<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to __________
COMMISSION FILE NUMBER 1-12342
AIRTOUCH COMMUNICATIONS, INC.
A DELAWARE CORPORATION I.R.S. EMPLOYER NUMBER 94-3213132
ONE CALIFORNIA STREET
SAN FRANCISCO, CA 94111
(415) 658-2000
-------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
At May 6, 1999, 576,976,076 shares of common stock were outstanding.
<PAGE> 2
AIRTOUCH COMMUNICATIONS, INC.
INDEX TO REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
PART I -- FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Statements of Income............................... 3
Consolidated Balance Sheets..................................... 4
Consolidated Statements of Cash Flows........................... 5
Notes to Consolidated Financial Statements...................... 6
Selected Proportionate Financial Data .......................... 12
Selected Proportionate Operating Data .......................... 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 14
REPORT OF INDEPENDENT ACCOUNTANTS ................................ 23
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................................ 24
ITEM 2. CHANGES IN SECURITIES ............................................ 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .................................. 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 24
ITEM 5. OTHER INFORMATION ................................................ 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................. 24
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
=======================================================================================================
(Unaudited)
Three Months Ended
March 31
-------------------------
(Dollars in millions, except per share information) 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues $ 1,426 $ 958
- -------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of revenues 317 201
Selling and customer operations expenses 426 261
General, administrative, and other expenses 142 118
Depreciation and amortization expenses 275 144
- -------------------------------------------------------------------------------------------------------
Total operating expenses 1,160 724
- -------------------------------------------------------------------------------------------------------
Operating income 266 234
Equity in net income (loss) of unconsolidated wireless systems:
U. S. -- (4)
International 162 81
Minority interests in net (income) loss of consolidated wireless systems (45) (42)
Interest:
Expense (40) (19)
Income 2 6
Miscellaneous income (expense) 68 (10)
- -------------------------------------------------------------------------------------------------------
Income before income taxes and preferred dividends 413 246
Income taxes 121 79
- -------------------------------------------------------------------------------------------------------
Income before preferred dividends 292 167
Preferred dividends 35 14
- -------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 257 $ 153
=======================================================================================================
Net income applicable to common stockholders - per share
Basic $ 0.45 $ 0.30
Diluted $ 0.43 $ 0.30
=======================================================================================================
Weighted average shares outstanding (in thousands) 574,062 509,424
=======================================================================================================
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
3
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
=============================================================================================================================
(Unaudited)
MARCH 31 December 31
(Dollars in millions) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6 $ 44
Accounts receivable (net of allowance for uncollectibles of $67 and $65, respectively) 670 724
Inventories 120 143
Other receivables 238 225
Due from related parties 54 59
Other current assets 139 120
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 1,227 1,315
Property, plant, and equipment, net 4,044 4,049
Investments in unconsolidated wireless systems 3,767 3,491
Intangible assets, net 8,418 8,513
Deferred charges and other noncurrent assets 145 185
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 17,601 $ 17,553
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 317 $ 493
Short-term borrowings 36 72
Current portion of long-term debt 43 45
Other current liabilities 890 925
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,286 1,535
Long-term debt 2,743 2,701
Deferred income taxes 1,815 1,839
Deferred credits 153 152
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,997 6,227
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interests in consolidated wireless systems 415 427
Class D and E redeemable preferred stock ($.01 par value; 1.65 million shares authorized,
issued, and outstanding; redemption value of $1.65 billion) 1,575 1,574
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock and additional paid-in capital ($.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 $497) 498 500
4.25% Class C Convertible (13 million shares authorized, 11.0 million shares issued
and outstanding; liquidation value of $551) 539 541
Common stock and additional paid-in capital ($.01 par value; 1.1 billion shares authorized,
581.0 million shares issued and 575.6 million shares outstanding [net of
5.3 million treasury shares at cost of $298] at March 31, 1999; 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) 7,364 7,255
Retained earnings 1,280 1,023
Accumulated other comprehensive income (64) 8
Deferred compensation (3) (2)
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,614 9,325
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 17,601 $ 17,553
=============================================================================================================================
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
==========================================================================================================
(Unaudited)
Three Months Ended
March 31
-------------------
(Dollars in millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Income before preferred dividends $ 292 $ 167
Adjustments to reconcile income before preferred dividends
for items currently not affecting operating cash flows:
Depreciation, amortization, and other noncash items 274 145
Equity in net (income) loss of unconsolidated wireless systems (162) (77)
Distributions received from equity investees 19 16
Minority interests in net income (loss) of consolidated wireless systems 45 42
Deferred income tax (benefit) expense 30 7
Loss (gain) on sale of assets and telecommunications interests -- (1)
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable, net 45 25
Other current assets and receivables (31) (49)
Deferred charges and other noncurrent assets 11 3
Accounts payable and other current liabilities (100) (140)
Deferred credits and other liabilities (82) 4
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities 341 142
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investments in wireless systems (220) (137)
Additions to property, plant, and equipment (262) (171)
Proceeds from sale of property, plant, and equipment 3 3
Proceeds from sale of available-for-sale securities 89 --
Other investing activities 1 --
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities (389) (305)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuing long-term debt and commercial paper 266 211
Retirement of long-term debt and commercial paper (195) (72)
Net distributions to minority interests of consolidated wireless systems (17) (7)
Proceeds from common shares issued 118 81
Purchases of common stock (93) --
Increase (decrease) in short-term borrowings (32) --
Payment of preferred stock dividends (35) (13)
Other financing activities -- (2)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities 12 198
- ----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (2) (1)
- ----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (38) 34
Beginning cash and cash equivalents 44 1
- ----------------------------------------------------------------------------------------------------------
Ending cash and cash equivalents $ 6 $ 35
==========================================================================================================
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
5
<PAGE> 6
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
A. BASIS OF PRESENTATION
The unaudited Consolidated Financial Statements of AirTouch Communications, Inc.
and Subsidiaries (the "Company" or "AirTouch") furnished herein have been
reviewed by independent accountants and reflect all adjustments that are, in the
opinion of the Company, necessary to present fairly the financial position and
results of operations for each interim period presented. All such adjustments
are normal recurring adjustments. The Company recommends that these interim
financial statements be read in conjunction with the Consolidated Financial
Statements and accompanying Notes presented in the Company's 1998 Annual Report
on Form 10-K.
With respect to the unaudited consolidated financial information of the Company
as of March 31, 1999 and for the three-month periods ended March 31, 1999 and
1998 included herein, PricewaterhouseCoopers LLP reported that they have applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate report dated May 12, 1999, appearing
herein, states that they did not audit and they do not express an opinion on the
unaudited consolidated financial information. PricewaterhouseCoopers LLP has not
carried out any significant or additional audit tests beyond those which would
have been necessary if their report had not been included. Accordingly, the
degree of reliance on their report on such information should be restricted in
light of the limited nature of the review procedures applied.
PricewaterhouseCoopers LLP is not subject to the liability provisions of Section
11 of the Securities Act of 1933 (the "Act") for their report on the unaudited
consolidated financial information because that report is not a "report" or a
"part" of this Form 10-Q prepared or certified by PricewaterhouseCoopers LLP
within the meaning of Sections 7 and 11 of the Act.
B. CHANGES FROM DECEMBER 31, 1998
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires the recognition of all derivatives as
either assets or liabilities and the measurement of those instruments at fair
value. Consistent with the requirements of the statement, the Company intends to
adopt SFAS No. 133 effective January 1, 2000. If the Company had implemented
SFAS No. 133 at March 31, 1999, based on the Company's current derivative
instruments, there would not have been a material impact on the Company's
financial position or results of operations.
VODAFONE MERGER
On January 15, 1999, AirTouch 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 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.
In April 1999, the Company received an Internal Revenue Service private letter
ruling affirming that the terms of the proposed merger transaction will satisfy
a key requirement for a tax-free merger between a foreign and U.S. company.
On April 22, 1999, the Company filed a proxy statement related to the merger.
The proxy statement was subsequently mailed to the shareholders of AirTouch in
preparation for a shareholder meeting scheduled May 28, 1999. The merger is
subject to the approval of the stockholders of Vodafone and AirTouch and
customary government and regulatory authority approvals. The merger is expected
to close in June or July 1999, but no earlier than June 23, 1999, the date of a
United Kingdom court hearing to confirm Vodafone's reduction of share capital in
connection with the redenomination of its ordinary share capital into U.S.
Dollars prior to the merger.
6
<PAGE> 7
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
C. EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated based on net income applicable to
common stockholders divided by the weighted average common shares outstanding.
Diluted EPS is calculated based on net income applicable to common stockholders
divided by the sum of the weighted average common shares outstanding and any
common stock equivalents. Common stock equivalents ("CSEs") related to stock
options, determined using the treasury stock method, and CSEs related to
convertible Class C preferred stock, determined using the "if converted" method,
had a dilutive impact on EPS for the three months ended March 31, 1999 and were
included in the calculation of diluted EPS. CSEs related to convertible Class B
preferred stock, also determined using the "if converted" method, had an
anti-dilutive impact on EPS for the three months ended March 31, 1999 and were
not included in the calculation of EPS.
CSEs related to stock options had an immaterial impact on EPS for the three
months ended March 31, 1998. CSEs related to Class B and Class C preferred stock
had an anti-dilutive impact on EPS for the three months ended March 31, 1998 and
were not included in the calculation of diluted EPS.
<TABLE>
<CAPTION>
==================================================================================================================================
(Unaudited) (Unaudited)
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
(Dollars in millions, except per share information; ---------------------------------- ----------------------------------
shares in thousands) Income Shares Per Share Income Shares Per Share
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Net income applicable to common stockholders $ 257 574,062 $ 0.45 $ 153 509,424 $ 0.30
======= =======
Effect of Dilutive Securities
Stock options 19,020 9,295
Class C preferred stock 6 15,222 -- --
-------------------- --------------------
Diluted Earnings Per Share
Net income applicable to common stockholders $ 263 608,304 $ 0.43 $ 153 518,719 $ 0.30
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
D. SEGMENT INFORMATION
The following table presents the Company's business segment information for the
three months ended March 31, 1999 and 1998. There has not been a change in the
basis of segmentation or the basis of measurement of segment profit or loss for
each of these segments from the Company's 1998 Annual Report on Form 10-K.
<TABLE>
<CAPTION>
(Unaudited)
-------------------------------------------------------------------------------
Three Months Ended March 31, 1999
-------------------------------------------------------------------------------
U.S. U.S. Corporate
Cellular International Paging and Total
(Dollars in millions) Operations (a) Operations Operations (b) Other (c) Company
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 1,043 $ 274 $ 110 $ (1) $ 1,426
==================================================================================================================================
Net income applicable to common stockholders $ 82 $ 169 $ 7 $ (1) $ 257
==================================================================================================================================
Total assets as of March 31, 1999 $ 13,938 $ 3,253 $ 469 $ (59) $ 17,601
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
-------------------------------------------------------------------------------
Three Months Ended March 31, 1998
-------------------------------------------------------------------------------
U.S. U.S. Corporate
Cellular International Paging and Total
(Dollars in millions) Operations (a) Operations Operations (b) Other (c) Company
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 647 $ 213 $ 98 $ -- $ 958
==================================================================================================================================
Net income applicable to common stockholders $ 83 $ 89 $ 6 $ (25) $ 153
==================================================================================================================================
Total assets as of March 31, 1998 $ 6,400 $ 2,542 $ 469 $ (10) $ 9,401
==================================================================================================================================
</TABLE>
(a) U.S. Cellular Operations include the equity earnings in PrimeCo.
(b) U.S. Paging Operations are wholly owned by the Company and include
operations in Canada which are not material to the information
presented.
(c) Corporate and Other includes intercompany eliminations, primarily for
interest and accounts receivable, and any rounding adjustments.
8
<PAGE> 9
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
E. COMPREHENSIVE INCOME
The Company's 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's total comprehensive income was $220 million and $160 million for the
three months ended March 31, 1999 and 1998.
F. INVESTMENTS IN UNCONSOLIDATED WIRELESS SYSTEMS
The Company's investments in unconsolidated wireless systems consist of the
following:
<TABLE>
<CAPTION>
=====================================================
MARCH 31 December 31
(Dollars in millions) 1999 1998
- -----------------------------------------------------
<S> <C> <C>
Investments at equity $3,611 $3,344
Investments at cost 156 147
- -----------------------------------------------------
$3,767 $3,491
=====================================================
</TABLE>
The Company's equity in net income of its significant equity investee at
December 31, 1998, Mannesmann Mobilfunk GmbH ("Mannesmann") was $95 million and
$81 million for the three months ended March 31, 1999 and 1998, respectively.
The Company's equity in net income of Mannesmann differs from its proportionate
share of Mannesmann's reported net income in the table below primarily due to
amortization of intangibles and other adjustments. Condensed operating results
for Mannesmann is as follows:
<TABLE>
<CAPTION>
=========================================================
Three Months Ended
March 31
----------------------
(Dollars in millions) 1999 1998
- ---------------------------------------------------------
<S> <C> <C>
Mannesmann Mobilfunk GmbH
Operating revenues $1,197 $ 878
Operating income $ 477 $ 365
Net income $ 206 $ 157
=========================================================
</TABLE>
G. 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. Certain plaintiffs have 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 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
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.
9
<PAGE> 10
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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. 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.
The Company is a defendant in a class action in the Federal District Court for
the Northern 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 failed to disclose material
information about AirTouch's merger discussions. 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
Federal Court 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.
In March 1999, a class action complaint on behalf of customers of AirTouch was
filed in Los Angeles County Superior Court against the Company challenging the
legality of the assessment of an early disconnection charge when a customer
terminates service under a contract whose duration has been extended upon the
acceptance of a new promotional offer. The plaintiffs are seeking injunctive
relief and unspecified monetary damages, including disgorgement of monies
obtained as a result of the alleged unlawful business practices. 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.
In April 1999, a complaint was filed against the Company in the State of
Michigan, Third Circuit Court on behalf of all individuals subscribing to
service in that state. The plaintiffs are challenging the legality of the
Company's assessment of certain charges for local calls and charges for calls
that pass through wireline networks. The plaintiffs are seeking injunctive
relief and unspecified monetary damages. 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.
In the ordinary course of business, the Company has issued letters of
responsibility and letters of support for performance guarantees, refundable
security deposits, and credit facilities of certain subsidiaries and affiliates
providing varying degrees of recourse to the Company. At March 31, 1999, the
Company's proportionate share under such arrangements was $225 million. The
Company believes it is remote that it will be required to pay under these
various arrangements.
10
<PAGE> 11
Selected Proportionate Financial Data (UNAUDITED)
NON GAAP SUPPLEMENTAL PROPORTIONATE DATA
The following tables are 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.
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.
11
<PAGE> 12
Selected Proportionate Financial Data (UNAUDITED)
<TABLE>
<CAPTION>
================================================================================================
Three Months Ended
March 31
----------------------
(Dollars in millions) 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL COMPANY
Service and other revenues $ 2,119 $ 1,355
Operating expenses before depreciation and amortization expenses (1) 1,285 808
- ------------------------------------------------------------------------------------------------
Operating cash flow (2) 834 547
Depreciation and amortization expenses 395 216
- ------------------------------------------------------------------------------------------------
Operating income 439 331
Interest and other income (expenses) 42 (34)
Income taxes (189) (130)
- ------------------------------------------------------------------------------------------------
Income before preferred dividends 292 167
Preferred dividends 35 14
- ------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 257 $ 153
================================================================================================
Operating cash flow margin (3) 39.4% 40.4%
================================================================================================
U.S. CELLULAR AND PCS OPERATIONS (4)
Service and other revenues $ 1,051 $ 640
Operating expenses before depreciation and amortization expenses (1) 646 362
- ------------------------------------------------------------------------------------------------
Operating cash flow (2) 405 278
Depreciation and amortization expenses 251 113
- ------------------------------------------------------------------------------------------------
Operating income $ 154 $ 165
================================================================================================
Operating cash flow margin (3) 38.5% 43.4%
================================================================================================
INTERNATIONAL OPERATIONS
Service and other revenues $ 968 $ 626
Operating expenses before depreciation and amortization expenses (1) 571 370
- ------------------------------------------------------------------------------------------------
Operating cash flow (2) 397 256
Depreciation and amortization expenses 121 81
- ------------------------------------------------------------------------------------------------
Operating income $ 276 $ 175
================================================================================================
Operating cash flow margin (3) 41.0% 40.9%
================================================================================================
U.S. PAGING OPERATIONS (5)
Service and other revenues (6) $ 100 $ 89
Operating expenses before depreciation and amortization expenses 68 59
- ------------------------------------------------------------------------------------------------
Operating cash flow (2) 32 30
Depreciation and amortization expenses 20 19
- ------------------------------------------------------------------------------------------------
Operating income $ 12 $ 11
================================================================================================
Operating cash flow margin (3) 32.0% 33.7%
================================================================================================
</TABLE>
Footnotes:
(1) Includes net loss on handsets sold.
(2) "Operating cash flow" is defined as "Operating income" plus
"Depreciation and amortization expenses" and is not the same as "Cash
flows 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.
(3) "Operating cash flow margin" is calculated by dividing "Operating cash
flow" by "Service and other revenues."
(4) 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 as of March 31, 1999 and a 25% interest at
March 31, 1998. Because PrimeCo does not own 100% of all its markets,
the Company's proportionate interest in PrimeCo's results is slightly
less than 50%. Beginning in 1999, PCS data is included with the
Company's U.S. Cellular data. 1998 information has been adjusted to
conform to this presentation.
(5) U.S. Paging Operations are wholly owned by the Company and include
operations in Canada which are not material to the information
presented.
(6) Includes any gain or loss on equipment sales.
12
<PAGE> 13
Selected Proportionate Operating Data (UNAUDITED) (1)
<TABLE>
<CAPTION>
=======================================================================================================
Three Months Ended
March 31
----------------------
(Dollars in millions, except per unit data and operating data in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL COMPANY
Cellular and PCS POPs (2)(3)(4) 239,494 180,759
Cellular and PCS subscribers (2)(4) 15,279 8,270
Paging units in service (4)(5) 3,543 3,228
Total proportionate customers (4) 18,822 11,498
Cellular and PCS subscriber net adds in period, excluding acquisitions (2) 1,072 654
Capital expenditures and capital calls, excluding acquisitions (6) $ 375 $ 265
Proportionate capital expenditures (7) $ 407 $ 314
=======================================================================================================
U.S. CELLULAR AND PCS OPERATIONS (2)
Cellular and PCS POPs (2)(3)(4) 96,480 58,321
Cellular and PCS subscribers (2)(4) 8,680 4,681
Cellular and PCS subscriber net adds in period, excluding acquisitions (2) 353 200
Monthly average revenue per unit $ 41.20 $ 47.03
Monthly cash cost per unit $ 25.33 $ 26.60
Proportionate capital expenditures (7) $ 173 $ 135
=======================================================================================================
INTERNATIONAL OPERATIONS
Cellular POPs (3)(4) 143,014 122,438
Cellular subscribers (4) 6,599 3,589
Cellular subscriber net adds in period, excluding acquisitions 719 454
Monthly average revenue per unit $ 51.98 $ 62.06
Monthly cash cost per unit $ 30.66 $ 36.68
Proportionate capital expenditures (7) $ 214 $ 155
=======================================================================================================
U.S. PAGING OPERATIONS (8)
Total paging units in service (4) 3,468 3,140
Paging units in service net adds in period, excluding acquisitions 46 39
Capital expenditures (6) $ 17 $ 18
=======================================================================================================
</TABLE>
Footnotes:
(1) The table reflects operating data of systems in which the Company owns
an interest, multiplied by the Company's ownership interest, exclusive
of cost-based investments and certain equity-based investments that are
not material to the information presented.
(2) PCS data relates to PrimeCo Personal Communications, L.P. ("PrimeCo"), a
U.S. personal communications services ("PCS") business in which the
Company had a 50% interest as of March 31, 1999 and a 25% interest at
March 31, 1998. Because PrimeCo does not own 100% of all its markets,
the Company's proportionate interest in PrimeCo's results is slightly
less than 50%. Beginning in 1999, PCS data is included with the
Company's U.S. Cellular data. 1998 information has been adjusted to
conform to this presentation.
(3) POPs are the estimated market population multiplied by the Company's
ownership interest in a licensee operating in that market and includes
markets in which the networks are under construction and the markets of
certain cost-based investments not included in proportionate operating
results.
(4) As of the period ended.
(5) Total Company "Paging units in service" include both U.S. and
International paging units in service.
(6) Reflects GAAP-basis operating data for the three months ended March 31.
(7) "Proportionate capital expenditures" are expenditures for property,
plant, and equipment of each system in which the Company owns an
interest multiplied by the Company's ownership interest.
(8) U.S. Paging Operations are wholly owned by the Company and include
operations in Canada which are not material to the information
presented.
13
<PAGE> 14
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis for AirTouch Communications, Inc.,
together with its subsidiaries and partnerships (collectively, the "Company" or
"AirTouch"), focuses on material changes in financial condition from December
31, 1998, and in results of operations for the quarters ended March 31, 1999 and
1998. Please read the following discussion and analysis with management's
discussion and analysis included in the Company's 1998 Annual Report on Form
10-K and with the Company's Consolidated Financial Statements and accompanying
Notes included herein.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
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 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 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.
In April 1999, the Company received an Internal Revenue Service private letter
ruling affirming that the terms of the proposed merger transaction will satisfy
a key requirement for a tax-free merger between a foreign and U.S. company.
On April 22, 1999, the Company filed a proxy statement related to the merger.
The proxy statement was subsequently mailed to the shareholders of AirTouch in
preparation for a shareholder meeting scheduled May 28, 1999. The merger is
subject to the approval of the stockholders of Vodafone and AirTouch and
customary government and regulatory authority approvals. The merger is expected
to close in June or July 1999, but no earlier than June 23, 1999, the date of a
United Kingdom court hearing to confirm Vodafone's reduction of share capital in
connection with the redenomination of its ordinary share capital into U.S.
Dollars prior to the merger. For more details of the merger, please see the
Company's Current Report on Form 8-K filed January 19, 1999 and the above
mentioned proxy statement.
RESULTS OF OPERATIONS
The following discussions compare the results of operations for the quarter
ended March 31, 1999, to the quarter ended March 31, 1998. The operating results
of the periods discussed below are not necessarily indicative of operating
results in future periods.
Consolidated Results of Operations
Net income increased primarily due to the growth in earnings from the Company's
unconsolidated wireless systems, the one-time gain from the sale of securities,
and the one-time gain from the sale of PrimeCo's Hawaii wireless system. See
"Consolidated Results of Operations - 1999 vs. ProForma 1998," for further
discussion.
14
<PAGE> 15
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
Consolidated operating revenues and operating income increased primarily due to
the consolidation of the cellular businesses acquired from MediaOne Group, 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, the gain from PrimeCo's sale of its Hawaii market, and
increased profitability at CMT Partners. Increased ownership from 25% to 50% in
the operating losses of PrimeCo, due to the MediaOne Group merger, partially
offset the increase. These increases are discussed in the U.S.
cellular and international sections.
The Company's unconsolidated ventures distributed $19 million of cash dividends
during the quarter ended March 31, 1999, as compared to $16 million during the
quarter ended March 31, 1998.
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 - 1999 vs. Pro Forma 1998
The consolidated operating results for the quarter ended March 31, 1999, were
not comparable to the results for the quarter ended March 31, 1998, because
1999's results included the operating revenues and expenses of the cellular
businesses acquired from MediaOne Group, and increased operating losses
attributable to the ownership increase from 25% to 50% of PrimeCo.
Given the significance of this transaction, the Company believes it is more
meaningful to discuss 1999's operating results as compared to 1998's results on
a pro forma basis, as if the transaction had occurred on January 1, 1998. The
following discussion is based on the pro forma results presented in the
following table. The 1998 pro forma results of operations were not necessarily
indicative of the results of operations of the Company that would have actually
occurred if the merger had taken place on January 1, 1998.
Consolidated Results of Operations (GAAP Basis)
<TABLE>
<CAPTION>
=============================================================
Three Months Ended
March 31
---------------------
(Unaudited) Actual Pro Forma
(Dollars in millions) 1999 1998
- -------------------------------------------------------------
<S> <C> <C>
Operating revenues $ 1,426 $ 1,300
- -------------------------------------------------------------
Operating expenses
before depreciation
and amortization expenses 885 781
Depreciation and
amortization expenses 275 252
- -------------------------------------------------------------
Total operating expenses 1,160 1,033
- -------------------------------------------------------------
Operating income 266 267
Equity in net income (loss) of
unconsolidated wireless systems 162 41
Minority interests in net (income)
of consolidated wireless systems (45) (52)
Interest and miscellaneous income 30 (36)
- -------------------------------------------------------------
Income before income taxes
and preferred dividends 413 220
Income taxes 121 70
- -------------------------------------------------------------
Income before preferred dividends 292 150
Preferred dividends 35 35
- -------------------------------------------------------------
Net income applicable to
common stockholders $ 257 $ 115
=============================================================
</TABLE>
Net income increased 124% due to strong operating results from the Company's
consolidated and unconsolidated wireless systems, the one-time gain from the
sale of securities, and the one-time gain from the sale of PrimeCo's Hawaii
wireless system. Without the one-time gains, net income would have increased
75%. The strong operating results were due to substantial subscriber growth in
the Company's international and U.S. cellular operations.
Consolidated operating revenues increased 10%, while consolidated operating
income remained flat. The increased operating revenues were primarily the result
of substantial subscriber growth in the Company's international and U.S.
cellular markets. See further discussion in the following U.S. cellular and
international sections.
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 sections.
15
<PAGE> 16
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
As discussed in management's discussion and analysis included in the Company's
1998 Annual Report on Form 10-K, the effective 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. After deducting the
equity in net income of unconsolidated international wireless systems for which
no U.S. taxes were provided, the normalized rate was 43% for the three months
ended March 31, 1999, compared to 45% for the three months ended March 31, 1998.
U.S. Cellular Operations
Discussions of results of operations for U.S. cellular include equity losses in
PrimeCo.
As previously discussed, the Company believes it is more meaningful to compare
the results of the quarter ended March 31, 1999, with the pro forma results of
the quarter ended March 31, 1998, as presented in the following table.
U.S. Cellular Operating Results (GAAP Basis)
<TABLE>
<CAPTION>
===============================================================
Three Months Ended
March 31
-------------------------------
Actual Pro Forma
(Unaudited) ------------------ ---------
(Dollars in millions) 1999 1998 1998
- ---------------------------------------------------------------
<S> <C> <C> <C>
Service and other revenues $ 981 $ 617 $ 933
Equipment sales 62 30 55
- ---------------------------------------------------------------
Operating revenues 1,043 647 988
- ---------------------------------------------------------------
Operating expenses before
depreciation and
amortization expenses 628 359 562
Depreciation and
amortization expenses 222 98 204
- ---------------------------------------------------------------
Operating income $ 193 $ 190 $ 222
===============================================================
Equity in net income of
unconsolidated
wireless systems $ -- $ (4) $ (40)
===============================================================
</TABLE>
The 5% increase in the Company's U.S. cellular service and other revenues was
primarily due to the 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 10% compared to the quarter
ended March 31, 1998. Although average revenue per customer decreased, it did so
at a slower rate than the first quarter in 1998, as usage per customer increased
16%. Usage increased in the past year in response to lower per minute rates
available through bundled minute plans (subscribers pay a fixed monthly fee for
access and a fixed number of minutes) and the increased availability of digital
handsets, which have longer battery lives and offer additional features that are
attractive to subscribers. Revenue per minute of use decreased 22% compared to
the first quarter 1998. Decreases in both average revenue per customer and
average revenue per minute were a result of rate reductions and discounts
offered to new and existing customers in response to increased competition.
Competition continues to be intense. The Company anticipates that such
competition will lead to continued price reductions resulting in lower revenue
per minute of use and lower average revenue per customer. However, lower prices
and other factors are leading to an increase in usage as customers shift their
calling from landline to wireless networks. The Company's outlook for the
wireless industry is continued strong demand and an expanding market. The
Company intends to fully pursue this growth opportunity by positioning itself as
the wireless communications provider that delivers superior service to
customers.
The Company offers choice of service and handset pricing that is designed to be
attractive to customers in different market segments and that is competitive
with other wireless service providers. During the quarter, the Company achieved
approximately one-third of its net gains from the re-launched prepaid program.
Customers can buy prepaid service in fixed dollar increments. Prepaid programs
extend service to customers who wish to obtain cellular service at a fixed price
and to customers without a credit history. Prepaid programs allow the Company to
provide this service in a cost effective way. Prepaid subscribers are a very
small but growing part of the subscriber base.
16
<PAGE> 17
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
Another trend in the U.S. wireless industry is to offer one rate plans, which
include roaming and long distance at no extra charge. The Company has responded
with various pricing plans including plans which offer roaming at no extra
charge. The industry's one rate plans have increased roaming activity within the
U.S. wireless industry. As the Company and other wireless operators seek to be
profitable with these one rate plans, reciprocal roaming rates between wireless
operators will continue to be negotiated resulting in lower rates. For the three
months ended March 31, 1999, the Company's roaming-in revenues remained at
approximately 9% of service and other revenue, as increased roaming-in traffic
offset rate reductions. During the first quarter of 1999, net roaming-out
expense increased as reductions in roaming rates were more than offset by the
increased volume in roaming-out traffic.
The Company is focused on maximizing roaming activity with its partners with
whom it has favorable roaming agreements. 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 operating cash flow margin (operating margins excluding the effect of
depreciation and amortization expenses) decreased for the quarter ended March
31, 1999, compared to the same period in 1998. The 4% decrease in average cash
cost per customer (including the loss on equipment sales) was less than the
decrease in average revenue per customer, resulting in a lower margin.
Approximately a third of the decrease in operating cash flow margin was
attributable to the short-term increase in costs associated with the year 2000
remediation efforts and the transition cost of centralizing certain functions
previously performed in multiple locations. The remaining margin decrease was
primarily attributable to increased customer operations costs. The most
significant component of the increased cost was the additional handset subsidies
incurred to retain customers. Churn increased from the first quarter of 1998 to
the first quarter of 1999 due to competition, but decreased from the fourth
quarter of 1998 due to increased retention efforts. It is likely that the
Company will continue to incur higher costs to keep its existing customers. The
increased selling cost attributable to the larger volume of gains in the first
quarter of 1999 relative to the first quarter of 1998, was mitigated by cost
control efforts in other components of selling cost. Such decreases may not be
sustainable over the long-term. Furthermore, additional year 2000 remediation
costs will be incurred in the near-term. In the highly competitive U.S. wireless
market, there can be no assurance that the Company's U.S. cellular operations
will not experience further decreases to its operating cash flow margin.
Depreciation and amortization expenses increased 9%. 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, higher roaming-in revenues, and increased operating margin.
Decreased losses at PrimeCo were attributable to both the one-time gain from the
sale of the Hawaii market as well as 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.
AirTouch and Bell Atlantic Mobile are equal partners in PrimeCo, whose markets
complement the existing U.S. cellular operations of the partners. Bell Atlantic
stated in a proxy statement dated April 13, 1999, that upon completion of the
Vodafone/ AirTouch merger, Bell Atlantic intends to exercise its option to
dissolve PrimeCo and divide PrimeCo's properties with AirTouch in accordance
with procedures contained in the PrimeCo partnership agreement. The Company does
not believe that such a dissolution would have a material adverse effect on the
Company's results of operations.
17
<PAGE> 18
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
U.S. Paging Operations
All U.S. paging markets are wholly owned by the Company.
U.S. Paging Operating Results (GAAP Basis)
<TABLE>
<CAPTION>
=======================================================
Three Months Ended
(Unaudited) March 31
-------------------
(Dollars in millions) 1999 1998
- -------------------------------------------------------
<S> <C> <C>
Service and other revenues $ 99 $ 88
Equipment sales 11 10
- -------------------------------------------------------
Operating revenues 110 98
- -------------------------------------------------------
Operating expenses before
depreciation and
amortization expenses 78 68
Depreciation and
amortization expenses 20 19
- -------------------------------------------------------
Operating income $ 12 $ 11
=======================================================
Operating cash flow (a) $ 32 $ 30
Operating cash flow margin (b) 29.1% 30.6%
=======================================================
</TABLE>
(a) "Operating cash flow" is "Operating income" plus "Depreciation and
amortization expenses" and is not the same as "Cash flows from operating
activities."
(b) "Operating cash flow margin" 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. Such costs are treated as a
reduction to "Service and other revenues" in the proportionate
presentation for U.S. paging.
Operating revenues increased 12% primarily due to a 10% annual growth in paging
units in service and a 2% increase in the average revenue per unit in service.
The Company's U.S. paging operations were able to increase units in service and
average revenue per unit in line with the Company's strategy of shifting growth
to the higher revenue retail and direct channels away from the reseller channel.
The operating margin remained constant for the quarters ended March 31, 1998,
and 1999. Operating cash flow margin (operating margin excluding the effect of
depreciation and amortization) declined slightly for the quarter ended March 31,
1999.
During the quarter, the Company announced a multi-year strategic alliance with
PageMart Wireless, Inc. The Company will market PageMart's Internet Protocol
Advanced Messaging Network nationwide by mid-May. Advanced messaging systems
increase capability for alphanumeric paging, acknowledgement paging, and the use
of the internet for messaging. The nationwide and three regional narrowband PCS
licenses that the Company holds will allow the Company to offer its own
value-added services. The strategic alliance with PageMart allows for sharing of
certain capital and operating expenses related to the build-out of narrowband
networks, which will significantly lower costs for both parties.
International Operations
International Operating Results (GAAP Basis)
<TABLE>
<CAPTION>
==================================================
Three Months Ended
(Unaudited) March 31
------------------
(Dollars in millions) 1999 1998
- --------------------------------------------------
<S> <C> <C>
Service and other revenues $ 255 $ 198
Equipment sales 19 15
- --------------------------------------------------
Operating revenues 274 213
- --------------------------------------------------
Operating expenses before
depreciation and
amortization expenses 178 134
Depreciation and
amortization expenses 31 25
- --------------------------------------------------
Operating income $ 65 $ 54
==================================================
Equity in net income of
unconsolidated
wireless systems $ 162 $ 81
==================================================
</TABLE>
The Company's consolidated wireless systems are Europolitan in Sweden and
Telecel in Portugal.
The Company's consolidated and unconsolidated international wireless systems
include operations in certain countries that are less mature than the Company's
U.S. cellular operations (not including PrimeCo). As the operations have
matured, the portion of the Company's operating results and profits contributed
by the international consolidated and unconsolidated international wireless
systems have increased. For the three months ended March 31, 1999, the
consolidated international wireless operations were 19% of the Company's
operating revenues as compared to 16% for the same period in 1998, and 24% of
the Company's operating income as compared to 20% for 1998.
Operating revenues for the Company's international wireless operations increased
29%. The increase was primarily due to a 61% annual growth in subscribers.
Prepaid customers represented 81% of the annual growth and 54% of total combined
subscribers as of March 31, 1999. 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
18
<PAGE> 19
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
calling party pays. The increase in operating revenues resulting from the
subscriber growth was partially offset by a 23% decrease in average revenue per
customer.
Operating cash flow margin decreased 2% primarily due to the vigorous
competition from a new competitor in Portugal, which launched service in the
fourth quarter of 1998. This has led to decreased prices as well as increased
costs related to replacing customers lost to higher churn and offering more
incentives to maintain its higher revenue postpaid customers.
Depreciation and amortization expenses increased 24%. 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 the remainder of 1999
to increase capacity in line with the increased usage driven by subscriber
growth. Consequently, depreciation and amortization expenses will continue to
increase.
Equity in net income of international unconsolidated wireless systems increased
100%. 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 82% without the favorable impacts of foreign
currency exchange rates. The most significant contributor to the Company's
equity earnings was Mannesmann Mobilfunk GmbH ("Mannesmann"), the German
wireless system operated by Mannesmann AG. Mannesmann subscribers increased
approximately 60% as compared to March 31, 1998, as competition drove prices
lower and stimulated demand. Mannesmann recently announced further rate
decreases for certain price plans which will go into effect during the second
quarter. Competition has responded, but Mannesmann continues to innovate with
new products and promotions designed to stimulate demand.
The Company's international operations, including those operated by its joint
venture partners, face increasing competition, especially in Europe, as
competitors launch new service. Competition has driven prices down and
stimulated demand. Until recently, the Company's international ventures have
seen increased margins from reduced average cash cost per customer as the
ventures reaped greater benefits from economies of scale, low churn, and lower
selling costs per customer. However, with competitors aggressively lowering
prices, there can be no assurance that the Company's consolidated and
unconsolidated international systems' margins will not decrease from current
levels.
CONTINGENCIES
The Company is party to various legal proceedings, including certain antitrust
litigation. See Note G, "Contingencies," to the Consolidated Financial
Statements on page 9.
Year 2000 Readiness Disclosure
The discussion below is an update to the year 2000 discussion included under
Contingencies in "Management's Discussion and Analysis" in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 and should be read in
conjunction with that discussion.
State of Readiness
The Company has substantially completed phases one, two, and three of its plan.
Phase four is approximately 85% complete and is on target to be 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.
Dependence on Third Parties
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 and during the first part of 1999. Test results
can be obtained from the Cellular Telecommunications Industry Association.
19
<PAGE> 20
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
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 incurred $10 million of total pre-tax
expenses during the first quarter of 1999. The Company plans to incur an
additional $40 million in total pre-tax expenses in 1999. These expenses should
cover development and implementation of the business continuity plan for year
2000 as well as the remaining integration testing and implementation activities.
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.
Business Continuity Plans
The Company's business continuity plan is currently under development for year
2000 issues. The Company believes that the most reasonably likely worst case
scenario resulting from the change of the millennium with respect to the
Company's own systems is that, despite the Company's remediation and testing
efforts, certain system components could malfunction and temporarily disrupt
wireless service in some of the Company's service areas. The Company will have
teams of technicians and programmers standing by in the days following December
31, 1999, to troubleshoot and fix any such problems. The Company believes that
any such disruptions will be limited and temporary and will not have a material
adverse effect on the Company's overall operations.
The Company believes that the most reasonably likely worst case scenario with
respect to systems maintained by third parties is that the other
telecommunications systems with which the Company's systems interconnect such as
the landline and long-distance systems or the power systems that supply power to
the Company's systems could malfunction, which would disrupt the Company's
ability to provide wireless service until such systems are restored. The Company
is not currently aware of any evidence that such a failure is likely to occur in
any of its service areas. However, the Company is currently establishing
relationships with these service providers and implementing escalation policies
in the event that any such failures do occur.
Market Risk
Please see the Contingencies section of the Company's 1998 Annual Report on Form
10-K for a complete discussion and analysis of the Company's market risks. These
risks include unfavorable movements in interest rates and foreign currency
exchange rates. The Company does not anticipate any near-term changes in the
nature of its market risk exposures or in management's objectives and strategies
with respect to managing such exposures.
Interest and Foreign Exchange Rate Risks
As of March 31, 1999, the Company's financial instruments that are subject to
interest and foreign currency exchange rate risks included debt and redeemable
preferred stock with an aggregate fair value of $4,526 million and forward
contracts with an aggregate positive market value of $42 million. This
represents a slight decrease in the total aggregate value of approximately $45
million from December 31, 1998.
With respect to foreign exchange rate risk, the "value-at-risk" ("VAR") for the
Company's debt instruments (including redeemable preferred stock at March 31,
1999) and forward contracts was $77 million at March 31, 1999, and $68 million
at March 31, 1998. The corresponding interest rate risk VAR was $503 million at
March 31, 1999, and $50 million at March 31, 1998.
Merger Costs
As disclosed in the April 22, 1999, proxy statement related to the merger, under
"Fees and Expenses," the Company will incur certain merger related costs of
approximately $70 million. Most of the anticipated costs are contingent upon the
completion of the merger which is expected to be in June or July 1999, but no
earlier than June 23, 1999. To the extent these merger costs are incurred, they
will substantially dilute the Company's earnings in the quarter in which the
merger closes, and reduce cash flows in the quarter in which they are paid.
20
<PAGE> 21
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
LIQUIDITY AND CAPITAL RESOURCES
The Company defines liquidity as its ability to generate resources to finance
business expansion, construct capital assets, and pay its current obligations.
The Company requires substantial capital to operate and expand its existing
wireless systems, to construct new wireless systems, and to acquire interests in
existing wireless systems.
Capital Spending, Debt Service, Net Distribution, and Dividend Requirements for
the First Three Months of 1999
The Company spent $262 million during the first three months of 1999 for
additions to property, plant, and equipment primarily to increase its cellular
and paging network system capacity. The Company invested an additional $220
million during the first three months of 1999 to expand and build-out the
cellular and PCS networks, to purchase additional interests in Omnitel Pronto
Italia, S.p.A., and to fund other capital requirements related to its
unconsolidated systems. Cash payments for debt service during the first three
months of 1999 amounted to approximately $44 million. The Company also paid $17
million in net distributions to holders of minority interests of its
consolidated wireless systems and $35 million for preferred dividends during the
first three months of 1999.
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 March 31, 1999,
the Company had cumulatively spent $244 million to repurchase its common stock
under this authorization. The Company may continue to buy shares on the open
market from time to time, based on market conditions.
Funding - First Three Months of 1999
Cash flows from operating activities of $341 million, proceeds from the issuance
of commercial paper, long term debt, and proceeds from the exercise of stock
options were the primary sources utilized to fund the above mentioned cash
requirements. Cash flows from operations include distributions of $19 million
received from unconsolidated equity investees.
Future Funding Requirements
Worldwide, the wireless industry continues to experience substantial subscriber
growth as evidenced by increasing penetration. In the U.S., subscribers appear
increasingly attracted to subscription plans that feature a large number of
minutes for a fixed monthly fee. In the Company's international operations, new
products and services, such as prepaid services, have resulted in tremendous
subscriber growth. Finally, as competition spurs prices lower, wireline minutes
are migrating to wireless carriers. All the above trends will result in
increased wireless usage which in turn could put upward pressure on the capital
required to expand the network infrastructures of the Company's consolidated and
unconsolidated wireless systems.
The Company will continue to be required to make substantial expenditures in
connection with its efforts to expand its existing wireless business and,
potentially, to pursue opportunities to expand into new markets. For the
remainder of 1999, U.S. and international requirements for capital expenditures
and contributions to existing wireless systems are expected to be approximately
$1.4 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 primarily to expand its digital wireless networks as subscribers and
usage increase in both the U.S. and its consolidated international systems in
Sweden and Portugal.
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.
The Company's existing U.S. and international operations were committed to spend
approximately $110 million at March 31, 1999, for the acquisition of property,
plant, and equipment. In addition to these commitments, the Company plans to
make additional capital expenditures of approximately $910 million during the
remainder of 1999 to increase the capacity of its existing wireless networks and
to continue its expansion of CDMA digital technology. Included in the projected
capital spending is the 1999 portion of the multi-year $500 million contract
with Nortel Networks to expand and upgrade the Company's digital cellular
networks. The Company is also committed to spend approximately $311 million at
March 31, 1999, for the purchase of cellular handsets, pagers, and other items.
21
<PAGE> 22
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
Unconsolidated Wireless Systems
As of March 31, 1999, commitments for capital contributions to existing
unconsolidated wireless systems were not significant. However, the Company plans
to make additional capital contributions of approximately $138 million during
the remainder of 1999 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 April 1999, the Company increased its ownership in its joint venture in South
Korea, Shinsegi Mobile Telecommunication Co., Ltd., from 10.7% to 11.4%. 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.
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 March 31, 1999, the
amount available for borrowing under the Facility was approximately $1.2
billion.
In April 1999, the Company and Vodafone arranged for a credit line from a
banking syndicate for funding up to $10.5 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. As of
April 22, 1999, the Company's has an effective registration statement permitting
the issuance of an additional $800 million of securities.
In addition to these sources, the Company also has access to international
capital markets.
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 its minority partners, and preferred dividends through the end
of 1999. Cash flows from operations include distributions from unconsolidated
equity partners, 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, or other unanticipated events,
the Company may raise the required funds through borrowings or public or private
sales of debt or equity securities. Such funding may be obtained through
borrowings under the Facility; through the Company's commercial paper program;
from additional securities which may be issued from time to time under an
effective registration statement; through the issuance of securities in a
transaction exempt from registration under the Securities Act of 1933; or a
combination of one or more of the foregoing. The Company believes, that in the
event of such requirements, it will be able to access the capital markets on
terms and in amounts adequate to meet its objectives. However, given the
possibility of changes in market conditions or other occurrences, there can be
no certainty that such funding will be available in quantities or on terms
favorable to the Company.
22
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF AIRTOUCH COMMUNICATIONS, INC.:
We have reviewed the accompanying Consolidated Balance Sheet of AirTouch
Communications, Inc. and subsidiaries ("Company") as of March 31, 1999 and the
related Consolidated Statements of Income and of Cash Flows for the three-month
periods ended March 31, 1999 and 1998. These Consolidated Financial Statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists primarily of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying Consolidated Financial Statements for them to be in
conformity with generally accepted accounting principles.
Our reviews were made for the purpose of expressing limited assurance on the
Consolidated Financial Statements taken as a whole. The Selected Proportionate
Financial Data ("Proportionate Financial Data") for the three-month periods
ended March 31, 1999 and 1998 appearing on page 12 is presented for additional
analysis and is not a required part of the basic financial statements. As
discussed on page 11, the Proportionate Financial Data has been prepared by the
Company to present financial information that, in the opinion of management, is
not provided by financial statements prepared in conformity with generally
accepted accounting principles. Such Proportionate Financial Data, prepared on
the basis of presentation described on page 11, has been subjected to the
inquiry and analytical procedures applied in the review of the basic financial
statements. Based on our reviews, we are not aware of any material modifications
that should be made to such information in relation to the basic Consolidated
Financial Statements taken as a whole.
We previously audited in accordance with generally accepted auditing standards,
the Consolidated Balance Sheet as of December 31, 1998, and the related
Consolidated Statements of Income, of Stockholders' Equity, and of Cash Flows
for the year then ended (not presented herein), and in our report dated March 1,
1999 we expressed an unqualified opinion on those Consolidated Financial
Statements. In our opinion, the information set forth in the accompanying
Consolidated Balance Sheet information as of December 31, 1998, is fairly stated
in all material respects in relation to the Consolidated Balance Sheet from
which it has been derived.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 12, 1999
23
<PAGE> 24
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Footnote G, "Contingencies", in the Notes to Consolidated Financial
Statements
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibits identified below are incorporated herein by reference as exhibits
hereto.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
15.1 Letter of PricewaterhouseCoopers LLP Re:Unaudited Interim
Financial Information
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
Date of Report: January 15, 1999
Item 5. Other Events and Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits
Date of Report: January 19, 1999
Item 5. Other Events
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AIRTOUCH COMMUNICATIONS, INC.
By: /s/ Mohan S. Gyani
-----------------------------
Mohan S. Gyani
Executive Vice President and
Chief Financial Officer
Date: May 12, 1999
25
<PAGE> 1
Exhibit 15.1
May 12, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated May 12, 1999 on our review of interim
financial information of AirTouch Communications, Inc. for the quarter ended
March 31, 1999 and included in the Company's quarterly report on Form 10-Q for
the quarter then ended is incorporated by reference in the Registration
Statements on Form S-8 (Nos. 33-57077, 33-57081, 33-57083, 33-64553, 333-10389,
333-17891, 333-36339, 333-50541, and 333-67035) and the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-62787 and
333-56645).
Yours very truly,
/s/ PRICEWATERHOUSECOOPERS LLP
<TABLE> <S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,000
<SECURITIES> 0
<RECEIVABLES> 737,000
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<INVENTORY> 120,000
<CURRENT-ASSETS> 1,227,000
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1,575,000
1,037,000
<COMMON> 7,364,000
<OTHER-SE> 8,577,000
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