecel's operating results and
cash flows were included beginning in 1997. The Company began consolidating the
results of its Great Lakes market (cellular properties in Michigan and Ohio,
including Detroit, Cleveland, and Columbus), in August 1996. On that date, the
Company completed its acquisition of the remaining capital stock of Cellular
Communications, Inc. ("CCI") that it did not already own. For further
information regarding this acquisition, see "Cellular Communications, Inc.
Merger" and Note G, "Partnerships and Acquisitions," to the Consolidated
Financial Statements.
COMPOSITION OF OPERATING REVENUES AND EXPENSES
Operating revenues include cellular and paging service revenues, as well as
equipment sales. Cellular service revenues consist primarily of charges for air
time use, monthly network access fees, and roaming-in charges. Roaming-in refers
to use of the Company's wireless networks by customers of other cellular or
personal communication services ("PCS") carriers. Paging service revenues
consist primarily of paging service charges and rentals of paging units in the
United States. Equipment sales consist of revenues from sales of cellular
telephones, pagers, and accessories. Equipment sales are not a primary part of
the Company's cellular or paging businesses. Rather, the Company offers cellular
and paging equipment at competitive prices, which are often at or below cost, as
an incentive for new customers to subscribe to its cellular and paging services.
Operating expenses include: cost of revenues; selling and customer
operations expenses; general, administrative, and other expenses; and
depreciation and amortization expenses. Cost of revenues consists primarily of
cellular and paging network operating costs, interconnection fees assessed by
local exchange carriers, net roaming-out charges, and cost of equipment and
accessories sold. Interconnection costs have fixed and variable components. The
fixed component of interconnection costs consists of monthly flat-rate fees for
facilities leased from local exchange carriers. The variable component of
interconnection costs, which fluctuates in relation to the level of cellular
calls and paging messages, consists of per-minute use fees charged by local
exchange carriers for cellular calls or paging messages terminating on their
networks. Net roaming-out charges represent the cost of the subsidized roaming
activity by the Company's customers on other cellular and PCS operators'
networks.
Selling and customer operations expenses consist primarily of commissions;
salaries, wages, and related benefits for sales and customer service personnel;
and billing, advertising, and promotional expenses. General, administrative, and
other expenses consist primarily of salaries, wages, and related benefits for
general and administrative personnel, bad debt, year 2000 remediation costs, and
other overhead expenses. Depreciation and amortization charges consist primarily
of depreciation recorded for the Company's cellular and paging networks and
amortization of intangibles such as wireless license costs, subscriber lists,
and goodwill.
-10-
<PAGE> 11
MANAGEMENT'S DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS
The following discussions compare the results of operations for the year
ended December 31, 1998 to 1997 and 1997 to 1996. The operating results of these
periods are not necessarily indicative of operating results in future periods.
The following comparative information should be read in conjunction with the
Consolidated Financial Statements and accompanying Notes for each period
discussed as well as the information presented in all other sections of
Management's Discussion and Analysis.
1998 VS. 1997
CONSOLIDATED RESULTS OF OPERATIONS
Net income increased 54% for the year ended December 31, 1998, as compared
to 1997 primarily due to the growth in earnings from the Company's
unconsolidated wireless systems and the acquisition of MediaOne Group's cellular
businesses.
Consolidated operating revenues and operating income increased primarily
due to the MediaOne Group merger, as well as subscriber growth in the U.S. and
international cellular markets. Increased demand for wireless services worldwide
drove subscriber growth.
Equity in net income of unconsolidated wireless systems increased primarily
due to the strong operating results of the Company's unconsolidated
international wireless systems. Increased profitability at CMT Partners also
contributed to the increase. These increases are discussed in the U.S. Cellular
and International Operations' discussions. Increased ownership in the operating
losses of PrimeCo partially offset the increase. In April 1998, the Company
increased its ownership of PrimeCo from 25% to 50% in its transaction with
MediaOne Group.
The Company's unconsolidated ventures distributed $391 million of cash
dividends for the year ended December 31, 1998, up slightly from 1997's amount
of $383 million.
Interest expense and preferred dividends increased primarily due to debt
and redeemable preferred stock issued in connection with the MediaOne Group
merger.
CONSOLIDATED RESULTS OF OPERATIONS -- PRO FORMA
The consolidated operating results for the year ended December 31, 1998,
were not comparable to 1997 because they included the operating results of the
cellular markets acquired from MediaOne Group in April 1998. Given the
significance of this transaction, the Company believes it is more meaningful to
discuss operating results on a pro forma basis, as if the transaction had
occurred on January 1, 1997. 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 Company or the results of
operations of the combined Company that would have actually occurred.
Pro Forma Consolidated Results of Operations (GAAP-Basis)
<TABLE>
<CAPTION>
For the Year
Ended
December 31
---------------
1998 1997
(Dollars in millions) ------ ------
<S> <C> <C>
Operating revenues........................... $5,542 $5,034
------ ------
Operating expenses before depreciation and
amortization expenses...................... 3,498 3,245
Depreciation and amortization expenses....... 1,062 946
------ ------
Total operating expenses............. 4,560 4,191
------ ------
Operating income............................. 982 843
Equity in net income (loss) of unconsolidated
wireless systems........................... 357 81
Minority interests in net (income) loss of
consolidated wireless systems.............. (189) (161)
Interest and miscellaneous income
(expense).................................. (133) (156)
------ ------
Income before income taxes and preferred
dividends.................................. 1,017 607
Income taxes................................. 307 242
------ ------
Income before preferred dividends............ 710 365
Preferred dividends.......................... (140) (139)
------ ------
Net income applicable to common
stockholders............................... $ 570 $ 226
====== ======
</TABLE>
Net income increased 152% for the year ended December 31, 1998, due to
strong operating results from the international, U.S. cellular, and U.S. paging
operations, including the operations of the Company's unconsolidated wireless
systems. These results were due to substantial subscriber growth in our
international and U.S. cellular operations, as well as improved margins per
customer.
For the year ended December 31, 1998, operating revenues increased 10% and
operating income increased 16%. These increases were primarily the result of
subscriber growth in the Company's international and U.S. cellular markets.
The equity in net income of unconsolidated wireless systems increased
primarily due to strong subscriber growth in the Company's unconsolidated
international ventures. Increased profitability at CMT Partners and decreased
losses at PrimeCo also contributed to the increase. These increases are
discussed in the U.S. Cellular and International Operations' discussions.
The effective tax rate calculated by dividing "Income taxes" by "Income
before income taxes and preferred dividends" is not a meaningful measure of the
-11-
<PAGE> 12
MANAGEMENT'S DISCUSSION & ANALYSIS
Company's income tax trends. The primary reason for this was that the Company's
"Income before income taxes and preferred dividends" included equity earnings
from its unconsolidated international wireless systems, which were recorded net
of applicable local taxes. No U.S. taxes were provided on these earnings, as the
Company believes these earnings will be indefinitely invested overseas. See Note
L, "Income Taxes" for a reconciliation of the federal statutory tax rate to the
Company's effective tax rate.
In 1998, the Company's international operations experienced substantially
higher growth rates and benefits from economies of scale than the more
established U.S. cellular or U.S. paging operations. As a result, international
operations contributed approximately 68% of the Company's net income before
preferred dividends for the year ended December 31, 1998, as compared to 58% for
the year ended December 31, 1997.
U.S. CELLULAR OPERATIONS
Discussions of results of operations for U.S. cellular include equity
earnings in PrimeCo.
<TABLE>
<CAPTION>
For the Year
Ended
U.S. Cellular Operating Results (GAAP-Basis) December 31
---------------
1998 1997
(Dollars in millions) ------ ------
<S> <C> <C>
Service and other revenues.................................. $3,538 $2,351
Equipment sales............................................. 198 125
------ ------
Operating revenues.......................................... 3,736 2,476
------ ------
Operating expenses before depreciation and amortization
expenses.................................................. 2,185 1,452
Depreciation and amortization expenses...................... 748 381
------ ------
Operating income............................................ $ 803 $ 643
------ ------
Equity in net income (loss) of unconsolidated wireless
systems (a)............................................... $ (41) $ 1
====== ======
</TABLE>
U.S. CELLULAR OPERATIONS -- PRO FORMA
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
acquisition of MediaOne's wireless businesses had been effective January 1,
1997.
Pro forma operating results were:
<TABLE>
<CAPTION>
For the Year
Ended
Pro Forma U.S. Cellular Operating Results (GAAP-Basis) December 31
---------------
1998 1997
------ ------
(Dollars in millions)
<S> <C> <C>
Service and other revenues.................................. $3,874 $3,621
Equipment sales............................................. 224 295
------ ------
Operating revenues.......................................... 4,098 3,916
------ ------
Operating expenses before depreciation and amortization
expenses.................................................. 2,398 2,360
Depreciation and amortization expenses...................... 860 780
------ ------
Operating income............................................ $ 840 $ 776
------ ------
Equity in net income (loss) of unconsolidated wireless
systems (a)............................................... $ (77) $ (125)
====== ======
</TABLE>
(a) U.S. Cellular Operations include equity earnings in PrimeCo.
The increase in the Company's U.S. cellular operating revenues for the year
ended December 31, 1998, was primarily the result of a 16% annual growth in
subscribers, partially offset by a decrease in the average revenue per customer.
Average revenue per customer (excluding revenue from equipment sales) decreased
12% for the year ended December 31, 1998. Although average revenue per customer
decreased in 1998, it did so at a slower rate than in 1997, as usage per
customer increased. Usage increased in 1998 in response to lower per minute
rates available through the bundled minute plans (subscribers pay a fixed
monthly fee for access and a fixed number of minutes), longer battery life, and
increased availability of digital handsets. Revenue per minute of use also
decreased 16% for the comparable period. The relatively large decrease in
revenue per minute of use reflects the increasing popularity of bundled minute
plans. Decreases in both average revenue per customer and average revenue per
minute were caused by rate reductions and discounts offered to both new and
existing customers in response to increased competition.
Competition intensified as the newer entrants aggressively built-out their
networks and expanded their regional and national coverage. The Company's
strategy is to offer excellent customer service by offering customers a choice
of service and handset pricing that is attractive to customers in different
market segments and that is competitive with those being offered by other
providers in that specific market.
The intense competition in the U.S. cellular and PCS markets will continue
to lead to price decreases and reduced customer growth rates. This will lower
revenue per minute of use and will continue to lower
-12-
<PAGE> 13
MANAGEMENT'S DISCUSSION & ANALYSIS
average revenue per customer. However, lower costs and other factors should
increase usage as customers shift their calling from landline to wireless
networks.
A recent trend in the U.S. wireless industry is to offer one rate price
plans, which include roaming and long distance at no extra charge. The Company
has responded with regional one rate plans that meet the needs of a large
portion of its customers who roam. As the Company and other wireless operators
seek to be profitable with these one rate plans, reciprocal roaming rates
between wireless operators will be negotiated to result in lower rates. In 1998,
the Company's roaming-in revenues were 9.5% of service and other revenues as
compared to 8.7% in 1997. Roaming-in revenues will likely decrease in the near
term unless increased usage offsets the lower rates. Although lower roaming
rates will decrease the direct cost of roaming-out, net roaming-out expense may
not decrease depending on whether roaming activity or the subsidy that the
Company provides on roaming-out activity increases. The Company is also focused
on maximizing roaming activity with its partners. The Company will manage
roaming activity by utilizing technology that is expected to be available in the
near term. Such technology includes the ability to pre-program handsets with
preferred roaming carriers and tri-mode handsets, which will allow roaming by
the Company's cellular customers on its PCS networks.
The improvement of operating margins and operating cash flow margins
(operating margins excluding the effect of depreciation and amortization
expenses) resulted from a decrease in the average cash cost per customer
(including the loss on equipment sales) of 13% for the year ended December 31,
1998, which exceeded the decrease in average revenue per customer. This decrease
resulted from several factors, including lower selling costs per customer,
reduction of fraud, greater volume purchasing discounts in many areas of the
business, and increased economies of scale attributable to subscriber growth,
partially offset by the cost of increased monthly churn. Higher churn means
additional selling costs have to be incurred to maintain the customer base.
Churn increased in 1998 to 2.2% from 2% for 1997. This increase is attributable
to increasing competition. In the highly competitive U.S. wireless market, there
can be no assurance that the Company's U.S. cellular operations will be able to
maintain margins by continuing to decrease average cost per customer faster than
average revenue per customer decreases.
Depreciation and amortization expenses increased 10% for the year ended
December 31, 1998. The increase was primarily due to depreciation of larger
property, plant, and equipment balances associated with the continued build-out
of the Company's cellular networks. See the "Consolidated Expenditures" section
for additional discussion regarding the Company's capital expenditures.
The equity in net loss of unconsolidated wireless systems decreased
primarily due to stronger operating results of CMT Partners and reduced net
losses from PrimeCo. Stronger operating results at CMT Partners were driven by
growth in subscribers, increased roaming-in revenues, and increased margins from
lowering average cost per customer faster than average revenue per customer
decreased. Decreased losses at PrimeCo were due to improving economies of scale,
driven by growth in subscribers. The Company's equity investees are impacted by
similar industry trends and competitive forces as the Company's consolidated
markets.
U.S. PAGING OPERATIONS
All U.S. paging markets are wholly owned by the Company. U.S. paging
operations include operations in Canada, which are not material to the
information presented.
U.S. Paging Operating Results (GAAP-Basis)
<TABLE>
<CAPTION>
For the Year
Ended
December 31
-------------
1998 1997
----- -----
(Dollars in millions)
<S> <C> <C>
Service and other revenues.......... $371 $330
Equipment sales..................... 48 39
----- -----
Operating revenues.................. 419 369
----- -----
Operating expenses before
depreciation and amortization
expenses.......................... 296 261
Depreciation and amortization
expenses.......................... 80 74
----- -----
Operating income.................... $ 43 $ 34
===== =====
Operating cash flow (a)............. $123 $108
Operating cash flow margin (b)...... 29% 29%
----- -----
</TABLE>
(a) Operating cash flow is operating income plus depreciation and amortization
and is not the same as cash flow from operating activities.
(b) Operating cash flow margins in the GAAP presentation above differ from the
same margins presented in "Selected Proportionate Financial Data" because
costs of equipment sales are included in operating expenses in this
presentation in accordance with GAAP, rather than being presented as a
reduction to service and other revenues as is done in the proportionate
presentation for U.S. paging.
Operating revenues increased 14% due primarily to a 10% annual growth in
paging units in service and a 4% increase in the average revenue per unit in
service. The Company's strategy is to shift its growth to the higher revenue
retail and direct channels from the reseller channel. Operating margins
increased slightly from 9% to 10% and operating cash flow margins (operating
margins excluding the effect of
-13-
<PAGE> 14
MANAGEMENT'S DISCUSSION & ANALYSIS
depreciation and amortization) remained stable at 29%.
The Company acquired one nationwide and three regional licenses for
narrowband PCS in 1994. The Company's narrowband spectrum will allow it to offer
its own value-added services such as acknowledgment paging, remote monitoring,
and customized information services. The Federal Communications Commission
("FCC") requires licensees to build-out and achieve certain coverage of the
licensed areas by September 1999. The Company expects to meet this requirement.
When commercial services begin, estimated to be in the second half of 1999, the
costs of the license and build-out will be depreciated. Accordingly,
depreciation and amortization expenses are expected to increase from 1998
levels.
INTERNATIONAL OPERATIONS
International Operating Results (GAAP-Basis)
<TABLE>
<CAPTION>
For the Year
Ended
December 31
------------
(Dollars in millions) 1998 1997
------ ------
<S> <C> <C>
Service and other revenues.................................. $ 935 $ 685
Equipment sales............................................. 89 66
------ ------
Operating revenues.......................................... 1,024 751
------ ------
Operating expenses before depreciation and amortization
expenses.................................................. 674 551
Depreciation and amortization expenses...................... 112 85
------ ------
Operating income............................................ $ 238 $ 115
====== ======
Equity in net income (loss) of unconsolidated wireless
systems................................................... $ 434 $ 199
------ ------
</TABLE>
Telecel and Europolitan, the Company's consolidated international wireless
operations, experienced substantially higher growth rates than the Company's
U.S. cellular operations. For the year ended December 31, 1998, the consolidated
international wireless operations were 18% of the Company's operating revenues,
as compared to 15% for 1997 and 24% of the Company's operating income, as
compared to 14% for 1997.
Operating revenues for the Company's international wireless operations
increased 36% for the year ended December 31, 1998. The increase was primarily
due to a 70% annual growth in subscribers. Prepaid customers represented 81% of
the annual growth and 53% of total combined subscribers as of December 31, 1998.
Prepaid pricing plans have created a convenient and inexpensive way for
customers to obtain wireless service by eliminating monthly access or service
charges. In addition to revenues generated directly from subscribers,
international ventures generate revenue from non-subscribers since all incoming
calls to subscribers are billed to the person originating the call. This billing
practice is commonly referred to as calling party pays. The increase in
operating revenues resulting from the subscriber growth was partially offset by
a 30% decrease in average revenue per customer for the year ended December 31,
1998.
Operating margins increased almost 8% in 1998 due to a decrease in average
cash cost per customer of 38%, which exceeded the decrease in average revenue
per customer. The decrease in average cash cost per customer was due to
increased economies of scale and lower selling costs of prepaid plans. Although
revenues from prepaid plans were generally lower than from non-prepaid plans,
the lower overall selling costs of these plans and the growth generated by these
plans enabled this segment of the subscriber base to be profitable.
Depreciation and amortization expenses increased 31% for the year ended
December 31, 1998. The increase was due to depreciation of larger property,
plant, and equipment balances associated with the continued build-out of
Europolitan and Telecel's cellular networks. The Company will continue to spend
significant capital during 1999 to increase capacity in line with the increased
usage driven by higher subscribers. Consequently, depreciation and amortization
expenses will continue to increase.
Equity in net income of international unconsolidated wireless systems
increased 119%. This significant increase was primarily due to strong subscriber
growth and increased profitability as more ventures benefited from economies of
scale. The increase would have been 111% without the favorable impacts of
foreign currency exchange rates for the year ended December 31, 1998, as
compared to 1997. The most significant contributor to this increase was
Mannesmann Mobilfunk GmbH ("MMO"), the German wireless system operated by
Mannesmann AG. MMO subscribers increased by approximately 70% over 1997, as new
competition drove prices lower and stimulated demand. Operating margins remained
stable at 38%. Increasing competition will continue to drive prices lower in the
foreseeable future, and there is no guarantee that MMO will be able to maintain
margins. The Company received gross distributions of profits from MMO of $258
million in 1998, slightly less than 1997's amount of $279 million.
The Company's international operations, including those operated by its
joint venture partners face increasing competition, especially in Europe, as
competitors launch new service. New competition has driven prices down and
stimulated demand. The Company's international ventures achieved increased
margins from reduced average cash cost per customer as the ventures reaped
greater benefits from economies of scale. The improved economies of scale,
record low churn, and lower selling costs per customer have resulted in average
cash cost per customer decreasing at a greater rate than average revenue per
customer decreased. However, there can be no assurances that the Company's
-14-
<PAGE> 15
MANAGEMENT'S DISCUSSION & ANALYSIS
international ventures will be able to continue this trend.
Other Matters Affecting International Operations
Foreign Currencies Exchange Rate Fluctuations. Foreign currency exchange
rates may be material to the Company's results of operations. A significant
weakening against the dollar of the currency of a country where the Company
generates revenues and earnings may adversely impact the Company's results,
although foreign exchange rate fluctuations in 1998 favorably impacted 1998's
results. A similar weakening against the dollar of the currency of a country
from where the Company receives a distribution can also adversely impact cash
flows, since the Company does not control the timing of its distributions from
its foreign equity investees. Conversely, any weakening of the dollar against
such currency could have an adverse impact on cash flows if the Company is
obligated to make significant foreign currency denominated capital investments
in such a 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.
The Company engages in risk management activities to hedge foreign currency
denominated investments and firm capital commitments. The Company does not
engage in speculative foreign exchange activities. See "Market Risk" for
additional information.
The Company's equity investments in foreign wireless systems are viewed as
long-term assets valued in the local currency, translated into U.S. dollars, and
reported in the Company's financial statements. The Company hedges a portion of
these investments with forward foreign currency exchange contracts and foreign
currency denominated loans. These hedges are in accordance with the Company's
objective to offset the U.S. dollar values of foreign currency denominated
assets with foreign currency denominated liabilities. The accounting treatment
is described in Note A, "Summary of Significant Accounting Policies," to the
Consolidated Financial Statements.
Almost all of the Company's economic hedges qualify as hedges under
accounting rules. Non-qualifying hedges relate to cost method investments that
do not qualify for hedge accounting or mismatches between the hedge instruments
and the hedged investments due to equity losses of foreign wireless systems
during start-up. All gains and losses pertaining to hedges that do not qualify
for hedge accounting are included in net income.
Deferred Taxes. International equity in net income of unconsolidated
wireless systems includes tax benefits of $30 million in both 1998 and 1997.
These tax benefits are recorded in "Equity in net income (loss) of
unconsolidated wireless systems" in the Consolidated Statements of Income. The
tax benefits represent future benefits that the international unconsolidated
wireless systems will receive by deducting net operating losses from future
taxable income. At December 31, 1998, the Company's proportionate share of
deferred tax assets of its international equity investees was $138 million,
which was offset by a valuation allowance of $73 million. While the Company
believes it is more likely than not that the net deferred tax assets will be
fully realized, there can be no assurance this will happen. Certain factors
beyond the control of the equity investees and the Company, such as
deteriorating local economic conditions, increasing competition, and changes in
tax laws, may affect the future timing and amounts of taxable income.
-15-
<PAGE> 16
MANAGEMENT'S DISCUSSION & ANALYSIS
1997 VS. 1996
CONSOLIDATED RESULTS OF OPERATIONS
Net income increased 120% for the year ended December 31, 1998, as
compared to 1997 primarily due to the increased ownership of the Great Lakes
market during 1997, and the equity earnings from the Company's unconsolidated
equity wireless systems.
Improvements in consolidated operating income resulted primarily from
increases in the operating income of U.S. cellular and international operations.
As indicated in the individual discussions of U.S. cellular and international
operations, the increase in consolidated operating income resulted from
consolidation during 1997 of the Great Lakes market and Telecel, as well as
substantial subscriber growth in both U.S. and international cellular markets.
The decrease in U.S. equity in net income of unconsolidated wireless
systems was attributable to consolidation of the Great Lakes market in August
1996, (see "Cellular Communications, Inc. Merger") and increased operating
losses of PrimeCo associated with the start-up phase of the PCS business.
Decreases due to consolidation of the Great Lakes market and increased losses of
PrimeCo were partially offset by improved operating results of CMT Partners,
AirTouch's cellular joint venture operating primarily in the San Francisco Bay
Area. The improvements in international equity in net income (loss) of
unconsolidated wireless systems were due primarily to improved profitability
resulting from substantial growth in the subscriber base and, secondarily, to
favorable adjustments resulting from changes in estimates based on the Company's
assessment of various tax positions recorded in 1997.
The Company's unconsolidated ventures distributed $383 million of cash
dividends for the year ended December 31, 1997, up significantly from 1996's
amount of $140 million.
The increases in interest expense resulted from higher average debt
balances and a reduction in capitalized interest as the related assets under
construction were placed in service.
The decrease in miscellaneous income was primarily attributable to a $56
million gain recorded during 1996 for the sale of Dansk Mobiltelefon AB ("DMT"),
an investment held by Europolitan. Net of minority interest and taxes, the sale
of DMT resulted in a $6 million increase in consolidated net income.
As mentioned previously, the effective tax rate calculated by dividing
"Income taxes" by "Income before income taxes and preferred dividends" is not a
meaningful measure of the Company's income tax trends. The most significant
reason for this was that the Company's "Income before income taxes and preferred
dividends" included equity earnings from its unconsolidated international
wireless systems, which were recorded net of applicable local taxes. No U.S.
taxes were provided for on these earnings, as the Company believes these
earnings will be indefinitely invested overseas. See Note L, "Income Taxes" for
a reconciliation of the federal statutory tax rate to the Company's effective
tax rate.
U.S. CELLULAR OPERATIONS
Discussions of results of operations for U.S. cellular include equity
earnings in PrimeCo.
U.S. Cellular Operating Results (GAAP-Basis)
<TABLE>
<CAPTION>
For the Year Ended
December 31
---------------------------
Actual Pro
--------------- Forma (b)
1997 1996 1996
------ ------ ---------
(Dollars in millions)
<S> <C> <C> <C>
Service and other revenues.................................. $2,351 $1,634 $2,092
Equipment sales............................................. 125 60 81
------ ------ ---------
Operating revenues.......................................... 2,476 1,694 2,173
------ ------ ---------
Operating expenses before depreciation and amortization
expenses.................................................. 1,452 1,055 1,301
Depreciation and amortization expenses...................... 381 240 350
------ ------ ---------
Operating income............................................ $ 643 $ 399 $ 522
====== ====== =========
Equity in net income (loss) of unconsolidated wireless
systems (a)............................................... $ 1 $ 151 $ 57
------ ------ ---------
</TABLE>
(a) U.S. Cellular Operations include equity earnings in PrimeCo.
(b) Adjusted to present results as if the Great Lakes market had been wholly
owned and consolidated during the year ended December 31, 1996.
Cellular Communications, Inc. Merger. In August 1996, AirTouch acquired the
remaining 63% of CCI's capital stock that it did not already hold. As a result
of the acquisition, AirTouch owns 100% of CCI and New Par, the equally owned
partnership between the Company and CCI that operated cellular properties in
Michigan and Ohio prior to the merger. Accordingly, the operating results of CCI
and New Par (referred to elsewhere in Management's Discussion and Analysis as
the "Great Lakes" market) are reflected in equity earnings at the Company's
ownership interest prior to the merger and in consolidated results at 100%
thereafter. Since the actual results of operations for the years ended December
31, 1997 and 1996, are not comparable, pro forma results for the year ended
December 31, 1996, are included in the preceding table to reflect results as if
the Great Lakes market had been wholly owned and consolidated during all of
1996.
U.S. Cellular Operations -- 1997 vs. Pro Forma 1996. The improvement in
U.S. cellular consolidated operating revenues during the year ended December 31,
1997, was due to an approximate 30% increase in total minutes of use
attributable primarily to a 26% increase in subscribers, partially offset by an
-16-
<PAGE> 17
MANAGEMENT'S DISCUSSION & ANALYSIS
approximate 14% decline in average revenue per minute of use. The average
revenue per customer declined approximately 13% comparing the year ended
December 31, 1997, to the year ended December 31, 1996.
The Company achieved customer growth in its consolidated markets through
advertising and by continuing to offer competitive incentive programs such as
waived service establishment charges, discounted monthly access fees, discounted
cellular handsets, discounted air time packages, promotional air time credits at
the beginning of service contracts, options to purchase bundled minutes of use
at fixed monthly rates, and reduced or fixed rates for off-peak usage and
roaming.
The declines in average revenue per customer and average revenue per minute
of use were primarily attributable to continued penetration of consumer markets
and to rate reductions and discounts offered to new and existing customers in
response to increasing competition. Consumer usage patterns contributed to
declines in average revenue per customer because consumers typically use their
telephones more during lower-rate, off-peak calling periods. Declines in average
revenue per customer and average revenue per minute of use were partially offset
by a slight increase in minutes of use per customer during 1997, as compared to
the prior year.
U.S. cellular operating margins increased from 24% during 1996 to 26%
during 1997. Operating cash flow margins (operating margins excluding the effect
of depreciation and amortization expenses) increased from 40% during 1996 to 41%
during 1997. Improvements in operating margins despite a 14% decline in average
revenue per minute of use resulted from a greater decline of 16% in the average
cash cost per minute of use (including the loss on equipment sales).
The average revenue per customer declined 13%, while the average cash cost
per customer (including the loss on equipment sales) declined 15%. Declining
cash cost per customer and per minute of use reflect the Company's continuing
efforts to reduce cash cost more rapidly than the related declines in average
revenue per customer and average revenue per minute of use. Decreases in average
cash cost resulted from several factors, including increased economies of scale,
reductions in roaming fraud, a reduction in interconnection rates, declines in
handset costs and reductions in handset subsidies offered to customers, and a
shift in customer acquisitions to lower-cost direct sales channels.
The Company has also reduced the rate at which customers discontinue
service ("churn") by continually improving customer service and increasing its
focus on customer incentive programs designed to retain existing customers,
which is significantly less expensive than replacing customers who discontinue
service.
Depreciation and amortization increased 9%, due primarily to depreciation
of significantly larger property, plant, and equipment balances associated with
analog network expansion and digital cellular deployment across all consolidated
markets.
The decrease in U.S. cellular and PCS equity in net income of
unconsolidated wireless systems resulted from larger losses from PrimeCo for its
first full year of operations. PrimeCo launched service in November 1996.
Partially offsetting these losses were the improved operating results of CMT
Partners. Consistent with the Company's consolidated U.S. markets, CMT Partners
achieved increased earnings through substantial customer growth and significant
reductions in the average cash cost per customer, partially offset by declines
in average revenue per customer.
U.S. PAGING OPERATIONS
All U.S. paging markets are wholly owned by the Company. U.S. paging
operations include operations in Canada, which are not material to the
information presented.
U.S. Paging Operating Results (GAAP-Basis)
<TABLE>
<CAPTION>
For the Year
Ended
December 31
-------------
1997 1996
----- -----
(Dollars in millions)
<S> <C> <C>
Service and other revenues.................................. $330 $293
Equipment sales............................................. 39 50
----- -----
Operating revenues.......................................... 369 343
----- -----
Operating expenses before depreciation and amortization
expenses.................................................. 261 255
Depreciation and amortization expenses...................... 74 64
----- -----
Operating income............................................ $ 34 $ 24
===== =====
Operating cash flow (a)..................................... $108 $ 88
Operating cash flow margin (b).............................. 29% 26%
----- -----
</TABLE>
(a) Operating cash flow is operating income plus depreciation and amortization
and is not the same as cash flow from operating activities.
(b) Operating cash flow margins in the GAAP presentation above differ from the
same margins presented in "Selected Proportionate Financial Data" because
costs of equipment sales are included in operating expenses in this
presentation in accordance with GAAP, rather than being presented as a
reduction to service and other revenues as is done in the proportionate
presentation for U.S. paging.
-17-
<PAGE> 18
MANAGEMENT'S DISCUSSION & ANALYSIS
Operating revenues increased approximately 8%, due primarily to a 9%
increase in paging units in service, partially offset by an approximate 3%
decline in the average revenue per unit in service. Increased revenues
associated with subscriber growth were also offset by declines in pager sales
attributable to decreases in the number of units in service added. Operating
cash flow margins (operating margins excluding the effect of depreciation and
amortization) increased from 26% to 29%, due to increased service and other
revenues and lower costs of paging equipment sales attributable to declines in
units in service added, partially offset by moderate increases in network
operating costs necessary to serve the expanded customer base. Increased service
and other revenues resulted from growth in paging units in service, a shift from
paging service sold at wholesale rates through resellers to service sold
directly by the Company or through retail sales channels, and retail service
price increases in selected markets. Increased depreciation and amortization
resulted from expansion of paging networks and higher depreciation of more
expensive leased alphanumeric pagers, which comprised a larger percentage of
leased pagers during 1997.
INTERNATIONAL OPERATIONS
International Operating Results (GAAP-Basis)
<TABLE>
<CAPTION>
For the Year Ended
December 31
-----------------------
Actual Pro
----------- Forma (a)
1997 1996 1996
---- ---- ---------
(Dollars in millions)
<S> <C> <C> <C>
Service and other revenues.................................. $685 $190 $521
Equipment sales............................................. 66 22 62
---- ---- ---------
Operating revenues.......................................... 751 212 583
---- ---- ---------
Operating expenses before depreciation and amortization
expenses.................................................. 551 239 479
Depreciation and amortization expenses...................... 85 34 68
---- ---- ---------
Operating income (loss)..................................... $115 $(61) $ 36
==== ==== =========
Equity in net income (loss) of unconsolidated wireless
systems................................................... $199 $(18) $(42)
---- ---- ---------
</TABLE>
(a) Adjusted to present results for the year ended December 31, 1996, as if
Telecel had been consolidated and the Company's ownership interest in
Telecel had been 51 percent and the Company's 1997 ownership interests in
its unconsolidated wireless systems had been the ownership interests during
the corresponding periods of 1996.
International Investment Ownership Increases.
Actual consolidated international operating results presented in the
preceding table for the year ended December 31, 1996, reflect the operations of
Europolitan, the Company's 51 percent-owned cellular system in Sweden. On
December 31, 1996, the Company consolidated Telecel, its cellular system in
Portugal, subsequent to acquiring a 51 percent controlling interest.
Accordingly, consolidated international operating results presented in the
preceding table for the year ended December 31, 1997, reflect the operations of
both Telecel and Europolitan. Operating results for other international markets
are reflected in equity in net income (loss) of unconsolidated wireless systems
during all periods presented. Since the actual results of operations for each
period are not comparable, pro forma results for the year ended December 31,
1996, are included in the preceding table to reflect results as described in
footnote (a) to the preceding table.
International Operations -- 1997 vs. Pro Forma 1996. The increase in
operating revenues resulted primarily from an 80% increase in Europolitan and
Telecel's combined average subscribers, partially offset by a 25% decrease in
Europolitan and Telecel's combined average revenue per customer 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
46%. Operating margins improved from 6% during 1996 to 15% during 1997, due
primarily to substantial subscriber growth and rapidly declining cash cost per
customer as Europolitan and Telecel's operations continued to gain operating
scale. If foreign exchange rates had remained constant, operating income would
have increased 344%.
Improvement in equity in net income (loss) of unconsolidated wireless
systems was due to improved operating results in Europe and Japan. Improved
results in these wireless systems resulted primarily from increasing economies
of scale and continued subscriber growth, partially offset by overall declines
in the average revenue per customer. The most significant contributor to the
increase was MMO, where subscribers increased by approximately 53% over 1996.
Operating margins improved from 31% to 38% in 1997 due to average cost per
customer decreasing faster than average revenue per customer decreased. In
addition, the Company recognized certain favorable adjustments resulting from
changes in estimates based on the Company's assessment of various tax positions.
Improvements were also partially offset by unfavorable movements in all foreign
currency exchange rates.
-18-
<PAGE> 19
MANAGEMENT'S DISCUSSION & ANALYSIS
CONTINGENCIES
The Company is party to various legal proceedings, including antitrust
litigation. See Note N, "Commitments and Contingencies," to the Consolidated
Financial Statements for a detailed discussion.
CONVERSION TO THE EURO
A new common currency, the "Euro," was introduced on January 1, 1999. The
eleven participating European Union ("EU") member countries established fixed
conversion rates between their existing currencies and the Euro. The Company has
consolidated and equity investments in a number of the participating EU
countries: Portugal, Germany, Italy, Spain, and Belgium. The Company also has a
consolidated interest in Sweden, which has not yet adopted the Euro. The Euro
became available for non-cash transactions as of January 1, 1999. The Euro will
be phased in over a transition period culminating on January 1, 2002. The
amounts expended by the Company's majority-owned European operations to date for
the conversion to the Euro have not been material to the Company's financial
position or results of operations. Estimated costs of conversion prior to
January 1, 2002, are not available.
The conversion to the Euro is a critical element in the EU's plan to create
one integrated market encompassing the economies of its member states. This
could have longer-term competitive implications for the Company's European
operations. The Company is currently unable to predict the ultimate financial
impact of the conversion on its operations.
YEAR 2000 READINESS
Issues for AirTouch
Many of the Company's systems are affected by the year 2000 issue, which
refers to the inability of computerized systems and embedded technology to
process dates or operate beyond December 31, 1999. The Company has implemented a
comprehensive plan to address the year 2000 issue in the mission critical
systems of its consolidated markets. 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. These include, among others, systems that constitute the Company's
wireless networks, billing systems, and customer care systems.
State of Readiness
The Company's plan to address the year 2000 issue consists of five phases:
(1) the complete inventory of all mission critical systems employed in the
Company's consolidated markets and the identification of hardware, software, and
embedded technology that are affected by the year 2000 issue; (2) analysis and
design of (or interaction with third party suppliers regarding) modifications
for each affected component; (3) creation and testing of the modifications; (4)
implementation of the modifications on a company-wide basis; and (5) testing of
the interface between systems. The Company's plan addresses both information
technology ("IT") and technology embedded in equipment and other infrastructure.
The plan is being implemented under the oversight of an executive steering
committee that includes the Company's President and Chief Operating Officer and
Executive Vice President and Chief Financial Officer. The Company currently
employs over 200 full-time contractors and employees implementing the plan. The
Company's executive steering committee is regularly updated by an independent
consultant who reviews the adequacy of the Company's processes and methodologies
for assessing the costs and risks associated with the year 2000 issue and by the
Company's internal audit group that independently verifies the project status.
The Company has completed phases one and two of its plan. It has completed
approximately three-quarters of phases three and four and is on target to have
them substantially completed by mid-1999. The Company is also conducting phase
five work and is on target for substantial completion by mid-1999. If the
Company discovers that certain components have not been sufficiently modified,
then it will have to repeat phases two through five with respect to such
components.
Based on the current progress of the Company's year 2000 efforts and on the
assumption that third parties will meet their commitments, the Company believes
that it can prevent serious disruption to the mission critical systems of its
consolidated markets.
The Company is also monitoring the progress of its significant
unconsolidated ventures in addressing their mission critical systems through its
positions on the governing boards of such entities and, in some cases, through
review of the subsidiary's remediation plans.
-19-
<PAGE> 20
MANAGEMENT'S DISCUSSION & ANALYSIS
Dependence on Third Parties
Much of the technology employed in the Company's mission critical systems
was purchased from third parties. The Company is dependent on those third
parties to assess the impact of the year 2000 on their technology and to take
any necessary corrective action. The Company is monitoring the progress of these
third parties and, in selected cases, has reviewed their modification and test
plans. The Company has received information for all of its supplied products
regarding the impact of the year 2000 issue and the vendors' plans to correct
them. The Company is selectively conducting tests to determine whether certain
suppliers have accurately assessed and addressed the impact of the year 2000 on
their products.
The ability of the Company to complete its remediation plan and avoid
disruption of its service is dependent on its suppliers delivering the necessary
modifications to their products by the projected delivery dates.
Management believes that the original manufacturers of handsets and pagers
are primarily liable for failures of such products. Based on representations
made by such manufacturers, the Company does not expect significant disruption
to its customers as a result of handset or pager failure. However, in the event
of such product failures, the Company could experience service revenue loss and
incur additional costs to furnish customers with temporary or permanent
replacement equipment to prevent further service revenue loss.
The Company's systems are interconnected with numerous networks and systems
operated by third parties, including landline telecommunications networks,
long-distance networks, the networks of other wireless service providers, and
networks operated by utilities. The operators of these networks are responsible
for addressing the year 2000 issue in their own systems. The ability of the
Company's systems to operate, including the ability of the Company to provide
wireless service, is dependent upon these third party networks and systems being
year 2000 compliant. Of this, there can be no assurance.
The Company has taken an active role with industry groups to develop
procedures to test the interconnection among different wireless networks and
between certain wireless networks and landline telecommunications networks. A
set of successful tests led by the Cellular Telecommunications Industry
Association took place at the end of 1998. Additional testing is being conducted
during the first half of 1999.
Costs
The Company incurred approximately $30 million in incremental consolidated
pre-tax expenses through the end of 1998 for the year 2000 program. Prior to
1999, the Company did not comprehensively track non-incremental costs, which
consist primarily of time spent on year 2000 efforts by employees not dedicated
to the year 2000 project. The Company plans to incur approximately $50 million
in total pre-tax expenses in 1999, including incremental and non-incremental,
for its remediation and testing of its consolidated mission critical systems.
The majority of the remaining expenses will be incurred in the first half of
1999. Additionally, the Company will incur capitalized costs that represent
ongoing investments in new systems and system upgrades, the timing of which is
being accelerated in order to facilitate year 2000 compliance. These capitalized
costs are not expected to have a material impact on the Company's financial
position or results of operations. The Company's cost estimate assumes that the
Company and its third party suppliers have accurately assessed the compliance of
the components and systems for which they are responsible and that they will
successfully remediate non-compliant components and systems. Because of the
complexity of year 2000 remediation, actual costs may vary from this estimate.
The Company redeployed employees to address the year 2000 issue resulting
in delays of other non-critical IT projects. The costs expected to be incurred
in 1999 for these employees are included in the estimated costs. The Company
does not expect the delay in these non-critical IT projects to have an adverse
effect on its results of operations or financial condition.
Business Continuity Plans
The Company's business continuity plan is currently under development for
year 2000 issues. The first phase is to analyze mission critical business
functions, such as billing and customer care systems, and determine the risks of
failure based on the number and complexity of the year 2000 modifications to the
systems supporting those functions. The second phase is to prepare and implement
alternatives for those business functions that are most susceptible to
disruption and the final phase will be to test these alternatives. The Company
is currently completing phases one and two and will be in a better position to
assess the most reasonably likely worst case scenario and the
-20-
<PAGE> 21
MANAGEMENT'S DISCUSSION & ANALYSIS
potential cost of the Company's business continuity plan at the end of these
phases, targeted for mid-1999. The Company is also developing processes intended
to quickly identify the cause of any disruptions to its mission critical systems
in the year 2000. There can be no assurance that these plans will successfully
avoid service disruption.
Risks
If the Company or its suppliers are unsuccessful in their efforts to
correct the Company's mission critical systems or if third parties with whom the
Company's systems interconnect do not correct their systems, the Company may
experience significant disruption to its operations. This could include the
disruption of the Company's ability to provide wireless service and to correctly
bill customers, resulting in potential revenue loss and increased costs. Such an
outcome could have a material adverse impact on the Company's financial
condition or results of operations.
MARKET RISK
Interest and Foreign Exchange Rate Risks
The Company is exposed to interest and foreign currency exchange rate
risks. In certain cases, the Company enters into derivative financial instrument
contracts to manage its exposure to such risks. With respect to foreign currency
exchange rate risk, the Company enters into foreign currency forward contracts
("forward contracts") to hedge its net investment in its international wireless
systems and to manage risks associated with firm capital commitments denominated
in foreign currencies. The Company has used interest rate swaps to convert
variable-rate debt to fixed-rate debt or to reduce interest rate risk associated
with anticipated future borrowings. At December 31, 1998, the Company did not
have any interest rate swaps. The Company does not enter any such arrangements
for purposes of trading or speculation. The nature of the Company's market risk
exposures and management's objectives and strategies with respect to managing
such exposures did not change in 1997 or 1998 and it does not anticipate any
changes in the near term.
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. 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 decrease more than the VAR amounts in the following table due to movements in
the relevant market rates). VAR amounts do not represent actual losses that may
be incurred by the Company. Although changes in market rates may adversely
impact the fair value of the Company's debt instruments, its risk is reduced
since the majority of the Company's existing debt bears interest at fixed rates.
Further, potential changes in the fair value of forward contracts, in most
cases, will be offset by changes in the fair value of the underlying asset
hedged by the forward contract.
VAR may be calculated using several types of models. The Company uses the
"variance/co-variance" model, which calculates VAR based on the actual
historical volatility of the related interest and foreign exchange rates and the
actual historical correlation of such rates with one another. The Company's
calculations were based on the actual correlation of such rates observed during
the preceding twelve months, a 95% confidence level, and a one-year holding
period for each financial instrument (except for those instruments maturing
prior to the end of the one-year holding period). The model was applied to all
of the Company's debt instruments, redeemable preferred stock, and forward
contracts outstanding at December 31, 1998 and 1997. For VAR calculation
purposes, the Company's redeemable preferred stock was considered a debt
instrument.
At December 31, 1997, the Company's financial instruments that were subject
to interest or foreign currency exchange rate risks included debt and forward
contracts. In 1998 it also included redeemable preferred stock. The fair market
value and the related VARs are presented in the following table:
<TABLE>
<CAPTION>
December 31
---------------
1998 1997
------ ------
(Dollars in millions)
<S> <C> <C>
FAIR MARKET VALUE
Debt and redeemable preferred stock (a)..................... $4,611 $1,436
Foreign forward contracts................................... $ 2 $ 60
FOREIGN EXCHANGE RATE VAR
Debt and redeemable preferred stock (a)..................... $ 13 $ 18
Foreign forward contracts................................... $ 55 $ 49
INTEREST RATE VAR
Debt and redeemable preferred stock (a)..................... $ 431 $ 58
Foreign forward contracts................................... $ 25 $ 53
</TABLE>
(a) Includes redeemable preferred stock only as of December 31, 1998.
-21-
<PAGE> 22
MANAGEMENT'S DISCUSSION & ANALYSIS
The increase in debt and redeemable preferred stock was primarily due to
the MediaOne Group merger. The debt was denominated in U.S. Dollars, Swedish
Krona, German Deutsche Marks, and Portuguese Escudos. The forward contracts were
denominated in German Deutsche Marks, Belgian Francs, Spanish Pesetas, Italian
Lira, and Portuguese Escudos (the "Euro" currencies, effective January 1, 1999),
Swedish Krona, and Korean Won. The Company liquidated its Japanese Yen
denominated debt and forward contracts in 1998. See Note E, "Financial
Instruments" for further information on the Company's forward contracts and Note
I, "Debt and Credit Facilities," to the Consolidated Financial Statements for
further detailed information concerning the Company's debt instruments and
credit facilities.
The average, high, and low VAR values with respect to foreign exchange rate
risk and interest rate risk for the Company's debt and redeemable preferred
stock and forward contracts held during the past year were:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1998
--------------------
Low Avg High
---- ----- -----
<S> <C> <C> <C>
FOREIGN EXCHANGE RATE VAR................................... $67 $ 72 $ 79
INTEREST RATE VAR........................................... $50 $198 $456
</TABLE>
Equity Price Risk
At December 31, 1998, the Company held common stock in QUALCOMM, Inc. and
Leap Wireless International, Inc. ("Lwi"). Both companies' common stock is
publicly traded in U.S. equity markets and subject to equity price risks. In
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," the investments are
reported at market value in the Company's financial statements. At December 31,
1998, the investments were valued at $56 million. The same investments at
December 31, 1997, would have been valued at $52 million. A 10% decrease in the
price of QUALCOMM, Inc. and Lwi stocks would result in a $5.6 million decrease
in the fair value of the Company's investment. During the first quarter of 1999,
the Company sold all of the Lwi common stock and all of the QUALCOMM, Inc.
common stock.
The Company also holds certain cost-based investments in Mannesmann Arcor,
(a German landline telephone company), Globalstar L.P. (a satellite-based
wireless communications partnership), a Japanese long distance company, Japanese
cellular properties, smaller U.S. cellular properties, and other small
investments. At December 31, 1998 and 1997, investments in these entities
totaled $147 million and $110 million, respectively, and were reported in
"Investments in unconsolidated wireless systems," in the Company's Consolidated
Balance Sheets. These investments also expose the Company to risk of loss;
however, it is not practical to estimate the fair value of these investments as
quoted market prices are not available and alternative information for
estimating such fair value is not readily available to the Company. Accordingly,
the Company has not provided information concerning sensitivity to relevant
market rates for these investments.
LIQUIDITY AND CAPITAL RESOURCES
The Company defines liquidity as its ability to generate resources to
finance business expansion, construct capital assets, and meet 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.
1998 CAPITAL SPENDING, DEBT SERVICE, NET DISTRIBUTION, AND PREFERRED DIVIDEND
REQUIREMENTS
In 1998, the Company made capital expenditures of $1,030 million for
additions to property, plant, and equipment, primarily to support customer
growth. The Company invested an additional $673 million in its unconsolidated
wireless systems to fund the expansion and build-out of cellular and PCS
networks and to increase its interest in certain systems. Cash payments for debt
service in 1998 were $153 million. The Company also paid $95 million in
dividends to holders of its preferred stock and $94 million in net distributions
to holders of minority interests of its consolidated wireless systems.
FUNDING OF 1998 CAPITAL SPENDING, DEBT SERVICE, NET DISTRIBUTION, AND PREFERRED
DIVIDEND REQUIREMENTS
Cash flows from operations of $1.9 billion, combined with proceeds from the
issuance of common stock pursuant to stock option exercises and net proceeds
from other investing and financing activities, were sufficient to fund capital
requirements, preferred dividend obligations, and net distributions to minority
partners. Cash flow from operations includes distributions of $391 million
received from unconsolidated equity investees.
-22-
<PAGE> 23
MANAGEMENT'S DISCUSSION & ANALYSIS
FUTURE FUNDING REQUIREMENTS
The Company will continue to make substantial expenditures to expand its
existing wireless business and, potentially, to expand into new markets. Planned
1999 capital expenditures for existing operations are approximately $1.8
billion. This amount does not include expenditures for new investment
opportunities.
CONSOLIDATED EXPENDITURES
The Company plans to incur significant capital expenditures in its
consolidated markets to expand its digital wireless networks and maintain its
analog networks. Both of the Company's consolidated international cellular
operations, Telecel and Europolitan, operate on a digital standard known as GSM.
GSM is the prevailing digital standard in Europe. The Company's U.S. cellular
consolidated markets operate on the Code Division Multiple Access ("CDMA")
digital standard. The Company believes that digital cellular technology offers
certain advantages over analog technology, including increased capacity, greater
call privacy, superior voice quality, enhanced services, reduced susceptibility
to fraud, longer battery life for handsets, and opportunity to provide improved
data transmissions. By the end of 1998, a significant portion of U.S. customers'
peak time usage was on digital networks, as customers took advantage of its
enhanced capabilities.
Although the Company will invest the majority of its future capital in
digital technology, the Company believes that in the United States both analog
and digital technologies will coexist until such time that technologies to
bridge the different digital standards become widely available. The Company will
maintain its analog networks to meet the continued demand for analog service and
to allow roaming on its analog networks. Analog networks provide the only common
roaming platform currently available throughout the United States.
At December 31, 1998, the Company was committed to spend $223 million for
the acquisition of property, plant, and equipment for its consolidated
operations. In addition to these commitments, the Company plans to make
additional capital expenditures in 1999 of approximately $1.1 billion to
increase the capacity of its consolidated wireless networks. At December 31,
1998, the Company had also committed to spend approximately $100 million for the
purchase of cellular handsets, pagers, and other items.
In February 1999, the Company signed a multi-year $500 million contract
with Nortel Networks to expand and upgrade its digital cellular networks. The
previously mentioned $1.1 billion plan for consolidated wireless networks
includes the anticipated 1999 portion of this contract.
In addition, the FCC has adopted rules requiring carriers such as the
Company to provide customers in the United States with local number portability
by November 24, 2002. Local number portability is the ability for customers to
retain their telephone numbers should they choose to switch landline or wireless
carriers. Providing this functionality will result in additional capital
requirements and operating expenses in future years. The Company does not expect
these costs to have a material impact on its results of operations or liquidity.
The Company will also be required to upgrade its wireless networks in the
U.S. to provide certain functionality to authorized law enforcement agencies.
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, the Communications Assistance Law
Enforcement Act ("CALEA") will require the Company to provide law enforcement
agencies with certain network 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 costs incurred to upgrade its
networks and to provide ongoing assistance to law enforcement agencies; however,
the Company can provide no assurance that all such costs will be recoverable.
UNCONSOLIDATED WIRELESS SYSTEMS
In 1999, the Company plans to make additional capital contributions of
approximately $250 million to certain of its existing U.S. and international
unconsolidated wireless systems and to fund the continuing network build-out and
operating losses of wireless systems that have not achieved sufficient scale.
In January 1999, the Company exercised an option to increase its indirect
ownership in Omnitel Pronto Italia, S.p.A., from 15.5 percent to 17.8 percent.
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.
-23-
<PAGE> 24
MANAGEMENT'S DISCUSSION & ANALYSIS
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. As of December 31,
1998, the Company had repurchased $170 million of its common stock under this
program. The Company may continue to buy shares on the open market based on
market conditions.
FINANCING SOURCES
The Company's commercial paper program consists of the sale of discounted
notes that are exempt from registration under the Securities Act of 1933. In
1996, the Company's Board of Directors authorized the issuance of commercial
paper in amounts necessary to finance the Company's working capital
requirements. 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"), may not exceed $2 billion. At
December 31, 1998, the amount available for borrowing under the Facility was
$1.25 billion.
The planned merger with Vodafone triggered a "change of control" violation
of the Facility's covenants. The agreement has been amended so that "change in
control" occurs at the closing of the planned merger. During the first quarter
of 1999, the Company and Vodafone were in the process of securing a credit line
from a banking syndicate for funding up to $13 billion. Such funding will be
used to satisfy the cash portion of the planned merger as well as refinance
existing indebtedness, support commercial paper issuance, and provide the
combined company with working capital and funding for continued investment and
general corporate purposes. Should the planned merger be completed, it is likely
that the Facility will be refinanced under this new credit line.
Other financing sources available to the Company include various forms of
debt and equity securities that may be registered with the SEC on Form S-3. At
December 31, 1998, the Company had an effective registration statement
permitting the issuance of $800 million of securities.
In addition to these sources, the Company also has access to international
capital markets, as evidenced by the Company's issuance of 400 million Deutsche
Mark Eurobonds in July 1998. See Note I, "Debt and Credit Facilities" for
additional information.
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,
net distributions to minority partners, preferred dividends, and a certain level
of share buy-backs through the end of 1999. Cash flow from operations include
distributions from unconsolidated equity investees, the timing of which the
Company does not always control. Should additional funding be required due to
the award of one or more new international cellular licenses, new investment
opportunities, higher levels of AirTouch share buy-backs, or other unanticipated
events, the Company may raise the required funds through borrowings or public or
private sales of debt or equity securities. Such funding may be obtained through
borrowings under the Facility; through the Company's commercial paper program;
from additional securities; 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.
-24-
<PAGE> 25
REPORT OF MANAGEMENT
To the Stockholders of AirTouch Communications, Inc.:
FINANCIAL STATEMENTS
The management of AirTouch Communications, Inc. and its subsidiaries
prepared the accompanying Consolidated Financial Statements and is responsible
for their integrity and objectivity. The statements were prepared in accordance
with generally accepted accounting principles in the United States applied on a
consistent basis and are not misstated as a result of material fraud or error.
The Consolidated Financial Statements include amounts based on management's best
estimates and judgments, where necessary. Management also prepared the other
information in this annual report and is responsible for its accuracy and
consistency with the Consolidated Financial Statements.
The Company's Consolidated Financial Statements have been audited by
PricewaterhouseCoopers LLP, independent accountants. Management has made
available to PricewaterhouseCoopers LLP all of the Company's financial records
and related data, as well as the minutes of meetings of the Board of Directors.
Furthermore, management believes that all of the representations made to
PricewaterhouseCoopers LLP during their audits were valid and appropriate.
INTERNAL CONTROL SYSTEM
AirTouch Communications, Inc. and its subsidiaries maintain a system of
internal controls over financial reporting, one of the purposes of which is to
provide reasonable assurance to the Company's management and Board of Directors
regarding the preparation of reliable published financial statements. The Audit
and Investment Committee of the Board of Directors is responsible for overseeing
the Company's financial reporting process on behalf of the Board. During 1998,
the Audit and Investment Committee met regularly with management, internal
audit, and the independent accountants to review internal controls, accounting,
auditing, and financial reporting matters.
The system of internal controls contains self-monitoring mechanisms and
actions are taken to correct deficiencies as they are identified. Even an
effective internal control system, no matter how well designed, has inherent
limitations - including the possibility of the circumvention or overriding of
controls and therefore can provide only reasonable assurance with respect to
financial statement preparation. Further, because of changes in conditions,
internal control system effectiveness may vary over time.
The Company assessed its internal control system in its consolidated
operations throughout the year ended December 31, 1998. Criteria for effective
internal control over financial reporting described in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") were considered in
management's control process assessments. To assess the internal control systems
in its unconsolidated partnerships and corporations, management relied on
reports issued by the Company's internal audit group and various external public
accountants who performed audits of those entities, where such reports were
available. Management believes that its overall system of internal control over
financial reporting was operating effectively at December 31, 1998.
/s/ Sam Ginn
Chairman and Chief Executive Officer
/s/ Mohan Gyani
Executive Vice President and Chief
Financial Officer
March 1, 1999
-25-
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of AirTouch Communications, Inc.:
In our opinion, the accompanying Consolidated Balance Sheets and the
related Consolidated Statements of Income, of Stockholders' Equity, and of Cash
Flows present fairly, in all material respects, the financial position of
AirTouch Communications, Inc. and subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Our audits were made for the purpose of forming an opinion on the
Consolidated Financial Statements taken as a whole. The Selected Proportionate
Financial Data (Proportionate Financial Data) for each of the three years in the
period ended December 31, 1998, appearing on page 63 is presented for additional
analysis and is not a required part of the basic financial statements. As
discussed on page 62, this 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. The Proportionate Financial Data reflects
selected operating data of the Company's consolidated and unconsolidated
investments using the proportionate method of accounting and is not a
presentation in accordance with generally accepted accounting principles. Such
Proportionate Financial Data for each of the three years in the period ended
December 31, 1998, determined on the basis of presentation described on page 62,
has been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the Consolidated Financial Statements taken as a whole.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
March 1, 1999
-26-
<PAGE> 27
CONSOLIDATED STATEMENTS OF INCOME
AirTouch Communications, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the Year Ended December 31
------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in millions, except per share information)
<S> <C> <C> <C>
Operating revenues.......................................... $ 5,181 $ 3,594 $ 2,252
-------- -------- --------
Operating expenses:
Cost of revenues............................................ 1,126 846 521
Selling and customer operations expenses.................... 1,512 990 705
General, administrative, and other expenses................. 647 503 394
Depreciation and amortization expenses...................... 950 549 351
-------- -------- --------
Total operating expenses.......................... 4,235 2,888 1,971
-------- -------- --------
Operating income............................................ 946 706 281
Equity in net income (loss) of unconsolidated wireless
systems:
U. S........................................................ (41) 1 151
International............................................... 434 199 (18)
Minority interests in net (income) loss of consolidated
wireless systems.......................................... (179) (119) (95)
Interest:
Expense..................................................... (145) (90) (52)
Income...................................................... 23 18 14
Miscellaneous income (expense).............................. 3 (1) 67
-------- -------- --------
Income before income taxes and preferred dividends.......... 1,041 714 348
Income taxes................................................ 316 266 149
-------- -------- --------
Income before preferred dividends........................... 725 448 199
Preferred dividends......................................... 117 54 20
-------- -------- --------
Net income applicable to common stockholders................ $ 608 $ 394 $ 179
======== ======== ========
Net income applicable to common stockholders - per share
Basic..................................................... $ 1.09 $ 0.78 $ 0.36
Diluted................................................... $ 1.07 $ 0.78 $ 0.36
-------- -------- --------
Weighted average shares outstanding (in thousands).......... 555,995 503,883 500,051
-------- -------- --------
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
-27-
<PAGE> 28
CONSOLIDATED BALANCE SHEETS
AirTouch Communications, Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31
----------------
(Dollars in millions) 1998 1997
------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 44 $ 1
Accounts receivable (net of allowance for uncollectibles of
$65 and $44, respectively)................................ 724 472
Inventories................................................. 143 106
Other receivables........................................... 225 44
Due from related parties.................................... 59 48
Other current assets........................................ 120 51
------- ------
Total current assets.............................. 1,315 722
Property, plant, and equipment, net......................... 4,049 2,539
Investments in unconsolidated wireless systems.............. 3,491 2,068
Intangible assets, net...................................... 8,513 3,297
Deferred charges and other noncurrent assets................ 185 344
------- ------
Total assets...................................... $17,553 $8,970
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade..................................... $ 493 $ 244
Short-term borrowings....................................... 72 --
Current portion of long-term debt........................... 45 57
Other current liabilities................................... 925 675
------- ------
Total current liabilities......................... 1,535 976
Long-term debt.............................................. 2,701 1,362
Deferred income taxes....................................... 1,839 711
Deferred credits............................................ 152 86
------- ------
Total liabilities................................. 6,227 3,135
------- ------
Commitments and contingencies
Minority interests in consolidated wireless systems......... 427 306
Class D and E redeemable preferred stock ($.01 par value;
1.65 million shares authorized; 1.65 million shares issued
and outstanding; redemption value $1.65 billion).......... 1,574 --
------- ------
Stockholders' equity:
Preferred stock and additional paid-in capital ($.01 par
value; 48.35 million shares authorized):
Series A (7 million shares authorized, no shares issued or -- --
outstanding)..............................................
6.00% Class B Mandatorily Convertible (19 million shares
authorized; 17.2 million shares issued and outstanding;
liquidation value of $499)................................ 500 500
4.25% Class C Convertible (13 million shares authorized,
11.0 million shares issued and outstanding; liquidation
value of $552)............................................ 541 541
Common stock and additional paid in-capital ($.01 par value;
1.1 billion shares authorized, 576.8 million shares issued
and 572.4 million shares outstanding [net of 4.3 million
treasury shares at cost of $207] at December 31, 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)................................ 7,255 4,079
Retained earnings........................................... 1,023 415
Accumulated other comprehensive income...................... 8 1
Deferred compensation....................................... (2) (7)
------- ------
Total stockholders' equity........................ 9,325 5,529
------- ------
Total liabilities and stockholders' equity........ $17,553 $8,970
======= ======
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
-28-
<PAGE> 29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AirTouch Communications, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Class B Class C
Preferred Preferred Accum.
Stock Stock Common Other
(a) (a) Stock (a) Retained Compre- Compre-
and and and Earnings hensive hensive Deferred
(Dollars in millions) APIC APIC APIC (Deficit) Income Income Comp. Total
--------- --------- --------- --------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995, balances............... $ -- $ -- $3,882 $ (158) $44 $(17) $3,751
Comprehensive income:
Income before preferred dividends......... 199 $199 199
Other comprehensive income, net of tax:
Foreign currency translation loss......... (14) (14) (14)
Unrealized holding loss on noncurrent
available-for-sale securities, net...... (3) (3) (3)
----
Other comprehensive income, net of tax:... (17)
----
Comprehensive income (b).................. $182
====
Preferred stock issued.................... 500 541 1,041
Preferred stock dividends (a)............. (20) (20)
Stock options issued for CCI merger....... 17 17
Shares issued (c)......................... 90 90
Treasury shares (d)....................... (2) (2)
Unearned compensation..................... (13) (13)
Compensation expense...................... 16 16
--------------------------------------------------- ---------------
December 31, 1996, balances............... 500 541 3,987 21 27 (14) 5,062
Comprehensive income:
Income before preferred dividends......... 448 $448 448
Other comprehensive income, net of tax:
Foreign currency translation loss......... (35) (35) (35)
Unrealized holding gain on noncurrent
available-for-sale securities, net...... 9 9 9
----
Other comprehensive income, net of tax:... (26)
----
Comprehensive income (b).................. $422
====
Preferred stock dividends (a)............. (54) (54)
Shares issued (c)......................... 99 99
Treasury shares (d)....................... (7) (7)
Unearned compensation..................... (14) (14)
Compensation expense...................... 21 21
--------------------------------------------------- ---------------
December 31, 1997, balances............... 500 541 4,079 415 1 (7) 5,529
Comprehensive income:
Income before preferred dividends......... 725 $725 725
Other comprehensive income, net of tax:
Foreign currency translation gain......... 8 8 8
Unrealized holding loss on noncurrent
available-for-sale securities, net...... (1) (1) (1)
----
Other comprehensive income, net of tax:... 7
----
Comprehensive income (b).................. $732
====
Preferred stock dividends (a)............. (117) (117)
Shares issued for acquisitions............ 3,116 3,116
Shares issued (c)......................... 256 256
Treasury shares (d)....................... (196) (196)
Unearned compensation..................... (34) (34)
Compensation expense...................... 39 39
---- ---- ------ ------ --- ---- ------
December 31, 1998, balances............... $500 $541 $7,255 $1,023 $ 8 $ (2) $9,325
==== ==== ====== ====== === ==== ======
</TABLE>
(a) See Note J, "Capital Stock" to the Consolidated Financial Statements for
additional information.
(b) See Note C, "Comprehensive Income" to the Consolidated Financial Statements
for additional information.
(c) Shares issued under incentive and employee benefit programs, including
related tax benefits of $38 million, $3 million, and $8 million in 1998,
1997, and 1996, respectively. The 1998 amount includes proceeds from the
sale of put options. See Note J, "Capital Stock" and Note L, "Income Taxes"
to the Consolidated Financial Statements for additional information.
(d) Treasury share additions from the stock repurchase program and incentive
plan forfeitures, net of shares reissued under incentive programs.
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
-29-
<PAGE> 30
CONSOLIDATED STATEMENTS OF CASH FLOWS
AirTouch Communications, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the Year Ended December 31
------------------------------
(Dollars in millions) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Income before preferred dividends........................... $ 725 $ 448 $ 199
Adjustments to reconcile income before preferred dividends
for items currently not affecting operating cash flows:
Depreciation, amortization, and other noncash charges....... 985 561 358
Equity in net (income) loss of unconsolidated wireless
systems................................................... (393) (200) (133)
Distributions received from equity investees................ 391 383 140
Minority interests in net income (loss) of consolidated
wireless systems.......................................... 179 119 95
Deferred income tax (benefit) expense....................... 21 75 33
Loss (gain) on sale of assets and telecommunications
interests................................................. (1) 2 (60)
Changes in assets and liabilities:
Accounts receivable, net.................................... (82) (69) (7)
Other current assets and receivables........................ (190) (87) 24
Deferred charges and other noncurrent assets................ (51) 9 61
Accounts payable and other current liabilities.............. 250 91 26
Deferred credits and other liabilities...................... 22 3 39
------- ------- -------
Cash flows from operating activities........................ 1,856 1,335 775
------- ------- -------
Cash flows from investing activities:
Investments in unconsolidated wireless systems.............. (673) (445) (857)
Proceeds from sale of wireless systems...................... -- -- 131
Additions to property, plant, and equipment................. (1,030) (683) (480)
Proceeds from sale of property, plant, and equipment........ 22 16 25
Maturity of available-for-sale securities................... -- 7 11
Other investing activities.................................. 25 8 (5)
------- ------- -------
Cash flows from investing activities........................ (1,656) (1,097) (1,175)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuing long-term debt and commercial paper... 2,671 406 2,323
Retirement of long-term debt and commercial paper........... (2,703) (627) (1,991)
Distributions to minority interests of consolidated wireless
systems................................................... (97) (71) (56)
Contributions from minority interests of consolidated
wireless systems.......................................... 3 5 1
Proceeds from common shares issued.......................... 161 90 82
Purchases of common stock................................... (182) (7) (2)
Increase (decrease) in short-term borrowings................ 68 -- --
Payment of preferred stock dividends........................ (95) (54) (7)
Other financing activities.................................. 15 (2) (4)
------- ------- -------
Cash flows from financing activities........................ (159) (260) 346
------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... 2 (5) (1)
Net change in cash and cash equivalents..................... 43 (27) (55)
Beginning cash and cash equivalents......................... 1 28 83
------- ------- -------
Ending cash and cash equivalents............................ $ 44 $ 1 $ 28
======= ======= =======
Supplemental information:
Cash payments for:
Interest.................................................... $ 153 $ 107 $ 53
Income taxes................................................ $ 232 $ 154 $ 54
Noncash financing activities:
Preferred stock and options issued for CCI Merger (a)....... $ -- $ -- $ 1,057
Preferred stock and common stock issued for MediaOne Group
merger(a)................................................. $ 4,478 $ -- $ --
======= ======= =======
</TABLE>
(a) See Note G, "Partnerships and Acquisitions" for additional information.
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
-30-
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
AirTouch Communications, Inc., along with its subsidiaries, unconsolidated
partnerships, and corporations (collectively referred to herein as the
"Company"), provide wireless telecommunications services in the United States,
Europe, Asia, and North Africa. The Company's business units are AirTouch
Cellular, AirTouch Paging, and AirTouch International. These business units
provide cellular and paging services. The majority of the Company's revenues are
provided by its U.S. cellular operations, AirTouch Cellular.
The Consolidated Financial Statements include the accounts of the Company,
its subsidiaries, and partnerships in which the Company has a direct controlling
interest. All significant intercompany balances and transactions have been
eliminated.
In April 1998, the Company completed its acquisition of the U.S. cellular
properties of MediaOne Group, Inc. (formerly U S WEST Media Group). Accordingly,
the Company began consolidating the results of operations of the U.S. cellular
properties acquired. See Note G, "Partnerships and Acquisitions -- MediaOne
Group Merger," for further information. The Company also acquired the 25%
interest in PrimeCo Personal Communications, Inc. ("PrimeCo") of MediaOne Group,
Inc. bringing its interest in PrimeCo to 50%.
In January 1997, the Company began consolidating the results of operations
of Telecel Communicacoes Pessoias, S.A. ("Telecel"), its cellular system in
Portugal, after obtaining a controlling interest.
In August 1996, the Company completed its acquisition of Cellular
Communications, Inc. ("CCI"). Prior to the acquisition, the Company used the
equity method of accounting to report the results of both CCI and New Par, an
equally owned partnership with CCI. Since the merger, CCI and New Par have been
consolidated in the Company's Consolidated Financial Statements. See Note G,
"Partnerships and Acquisitions -- CCI Merger," for further information.
In January 1996, the Company sold its vehicle location and fleet tracking
services business, AirTouch Teletrac.
The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") applicable in the United
States. Conformity with GAAP requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
Cash Equivalents
Cash equivalents are short-term, highly liquid, held-to-maturity
investments with original maturities of 90 days or less from the date of
purchase.
Inventories
Inventories are stated at cost or the lower of cost or market. Cost is
determined using either the first-in first-out or average method. Market is
determined using replacement cost in accordance with industry standards.
Foreign Currency Translation and Transactions
Results of operations for international investments are translated using
average exchange rates during the period, while assets and liabilities are
translated using end-of-period rates. The resulting foreign exchange gains or
losses are accumulated in the "Cumulative translation adjustment" ("CTA")
account, a component of "Accumulated other comprehensive income" in
Stockholders' Equity. All gains and losses resulting from foreign currency
transactions are included in operations.
Financial Instruments
Foreign currency and interest rate fluctuations expose the Company to
market risks. The Company enters into foreign currency hedging activities to
reduce currency exposures to its long-term investments in international wireless
systems. The Company hedges a portion of these investments with long-dated
forward foreign currency exchange contracts ("forward contracts"). In addition,
the Company enters into forward contracts to reduce exposures of firm capital
commitments denominated in foreign currencies. The Company also enters into
interest rate swap agreements to manage its exposure to fluctuations in interest
rates in an effort to minimize its cost of funds. The Company uses swap
agreements to effectively convert existing variable rate debt to fixed rate and
to reduce the interest rate risk for future borrowings. The Company does not
hold or issue financial instruments for trading or speculative purposes.
Foreign currency hedges. Under a forward contract, the Company exchanges
foreign currency for equivalent U.S. Dollars at a specified rate and amount at a
stated future date. Gains or losses associated with forward contracts that are
considered economic
-31-
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
hedges ("qualifying hedges") of net foreign investments are recorded in the CTA
account, with a corresponding adjustment to a deferred asset or liability
account. Cash flows resulting from such hedges are reported in the Statements of
Cash Flows in investing activities. Gains and losses upon termination of net
investment hedges are recorded in the CTA account. Gains and losses related to
qualifying hedges of firm commitments are deferred and are recognized as
adjustments of carrying amounts when the hedged transactions occur. Cash flows
resulting from these hedges are reported in the Statements of Cash Flows in the
same category as the cash flows from the items being hedged. Gains or losses on
forward contracts that do not qualify as hedges are recorded in "Miscellaneous
income (expense)" in the Consolidated Statements of Income.
Interest rate hedges. Under an interest rate swap, the Company exchanges
interest payments at specified intervals over a defined term. Interest payments
are calculated by reference to the notional amount of the instrument based on
the fixed and variable terms of the swap agreement. The Company adjusts interest
expense for the net interest received or paid as part of the interest rate swap.
The Company amortizes the fair value of forward interest rate swaps used to
hedge future borrowings over the term of the related debt when incurred. Cash
flows resulting from such hedges are reported in the Statements of Cash Flows in
operating activities. Also, gains or losses on termination of interest rate
swaps are deferred and amortized over the remaining term of the related debt.
Property, Plant, and Equipment
The Company records assets of businesses purchased at their fair values on
the date of acquisition. All other property, plant, and equipment are recorded
at cost. Depreciation is computed using the straight-line method over the
estimated useful life of the asset. Land is not depreciated. Gains and losses on
disposals are included in income at amounts equal to the difference between the
net book value of the disposed assets and the proceeds received upon disposal.
Expenditures for replacements and betterments are capitalized, while
expenditures for maintenance and repairs are charged against earnings as
incurred. Assets under construction are not depreciated until placed in service.
Interest cost incurred during the construction period is capitalized, as
discussed below in "Capitalized Interest."
Intangible Assets
The Company uses modeling techniques on new acquisitions and long-range
business plans, revised annually, to assess whether a revision of the existing
estimated useful lives of intangible assets is necessary.
Goodwill. The excess of the purchase price paid over the fair value of net
assets acquired in business combinations is recorded as goodwill and is
amortized over its expected useful period, generally 40 years, using the
straight-line method.
FCC licenses. The Federal Communications Commission ("FCC") issues cellular
licenses that enable U.S. cellular carriers to provide service in specific
Cellular Geographic Service Areas. A cellular license is issued conditionally
for ten years. Historically, the FCC has routinely granted license renewals to
licensees that have complied with applicable rules, policies, and the
Communications Act of 1934, as amended. The Company believes it has complied and
intends to continue to comply with these standards.
The Company amortizes FCC licenses for U.S. cellular and paging operations
and those acquired through business combinations using the straight-line method
over 40 years.
Other intangible assets. Other intangible assets primarily include
international cellular and paging licenses, subscriber lists, and favorable
lease agreements. These intangible assets are amortized on a straight-line basis
over the lives which the Company expects to be benefited, which range from two
to 30 years.
Valuation of Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived assets
and certain identifiable intangibles for impairment, when events and
circumstances indicate that the book value of an asset may not be recoverable.
An impairment loss is recognized whenever the review demonstrates that the book
value of a long-lived asset is not recoverable.
Investments in Unconsolidated Wireless Systems
The Company uses the equity method to account for investments in all U.S.
cellular markets and international markets in which it has significant influence
but does not have a direct controlling interest, including those investments in
which the Company's ownership percentage may be less than 20%. The Company uses
the cost method to account for limited partnership interests and other
unconsolidated wireless system investments in which it has a minor interest and
does not exercise significant influence.
-32-
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
Basic earnings per share ("EPS") is calculated as net income applicable to
common stockholders divided by the weighted average common shares outstanding.
Diluted EPS is calculated as net income applicable to common stockholders
divided by the sum of the weighted average common shares outstanding and any
common stock equivalents ("CSEs"). CSEs related to stock options, determined
using the treasury stock method, had a dilutive impact on EPS for 1998 and no
impact on EPS for 1997 or 1996. CSEs related to convertible debt, determined
using the "if converted" method, had no impact on EPS for 1998, 1997, or 1996.
CSEs related to convertible Class B and Class C preferred stock, also determined
using the "if converted" method, had an anti-dilutive impact on earnings per
share for 1998, 1997, and 1996, and therefore, were not included in the
calculation of diluted earnings per share.
<TABLE>
<CAPTION>
December 31, 1998
---------------------------
(In millions, except per share amounts) Income Shares Per Share
- --------------------------------------- ------ ------ ---------
<S> <C> <C> <C>
Basic EPS:
Net income applicable to common stockholders................ $608 556.0 $1.09
Effect of Dilutive CSEs:
Stock options............................................... 9.8
---- ----- -----
Dilutive EPS:
Net income applicable to common stockholders................ $608 565.8 $1.07
==== ===== =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------
(In millions, except per share amounts) Income Shares Per Share
- --------------------------------------- ------ ------ ---------
<S> <C> <C> <C>
Basic EPS:
Net income applicable to common stockholders................ $394 503.9 $0.78
Effect of Dilutive CSEs:
Stock options............................................... 3.6
Convertible debt............................................ 0.3
---- ----- -----
Dilutive EPS:
Net income applicable to common stockholders................ $394 507.8 $0.78
==== ===== =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------
(In millions, except per share amounts) Income Shares Per Share
- --------------------------------------- ------ ------ ---------
<S> <C> <C> <C>
Basic EPS:
Net income applicable to common stockholders................ $179 500.1 $0.36
Effect of Dilutive CSEs:
Stock options............................................... 1.7
Convertible debt............................................ 1.5
---- ----- -----
Dilutive EPS:
Net income applicable to common stockholders................ $179 503.3 $0.36
==== ===== =====
</TABLE>
Capitalized Interest
The Company capitalizes interest related to the construction of significant
additions to property, plant, and equipment and on start-up investments in
unconsolidated wireless systems accounted for under the equity method of
accounting until their principal operations commence. The Company amortizes
these costs over the related assets' estimated useful lives. Total interest
incurred was $169 million, $103 million, and $83 million for 1998, 1997, and
1996, respectively, of which $24 million, $13 million, and $31 million was
capitalized in 1998, 1997, and 1996, respectively.
Advertising Expense
The Company primarily expenses advertising costs as incurred. Advertising
expense was $270 million in 1998, $178 million in 1997, and $107 million in
1996.
B. ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 requirements of the Statement, the Company will adopt SFAS
No. 133 effective January 1, 2000. Based on the Company's derivative instruments
at December 31, 1998, the implementation of SFAS No. 133 will not have a
material impact on the Company's financial position or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 requires certain
disclosures by employers that sponsor defined benefit pension plans and defined
benefit postretirement plans. Effective with the issuance of the 1998
Consolidated Financial Statements, the Company implemented the provisions of
SFAS No. 132. The implementation of SFAS No. 132 did not have an impact on the
Company's financial position or results of operations. See Note M, "Employee
Benefits" for further information.
Effective with the issuance of its 1998 Consolidated Financial Statements,
the Company also implemented the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting information about operating segments in annual
-33-
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial statements and requires reporting of selected information in interim
reports. The implementation of SFAS No. 131 did not have an impact on the
Company's financial position or results of operations. See Note Q, "Segment
Information" for further information.
Effective with the issuance of its first quarter 1998 financial statements,
the Company implemented the provisions of SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of financial statements.
The implementation of SFAS No. 130 did not have an impact on the Company's
financial position or results of operations. See Note C, "Comprehensive Income"
and the Company's Consolidated Statements of Stockholders' Equity for further
information.
Effective with the issuance of the 1997 Consolidated Financial Statements,
the Company implemented the provisions of SFAS No. 128, "Earnings Per Share."
SFAS No. 128 requires the Company to replace the traditional EPS disclosures
with a dual presentation of "Basic" and "Diluted" EPS. Implementation of SFAS
No. 128 did not have an impact on the Company's financial position or results of
operations or on previously reported EPS.
C. COMPREHENSIVE INCOME
With the issuance of its first quarter 1998 financial statements, the
Company implemented the provisions of SFAS No. 130, "Reporting Comprehensive
Income." For the Company, comprehensive income includes: income before preferred
dividends; unrealized gains (losses) on available-for-sale securities;
cumulative translation adjustments; and minimum pension liability adjustments.
The Company reported "Comprehensive Income" and "Accumulated other comprehensive
income" in its Consolidated Statements of Stockholders' Equity.
The taxes allocated to each component of "Accumulated other comprehensive
income" were:
<TABLE>
<CAPTION>
Tax
Before Benefit Net of
(Dollars in millions) Tax (Expense) Tax
- --------------------- ------ --------- ------
<S> <C> <C> <C>
1996
Foreign currency translation loss........................... $(31) $ 17 $(14)
Unrealized holding loss on securities....................... (5) 2 (3)
---- ---- ----
Other comprehensive income (a).............................. $(36) $ 19 $(17)
==== ==== ====
1997
Foreign currency translation loss........................... $(62) $ 27 $(35)
Unrealized holding gain on securities....................... 14 (5) 9
---- ---- ----
Other comprehensive income (a).............................. $(48) $ 22 $(26)
==== ==== ====
1998
Foreign currency translation gain........................... $ 27 $(19) $ 8
Unrealized holding loss on securities....................... (2) 1 (1)
---- ---- ----
Other comprehensive income (a).............................. $ 25 $(18) $ 7
==== ==== ====
</TABLE>
- ---------------
(a) The Company had no significant reclassification adjustments.
The components of "Accumulated other comprehensive income" were:
<TABLE>
<CAPTION>
Unrealized
Gains
(Losses) on Minimum Accum.
Available- Cumulative Pension Other
For-Sale Translation Liability Comp.
(Dollars in millions) Securities Adjustments Adjustments Income
- --------------------- ----------- ----------- ----------- ------
<S> <C> <C> <C> <C>
December 31, 1995, balances........................... $28 $ 17 $(1) $44
Foreign currency translation loss..................... (14) (14)
Unrealized holding loss on securities................. (3) (3)
--- ---- --- ---
December 31, 1996, balances........................... 25 3 (1) 27
Foreign currency translation loss..................... (35) (35)
Unrealized holding gain on securities................. 9 9
--- ---- --- ---
December 31, 1997, balances........................... 34 (32) (1) 1
Foreign currency translation gain..................... 8 8
Unrealized holding loss on securities................. (1) (1)
--- ---- --- ---
DECEMBER 31, 1998, BALANCES............................ $33 $(24) $(1) $ 8
=== ==== === ===
</TABLE>
-34-
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of:
<TABLE>
<CAPTION>
December 31
Lives(Years) ---------------
(Dollars in millions) Depreciable 1998 1997
- --------------------- ----------- ------ ------
<S> <C> <C> <C>
Land........................................................ -- $ 37 $ 29
Buildings and leasehold improvements........................ 5-50 495 214
Cellular plant and equipment................................ 5-15 4,999 2,878
Pagers, paging terminals, and other paging equipment........ 3-15 315 303
Other equipment and furniture............................... 2-10 689 542
Construction in progress.................................... -- 390 194
------ ------
6,925 4,160
Less: accumulated depreciation.............................. 2,876 1,621
------ ------
Property, plant, and equipment, net......................... $4,049 $2,539
====== ======
</TABLE>
Related depreciation expense was $653 million, $429 million, and $295
million in 1998, 1997, and 1996, respectively.
E. FINANCIAL INSTRUMENTS
Market Risk Management
At December 31, 1998 and 1997, the Company held outstanding forward
contracts denominated in German Deutsche Marks ("DEM"), Belgian Francs, Spanish
Pesetas, Italian Lira, Portuguese Escudos, (the "Euro" currencies, effective
January 1, 1999), Swedish Krona, and Korean Won. The Company also held contracts
in Japanese Yen at December 31, 1997. These contracts had face amounts totaling
$649 million and $814 million at December 31, 1998 and 1997, respectively, with
maturities through 2004.
The Company also enters into interest rate swap agreements to manage its
exposure to fluctuations in interest rates in an effort to minimize its cost of
funds. The Company uses swap agreements to effectively convert existing variable
rate debt to fixed rate and to reduce the interest rate risk for future
borrowings. At December 31, 1998 and 1997, the Company was not a party to any
interest rate or other swaps.
In connection with the share repurchase program, the Company sold put
options, which give the purchaser the right to sell shares of the Company's
common stock to the Company at specified prices. The put option contracts allow
the Company to determine the method of settlement. In 1998, the Company received
$22.6 million in net proceeds from the sale of put options. At December 31,
1998, there were 3.6 million shares outstanding under put options, with strike
prices ranging from $51.39 to $55.86. The contracts mature from May 1999 through
February 2000.
Concentration of Credit Risk
The off-balance-sheet risks in outstanding forward contracts involve the
risk of a counterparty not performing under the terms of the contract and the
risk associated with changes in market value. The Company monitors its
positions, the credit ratings of counterparties, and the level of contracts the
Company enters into with any one party. The counterparties to these contracts
are major financial institutions. The Company has a policy of entering into
contracts with parties that have at least an "AA-" (or equivalent) credit rating
as well as other stringent qualifications. Given the high level of credit
quality of its derivative counterparties, the Company does not require
collateral arrangements. The Company believes the probability of losses from
counterparty nonperformance is remote. Any such nonperformance would not have
any material adverse impact on the Company's financial position or results of
operations. The Company does not have any significant exposure to any individual
counterparty.
Financial instruments that potentially subject the Company to
concentrations of credit risk are trade receivables and interest-bearing
investments. Due to the large volume and diversity of the Company's customer
base, concentrations of credit risk with respect to trade receivables are
limited. The Company avoids concentrations of credit risk in its
interest-bearing investment portfolio by investing in U.S. government
securities. The Company also avoids concentrations of credit risk by limiting
other investments in interest-bearing securities to instruments that are highly
rated by nationally recognized rating agencies.
-35-
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value
<TABLE>
<CAPTION>
December 31
---------------------------------------------
1998 1997
--------------------- ---------------------
Carrying Estimated Carrying Estimated
(Dollars in millions) Value Fair Value Value Fair Value
- --------------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Current assets........................................... $ 109 $ 109 $ 1 $ 1
Noncurrent assets........................................ $ 62 $ 62 $ 61 $ 61
Investments at cost...................................... $ 147 N/A $ 110 N/A
Forward foreign currency exchange contracts.............. $ 20 $ 2 $ 86 $ 60
Financial liabilities:
Current obligations...................................... $ 182 $ 182 $ 57 $ 57
Long.term debt, including leases......................... $2,701 $2,818 $1,362 $1,393
Off-balance-sheet financial instruments.................. $ -- $ 4 $ -- $ 5
Redeemable preferred stock............................... $1,574 $1,687 $ -- $ --
</TABLE>
N/A -- Not available
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Current assets
Current assets include cash and cash equivalents as well as funds held in
escrow. Carrying amounts are a reasonable approximation of fair value due to the
short-term character of the items.
Noncurrent assets
Investments in shares and warrants of common stock are recorded at quoted
market prices.
Investments at cost
The fair value of investments at cost are not estimable because quoted
market prices are not available. Also, some of these ventures are in the
start-up phase; therefore, other valuation techniques are not appropriate.
Further, alternative information, which might be pertinent to estimating the
fair value of such investments, is not readily available to the Company.
Forward foreign currency exchange contracts
Fair value is based on the current market value for similar transactions
and is adjusted for the holding period.
Current obligations
Carrying amounts are a reasonable approximation of fair value due to the
short-term character of the securities and obligations.
Long-term debt, including leases
Fair value (for debt issues that are not quoted on an exchange) is
estimated using interest rates that are currently available to the Company for
issuance of similar debt.
Off-balance-sheet financial instruments
Off-balance-sheet financial instruments are guarantees issued by the
Company. Fair value is based on estimated fees to enter into similar
arrangements. Such guarantees issued by the Company include letters of
responsibility and letters of support for various credit facilities and
financing activities of certain of its subsidiaries and affiliates. See Note N,
"Commitments and Contingencies" for further information.
Redeemable preferred stock
Fair value is estimated using interest rates that are currently available
to the Company for similar instruments.
-36-
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F. INVESTMENTS IN UNCONSOLIDATED WIRELESS SYSTEMS
The Company's investments in unconsolidated wireless systems consisted of:
<TABLE>
<CAPTION>
December 31
---------------
(Dollars in millions) 1998 1997
- --------------------- ------ ------
<S> <C> <C>
Investments at equity....................................... $3,344 $1,958
Investments at cost......................................... 147 110
------ ------
$3,491 $2,068
====== ======
</TABLE>
<TABLE>
<CAPTION>
Percentage
of
Ownership
December 31
-----------
1998 1997
---- ----
<S> <C> <C>
EQUITY INVESTMENTS
U.S.:
CMT Partners (California, Texas, Missouri, and Kansas).... 50.0% 50.0%
Nevada RSA2 Ltd. Partnership (Lander, Nevada)............. 50.0% 50.0%
PrimeCo Personal Communications, L.P. (a)................. 50.0% 25.0%
TOMCOM, L.P. (a).......................................... 35.0% 35.0%
Centel Cellular Company of Nevada Limited Partnership (Las
Vegas, Nevada)......................................... 27.8% 27.8%
International:
Cellular Communications India Ltd. (India)................ 49.0% 49.0%
Northstar Paging Holdings Ltd. (Canada)................... 48.5% 48.5%
Mannesmann Mobilfunk GmbH (Germany)....................... 34.8% 34.8%
Misrfone (Egypt).......................................... 30.0% --
Belgacom Mobile (Belgium)................................. 25.0% 25.0%
Globalstar de Mexico, S. de R. L. de C.V. (Mexico) (a).... 24.6% 24.6%
Globalstar Canada Company (Canada) (a).................... 23.4% 23.4%
Airtel Movil, S.A. (Spain)................................ 21.7% 21.7%
RPG Cellular Services Limited (India)..................... 20.6% 20.0%
Polkomtel S.A. (Poland)................................... 19.3% 19.3%
Sistelcom-Telemensaje, S.A. (Spain) (a)................... 17.5% 17.5%
Omnitel-Pronto Italia, S.p.A. (Italy) (a)................. 15.5% 15.5%
Tokyo Digital Phone Co. (Japan)........................... 15.0% 15.0%
Kansai Digital Phone Co. (Japan).......................... 13.0% 13.0%
Central Japan Digital Phone Co. (Japan)................... 13.0% 13.0%
Shinsegi Mobile Telecommunication Co., Ltd. (South
Korea)................................................. 10.7% 10.7%
MobiFon SA (Romania)...................................... 10.0% 10.0%
COST INVESTMENTS
U.S.:
GTE Mobilnet of Santa Barbara Limited Partnership......... 10.0% 10.0%
Globalstar, L.P........................................... 5.2% 5.7%
Cal-One Cellular Limited Partnership...................... 5.6% 5.6%
Fresno MSA Limited Partnership............................ 1.1% 1.1%
International:
Japan:
International Digital Communications, Inc.............. 10.0% 10.0%
Digital TU-KA (b)...................................... 4.5% 4.5%
Germany:
Mannesmann Arcor (a)................................... 3.4% 2.2%
</TABLE>
(a) Indirect ownership through a partially owned venture.
(b) Includes the Chugoku, Kyushu, Tohoku, Hokkaido, Hokuriku, and Shikoku
regions.
-37-
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had options to purchase additional interests, ranging from 6%
to 10%, in several of its international cellular consortia at December 31, 1998.
Options to increase its indirect ownership in Omnitel Pronto Italia, S.p.A. from
15.5% to 17.8% were exercised in January 1999. The Company expects to exercise
the remaining options in 1999.
Condensed combined financial information for unconsolidated wireless
systems accounted for under the equity method:
<TABLE>
<CAPTION>
For the Year Ended December 31 (a)
---------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
United Inter- United Inter- United Inter-
(Dollars in millions) States national States national States national
- --------------------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues or equity in net income of
partnership................................. $1,211 $13,471 $ 899 $8,886 $1,168 $7,419
Operating income (loss)....................... $ (125) $ 2,638 $(232) $1,225 $ 190 $ (251)
====== ======= ===== ====== ====== ======
Net income (loss)............................. $ (130) $ 1,364 $(238) $ 330 $ 205 $ (760)
Other partners' and stockholders' share of net
income (loss)............................... (99) 900 (243) 107 59 (764)
------ ------- ----- ------ ------ ------
Company's share of net income (loss).......... (31) 464 5 223 146 4
Amortization of intangibles and other
adjustments................................. (10) (30) (4) (24) 5 (22)
------ ------- ----- ------ ------ ------
Equity in net income (loss) of unconsolidated
wireless systems............................ $ (41) $ 434 $ 1 $ 199 $ 151 $ (18)
====== ======= ===== ====== ====== ======
</TABLE>
(a) The results reflect a 50% interest in PrimeCo beginning in April 1998, due
to the MediaOne Group acquisition and a 25% interest for results prior to
that date. Telecel results are included in 1996 only as the Company began
consolidating Telecel's results of operations in January 1997. The results
also include operations of CCI and New Par through August 15, 1996.
<TABLE>
<CAPTION>
December 31
-----------------------------------------------
1998 1997
---------------------- ----------------------
United United
(Dollars in millions) States International States International
- --------------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C>
Current assets......................................... $ 294 $3,708 $ 249 $1,863
Noncurrent assets...................................... 3,368 11,059 3,093 8,271
Current liabilities.................................... (496) (5,684) (466) (4,006)
Noncurrent liabilities and minority interest........... (418) (5,827) (345) (4,139)
------ ------ ------ ------
Total partners' and stockholders' capital.... 2,748 3,256 2,531 1,989
Other partners' and stockholders' share of capital..... 1,449 2,240 1,785 1,349
------ ------ ------ ------
Company's share of capital............................. 1,299 1,016 746 640
Goodwill and other intangible items.................... 513 516 72 500
------ ------ ------ ------
Equity investments in unconsolidated wireless
systems.............................................. $1,812 $1,532 $ 818 $1,140
====== ====== ====== ======
</TABLE>
International equity in net income (loss) of unconsolidated wireless
systems includes tax benefits of $30 million, $30 million, and $10 million in
1998, 1997, and 1996, respectively. The related tax asset represents future
benefits that the entities will receive by deducting the net operating losses
from future taxable income. At December 31, 1998 and 1997, the Company's
proportionate share of deferred tax assets of its international equity
subsidiaries was $138 million and $161 million, respectively. These amounts were
offset by related proportionate valuation allowances of $73 million and $84
million, respectively.
While the Company believes it is more likely than not that the net deferred
tax assets will be fully realized, there can be no assurance that this will
happen. Certain factors beyond the control of the entities and the Company, such
as deteriorating local economic conditions, increasing competition, and changes
in tax laws, may affect future timing and amounts of taxable income.
-38-
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. PARTNERSHIPS AND ACQUISITIONS
MediaOne Group Merger
In April 1998, the Company completed the acquisition of the U.S. cellular
business and the 25% PrimeCo interest of MediaOne Group, Inc. (the "Merger").
The Company issued approximately 59.4 million shares of common stock having a
fair market value of $2.9 billion on the date of issuance, approximately $1.6
billion of dividend-bearing preferred stock with a 5.143% coupon, assumed
approximately $1.4 billion of debt associated with the acquired businesses, and
granted MediaOne Group registration rights with respect to the common stock and
preferred stock issued. No cash was acquired or paid in the Merger. In September
1998, MediaOne Group returned approximately 0.1 million shares of common stock
as a purchase price adjustment.
The Merger was accounted for using the purchase method of accounting. There
were approximately $2.5 billion of identifiable intangible assets, which
primarily included FCC licenses of approximately $2.0 billion and customer lists
of approximately $0.4 billion. A deferred income tax liability of approximately
$1.0 billion was also recorded. The excess of the aggregate purchase price over
the final appraised fair value of the net assets acquired, plus the deferred
income tax liability, resulted in total goodwill of approximately $2.5 billion.
The identifiable intangible assets are amortized on a straight-line basis over
their estimated useful lives. Goodwill is amortized over 40 years.
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
losses of PrimeCo, increased interest expense for debt assumed in the Merger,
deductions for preferred stock dividends, and related income tax effects.
The unaudited pro forma results were:
<TABLE>
<CAPTION>
For the Year
Ended
December 31
(Dollars in millions, except per share amounts) 1998 1997
- ----------------------------------------------- ------ ------
<S> <C> <C>
Operating revenues.......................................... $5,542 $5,034
Net income applicable to common stockholders................ $ 570 $ 226
Net income applicable to common stockholders - per share
Basic..................................................... $ 1.00 $ 0.40
Diluted................................................... $ 0.98 $ 0.40
</TABLE>
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.
CCI MERGER
In August 1996, the Company acquired the approximately 63% of CCI's
outstanding stock that it did not already own for approximately $1.6 billion.
The merger consideration consisted of $1.04 billion in AirTouch preferred
securities, $393 million in cash, AirTouch stock options valued at approximately
$17 million, and the assumption of $217 million of Zero Coupon Convertible
Subordinated Notes Due 1999.
The Company accounted for the merger using the purchase method of
accounting and, accordingly, allocated the purchase price to the net assets
acquired based on their appraised fair values. The excess of the purchase price
over the final appraised fair values of net assets acquired was $1.1 billion.
The Company recorded the excess as goodwill and is amortizing it on a
straight-line basis over 40 years.
Had the transaction occurred at the beginning of 1996, the operating
revenues, net income applicable to common stockholders, and basic and diluted
net income applicable to common stockholders per share would have been $2.7
billion, $125 million, and $0.25 per share, respectively.
H. INTANGIBLE ASSETS
Intangible assets consisted of:
<TABLE>
<CAPTION>
December 31
---------------
(Dollars in millions) 1998 1997
- --------------------- ------ ------
<S> <C> <C>
Goodwill.................................................... $4,705 $1,926
FCC licenses................................................ 3,798 1,546
Other....................................................... 663 175
------ ------
9,166 3,647
Less: accumulated amortization.............................. 653 350
------ ------
Intangible assets, net...................................... $8,513 $3,297
====== ======
</TABLE>
Related amortization expense was $297 million, $120 million, and $56
million in 1998, 1997, and 1996, respectively. The $5.5 billion increase in
gross intangible assets from 1997 to 1998 resulted from the Merger. See Note G,
"Partnerships and Acquisitions" for additional information.
-39-
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. DEBT AND CREDIT FACILITIES
Short-Term Borrowings
At December 31, 1998, Telecel held short-term borrowings of 7.3 billion
Escudos ($43 million) under its revolving credit facilities and commercial paper
of 5.0 billion Escudos ($29 million). Borrowings under the credit facilities and
commercial paper borrowings bear interest at the Lisbon Interbank Offered Rate
("LISBOR") plus a margin. The effective interest rate of these borrowings was
3.5%. Telecel maintains various revolving credit facilities, which provide for
borrowings of up to 10.3 billion Escudos ($60 million). At December 31, 1998,
the amount available for borrowing under these revolving credit facilities was
2.9 billion Escudos ($17 million).
Long-Term Debt
Long-term debt consisted of:
<TABLE>
<CAPTION>
December 31
---------------
(Dollars in millions) 1998 1997
- --------------------- ------ ------
<S> <C> <C>
Corporate borrowings:
Revolving credit facility................................... $ 108 $ 180
Commercial paper............................................ 640 70
Notes, 6.65% due 2008 (a)................................... 499 --
Notes, 7.5% due 2006 (a).................................... 398 398
Notes, 7.125% due 2001...................................... 250 250
Notes, 7.0% due 2003........................................ 250 250
Notes, 6.35% due 2005....................................... 200 --
Eurobonds, 5.5% due 2008 (a) (b)............................ 240 --
Other....................................................... 11 30
Europolitan borrowings...................................... 101 148
Telecel borrowings.......................................... 15 55
Other foreign currency borrowings........................... 23 23
Capital leases.............................................. 11 15
------ ------
Total long-term debt.............................. 2,746 1,419
Less: current portion....................................... 45 57
------ ------
Total long-term debt, net......................... $2,701 $1,362
====== ======
</TABLE>
(a) Net of discount.
(b) The Company issued 400 million DEM of 5.5% Eurobonds and received net
proceeds of 397 million DEM ($223 million).
At December 31, 1998, annual maturities of long-term debt were:
<TABLE>
<CAPTION>
(Dollars in millions)
<S> <C>
1999........................................................ $ 45
2000........................................................ 856
2001........................................................ 253
2002........................................................ 2
2003........................................................ 250
Thereafter.................................................. 1,340
------
Total long-term debt............................... $2,746
======
</TABLE>
Corporate Borrowings
Revolving credit facility. The Company holds a $2 billion multi-currency
revolving credit facility (the "Facility") with a syndicate of banks. The
Facility expires in July 2000. Borrowings under the Facility are unsecured, bear
interest at the London Interbank Offered Rate ("LIBOR") plus a margin, which is
based on the Company's debt rating, and are available in U.S. Dollars or
selected foreign currencies. However, foreign borrowings may not exceed $300
million under the Facility. The Company pays a commitment fee, based on its
credit rating, on the unused portion of the Facility. Borrowings under the
Facility in 1998 were denominated in Deutsche Marks and the average balance
outstanding was $157 million. At December 31, 1998, the amount outstanding was
DEM 179 million ($108 million) and the weighted average Deutsche Mark interest
rate was 3.78%. At December 31, 1998, the amount available for borrowing under
the Facility was $1.25 billion. Commercial paper borrowings are supported by the
Facility and are deducted from the Facility in determining the amount available
for borrowing.
The Facility contains covenants, which, among other restrictions, prohibit
the Company with respect to mergers and acquisitions. The planned merger with
Vodafone Group Plc ("Vodafone"), see Note P, "Subsequent Event," triggered a
"change of control" violation of the Facility's covenants. The agreement has
been amended so that "change in control" occurs at the closing of the planned
merger. During the first quarter of 1999, the Company and Vodafone were in the
process of securing a credit line from a banking syndicate for funding up to $13
billion. Such funding will be used to satisfy the cash portion of the planned
merger as well as refinance existing indebtedness, support commercial paper
issuance, and provide the combined company with working capital and funding for
continued investment and general corporate purposes. Should the planned merger
be completed, it is likely that the Facility will be refinanced under this new
credit line.
At December 31, 1998, the Company was in compliance with all of its other
debt covenants.
Commercial paper. The Company's commercial paper program consists of
discounted notes that are exempt from registration under the Securities Act of
1933. Under the terms of the program, the total amount outstanding, including
all indebtedness incurred under the Facility, may not exceed $2 billion. The
Company holds A-2 and P-2 prime commercial paper ratings from Standard and
Poor's Corporation and Moody's Investor
-40-
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Service, respectively. The agencies may revise or withdraw these ratings at any
time. The Company classifies commercial paper borrowings as long-term debt
because the Facility supports these borrowings. The 1998 weighted average
interest rate of commercial paper borrowings was 5.75% and the average amount
outstanding in 1998 was $697 million.
Europolitan Borrowings
The Company's cellular subsidiary in Sweden, Europolitan Holdings AB, holds
borrowings outstanding under two long-term revolving credit facilities. One
credit agreement is a 200 million Krona ($25 million) revolving credit facility
due in December 1999 ("1999 Revolver"). Borrowings under the 1999 Revolver are
collateralized by Europolitan Holdings AB's equity shares in its wholly-owned
operating subsidiary. Borrowings under the 1999 Revolver bear interest at the
Stockholm Interbank Offered Rate plus a margin. At December 31, 1998, the
effective interest rate of the 1999 Revolver was 3.85% and the amount
outstanding was 132 million Krona ($16 million).
The second credit facility is a 1.4 billion Krona ($174 million)
multi-currency revolving credit facility (the "Europolitan Revolver") with a
syndicate of financial institutions. The Company guarantees the Europolitan
Revolver. Borrowings under the Europolitan Revolver bear interest at LIBOR plus
a margin and are due in November 2000. At December 31, 1998, the effective
interest rate of the Europolitan Revolver was 3.675% and the amount outstanding
was 680 million Krona ($85 million). The Company pays a commitment fee on the
unused portion of the Europolitan Revolver.
The planned merger with Vodafone also triggered a "change of control"
violation of the Europolitan Revolver because the Company is the guarantor. The
agreement has been amended so that "change in control" occurs at the closing of
the planned merger.
Telecel Borrowings
At December 31, 1998, Telecel held bonds due in 1999. The bonds bear
interest at LISBOR plus a margin. The interest rate of these bonds was 4.6% and
the amount outstanding was 2.5 billion Escudos ($15 million).
J. CAPITAL STOCK
Changes in equity security shares outstanding were:
<TABLE>
<CAPTION>
Class B Class C
Preferred Preferred Common
(In millions) Stock Stock Stock
- ------------- --------- --------- ------
<S> <C> <C> <C>
Shares outstanding at December 31, 1995 (a)................. -- -- 498.6
Acquisition of CCI.......................................... 17.2 11.1 --
Incentive programs and employee benefits plans.............. -- -- 3.8
Treasury stock activity (b)................................. -- -- (0.1)
---- ---- -----
Shares outstanding at December 31, 1996 (a)................. 17.2 11.1 502.3
Incentive programs and employee benefits plans.............. -- -- 3.5
Treasury stock activity (b)................................. -- -- (0.3)
---- ---- -----
Shares outstanding at December 31, 1997 (a)................. 17.2 11.1 505.5
Acquisition of MediaOne..................................... -- -- 59.4
Acquisitions, other......................................... -- -- 5.2
Incentive programs and employee benefits plans.............. -- -- 5.9
Preferred stock conversion.................................. -- (0.1) 0.1
Treasury stock activity (b)................................. -- -- (3.7)
---- ---- -----
SHARES OUTSTANDING AT
DECEMBER 31, 1998 (a)....................................... 17.2 11.0 572.4
==== ==== =====
</TABLE>
(a) In addition to the common shares outstanding, a subsidiary of the Company
owns 122,960 shares of its common stock; because the accounting treatment
for subsidiary-held shares is similar to that for treasury stock, the
subsidiary-held shares are not considered outstanding.
(b) Treasury share additions from the stock repurchase program and incentive
plan forfeitures, net of shares reissued under incentive programs.
Preferred Stock
Preferred Stock Dividends were:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
- --------------------- ---- ---- ----
<S> <C> <C> <C>
Preferred stock:
Class B..................................................... $ 30 $30 $11
Class C..................................................... 23 24 9
Class D..................................................... 32 -- --
Class E..................................................... 32 -- --
---- --- ---
Total preferred dividends......................... $117 $54 $20
==== === ===
</TABLE>
In connection with the acquisition of CCI described in Note G, the
Company's Board of Directors authorized 19 million shares of 6.00% Class B
Mandatorily Convertible Preferred Stock, Series 1996 ("Class B Preferred") and
13 million shares of 4.25% Class C Convertible Preferred Stock, Series 1996
("Class C Preferred"). Holders of Classes B and C Preferred receive cumulative
annual dividends of $1.74 and $2.125 per share, respectively, payable quarterly
in arrears.
-41-
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each share of the Class B Preferred mandatorily converts into Company
common stock on August 16, 1999 (or earlier in the case of certain mergers,
reorganizations, or asset sales). Each share of Class B Preferred mandatorily
converts into between 0.806 and one share of Company common stock, depending on
the common stock trading price at the time of conversion. Each Class B Preferred
share is also convertible at the option of the holder, at any time, into 0.806
of a share of Company common stock. Class B Preferred shares are not redeemable
by the Company.
In the event of liquidation, whether voluntary or involuntary, the holders
of Class B Preferred will receive $29.00 per share and all accrued and unpaid
dividends. The holders of Class B Preferred vote together with the common
stockholders, on the basis of four-fifths of a vote for each share held.
The Class C Preferred will mature on August 16, 2016, and the holders will
receive $50.00 per share and all accrued and unpaid dividends. Class C Preferred
shares are convertible, at the option of the holder, into 1.379 shares of the
Company's common stock. After August 16, 1999, the Company may convert the Class
C Preferred into shares of its common stock, if the common stock meets certain
minimum closing price requirements. After August 16, 2006, the Company may
redeem the Class C Preferred for cash or common stock. Therefore, for financial
reporting purposes, these shares are not considered to be mandatorily
redeemable.
In the event of liquidation, whether voluntary or involuntary, the holders
of Class C Preferred are entitled to receive $50.00 per share and all accrued
and unpaid dividends. The holders of Class C Preferred are not entitled to vote
unless their dividends are in arrears and unpaid for six quarterly dividend
periods, in which case holders may vote for the election of two directors.
Redeemable Preferred Stock
In connection with the acquisition of the U.S. cellular properties and the
additional 25% interest in PrimeCo of MediaOne Group, the Company issued 825,000
shares of 5.143% Class D Cumulative Preferred Stock, Series 1998 ("Class D
Preferred") and 825,000 shares of 5.143% Class E Cumulative Preferred Stock,
Series 1998 ("Class E Preferred"). These shares do not have any conversion
rights.
Holders of the Classes D and E Preferred receive cumulative annual
dividends of $51.43 per share, payable quarterly in arrears. The holders of
Classes D and E Preferred have similar voting rights as the holders of Class C
Preferred in the event that the Company fails to pay dividends.
The aggregate redemption value of the Classes D and E Preferred was $1.65
billion. The maturity date of the Class D Preferred is April 6, 2020, and the
Company may redeem it, in whole or in part, after April 7, 2018. The maturity
date of the Class E Preferred is April 7, 2018, with no early redemption. The
redemption price for the Classes D and E Preferred was $1,000 per share and all
accrued and unpaid dividends. In the event of the liquidation or dissolution of
the Company, holders of the Classes D and E Preferred would receive $1,000 per
share and all accrued and unpaid dividends.
The Classes D and E Preferred were reported on the Consolidated Balance
Sheet at their fair values 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 is being amortized and is reported as
incremental preferred dividends, using the interest method, over the maturity
periods of the Classes D and E Preferred.
Stock Repurchase and Put Options
In October 1997, the Company's Board of Directors authorized the repurchase
of up to $1 billion of Company common and preferred stock. Accordingly, based on
market conditions, the Company buys its shares on the open market. As of
December 31, 1998, the Company had repurchased 3.2 million common shares under
this program for $170 million.
In connection with the share repurchase program, the Company sold put
options, which give the purchaser the right to sell shares of the Company's
common stock to the Company at specified prices. The put option contracts allow
the Company to determine the method of settlement. In 1998, the Company received
$22.6 million in net proceeds from the sale of put options. At December 31,
1998, there were 3.6 million shares outstanding under put options, with strike
prices ranging from $51.39 to $55.86. The contracts mature from May 1999 through
February 2000.
-42-
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stockholder Rights Plan
The Company's stockholder rights plan provides for the distribution to
common stockholders of rights to purchase Series A Participating Preferred
Stock. These rights are only exercisable in certain circumstances where a party
acquires or attempts to acquire 10% or more of the Company's common stock. The
rights are not currently exercisable.
K. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The Company has reserved 56 million shares of common stock for its
Long-Term Stock Incentive Plan (the "Plan"). Awards to eligible employees under
the Plan may take the form of incentive ("ISOs") or non-qualified ("NSOs") stock
options, stock appreciation rights ("SARs"), restricted stock, stock units, or a
combination of these forms. The options granted to date have a term of up to ten
years and generally vest over three to four years of continuous employment. Some
of the options require that certain stock performance conditions be met before
vesting.
The Plan requires that the exercise price equals the fair market value of
the stock at the grant date for ISOs and allows the discretion of the Company
for NSOs. The exercise price may be paid in cash or stock. The Company may
settle SARs in cash or stock at its discretion. The settlement of SARs issued in
conjunction with NSOs requires the related unexercised NSOs to be canceled.
Restricted stock is held in escrow until the vesting provisions are satisfied,
although such shares have full voting and other rights. Stock units represent
shares of common stock. Holders of stock units are not required to pay for such
units and have no voting or other rights as a stockholder. Although the Company
does not currently pay dividends on its common stock, stock units may have
dividend rights at the Company's discretion. Settlement of stock unit awards may
be in cash, shares, or a combination at the Company's discretion.
In February 1998, the Company's Board of Directors approved a new
restricted stock incentive program for employees not eligible to receive stock
options. The program provided for vesting at the earlier of certain targets
related to the Company's common stock price or proportionate operating cash flow
or March 2, 2005. The Company issued approximately 702,250 shares under this
award in March and May of 1998. Shares under this program became vested on
January 14, 1999, when the target related to the Company's common stock price
was met.
For the following pro forma disclosures required by SFAS No. 123,
"Accounting for Stock Based Compensation," the estimated fair value of options
is amortized to expense over the option's vesting period. The Company uses the
Black-Scholes option valuation model to estimate the fair value of each option
grant on the date of grant. The Black-Scholes model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. The model requires the input of highly subjective
assumptions including expected stock price volatility, which is subject to
change. For this reason, and because the fair value-based method of accounting
established by SFAS No. 123 has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation costs are not necessarily
indicative of future costs.
The following pro forma information has been prepared as if the Company had
accounted for its employee stock options using the fair value-based method of
accounting established by SFAS No. 123:
<TABLE>
<CAPTION>
For the Year Ended
December 31
(Dollars in millions, except per share amounts) 1998 1997 1996
- ----------------------------------------------- ----- ----- -----
<S> <C> <C> <C>
Net income applicable to common stockholders:
As reported............................................... $ 608 $ 394 $ 179
Pro forma (a)............................................. $ 536 $ 357 $ 154
Net income applicable to common stockholders - per share
Basic:
As reported............................................... $1.09 $0.78 $0.36
Pro forma (a)............................................. $0.96 $0.71 $0.31
Diluted:
As reported............................................... $1.07 $0.78 $0.36
Pro forma (a)............................................. $0.96 $0.71 $0.31
</TABLE>
(a) Based on the following assumptions for grants in 1998, 1997, and 1996,
respectively: risk-free weighted average interest rates of 5.5%, 6.2%, and
6.0%; volatility factors of the expected market price of the Company's
common stock of 30.3%, 29.8%, and 29.0%; and weighted average expected
option lives of 4.2 years, 4.9 years, and 4.3 years.
-43-
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total compensation recognized under APB No. 25, "Accounting for Stock
Issued to Employees," was $38 million, $21 million, and $11 million for 1998,
1997, and 1996, respectively.
There were 9 million shares available for future employee awards at
December 31, 1998. Summary employee award activity was:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year... 21,035,283 $27.07 21,377,935 $27.62 12,618,329 $25.63
Stock options granted............ 21,580,104 $50.23 2,746,983 $26.29 10,176,998 $29.48
Restricted stock granted......... 734,718 -- 79,237 -- 813,210 --
Stock units granted.............. 3,965 -- 418,333 -- 59,532 --
Options exercised................ (3,674,175) $25.38 (2,018,949) $22.07 (585,251) $16.26
Awards forfeited................. (1,208,026) $39.74 (1,458,410) $32.52 (645,387) $28.61
Restricted stock issued.......... (734,529) -- (79,397) -- (1,012,346) --
Stock units issued............... (21,043) -- (30,449) -- (47,150) --
--------------------------------------------------------------------
Outstanding, end of year......... 37,716,297 $40.11 21,035,283 $27.07 21,377,935 $27.62
====================================================================
Options exercisable.............. 10,788,871 $26.90 9,053,724 $25.75 5,822,319 $23.27
</TABLE>
Summary information concerning outstanding and exercisable employee stock
awards at December 31, 1998, was:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$00.00 - $ 00.00(a) 427,615 8.07 yrs $00.00 -- $00.00
$17.47 - $ 30.25 13,658,901 4.45 yrs $25.83 9,622,125 $26.01
$30.50 - $ 48.19 2,543,338 6.57 yrs $38.50 1,105,497 $33.36
$49.31 - $ 59.85 21,086,443 6.36 yrs $50.36 61,249 $49.88
---------- ----------
37,716,297 10,788,871
========== ==========
</TABLE>
(a) Relates to stock units granted under a fixed plan, which does not require
the holders to pay for such units.
Exercise prices of some options differ from the market price of the stock
on the grant date. The following table summarizes options on the grant date
using the Black-Scholes model:
<TABLE>
<CAPTION>
Exercise Price Exercise Price Exercise Price
Equal to Greater Than Less Than
Market Price (a) Market Price (a) Market Price (a)
---------------- ---------------- ----------------
<S> <C> <C> <C>
1998
Options granted.................................. 21,580,104 -- --
Weighted average exercise price.................. $ 50.23 -- --
Weighted average fair value...................... $ 16.52 -- --
1997
Options granted.................................. 2,746,983 -- --
Weighted average exercise price.................. $ 26.29 -- --
Weighted average fair value...................... $ 9.59 -- --
1996
Options granted.................................. 8,503,618 1,673,380 --
Weighted average exercise price.................. $ 26.13 $ 46.52 --
Weighted average fair value...................... $ 7.79 $ 8.62 --
</TABLE>
(a) Represents the closing market price of the Company's common stock as quoted
on the grant date.
-44-
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Company's acquisition of CCI described in Note G,
"Partnerships and Acquisition," options to purchase CCI stock were converted
into options to purchase 1,924,001 shares of Company common stock (the "CCI
Options"). At the time of conversion, the CCI Options had a weighted average
exercise price of $20.24 per share and a weighted average fair value of $8.59
per share. There were 197,751 CCI Options outstanding and exercisable at
December 31, 1998.
The Company also has reserved 2.4 million shares of common stock for its
Employee Stock Purchase Plan ("ESPP"). The ESPP provides employees with the
opportunity to share in the success of the Company by purchasing stock on
favorable terms and paying for such purchases through payroll deductions. Stock
purchases under the ESPP were 434,522 shares, 580,953 shares, and 429,981 shares
for 1998, 1997, and 1996, respectively. The estimated weighted average fair
value of the ESPP purchases was $11.94 per share in 1998, $5.88 per share in
1997, and $5.78 per share in 1996. The Company based its estimates on the
Black-Scholes model using the following assumptions for 1998, 1997, and 1996,
respectively: risk-free weighted average interest rates of 4.8%, 5.5%, and 5.1%,
volatility factors of the expected market price of the Company's common stock of
35.7%, 33.9%, and 29.7%, and an expected life of 90 days for each of the three
years.
L. INCOME TAXES
The components of income tax expense for each of the three years ended
December 31 were:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
- --------------------- ---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................... $178 $ 80 $ 90
State and other taxes..................................... 64 57 26
Foreign................................................... 53 54 --
------------------
Total current..................................... 295 191 116
------------------
Deferred:
Federal................................................... (13) 78 49
State and other taxes..................................... 4 (8) --
Foreign................................................... 30 5 (16)
------------------
Total deferred.................................... 21 75 33
------------------
Total income taxes................................ $316 $266 $149
==================
</TABLE>
The domestic and foreign components of income (loss) before income taxes
and preferred dividends presented below for each of the three years ended
December 31, are on a legal entity basis and are not the same as the reporting
segments presented in Note Q, "Segment Information".
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
- --------------------- ------ ---- ----
<S> <C> <C> <C>
U.S. operations............................................. $ 441 $423 $405
International operations.................................... 600 291 (57)
--------------------
Income before income taxes and preferred dividends.......... $1,041 $714 $348
====================
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
were:
<TABLE>
<CAPTION>
December 31
-------------
(Dollars in millions) 1998 1997
- --------------------- ------ ----
<S> <C> <C>
Deferred tax liabilities:
Amortization.............................................. $1,495 $474
Depreciation.............................................. 264 192
Investments in U.S. partnerships.......................... 92 79
Capitalized interest...................................... 25 21
Unrealized gains.......................................... 15 28
Foreign tax liabilities in consolidated subsidiaries...... 13 --
Other..................................................... 5 7
------ ----
Total............................................. 1,909 801
------ ----
Deferred tax assets:
Accruals deductible when paid............................. 54 22
Accounts receivable....................................... 19 19
Currency translation adjustment........................... 15 34
Other..................................................... 3 33
Foreign tax benefits in consolidated subsidiaries......... -- 20
------ ----
Total............................................. 91 128
Less: valuation allowance................................... 3 7
------ ----
Total, net........................................ 88 121
------ ----
Total deferred taxes recorded in Consolidated
Balance Sheets.................................... $1,821 $680
------ ----
Current..................................................... $ (18) $(17)
Noncurrent.................................................. 1,839 697
------ ----
Net deferred tax liabilities................................ $1,821 $680
====== ====
</TABLE>
The Company believes it is more likely than not that it will generate
future taxable income sufficient to fully realize future benefits from the net
deferred tax assets of $88 million.
At December 31, 1998, the Company had $7 million in net operating loss
carryforwards for foreign tax
-45-
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reporting purposes, substantially all of which may be carried forward
indefinitely.
The differences each year between the statutory federal income tax rate and
the effective income tax rate were:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
Equity in net income (loss) of certain unconsolidated
wireless systems...................................... (14.7) (9.8) (0.2)
State income taxes, net of federal tax benefit......... 4.3 4.3 4.3
Nondeductible amortization............................. 3.7 2.1 3.2
Tax impact of foreign income........................... 2.3 3.8 (0.9)
Other.................................................. (0.2) 1.9 1.5
----- ---- ----
Effective income tax rate................................... 30.4% 37.3% 42.9%
===== ==== ====
</TABLE>
At December 31, 1998, $93 million of deferred tax liabilities, related to
$780 million of cumulative unrepatriated earnings from the Company's
international interests, were excluded from recognition under SFAS No. 109,
"Accounting for Income Taxes," because such earnings are intended to be
reinvested indefinitely.
For the years ended December 31, 1998 and 1997, consolidated net deferred
tax liabilities increased $19 million, and decreased $27 million, respectively,
due to amounts recorded directly to the CTA account. For the years ended
December 31, 1998 and 1997, consolidated net deferred tax liabilities decreased
$1 million and increased $5 million, respectively, due to amounts recorded
directly to other components of stockholders' equity.
M. EMPLOYEE BENEFITS
Defined Contribution Plan
The Company sponsors a defined contribution plan (the "Retirement Plan"),
which covers substantially all full-time employees. The Company bases its
contributions to the Retirement Plan on a percentage of pay and on matching a
portion of employee contributions. The related expense was $39 million, $30
million, and $24 million in 1998, 1997, and 1996, respectively.
Defined Benefit Pension Plan and Other Post Retirement Benefits
The Company maintains defined benefit plans (the "Pension Plans").
Individuals who were employees at December 31, 1986, and transferees from
Pacific Telesis Group, receive pension, death, and survivor benefits based on a
percentage of their final five-year average pay and years of service. In 1986,
the Company discontinued the accrual of service credit for Pension Plan
participants. Thus, pension benefits only increase as a participant's
compensation increases. The Pension Plans' assets are primarily composed of
mutual and index funds.
The Company provides medical and dental benefits for eligible retired
employees and their eligible dependents and also provides life insurance
benefits to eligible retired employees (the "Postretirement Plan"). The Company
retains the right, subject to existing agreements and applicable legal
requirements, to amend or eliminate these postretirement benefits. The accrued
postretirement benefit obligation, which is principally unfunded, was recorded
in the Company's Consolidated Balance Sheets.
In 1998, the Merger included the assumption of MediaOne Group's pension and
postretirement benefit plans' obligations.
-46-
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The plans' assets and obligations were:
<TABLE>
<CAPTION>
Defined Benefit Other Postretirement
Pension Plans Benefits
------------------- ---------------------
(Dollars in millions) 1998 1997 1996 1998 1997 1996
- --------------------- ----- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
CHANGES IN BENEFIT OBLIGATION:
Benefit obligation at January 1........................ $ 54 $ 52 $ 52 $ 20 $ 13 $ 15
Service cost........................................... -- -- -- 3 2 1
Interest cost.......................................... 5 4 4 1 1 1
Amendments............................................. -- -- 1 -- 2 --
Actuarial (gain) loss.................................. 17 6 -- 2 2 (4)
MediaOne Group merger.................................. 36 -- -- 7 -- --
Benefits paid.......................................... (4) (8) (5) -- -- --
----- ---- ---- ---- ---- ----
Benefit obligation at December 31...................... $ 108 $ 54 $ 52 $ 33 $ 20 $ 13
===== ==== ==== ==== ==== ====
CHANGES IN PLANS' ASSETS:
Fair value of assets at January 1...................... $ 117 $ 99 $ 90 $ -- $ -- $ --
Actual return on plans' assets......................... 24 22 13 -- -- --
MediaOne Group merger.................................. 19 -- -- -- -- --
Employer contributions................................. -- 4 1 -- -- --
----- ---- ---- ---- ---- ----
Benefits paid.......................................... (4) (8) (5) -- -- --
----- ---- ---- ---- ---- ----
Fair value of assets at December 31.................... $ 156 $117 $ 99 $ -- $ -- $ --
===== ==== ==== ==== ==== ====
FUNDED STATUS
Benefit obligation..................................... $(108) $(54) $(52) $(33) $(20) $(13)
Fair value of plans' assets............................ 156 117 99 -- -- --
Unrecognized transition obligation (asset)............. (2) (3) (4) -- -- --
Unamortized prior service cost......................... (1) (1) (1) 2 2 --
Unrecognized net actuarial (gain) loss................. (19) (23) (13) (1) (3) (5)
----- ---- ---- ---- ---- ----
Prepaid (accrued) benefit cost......................... $ 26 $ 36 $ 29 $(32) $(21) $(18)
===== ==== ==== ==== ==== ====
WEIGHTED-AVERAGE ACTUARIAL ASSUMPTIONS:
Discount rate:
Net periodic cost...................................... 7.0% 7.8% 7.3% 7.0% 7.8% 7.3%
Benefit obligation..................................... 6.5% 7.0% 7.8% 6.5% 7.0% 7.8%
Rate of compensation increase.......................... 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
Expected long-term return on plan assets............... 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost........................................... $ 1 $ -- $ -- $ 3 $ 2 $ 1
Interest cost.......................................... 5 4 4 2 1 1
Expected return on plans' assets....................... (10) (8) (7) -- -- --
Amortization of transition obligation (asset).......... (1) -- (1) -- -- --
Amortization of unrecognized prior service cost........ 17 -- -- 7 -- --
Amortization of unrecognized net (gains) losses........ (1) -- 1 -- -- --
Recognized settlement (gain) loss...................... -- 1 -- -- -- --
----- ---- ---- ---- ---- ----
Net periodic benefit cost (income)..................... $ 11 $ (3) $ (3) $ 12 $ 3 $ 2
===== ==== ==== ==== ==== ====
</TABLE>
-47-
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimates of the other postretirement benefits also include an
escalation factor for anticipated increases in health care costs. The escalation
rate was 7.0% in 1998 and decreases to 5.0% by 2002; it remains at that level
thereafter. A one-percentage-point change in health care cost trend rates would
have the following effects:
<TABLE>
<CAPTION>
1% 1%
(Dollars in millions) Increase Decrease
- --------------------- -------- --------
<S> <C> <C>
Effect on total service and interest cost components........ $ 969 $ (742)
Effect on postretirement benefit obligation................. $6,372 $(4,938)
</TABLE>
N. COMMITMENTS AND CONTINGENCIES
CONTINGENCIES
The Company is 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. The plaintiffs are alleging price fixing in the Los
Angeles cellular market. In 1994, a parallel class action complaint, filed in
Orange County Superior Court, was stayed pending the resolution of the 1993
case. In 1997, the Court approved a settlement of the 1993 case. Three
plaintiffs have filed an appeal challenging the adequacy of the settlement.
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. A settlement of the federal court
case was approved on November 28, 1998. 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
consolidated and the court approved a settlement of the case in 1998. One
plaintiff has filed an appeal. The Company believes that the ultimate outcome of
these matters, in the aggregate, will not have a material adverse impact on its
financial position or results of operations.
In July 1998, customers filed a complaint in Sacramento County Superior
Court against the Company and other cellular and PCS carriers challenging the
legality of certain billing practices and claiming that the practices are not
adequately disclosed in the California markets. This case was subsequently
dismissed with prejudice. The plaintiffs have filed a notice of appeal. In
August 1998, a complaint was filed against PrimeCo, an unconsolidated subsidiary
of the Company, in the Cook County Chancery Court. The plaintiffs are
challenging the legality of certain billing practices and claiming that the
practices are not adequately disclosed. The plaintiffs are seeking an
unspecified amount of monetary damages and revisions of PrimeCo's billing
practices. Also, in August 1998, a second complaint was filed against PrimeCo in
the Cook County Chancery Court alleging certain deficiencies in PrimeCo's
network performance. The plaintiffs are seeking an unspecified amount of
monetary damages. These cases are in the preliminary phase. The Company is not
currently able to assess the impact, if any, of these cases on its financial
position or results of operations.
In December 1998, a complaint was filed against the Company and other
cellular service providers in the Sacramento County Superior Court on behalf of
all individuals subscribing to service in the Sacramento area. The plaintiffs
claim that the defendants conspired to fix prices for cellular services. The
plaintiffs are seeking injunctive relief and damages in excess of $100 million.
This case is in the preliminary phase and the Company is not currently able to
assess the impact, if any, of this case on its financial position or results of
operations.
On January 6, 1999, a class action was filed against the Company in Federal
Court for the Central District of California alleging claims under Section 10(b)
and 20(a) of the Securities Exchange Act, 15 U.S.C. 78j and 78t and Rule 10b-5.
The action was filed on behalf of individuals who sold AirTouch common stock or
call options or purchased put options on January 4, 1999. The plaintiffs claim
the Company's press release of January 3, 1999, was false and misleading because
it confirmed the Company was in merger discussions with Bell Atlantic but did
not disclose that it was in discussions with Vodafone. This case is in the
preliminary phase and the Company is not currently able to assess the impact, if
any, on its financial position or results of operations.
Bell Atlantic filed an action against the Company on January 15, 1999, in
the Federal District Court for the Northern District of California seeking an
injunction to void clauses of the TOMCOM, L.P. and PrimeCo partnership
agreements which restrict the partners' ability to compete against the
partnerships. The Company has filed a counterclaim against Bell Atlantic for
violations of the partnership agreements. The case is in the preliminary phase
and the Company is not currently able to assess the impact, if any, on its
financial position or results of operations.
-48-
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is party to various other legal proceedings in the ordinary
course of business. The Company believes that the ultimate outcome of these
matters will not have a material adverse impact on its financial position or
results of operations.
Lease Commitments
The Company leases various facilities and equipment under noncancelable
lease arrangements. Most leases contain renewal options for varying periods.
Related rent expense was $107 million, $83 million, and $76 million in 1998,
1997, and 1996, respectively.
At December 31, 1998, future minimum lease payments under noncancelable
operating leases with an initial term of one year or more were:
<TABLE>
<CAPTION>
(Dollars in millions)
- ---------------------
<S> <C>
1999........................................................ $109
2000........................................................ 92
2001........................................................ 66
2002........................................................ 48
2003........................................................ 34
Thereafter.................................................. 160
----
Total minimum lease payments...................... $509
====
</TABLE>
Other Commitments
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 December 31, 1998, the
Company's proportionate share under such arrangements was $223 million. The
Company believes it is remote that it will be required to pay under these
various arrangements.
At December 31, 1998, the Company was committed to spend $323 million for
the acquisition of property, plant, and equipment and purchases of cellular
equipment and other items. In February 1999, the Company signed a multi-year
$500 million contract with Nortel Networks to expand and upgrade its digital
cellular networks.
O. OTHER CURRENT LIABILITIES
Other current liabilities consisted of:
<TABLE>
<CAPTION>
December 31
-----------
(Dollars in millions) 1998 1997
- --------------------- ---- ----
<S> <C> <C>
Accrued liabilities......................................... $199 $110
Taxes payable............................................... 198 78
Accrued compensation and benefits........................... 154 138
Advanced billing and customer deposits...................... 142 77
Interest and dividends payable.............................. 86 48
Accrued expenses............................................ 64 161
Other accounts payable...................................... 48 28
Other....................................................... 34 35
---- ----
Total current liabilities......................... $925 $675
==== ====
</TABLE>
P. SUBSEQUENT EVENT
VODAFONE MERGER
On January 15, 1999, AirTouch Communications and Vodafone announced a
definitive agreement to merge. Under the terms of the definitive agreement,
which has been unanimously approved by each company's Board of Directors, owners
of AirTouch common stock will be entitled to receive five Vodafone ordinary
shares in the form of 0.5 of a Vodafone American Depository share and $9.00 in
cash, without interest, for each share of AirTouch common stock held at closing,
subject to rebalancing between stock and cash under certain circumstances.
The merger is subject to the approval of the stockholders of Vodafone and
AirTouch, customary government and regulatory authority approvals, and the
receipt of opinions from tax counsel that the stock portion of the merger
consideration will be tax-free to the U.S. holders of AirTouch common stock. The
merger is expected to close in the third quarter of 1999.
-49-
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Q. SEGMENT INFORMATION
The Company is organized on the basis of geography, products, and services.
The Company's segments are strategic business units that offer different
products and services in the same geographic location or similar products and
services in different geographic locations. Based on management's perspective,
the Company's reportable segments are U.S. Cellular Operations, U.S. Paging
Operations, and International Operations. U.S. Cellular and U.S. Paging
Operations provide wireless telecommunication services in the United States.
International Operations provide wireless telecommunication services in Europe,
Asia, and North Africa.
The Company's business segment information was:
<TABLE>
<CAPTION>
U.S. (a) U.S. (b) Corporate
Cellular International Paging and Total
(Dollars in millions) Operations Operations Operations Other (c) Company
- --------------------- ---------- ------------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
1998
Operating revenues............................. $ 3,736 $1,024 $419 $ 2 $ 5,181
Operating expenses before depreciation and
amortization................................. 2,185 674 296 130 3,285
Depreciation and amortization expenses......... 748 112 80 10 950
--------------------------------------------------------------
Operating income (loss)........................ 803 238 43 (138) 946
Equity in net income (loss) of unconsolidated
wireless systems............................. (41) 434 -- -- 393
Minority interests in net income of
consolidated wireless systems................ (81) (98) -- -- (179)
Interest expense............................... (74) (19) (1) (51) (145)
Interest income................................ 21 2 -- -- 23
Other.......................................... (7) 4 -- 6 3
--------------------------------------------------------------
Income before income taxes and preferred
dividends.................................... 621 561 42 (183) 1,041
Income taxes................................... 295 78 19 (76) 316
--------------------------------------------------------------
Income before preferred dividends.............. 326 483 23 (107) 725
Preferred dividends............................ -- -- -- 117 117
--------------------------------------------------------------
Net Income applicable to common stockholders... $ 326 $ 483 $ 23 $(224) $ 608
==============================================================
Capital expenditures for property, plant, and
equipment.................................... $ 727 $ 234 $ 82 $ 41 $ 1,084
Investments in unconsolidated wireless
systems...................................... $ 1,814 $1,636 $ -- $ 41 $ 3,491
Total assets at year end............. $13,949 $3,104 $477 $ 23 $17,553
--------------------------------------------------------------
1997
Operating revenues (d)......................... $ 2,476 $ 751 $369 $ (2) $ 3,594
Operating expenses before depreciation and
amortization................................. 1,452 551 261 75 2,339
Depreciation and amortization expenses......... 381 85 74 9 549
--------------------------------------------------------------
Operating income (loss)........................ 643 115 34 (86) 706
Equity in net income (loss) of unconsolidated
wireless systems............................. 1 199 -- -- 200
Minority interests in net income of
consolidated wireless systems................ (70) (49) -- -- (119)
Interest expense............................... (54) (24) (2) (10) (90)
Interest income................................ 16 2 -- -- 18
Other.......................................... (9) 9 -- (1) (1)
--------------------------------------------------------------
Income before income taxes and preferred
dividends.................................... 527 252 32 (97) 714
Income taxes................................... 227 42 13 (16) 266
--------------------------------------------------------------
Income before preferred dividends.............. 300 210 19 (81) 448
Preferred dividends............................ -- -- -- 54 54
Net Income applicable to common stockholders... $ 300 $ 210 $ 19 $(135) $ 394
Capital expenditures for property, plant, and
equipment.................................... $ 466 $ 182 $ 67 $ 14 $ 729
==============================================================
Investments in unconsolidated wireless
systems...................................... $ 819 $1,248 $ 1 $ -- $ 2,068
Total assets at year end............. $ 6,084 $2,489 $470 $ (73) $ 8,970
--------------------------------------------------------------
</TABLE>
(Table continues on page 50.)
-50-
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
U.S. (a) U.S. (b) Corporate
Cellular International Paging and Total
(Dollars in millions) Operations Operations Operations Other (c) Company
- --------------------- ---------- ------------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
1996
Operating revenues............................. $ 1,694 $ 212 $343 $ 3 $ 2,252
Operating expenses before depreciation and
amortization................................. 1,055 239 255 71 1,620
Depreciation and amortization expenses......... 240 34 64 13 351
--------------------------------------------------------------
Operating income (loss)........................ 399 (61) 24 (81) 281
Equity in net income (loss) of unconsolidated
wireless systems............................. 151 (18) -- -- 133
Minority interests in net income of
consolidated wireless systems................ (71) (24) -- -- (95)
Interest expense............................... (49) (25) (2) 24 (52)
Interest income................................ 9 3 -- 2 14
Other.......................................... (2) 69 (1) 1 67
--------------------------------------------------------------
Income before income taxes and preferred
dividends.................................... 437 (56) 21 (54) 348
Income taxes................................... 179 (26) 9 (13) 149
--------------------------------------------------------------
Income before preferred dividends.............. 258 (30) 12 (41) 199
Preferred dividends............................ -- -- -- 20 20
--------------------------------------------------------------
Net Income applicable to common stockholders... $ 258 $ (30) $ 12 $ (61) $ 179
==============================================================
Capital expenditures for property, plant, and
equipment.................................... $ 340 $ 89 $ 98 $ 21 $ 548
Investments in unconsolidated wireless
systems...................................... $ 711 $1,281 $ -- $ -- $ 1,992
Total assets at year end............. $ 5,636 $2,320 $498 $ 70 $ 8,524
--------------------------------------------------------------
</TABLE>
(a) U.S. Cellular Operations include the Company's equity earnings of and
investment in PrimeCo.
(b) U.S. Paging Operations, which are wholly owned by the Company, include
operations in Canada.
(c) Includes intercompany eliminations, primarily for interest and intercompany
accounts receivable and payable.
(d) U.S. Paging Operations' revenues include intercompany sales of $1 million.
Selected consolidated financial data for the Company's domestic and foreign
operations is presented below. Operating revenues represent sales to
unaffiliated customers; there were no sales or transfers between domestic and
foreign operations. Assets maintained for general corporate purposes are
included with U.S. operations.
<TABLE>
<CAPTION>
International Operations
-----------------------------------
U.S. Telecel Europolitan
(Dollars in millions) Operations Portugal (a) Sweden Other Total
- --------------------- ---------- ------------ ----------- ------ -------
<S> <C> <C> <C> <C> <C>
1998
Operating revenues........................... $ 4,157 $641 $383 $ -- $ 5,181
Investments in unconsolidated wireless
systems.................................... $ 1,855 $ -- $ -- $1,636 $ 3,491
Property, plant, and equipment, net and
intangible assets, net..................... $11,714 $450 $396 $ 2 $12,562
---------------------------------------------------------
1997
Operating revenues........................... $ 2,843 $478 $273 $ -- $ 3,594
Investments in unconsolidated wireless
systems.................................... $ 820 $ (2) $ -- $1,250 $ 2,068
Property, plant, and equipment, net and
intangible assets, net..................... $ 5,134 $321 $374 $ 7 $ 5,836
---------------------------------------------------------
1996
Operating revenues........................... $ 2,040 $ -- $200 $ 12 $ 2,252
Investments in unconsolidated wireless
systems.................................... $ 711 $ 4 $ -- $1,277 $ 1,992
Property, plant, and equipment, net and
intangible assets, net..................... $ 5,035 $307 $385 $ 4 $ 5,731
---------------------------------------------------------
</TABLE>
(a) In December 1996, the Company consolidated Telecel's balance sheet,
subsequent to acquiring a controlling interest. Telecel's operating results
and cash flows were included beginning in 1997.
-51-
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in millions, except per share amounts) First Second (a) Third Fourth
- ----------------------------------------------- ----- ---------- ------ ------
<S> <C> <C> <C> <C>
1998
Operating revenues.......................................... $ 958 $1,348 $1,421 $1,454
Operating income............................................ $ 234 $ 286 $ 316 $ 110
Income before preferred dividends........................... $ 167 $ 180 $ 213 $ 165
Preferred dividends......................................... $ 14 $ 33 $ 35 $ 35
Net income applicable to common stockholders................ $ 153 $ 147 $ 178 $ 130
Net income applicable to common stockholders - per share:
Basic....................................................... $0.30 $ 0.26 $ 0.31 $ 0.23
Diluted..................................................... $0.30 $ 0.25 $ 0.30 $ 0.22
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
1997
Operating revenues.......................................... $ 836 $ 901 $ 916 $ 941
Operating income............................................ $ 208 $ 199 $ 215 $ 84
Income before preferred dividends........................... $ 77 $ 119 $ 141 $ 111
Preferred dividends......................................... $ 13 $ 13 $ 14 $ 14
Net income applicable to common stockholders................ $ 64 $ 106 $ 127 $ 97
Net income applicable to common stockholders - per share:
Basic....................................................... $0.13 $0.21 $0.25 $0.19
Diluted..................................................... $0.13 $0.21 $0.25 $0.19
</TABLE>
(a) Operating revenues, operating income, and preferred dividends increased in
the second quarter due to the MediaOne Group merger. See Note G,
"Partnerships and Acquisitions" for additional information.
-52-
<PAGE> 53
SELECTED PROPORTIONATE FINANCIAL DATA
NON GAAP SUPPLEMENTAL PROPORTIONATE FINANCIAL DATA
The following table is presented on a proportionate basis. Proportionate
presentation is not permitted by generally accepted accounting principles
("GAAP") and is not intended to replace the consolidated operating results
prepared and presented in accordance with GAAP. However, since significant
wireless systems in which the Company has an interest 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.
GAAP requires consolidation of wireless systems controlled by the Company
and the equity method of accounting for wireless systems in which the Company
has significant influence but not a controlling interest. 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. Proportionate results are calculated by multiplying the Company's
ownership interest in each wireless system by each system's total operating
results, and accordingly should not be compared with GAAP consolidated results
of any company.
Net income under either GAAP or proportionate presentation is the same.
Proportionately reported amounts include results from the Company's equity
investees, which the Company does not control. The Company does not have
control over the revenues, expenses or cash flows of its equity investees that
are reported in proportionate results and is only entitled to cash from
dividends received from these entities. The Company does not own the underlying
assets of its equity investees.
A list of the Company's equity investments and its ownership interests is
set forth in Note F, "Investments in Unconsolidated Wireless Systems," to the
Company's Consolidated Financial Statements for the year ended December 31,
1998. In the United States, the Company is a joint and equal owner with AT&T in
CMT Partners and with Bell Atlantic in PrimeCo, the Company's most significant
U.S. equity investments. Internationally, the degree of control of the
Company's equity investees varies from venture to venture. Although the Company
generally has significant contractual governance rights over these entities, it
does not control them. No person owns a majority of any of the Company's
international equity investees, with the exception of its investment in Germany,
where Mannesmann AG is the majority owner; Italy, where Omnitel Sistemi
Radiocellulari Italiani is the indirect majority owner; Belgium, where Belgacom
is the majority owner; Romania, where Telesystem International Wireless is the
majority owner; and India, where RPG Enterprises is the majority owner. In each
of those investees, the Company, or in the case of Italy, the Company's
majority-owned venture, has significant contractual rights regarding approval of
the business plan, which governs capital investments and use of cash flows.
<TABLE>
<CAPTION>
For the Year Ended
December 31
------------------------
(Dollars in millions) 1998 1997 1996
- --------------------- ------ ------ ------
<S> <C> <C> <C>
TOTAL COMPANY (a)
Service and other revenues.................................. $7,204 $4,907 $3,925
Operating expenses before depreciation and amortization
expenses (b).............................................. 4,506 3,171 2,801
------ ------ ------
Operating cash flow (c)..................................... 2,698 1,736 1,124
Depreciation and amortization expenses...................... 1,319 789 603
------ ------ ------
Operating income............................................ 1,379 947 521
Interest and other income (expenses)........................ (139) (106) (21)
Income taxes................................................ (515) (393) (301)
------ ------ ------
Income before preferred dividends........................... 725 448 199
Preferred dividends......................................... 117 54 20
------ ------ ------
Net income applicable to common stockholders................ $ 608 $ 394 $ 179
====== ====== ======
Operating cash flow margin (d).............................. 37.5% 35.4% 28.6%
------ ------ ------
</TABLE>
See footnotes on page 55.
-53-
<PAGE> 54
SELECTED PROPORTIONATE FINANCIAL DATA
(Dollars in millions)
<TABLE>
<C> <S> <S> <S>
U.S. CELLULAR OPERATIONS
Service and other revenues.................................. $3,524 $2,363 $1,984
------ ------ ------
Cost of revenues............................................ 364 236 222
Selling and customer operations expenses (b)................ 1,341 902 781
General, administrative, and other expenses................. 238 169 160
------ ------ ------
Operating cash flow (c)..................................... 1,581 1,056 821
Depreciation and amortization expenses...................... 747 388 292
Operating income............................................ $ 834 $ 668 $ 529
====== ====== ======
Operating cash flow margin (d).............................. 44.9% 44.7% 41.4%
------ ------ ------
U.S. PCS OPERATIONS (e)
Service and other revenues.................................. $ 177 $ 34 $ 1
Operating expenses before depreciation and amortization
expenses (b).............................................. 259 114 41
------ ------ ------
Operating cash flow (c)..................................... (82) (80) (40)
Depreciation and amortization expenses...................... 94 35 6
------ ------ ------
Operating income (loss)..................................... $ (176) $ (115) $ (46)
====== ====== ======
Operating cash flow margin (d).............................. (46.3)% (235.3)% N.M.
------ ------ ------
INTERNATIONAL OPERATIONS
Service and other revenues.................................. $3,128 $2,181 $1,640
Operating expenses before depreciation and amortization
expenses (b).............................................. 1,926 1,452 1,319
------ ------ ------
Operating cash flow (c)..................................... 1,202 729 321
Depreciation and amortization expenses...................... 386 283 226
Operating income............................................ $ 816 $ 446 $ 95
====== ====== ======
Operating cash flow margin (d).............................. 38.4% 33.4% 19.6%
------ ------ ------
U.S. PAGING OPERATIONS (f)
Service and other revenues (g).............................. $ 373 $ 330 $ 297
Operating expenses before depreciation and amortization
expenses.................................................. 250 222 209
------ ------ ------
Operating cash flow (c)..................................... 123 108 88
Depreciation and amortization expenses...................... 80 74 64
------ ------ ------
Operating income............................................ $ 43 $ 34 $ 24
====== ====== ======
Operating cash flow margin (d).............................. 33.0% 32.7% 29.6%
------ ------ ------
</TABLE>
Footnotes:
N.M. Information not meaningful.
(a) Reflects results 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.
(b) Includes net losses on handsets sold.
(c) Operating cash flow is 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.
(d) Operating cash flow margin is calculated by dividing "Operating cash flow"
by "Service and other revenues."
(e) PCS data relates to PrimeCo Personal Communications, L.P. ("PrimeCo"), a
U.S. personal communications services ("PCS") business in which the Company
had a 50% interest at December 31, 1998 and a 25% interest at December 31,
1997 and 1996. Operations began in the fourth quarter of 1996.
(f) U.S. Paging Operations are wholly owned by the Company and include
operations in Canada, which are not material to the information presented.
(g) Includes gains and losses on equipment sales.
-54-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF
AIRTOUCH COMMUNICATIONS, INC.
AirTouch International (California)
AirTouch Thailand Ltd. (Thailand)
AirTouch Taiwan, Inc. (Delaware)
AirTouch Belgium, S.A. (Belgium)
AirTouch Cayman Holdings Unlimited
(Cayman Islands, British West Indies)
AirTouch Espana, S.A. (Spain)
AirTouch (Europe) B.V. (Netherlands)
Pronto Italia S.p.A.(Italy)
AirTouch (Europe) Deinstleistungs-und Beteiligungs-B.V.
& Co. KG (Germany)
AirTouch International (Mauritius) Limited (Port Louis,
Mauritius)
AirTouch Japan Company Limited (Japan)
AirTouch Netherlands B.V. (Netherlands)
AirTouch Associates B.V. (Netherlands)
AirTouch do Brasil Ltda. (Brazil)
AirTouch Netherlands II B.V. (Netherlands)
ATI of Canada, Inc. (Canada)
India Wireless Holdings Limited (India)
Europolitan Holdings, AB (Sweden)
A.B. Europolitan (Sweden)
Europolitan Stores A.B. (Sweden)
Telecel - Comunicacoes Pessoais, SA (Portugal)
Zahan Communications (Mauritius) Limited (Mauritius)
AirTouch Communications - Washington, Inc. (Delaware)
AirTouch Communications Deutschland GmbH (Germany)
AirTouch Satellite Services, Inc. (Delaware)
ATSS Canada, Inc. (Delaware)
ATSS Mexico, Inc. (Delaware)
ATSS/Loral Mexico L.P. (Delaware)
AirTouch Satellite Services US, Inc. (Delaware)
AirTouch Technical Services (California)
AirTouch Services (California)
AirTouch PCS, Inc. (Delaware)
AirTouch PCS Holding, Inc. (Delaware)
PCS Nucleus, L.P. (Delaware)
PrimeCo Personal Communications, LP
AirTouch WMC, Inc. (Delaware)
WMC Partners, L.P. (Delware)
<PAGE> 2
AirTouch Cellular, Inc. (Delaware)
New Par (Delaware)
Muskegon Cellular Partnership
Cellular Communications of Cincinnati, Inc.
Cellular Communications of Cleveland, Inc.
AirTouch Cellular (California)
AirTouch Group, LLC
AirTouch CMT Holding I, Inc.
AirTouch CMT Holding III, LLC
CMT Partners (Delaware)
McCaw Communications of St. Jopseph, Inc.
St. Joseph Cellular Telephone Company
Bay Area Cellular Telephone Company
Cagal Cellular Communications, Corp.
Napa Cellular Telephone Company
Salinas Cellular Telephone Company
D/FW Signal Ltd.
Metroplex Telephone Company
AirTouch Cellular of California, Inc. (Delware)
Los Angeles SMSA Limited Partnership (California)
Mineral RSA Limited Partnership (California)
Nevada RSA No. 2 Limited Partnership (California)
Oxnard-Ventura-Simi Limited Partnership (California)
Celeritas Technologies Ltd.
AirTouch Cellular of Nevada (Nevada)
AirTouch Cellular of Georgia (Nevada)
Athens Cellular, Inc. (Delaware)
AirTouch Cellular of Kansas (Nevada)
Topeka Cellular Telephone Company, Inc. (Delaware)
AirTouch Cellular of Michigan (Nevada)
AirTouch Cellular of Texas (Nevada)
AirTouch Paging (Nevada)
AirTouch Paging of Kentucky, Inc. (Kentucky)
AirTouch Paging of Virginia, Inc. (Virginia)
AirTouch of Minnesota, Inc.
Duluth MSA Limited Partnership
AirTouch North Dakota, Inc.
North Dakota RSA #3 Limited Partnership
AirTouch Nebraska, Inc.
Omahan Cellular Telephone Company
AirTouch Utah, Inc.
<PAGE> 3
Wasateh Utah RSA - No. 2 Limited Partnership
Great Salt Lake Flats Partnership
AirTouch Iowa, Inc.
Des Moines MSA General Partnership
AirTouch Iowa RSA 1, Inc.
RSA 1 Limited Partnership
AT Investco, LLC
AT Arizona I, Inc.
La Paz Cellular of Arizona Limited Partnership
AT Arizona II, Inc.
Yuma Arizona RSA Limited Partnership
AT Colorado, Inc.
Western Colorado Cellular of Colorado Limited Partnership
AT Washington, Inc.
I-5 Cellular, Inc.
I-5 WN Mobilnet Limited Partnership
AT Delaware, I, Inc.
AT Delaware, II, Inc.
Idaho RSA No. 1 Limited Partnership
AT Delaware, III, Inc.
Pacific Cellular, Inc.
Spokane MSA Limited Partnership
Ardael, Inc.
Seattle SMSA Limited Partnership
Pacific Telecom Cellular of Colorado, Inc.
Centennial Cellular Telephone Company of Coconino
Universal Cellular for Arizona RSA #2, Inc.
Coconino, Arizona RSA Limited Partnership
AirTouch Materials, Inc.
AirTouch Iowa RSA 2, Inc.
Iowa RSA No. 2 Limited Partnership
AirTouch Iowa RSA 7, Inc.
RSA 7 Limited Partnership
AirTouch RSA 10, Inc.
Iowa RSA 10 General Partnership
AirTouch Idaho, Inc.
Idaho RSA No. 2 Limited Partnership
Idaho RSA 3 Limited Partnership
Boise City MSA Limited Partnership
Grays Harbor-Mason Cellular Partnership
Illinois SMSA Limited Partnership
Illinois 6 and 7 Limited Partnership
Illinois 4 Limited Partnership
Illinois Valley Cellular RSA 2-III Limited Partnership
Mohave Cellular Limited Partnership
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-62787 and
333-56645) and Form S-4 (No. 333-03107) and in the Registration Statements on
Form S-8 (Nos. 33-57077, 33-57081, 33-57083, 33-64553, 333-10389, 333-17891,
333-36339, 333-50541, and 333-67035) of AirTouch Communications, Inc. of our
report dated March 1, 1999 appearing on page 35 of the Annual Report to
Stockholders which is incorporated by reference in this Annual Report on Form
10-K. We also consent to the incorporation by reference of our report dated
February 23, 1998 relating to the consolidated financial statements of CMT
Partners, which appears on page S-3 of the Annual Report on Form 10-K for the
year ended December 31, 1997. We also consent to the incorporation by reference
of our report on the Financial Statement Schedule of AirTouch Communications,
Inc. which appears on page X-1 of this Annual Report on Form 10-K and our report
on the Financial Statement Schedule of CMT Partners which appears on page S-12
of the Annual Report on Form 10-K for the year ended December 31, 1997.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 29, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Prospectus constituting part
of the Registration Statements on Form S-3 (Nos. 33-62787 and 333-56645), in the
Registration Statement on Form S-4 (No. 333-03107), and in the Registration
Statements on Form S-8 (Nos. 33-57077, 33-57081, 33-57083, 33-64553, 333-10389,
333-17891, 333-36339, 333-50541, and 333-67035) of AirTouch Communications, Inc.
of our report dated February 16, 1999, relating to the financial statements of
Mannesmann Mobilfunk GmbH, which appears in AirTouch Communications Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1998.
Dusseldorf, Germany
March 29, 1999
KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
/s/ Scheffler /s/ Haas
Wirtschaftsprufer Wirtschaftsprufer
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion of our report dated January 24, 1997, on the
financial statements of Kansas Combined Cellular in this Form 10-K and to the
incorporation of our report included in this Form 10-K, in the Registration
Statement on Forms S-3 (Nos. 33-62787 and 333-56645), Registration Statement on
Form S-4 (No. 333-03107), and Registration Statements on Form S-8 (Nos.
33-57077, 33-57081, 33-57083, 33-64553, 333-10389, 333-17891, 333-36339,
333-50541, and 333-67035), of AirTouch Communications, Inc. We have not audited
any financial statements of Kansas Combined Cellular subsequent to December 31,
1996, nor performed any procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Kansas City, Missouri,
March 29, 1999
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
WHEREAS, AIRTOUCH COMMUNICATIONS, INC., a Delaware corporation (the
"Corporation"), proposes to file with the Securities and Exchange Commission
(the "SEC"), under the provisions of the Securities Act of 1934, as amended, an
Annual Report on Form 10-K; and
WHEREAS, each of the undersigned is an officer or director, or both, of the
Corporation as indicated below under his/her name;
NOW, THEREFORE, each of the undersigned hereby constitutes and appoints Sam
Ginn, Margaret G. Gill, Mohan S. Gyani, Arun Sarin, and each of them, his/her
attorneys for him/her in his/her stead, in his/her capacity as an officer,
director, or both, of the Corporation, to execute and file such Annual Report on
Form 10-K, and any and all amendments, modifications or supplements thereto, and
any exhibits thereto, and granting to each of said attorneys full power and
authority to sign and file any and all other documents and to perform and do all
and every act and thing whatsoever requisite and necessary to be done as fully,
to all intents and purposes, as he/she might or could do if personally present
at the doing thereof, and hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof in
connection with effecting the filing of the Annual Report on Form 10-K.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand this 29th day
of March, 1999.
<TABLE>
<C> <S>
/s/ SAM GINN /s/ DONALD G. FISHER
- ---------------------------------------------------- -----------------------------------------------------
Sam Ginn Donald G. Fisher, Director
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/s/ ARUN SARIN /s/ PAUL HAZEN
- ---------------------------------------------------- -----------------------------------------------------
Arun Sarin Paul Hazen, Director
President, Chief Operating Officer and Director
/s/ MOHAN S. GYANI /s/ ARTHUR ROCK
- ---------------------------------------------------- -----------------------------------------------------
Mohan S. Gyani Arthur Rock, Director
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ CAROL A. BARTZ /s/ CHARLES R. SCHWAB
- ---------------------------------------------------- -----------------------------------------------------
Carol A. Bartz, Director Charles R. Schwab, Director
/s/ MICHAEL J. BOSKIN /s/ GEORGE P. SHULTZ
- ---------------------------------------------------- -----------------------------------------------------
Michael J. Boskin, Director George P. Shultz, Director
/s/ C. LEE COX /s/ CHANG-LIN TIEN
- ---------------------------------------------------- -----------------------------------------------------
C. Lee Cox, Director Chang-Lin Tien, Director
</TABLE>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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1,574,000
1,041,000
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