<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 August 6, 1999, 597,376,542 shares of common stock were outstanding.
<PAGE> 2
AIRTOUCH COMMUNICATIONS, INC.
INDEX TO REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Statements of Income...................................................... 3
Consolidated Balance Sheets............................................................ 4
Consolidated Statements of Cash Flows.................................................. 5
Notes to Consolidated Financial Statements............................................. 6
Selected Proportionate Financial Data.................................................. 12
Selected Proportionate Operating Data.................................................. 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................................................ 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK .......................................................................... 25
REPORT OF INDEPENDENT ACCOUNTANTS .......................................................... 26
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .......................................................................... 27
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................................... 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ............................................................ 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........................................ 27
ITEM 5. OTHER INFORMATION .......................................................................... 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................................................... 28
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
(Dollars in millions, except per share information) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues $ 1,484 $ 1,348 $ 2,910 $ 2,306
--------- --------- --------- ---------
Operating expenses:
Cost of revenues 323 269 640 470
Selling and customer operations expenses 464 379 890 640
General, administrative, and other expenses 162 161 304 279
Depreciation and amortization expenses 285 253 560 397
--------- --------- --------- ---------
Total operating expenses 1,234 1,062 2,394 1,786
--------- --------- --------- ---------
Operating income 250 286 516 520
Equity in net income (loss) of unconsolidated wireless systems:
U.S. 9 (13) 9 (17)
International 193 98 355 179
Minority interests in net (income) loss of consolidated wireless systems (46) (45) (91) (87)
Interest:
Expense (36) (42) (76) (61)
Income 4 9 6 15
Merger related costs (116) -- (119) --
Miscellaneous income (expense) 21 3 92 (7)
--------- --------- --------- ---------
Income before income taxes and preferred dividends 279 296 692 542
Income taxes 98 116 219 195
--------- --------- --------- ---------
Income before preferred dividends 181 180 473 347
Preferred dividends 34 33 69 47
--------- --------- --------- ---------
Net income applicable to common stockholders $ 147 $ 147 $ 404 $ 300
========= ========= ========= =========
Net Income applicable to common stockholders - per share
Basic $ 0.25 $ 0.26 $ 0.70 $ 0.56
Diluted $ 0.25 $ 0.25 $ 0.68 $ 0.55
--------- --------- --------- ---------
Weighted average shares outstanding (in thousands) 578,088 568,856 576,075 539,140
--------- --------- --------- ---------
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
3
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
June 30 December 31
(Dollars in millions) 1999 1998
-------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 39 $ 44
Accounts receivable (net of allowance for uncollectibles of $70 and $65, respectively) 739 724
Inventories 128 143
Other receivables 384 225
Due from related parties 24 59
Other current assets 145 120
-------- --------
Total current assets 1,459 1,315
Property, plant, and equipment, net 4,159 4,049
Investments in unconsolidated wireless systems 3,902 3,491
Intangible assets, net 8,333 8,513
Deferred charges and other noncurrent assets 106 185
-------- --------
Total assets $ 17,959 $ 17,553
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 348 $ 493
Short-term borrowings 12 72
Current portion of long-term debt 39 45
Due to related parties 126 --
Other current liabilities 1,064 925
-------- --------
Total current liabilities 1,589 1,535
Long-term debt 2,337 2,701
Deferred income taxes 1,789 1,839
Deferred credits 161 152
-------- --------
Total liabilities 5,876 6,227
-------- --------
Commitments and contingencies
Minority interests in consolidated wireless systems 423 427
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 (no shares authorized, issued, or outstanding at
June 30, 1999; 19 million shares authorized and 17.2 million shares issued and outstanding
with a liquidation value of $552 at December 31, 1998) -- 500
4.25% Class C Convertible (13 million shares authorized; 8.6 million shares issued and outstanding
with a liquidation value of $432 at June 30, 1999; 11.0 million shares issued and outstanding
with a liquidation value of $551 at December 31, 1998) 421 541
Common stock and additional paid-in capital ($.01 par value; 1.1 billion shares authorized;
597.4 million shares issued and outstanding at June 30, 1999; 576.8 million shares issued and 572.4 million
shares outstanding [net of 4.3 million treasury shares at a cost of $207] at December 31, 1998) 8,347 7,255
Retained earnings 1,427 1,023
Accumulated other comprehensive income (110) 8
Deferred compensation -- (2)
-------- --------
Total stockholders' equity 10,085 9,325
-------- --------
Total liabilities and stockholders' equity $ 17,959 $ 17,553
-------- --------
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
AIR TOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30
--------------------
(Dollars in millions) 1999 1998
- --------------------- -------- -------
<S> <C> <C>
Cash flows from operating activities:
Income before preferred dividends $ 473 $ 347
Adjustments to reconcile income before preferred dividends
for items currently not affecting operating cash flows:
Depreciation, amortization, and other noncash items 561 387
Equity in net (income) loss of unconsolidated wireless systems (364) (162)
Distributions received from equity investees 104 22
Minority interest in net income (loss) of consolidated wireless systems 91 87
Deferred income tax (benefit) expense 69 23
Loss (gain) on sale of assets and telecommunications interests (34) --
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable, net (29) (19)
Other current assets and receivables (171) 18
Deferred charges and other noncurrent assets 12 (12)
Accounts payable and other current liabilities 389 (26)
Deferred credits and other liabilities (73) 18
------ -------
Cash flows from operating activities 1,028 683
------ -------
Cash flows from investing activities:
Investments in wireless systems (365) (493)
Proceeds from sale of wireless systems 57 --
Additions to property, plant, and equipment (546) (456)
Proceeds from sale of property, plant, and equipment 7 8
Proceeds from sale of available-for-sale securities 89 --
Other investing activities 61 2
------ -------
Cash flows from investing activities (697) (939)
------ -------
Cash flows from financing activities:
Proceeds from issuing long-term debt and commercial paper 304 2,378
Retirement of long-term debt and commercial paper (618) (2,126)
Net distributions to minority interests of consolidated wireless systems (75) (48)
Proceeds from common shares issued 284 91
Purchases of common stock (93) (4)
Increase (decrease) in short-term borrowings (55) 19
Payment of preferred stock dividends (76) (27)
Other financing activities (6) (4)
------ -------
Cash flows from financing activities (335) 279
------ -------
Effect of exchange rate changes on cash and cash equivalents (1) 1
------ -------
Net change in cash and cash equivalents (5) 24
Beginning cash and cash equivalents 44 1
------ -------
Ending cash and cash equivalents $ 39 $ 25
====== =======
</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 June 30, 1999 and for the three- and six-month periods ended June 30,
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 August 6,
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, which has been
subsequently amended by SFAS No. 137, the Company intends to adopt SFAS No. 133
effective January 1, 2001, if applicable. During the second quarter, the
Company unwound all of its foreign currency forward contracts in anticipation
of the Vodafone merger. There was no material impact on the Company's financial
position or results of operations. Based on its hedging activities at June 30,
1999, the Company does not believe that the implementation of SFAS No. 133 will
have a material adverse impact on its financial position or results of
operations.
VODAFONE AIRTOUCH MERGER
On June 30, 1999, AirTouch completed its merger with Vodafone Group Plc
("Vodafone") and became a wholly owned subsidiary of Vodafone AirTouch Plc.
Under the terms of the merger, owners of AirTouch common stock received five
Vodafone AirTouch ordinary shares in the form of 0.5 of a Vodafone AirTouch
American Depository Share and $9 in cash, without interest, for each share of
AirTouch common stock held at closing. As a result of the merger Vodafone was
renamed "Vodafone AirTouch Plc."
Concurrent with the closing of the merger, all existing AirTouch common shares
were cancelled. Additionally, all outstanding Preferred B shares were
mandatorily converted. In return the Company issued new common shares to
Vodafone AirTouch Plc.
CHANGES IN FINANCING
The Company discontinued issuing new commercial paper during the second quarter
in anticipation of its merger with Vodafone. Upon the completion of the merger,
the Company's $2 billion credit facility was cancelled. The commercial paper
remaining at June 30, 1999 was supported by Vodafone AirTouch Plc's $10.0
billion credit line with a syndicate of banks. During July, all remaining
outstanding commercial paper was paid off with proceeds from a long-term
intercompany loan with Vodafone AirTouch.
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, had a
dilutive impact on EPS for the three and six months ended June 30, 1999 and
1998 and were included in the calculation of diluted EPS. CSEs related to Class
B and Class C preferred stock, determined using the "if converted" method, had
an anti-dilutive impact on EPS for the three and six months ended June 30, 1999
and 1998 and were not included in the calculation of EPS.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Three Months Ended
June 30, 1999 June 30, 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 $ 147 578,088 $ 0.25 $ 147 568,856 $ 0.26
======= =======
Effect of Dilutive Securities
Stock options 17,304 9,428
Diluted Earnings Per Share
Net income applicable to common stockholders $ 147 595,392 $ 0.25 $ 147 578,284 $ 0.25
======= ======= ======= ====== ======= =======
<CAPTION>
(Unaudited) (Unaudited)
Six Months Ended Six Months Ended
June 30, 1999 June 30, 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 $ 404 576,075 $ 0.70 $ 300 539,140 $ 0.56
======= =======
Effect of Dilutive Securities
Stock options 18,059 8,247
Diluted Earnings Per Share
Net income applicable to common stockholders $ 404 594,134 $ 0.68 $ 300 547,387 $ 0.55
======= ======= ======= ====== ======= =======
</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 and six months ended June 30, 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 June 30, 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 $ 1,084 $ 287 $ 112 $ 1 $ 1,484
Net income applicable to common stockholders $ 91 $ 215 $ 5 $ (164) $ 147
<CAPTION>
(Unaudited)
Six Months Ended June 30, 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 $ 2,127 $ 561 $ 222 $ -- $ 2,910
Net income applicable to common stockholders $ 173 $ 384 $ 12 $ (165) $ 404
Total assets as of June 30, 1999 $14,072 $ 3,320 $ 476 $ 91 $17,959
<CAPTION>
(Unaudited)
Three Months Ended June 30, 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 $ 1,001 $ 241 $ 105 $ 1 $ 1,348
Net income applicable to common stockholders $ 99 $ 110 $ 5 $ (67) $ 147
<CAPTION>
(Unaudited)
Six Months Ended June 30, 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 $ 1,648 $ 454 $ 203 $ 1 $ 2,306
Net income applicable to common stockholders $ 182 $ 199 $ 11 $ (92) $ 300
Total assets as of June 30, 1998 $13,985 $ 2,808 $ 473 $ (38) $17,228
</TABLE>
(a) U.S. Cellular Operations include equity losses 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 $135 million and $187 million for the
three months ended June 30, 1999 and 1998, and $355 million and $347 million
for the six months ended June 30, 1999 and 1998, respectively.
F. INVESTMENTS IN UNCONSOLIDATED WIRELESS SYSTEMS
The Company's investments in unconsolidated wireless systems consist of the
following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
(Dollars in millions) 1999 1998
------- -----------
<S> <C> <C>
Investments at equity $ 3,714 $ 3,344
Investments at cost 188 147
------- -------
$ 3,902 $ 3,491
======= =======
</TABLE>
The Company's equity in net income of its significant equity investee at
December 31, 1998, Mannesmann Mobilfunk GmbH ("Mannesmann") was $101 million
and $67 million for the three months ended June 30, 1999 and 1998, and $196
million and $148 million for the six months ended June 30, 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
JUNE 30
--------------------------
(Dollars in millions) 1999 1998
------- -------
<S> <C> <C>
Mannesmann Mobilfunk GmbH
Operating revenues $ 1,273 $ 958
Operating income $ 522 $ 400
Net income $ 226 $ 173
------- -------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------------
(Dollars in millions) 1999 1998
------- -------
<S> <C> <C>
Mannesmann Mobilfunk GmbH
Operating revenues $ 2,470 $ 1,836
Operating income $ 999 $ 765
Net income $ 432 $ 330
------- -------
</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 an appeal. In August 1998,
a complaint
9
<PAGE> 10
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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.
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. On August 3, 1999, the
matter was settled. The Company believes the outcome of this matter will not
have an adverse impact 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. In June 1999,
the Monterey District Attorney and City Attorney of Los Angeles filed a class
action asserting identical claims. These cases are 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 June 30, 1999, the
Company's proportionate share under such arrangements was $219 million. The
Company believes it is remote that it will be required to pay under these
various arrangements.
10
<PAGE> 11
AirTouch Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
H. SUBSEQUENT EVENTS
On July 19, 1999, Vodafone AirTouch announced the signing of an agreement to
purchase CommNet Cellular, Inc. for $764 million and the assumption of
approximately $600 million of debt. The transaction is expected to close in
approximately four to five months from the signing of the agreement.
On August 3, 1999, Vodafone AirTouch and Bell Atlantic Corporation ("Bell
Atlantic") announced that they had entered into an agreement to dissolve
PrimeCo Personal Communications and allocate the properties between the
partners. Under the terms of the agreement, Vodafone AirTouch will take over
the operations of five markets, Chicago, IL, Milwaukee, WI, and the Texas
markets of Dallas, San Antonio, and Houston. Bell Atlantic will assume
ownership of the five markets in the Richmond, VA, New Orleans, LA, and Florida
markets of Jacksonville, Tampa, and Miami. This dissolution is expected to be
completed by the end of 1999 or early next year, pending certain regulatory
approvals and the completion of the necessary transitional steps. The Company
will incur certain costs related to the dissolution, however, such costs are
not expected to be material. Additionally, the Company does not believe that
this dissolution will have a material adverse impact on the Company's financial
position or results of operations.
11
<PAGE> 12
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. On August 3, 1999, Vodafone Air Touch and Bell Atlantic
announced that they had entered into an agreement to dissolve PrimeCo and
allocate the properties between the partners. 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.
12
<PAGE> 13
SELECTED PROPORTIONATE FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
(Dollars in millions) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total Company
Service and other revenues $ 2,297 $ 1,798 $ 4,416 $ 3,153
Operating expenses before depreciation and amortization expenses(1) 1,400 1,090 2,685 1,898
-------- -------- -------- --------
Operating cash flow(2) 897 706 1,731 1,255
Depreciation and amortization expenses 395 335 790 551
-------- -------- -------- --------
Operating income 502 373 941 704
Interest and other income (expenses) (133) (33) (91) (67)
Income taxes (188) (160) (377) (290)
-------- -------- -------- --------
Income before preferred dividends 181 180 473 347
Preferred dividends 34 33 69 47
-------- -------- -------- --------
Net income applicable to common stockholders $ 147 $ 147 $ 404 $ 300
======== ======== ======== ========
Operating cash flow margin(3) 39.1% 39.4% 39.2% 39.8%
======== ======== ======== ========
U.S. Cellular and PCS Operations(4)
Service and other revenues $ 1,116 $ 992 $ 2,167 $ 1,63
Operating expenses before depreciation and amortization expenses(1) 673 560 1,319 922
-------- -------- -------- --------
Operating cash flow(2) 443 432 848 710
Depreciation and amortization expenses 261 228 512 341
-------- -------- -------- --------
Operating income $ 182 $ 204 $ 336 $ 369
======== ======== ======== ========
Operating cash flow margin(3) 39.7% 43.5% 39.1% 43.5%
======== ======== ======== ========
International Operations
Service and other revenues $ 1,079 $ 713 $ 2,047 $ 1,339
Operating expenses before depreciation and amortization expenses(1) 629 436 1,200 806
-------- -------- -------- --------
Operating cash flow(2) 450 277 847 533
Depreciation and amortization expenses 112 86 233 167
-------- -------- -------- --------
Operating income $ 338 $ 191 $ 614 $ 366
======== ======== ======== ========
Operating cash flow margin(3) 41.7% 38.8% 41.4% 39.8%
======== ======== ======== ========
U.S. Paging Operations(5)
Service and other revenues(6) $ 102 $ 92 $ 202 $ 181
Operating expenses before depreciation and amortization expenses 72 62 140 121
-------- -------- -------- --------
Operating cash flow(2) 30 30 62 60
Depreciation and amortization expenses 20 19 40 38
-------- -------- -------- --------
Operating income $ 10 $ 11 $ 22 $ 22
======== ======== ======== ========
Operating cash flow margin(3) 29.4% 32.6% 30.7% 33.1%
======== ======== ======== ========
</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 at June 30, 1999 and 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.
13
<PAGE> 14
SELECTED PROPORTIONATE OPERATING DATA (UNAUDITED)(1)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
(Dollars in millions, except per unit data and operating data in thousands) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total Company
Cellular and PCS POPs(2)(3)(4) 239,832 235,738 239,832 235,738
Cellular and PCS subscribers(2)(4) 16,347 11,734 16,347 11,734
Paging units in service(4)(5) 3,579 3,317 3,579 3,317
Total proportionate customers(4) 19,926 15,051 19,926 15,051
Cellular and PCS subscriber net adds in period, excluding acquisitions(2) 1,063 870 2,135 1,524
Capital expenditures and capital calls, excluding acquisitions(6) $ 487 $ 323 $ 862 $ 588
Proportionate capital expenditures(7) $ 619 $ 378 $ 1,026 $ 692
======== ======== ======== ========
U.S. Cellular and PCS Operations(2)
Cellular and PCS POPs(2)(3)(4) 96,480 97,080 96,480 97,080
Cellular and PCS subscribers(2)(4) 8,951 7,572 8,951 7,572
Cellular and PCS subscriber net adds in period, excluding acquisitions(2) 285 297 638 497
Monthly average revenue per unit $ 42.23 $ 45.44 $ 41.73 $ 46.05
Monthly cash cost per unit $ 25.47 $ 25.65 $ 25.40 $ 26.02
Proportionate capital expenditures(7) $ 306 $ 197 $ 479 $ 332
======== ======== ======== ========
International Operations
Cellular POPs(3)(4) 143,352 138,658 143,352 138,658
Cellular subscribers(4) 7,396 4,162 7,396 4,162
Cellular subscriber net adds in period, excluding acquisitions 778 573 1,497 1,027
Monthly average revenue per unit $ 51.54 $ 61.42 $ 51.75 $ 61.72
Monthly cash cost per unit $ 30.05 $ 37.56 $ 30.34 $ 37.15
Proportionate capital expenditures(7) $ 284 $ 148 $ 498 $ 303
======== ======== ======== ========
U.S. Paging Operations(8)
Total paging units in service(4) 3,511 3,228 3,511 3,228
Paging units in service net adds in period, excluding acquisitions 43 88 89 127
Capital expenditures(6) $ 20 $ 20 $ 37 $ 38
======== ======== ======== ========
</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 at June 30, 1999 and 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 respective three- and six-month
periods ended June 30.
(7) "Proportionate capital expenditures" are expenditures for property, plant,
and equipment of each system in which the Company owns an interest
multiplied by the Company's ownership interest.
(8) U.S. Paging Operations are wholly owned by the Company and include
operations in Canada which are not material to the information presented.
14
<PAGE> 15
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis for AirTouch Communications, Inc., and
Subsidiaries (the "Company" or "AirTouch"), focuses on material changes in
financial condition from December 31, 1998, and in results of operations for
the three- and six-month periods ended June 30, 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: the ability of
Vodafone AirTouch to achieve the anticipated cost savings or revenue
enhancements following the merger, 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 AIRTOUCH MERGER
On June 30, 1999, AirTouch completed its merger with Vodafone Group Plc
("Vodafone") and became a wholly owned subsidiary of Vodafone AirTouch Plc.
Under the terms of the merger, owners of AirTouch common stock received five
Vodafone AirTouch ordinary shares in the form of 0.5 of a Vodafone AirTouch
American Depository Share and $9 in cash, without interest, for each share of
AirTouch common stock held at closing. As a result of the merger Vodafone
was renamed "Vodafone AirTouch Plc."
Concurrent with the closing of the merger, all existing AirTouch common shares
were cancelled. Additionally, all outstanding Preferred B shares were
mandatorily converted. In return the Company issued new common shares to
Vodafone AirTouch Plc.
RESULTS OF OPERATIONS
The following discussions compare the results of operations for the three- and
six-month periods ended June 30, 1999, to the comparable periods ended June 30,
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 was the same for the three months ended June 30, 1999, and increased
for the six months ended June 30, 1999, when compared to the same periods in
1998. The increase was primarily due to the growth in earnings from the
Company's unconsolidated wireless systems. Second quarter 1999's results
included approximately $97 million (after-tax) of one-time charges related to
the consummation of the merger with Vodafone which was partially reduced by a
one-time gain from the sale of one of the Company's investments in Japan and a
tax benefit from a reduction of the statutory tax rate in one of countries in
which the Company has an equity investment. The year-to-date period also
included several other one-time gain items such as the sale of securities and
the sale of PrimeCo's Hawaii wireless system. Without such one-time items, the
net income for the three-month period ended June 30, 1999, increased 46% from
the same period in 1998, and increased 39% for the six-month period ended June
30, 1999, over the same period in 1998. See "Consolidated Results of Operations
- - 1999 vs. ProForma 1998," for further discussion.
15
<PAGE> 16
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
Consolidated operating revenues increased for the quarter ended June 30, 1999,
due to continued subscriber growth in the U.S. and international cellular
markets, driven by increased demand for wireless services worldwide. The
year-to-date increase was also due to the consolidation of the cellular
businesses acquired from MediaOne Group as of April 6, 1998.
Consolidated operating cash flow margin decreased for both the three- and
six-month periods ended June 30, 1999 due to higher operating costs driven by
competition. See the U.S. cellular and international sections for further
discussion.
Equity in net income of unconsolidated wireless systems for both periods
increased primarily due to the strong operating results of the Company's
unconsolidated international wireless systems and the increased profitability
at CMT Partners. Second quarter 1999's results also included the benefit from
the tax rate reduction in one of the Company's international equity
investments, and the year-to-date increase included the gain from the sale of
PrimeCo's Hawaii wireless system. Increased ownership from 25% to 50% in the
operating losses of PrimeCo, due to the MediaOne Group merger, partially offset
the increase for the three- and six-month periods. These increases are
discussed in the U.S. cellular and international sections.
The Company's unconsolidated ventures distributed $85 million of cash dividends
during the quarter ended June 30, 1999, as compared to $6 million during the
quarter ended June 30, 1998, and $104 million for the 1999 year-to-date period
as compared to $22 million for the comparable period of 1998.
Interest expense and preferred dividends increased for the six-month period
ended June 30, 1999, primarily due to debt and redeemable preferred stock
issued in connection with the MediaOne Group merger.
Merger related costs for the three- and six-month periods ended June 30, 1999
were due to the consummation of the merger with Vodafone. These costs primarily
included investment banker's fees, change in control related benefits,
severance costs, legal, and regulatory filing fees.
Miscellaneous income for the three-month period ended June 30, 1999 was
primarily the gain from the sale of one of the Company's investments in Japan.
The six-month period ended June 30, 1999, also included one-time gains from the
sale of securities.
Consolidated Results of Operations - 1999 vs. Pro Forma 1998
The consolidated operating results for the three- and six-month periods ended
June 30, 1999, were not comparable to the results for the three- and six-month
periods ended June 30, 1998. 1999's results included a full three and six
months of 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, whereas, 1998 included
comparable results only from April 6, 1998.
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.
16
<PAGE> 17
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
Consolidated Results of Operations (GAAP Basis)
<TABLE>
<CAPTION>
=========================================================================================
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
(Unaudited) Actual Pro Forma Actual Pro Forma
(Dollars in millions) 1999 1998 1999 1998
- -------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues $ 1,484 $ 1,367 $ 2,910 $ 2,667
- -------------------------------------- --------- --------- --------- ---------
Operating expenses before depreciation
and amortization expenses 949 821 1,834 1,602
Depreciation and amortization expenses 285 257 560 509
- -------------------------------------- --------- --------- --------- ---------
Total operating expenses 1,234 1,078 2,394 2,111
- -------------------------------------- --------- --------- --------- ---------
Operating income 250 289 516 556
Equity in net income (loss) of
unconsolidated wireless systems 202 85 364 126
Minority interests in net (income)
of consolidated wireless systems (46) (45) (91) (97)
Merger related costs (116) -- (119) --
Interest and miscellaneous income (11) (31) 22 (67)
- -------------------------------------- --------- --------- --------- ---------
Income before income taxes
and preferred dividends 279 298 692 518
Income taxes 98 116 219 186
- -------------------------------------- --------- --------- --------- ---------
Income before preferred dividends 181 182 473 332
Preferred dividends 34 35 69 70
- -------------------------------------- --------- --------- --------- ---------
Net income applicable to
common stockholders $ 147 $ 147 $ 404 $ 262
====================================== ========= ========= ========= =========
</TABLE>
Net income was the same for the three-month period ended June 30, 1999, and
increased 54% for the six-month period ended June 30, 1999, when compared to
the same periods of 1998. Second quarter 1999's results included approximately
$97 million (after-tax) of one-time charges related to the consummation of the
merger with Vodafone which were partially reduced by a one-time gain from the
sale of one of the Company's investments in Japan and a tax benefit from a
reduction of the statutory tax rate in one of countries in which the Company
has an equity investment. The year-to-date period also included several other
one-time gain items such as the sale of securities and the sale of PrimeCo's
Hawaii wireless system. Without these one-time items, net income increased 46%
and 60% for the three- and six-month periods ended June 30, 1999, as compared
to the same periods of 1998. The increases were primarily due to the growth in
earnings from the Company's unconsolidated wireless systems.
Consolidated operating revenues increased 9% for both the three- and six-month
periods ended June 30, 1999, while consolidated operating income decreased for
both periods.
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 decreased operating income was due to the effects of competition in the
Company's consolidated 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. Second quarter 1999's results also
included the benefit from the tax rate reduction in one of the Company's
international equity investments, and the year-to-date increase included the
gain from the sale of PrimeCo's Hawaii wireless system. These increases are
discussed in the U.S. cellular and international sections.
Merger related costs for the three- and six-month periods ended June 30, 1999
were due to the consummation of the merger with Vodafone. These costs primarily
included investment banker's fees, change in control related benefits,
severance costs, legal, and regulatory filing fees.
The interest expense in the "Interest and miscellaneous income" for the
three-month period
17
<PAGE> 18
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
ended June 30, 1999 was partially offset by the gain from the sale of one of the
Company's investments in Japan. For the six-month period, interest expense was
more than offset by the one-time gains from the sale of securities.
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 normalizing for
the equity in net income of unconsolidated international wireless systems for
which no U.S. taxes were provided, differences in international tax rates, and
non-tax deductible costs, the normalized rate was 47% and 45% for the three-
and six-month periods ended June 30, 1999, compared to 46% and 45% for the
three- and six-month periods ended June 30, 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 three- and six- month periods ended June 30, 1999, with the
pro forma results of the three- and six- month periods ended June 30, 1998, as
presented in the following table:
U.S. Cellular Operating Results (GAAP Basis)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------- -------------------------------
(Unaudited) Actual Actual
-------------------- Pro Forma -------------------- Pro Forma
(Dollars in millions) 1999 1998 1998 1999 1998 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service and other revenues $ 1,020 $ 956 $ 975 $ 2,001 $ 1,573 $ 1,908
Equipment sales 64 45 46 126 75 101
--------- --------- --------- --------- --------- ---------
Operating revenues 1,084 1,001 1,021 2,127 1,648 2,009
--------- --------- --------- --------- --------- ---------
Operating expenses before depreciation
and amortization expenses 655 552 563 1,283 911 1,125
Depreciation and
amortization expenses 228 204 210 450 302 414
--------- --------- --------- --------- --------- ---------
Operating income $ 201 $ 245 $ 248 $ 394 $ 435 $ 470
========= ========= ========= ========= ========= =========
Equity in net income (loss) of
unconsolidated wireless systems $ 9 $ (13) $ (13) $ 9 $ (17) $ (53)
========= ========= ========= ========= ========= =========
</TABLE>
The 6% increase in operating revenues for the three- and six-month periods
ended June 30, 1999 compared to the same periods in 1998 was primarily due to
the 15% annual growth in customers, partially offset by a decrease in the
average revenue per customer. Average revenue per customer (excluding revenue
from equipment sales) decreased 9% when compared to the three- and six-month
periods ended June 30, 1998. Although average revenue per customer decreased,
it decreased at a slower rate than in 1998, as usage increased. Usage per
customer increased 14% and 15% for the three- and six-month periods ended June
30, 1999 from the comparable 1998 periods. Usage increases were 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). Revenue per
minute of use decreased 21% when compared to the three- and six-month periods
ended June 30, 1998. Decreases in both average revenue per customer and average
revenue per minute resulted from 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, the Company
believes that lower prices, increasing digital subscriber base, the increasing
availability of new handsets with wireless data capabilities and corresponding
new services will accelerate usage increases. Increasing usage should
eventually result in a stable or even increasing average revenue per customer.
The Company's outlook for the wireless industry is continued strong demand and
an expanding market. The Company
18
<PAGE> 19
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
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 second quarter, the Company
achieved approximately one-quarter of its net gains from the prepaid program
launched in the first quarter. 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. Currently, churn rates for prepaid customers are significantly
higher than postpaid customers. The Company's initiatives to reduce this churn
rate will include more customer service outreach. Prepaid subscribers are a
very small but growing part of the subscriber base.
The U.S. wireless industry is increasingly moving towards a one-rate pricing
model, which includes roaming and long distance at no extra charge. The Company
has increased its offerings of various one-rate pricing plans to remain
competitive. 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 have decreased. For the three months ended June 30,
1999, the Company's roaming-in revenues decreased to 9% of service and other
revenue from 10% for the comparable period in 1998, as rate reductions more
than offset increased volume. During the second quarter of 1999, net
roaming-out expense continued to increase as a percentage of total cash cost as
increased volume in roaming-out traffic more than offset rate reductions.
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 three- and six-month
periods ended June 30, 1999 as compared to the same periods in 1998. The
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
lower margin. A portion 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. However, the remaining margin
decrease was primarily attributable to the cost of increased gross gains and
increased customer operations costs. The increased gross gains did not result
in the same increase in subscribers, as churn increased in 1999 compared to
1998 due to intense competition. Churn increased for the three- and six-month
periods ended June 30, 1999 as compared to 1998; however, it has decreased from
the levels experienced during the prior two quarters due to increased retention
efforts. These retention efforts and further migration of customers from analog
to digital service resulted in additional handset subsidies. The Company also
incurred higher selling costs when it launched its new advertising campaign
promising superior service to its customers.
As customer demand for digital service increases, the Company expects that
operating cash flow margin will continue to be adversely impacted by the cost
of migrating customers from analog to digital service. Digital handsets are
more than twice the cost of analog handsets and competitive price points for
digital handsets require that they be sold with a greater subsidy than analog
handsets. This will tend to put pressure on selling costs and customer
retention costs until digital handset pricing can be significantly lowered.
However, digital customers generate higher average revenue per customer and
have lower churn than analog customers.
Although the Company anticipates higher costs from digital migration, the
Company is actively pursuing multiple initiatives to lower costs in all areas
of the business. Such initiatives primarily involve centralizing and leveraging
its scale to improve efficiency and standardization. The Company believes that
its efforts will ultimately be successful in lowering its cost structure.
However, due to the intense competition and pace of change in the industry,
there can be no assurance that the Company's U.S. cellular operations will not
continue to experience further decreases to its operating cash flow margin.
19
<PAGE> 20
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
Depreciation and amortization expenses increased 9% for both the three- and
six-month periods ended June 30, 1999. 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 increase in equity income for the three- and six-month periods ended June
30, 1999, was primarily due to stronger operating results of CMT Partners and
reduced net losses from PrimeCo. CMT Partners is equally owned by the Company
and AT&T. Stronger operating results at CMT Partners were driven by growth in
subscribers and higher roaming-in revenues. Decreased losses at PrimeCo were
primary due to improving economies of scale, driven by growth in subscribers.
The six-month period also includes the one-time gain from the sale of PrimeCo's
Hawaii wireless system. The Company's equity investees are impacted by similar
industry trends and competitive forces as the Company's consolidated markets.
On August 3, 1999, Vodafone AirTouch and Bell Atlantic Corporation ("Bell
Atlantic") announced that they had entered into an agreement to dissolve
PrimeCo Personal Communications and allocate the properties between the
partners. Under the terms of the agreement, Vodafone AirTouch will take over
the operations of five markets, Chicago, IL, Milwaukee, WI, and the Texas
markets of Dallas, San Antonio, and Houston. Bell Atlantic will assume
ownership of the five markets in the Richmond, VA, New Orleans, LA, and Florida
markets of Jacksonville, Tampa, and Miami. This dissolution is expected to be
completed by the end of 1999 or early next year, pending certain regulatory
approvals and the completion of the necessary transitional steps. The Company
will incur certain costs related to the dissolution, however, such costs are
not expected to be material. Additionally, the Company does not believe that
this dissolution will have a material adverse impact on the Company's financial
position or results of operations.
Additionally, the two companies announced the reaching of an out-of-court
settlement of all litigation currently pending before the United States
District Court for the Northern District of California, relating to their
limited partnership, TOMCOM, L.P.
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 Six Months Ended
(Unaudited) June 30 June 30
------------------ ----------------
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Service and other revenues $ 101 $ 91 $ 200 $ 179
Equipment sales 11 14 22 24
------ ------ ------ ------
Operating revenues 112 105 222 203
------ ------ ------ ------
Operating expenses before depreciation
and amortization expenses 82 75 160 143
Depreciation and
amortization expenses 20 19 40 38
------ ------ ------ ------
Operating income $ 10 $ 11 $ 22 $ 22
====== ====== ====== ======
Operating cash flow(a) $ 30 $ 30 $ 62 $ 60
Operating cash flow margin(b) 26.8% 28.6% 27.9% 29.6%
====== ====== ====== ======
</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 7% and 9% for the three- and six-month periods
ended June 30, 1999, respectively. Revenue growth was primarily due to a 9%
annual growth in paging units in service and a slight 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
20
<PAGE> 21
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
of shifting growth to the higher revenue retail and direct channels away from
the reseller channel. The operating cash flow margin (operating margin excluding
the effect of depreciation and amortization) decreased for the three- and
six-month periods ended June 30, 1999, due to the impact of additional direct
sales channels, which are in the start-up phase and one-time bad debt
write-offs. Once the revenues from these new channels increase, the Company
believes that the operating cash flow margin will increase to 1998 levels.
Furthermore, during 1999, the Company incurred increased litigation costs
related to certain implementation issues of the Telecom Act of 1996. Litigation
against certain local exchange carriers have been settled. The resulting
reductions in interconnection costs and increases in termination revenues offset
the increased cost of litigation in the second quarter of 1999. Settlements are
pending with other local exchange carriers. The Company expects that the results
of these settlements will be to lower interconnection costs and increase
termination revenues in the future.
During the second quarter, the Company began marketing PageMart Wireless,
Inc.'s ("PageMart") Internet Protocol Advanced Messaging Network nationwide as
previously announced as part of the multi-year strategic alliance with
PageMart. 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 Six Months Ended
(Unaudited) June 30 June 30
------------------ ----------------
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Service and other revenues $ 268 $ 223 $ 523 $ 421
Equipment sales 19 18 38 33
------ ------ ------ ------
Operating revenues 287 241 561 454
------ ------ ------ ------
Operating expenses before depreciation
and amortization expenses 188 153 366 287
Depreciation and
amortization expenses 33 26 64 51
------ ------ ------ ------
Operating income $ 66 $ 62 $ 131 $ 116
====== ====== ====== ======
Equity in net income (loss) of
unconsolidated wireless systems $ 193 $ 98 $ 355 $ 179
====== ====== ====== ======
</TABLE>
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 certain of these
operations have matured, the Company's international operations have
increasingly contributed to the profits of the Company.
The Company's consolidated wireless systems are Europolitan in Sweden and
Telecel in Portugal. Operating revenues for the Company's international
wireless operations increased 19% and 24% for the three- and six-month periods
ended June 30, 1999, over comparable periods of 1998. These increases were
primarily due to a 53% annual growth in subscribers. Prepaid customers
represented approximately three-quarters of the annual growth and slightly more
than half of total combined subscribers as of June 30, 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 revenues 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 22% decrease in
average revenue per customer for both the three- and six-month
21
<PAGE> 22
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
periods ended June 30, 1999, over comparable periods of 1998.
Operating cash flow margin for the three- and six-month periods ended June 30,
1999 decreased 2% when compared to the same periods in 1998, primarily due to
price plan reductions and increased costs necessitated by aggressive
competition from the third operator in Portugal, which launched service in the
fourth quarter of 1998. The Company's strategy in Portugal is to focus on
increasing service revenues by encouraging higher usage. At the end of the
quarter, Telecel launched commercial service on the internet, both as a service
and content provider.
Depreciation and amortization expenses increased 27% and 25% for the three- and
six-month periods ended June 30, 1999 over the comparable periods of 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 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
97% and 98%, respectively, for the three- and six-month periods ended June 30,
1999, over the comparable periods of 1998. These significant increases were
primarily due to strong subscriber growth and increased profitability as more
ventures benefited from economies of scale. Furthermore, during the second
quarter, the Company recorded the benefit from a reduction of the statutory tax
rates in one of the countries in which the Company has an equity investment.
The increases would have been 109% and 102% without the unfavorable 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 58% as compared to June 30, 1998, as competition drove
prices lower and stimulated demand. Mannesmann implemented the previously
announced rate decreases for certain price plans 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. The Company's international ventures have reduced average
cash cost per customer as the ventures reaped benefits from economies of scale,
low churn, and lower selling costs per customer. However, with competitors
aggressively lowering prices, operating cash flow margins are under pressure.
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 starting on page 9.
Year 2000 Readiness Disclosure
The discussion below is an update of 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 all five phases of its plan. Based on
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.
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 $19 million of total pre-tax
expenses during
22
<PAGE> 23
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
the first half of 1999. The remaining $31 million in the Company's original
estimate will be sufficient to cover the implementation of the business
continuity plan and the programs that the Company has put in place to ensure
that Year 2000 compliance is maintained.
Business Continuity Plans
The Company's business continuity plan is substantially complete for year 2000
issues. The Company has scheduled several rehearsals over the remainder of the
year to test the plan. 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.
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. At June 30, 1999, the Company had a working
capital deficit. The paragraphs that follow discuss the funding requirements
and the sources of such funding.
Capital Spending, Debt Service, Net Distribution, and Dividend Requirements for
the First Six Months of 1999
The Company spent $546 million during the first half of 1999 for additions to
property, plant, and equipment primarily to increase its cellular and paging
network system capacity. The Company invested an additional $365 million during
the first half 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 six months of 1999 amounted to approximately
$89 million. The Company also paid $75 million in net distributions to holders
of minority interests of its consolidated wireless systems and $76 million for
preferred dividends during the first half of 1999.
Funding - First Six Months of 1999
Cash flows from operating activities of $1,028 million was the primary source
utilized to fund the above mentioned cash requirements. Cash flows from
operations include distributions of $104 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. Worldwide, as competition spurs prices lower, wireline
minutes are migrating to wireless carriers. Finally, the cellular phone is
becoming more useful as a wireless data device, especially in Europe. 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, such capital requirements are expected to be approximately
$1.3 billion which includes the Company's capital commitment for the newly
awarded license in Hungary. 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
23
<PAGE> 24
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
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 $300 million at June 30, 1999, for the acquisition of
property, plant, and equipment during 1999. In addition to these commitments,
the Company plans to make additional capital expenditures of approximately $425
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 another $300 million at June 30, 1999, for the purchase of
various items and services. The Company also signed a ten year lease agreement
for a facility in Southern California for which occupancy is planned at the end
of 2000, for approximately $100 million over the ten year lease.
Unconsolidated Wireless Systems
As of June 30, 1999, commitments for capital contributions to existing
unconsolidated wireless systems and increase in ownership interests in its
existing unconsolidated wireless systems were $250 million. Furthermore, the
Company plans to make additional capital contributions of approximately $284
million during the remainder of 1999 to certain of its existing U.S. and
international unconsolidated wireless systems, to meet the capital commitments
of the Company's newly awarded license in Hungary, and to fund the continuing
network build-out and operating losses of wireless systems that have not
achieved sufficient scale.
New Investment Opportunities
On July 19, 1999, Vodafone AirTouch announced the signing of an agreement to
purchase CommNet Cellular, Inc. for $764 million and the assumption of
approximately $600 million of debt. The transaction is expected to close in
approximately four to five months from the signing of the agreement.
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 discontinued issuing new commercial paper during the second quarter
in anticipation of its merger with Vodafone. Upon the completion of the merger,
the Company's $2 billion credit facility was cancelled. The commercial paper
remaining at June 30, 1999 was supported by Vodafone AirTouch Plc's $10.0
billion credit line with a syndicate of banks. During July, all remaining
outstanding commercial paper was paid off with proceeds from a long-term
intercompany loan with Vodafone AirTouch. The Company's long-term
notes and the Deutsche Mark Eurobonds remain outstanding at June 30, 1999.
Other financing sources available to the Company and its parent, Vodafone
AirTouch include access to international capital markets.
Funding of Future Requirements
The Company anticipates cash flows from operations and borrowings under the
intercompany agreement with its parent, Vodafone AirTouch, 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 will likely obtain the required funds from
Vodafone AirTouch, which may raise the required funds through borrowings or
public or private sales of debt or equity securities. The Company believes,
that in the event of such requirements, the Company's parent, Vodafone AirTouch
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's parent,
Vodafone AirTouch.
24
<PAGE> 25
AirTouch Communications, Inc. and Subsidiaries
Management's Discussion and Analysis
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. During the second quarter, the Company unwound all of
its foreign currency forward contracts in anticipation of the Vodafone merger.
Foreign currency risk is now managed by the Company's new parent, Vodafone
AirTouch Plc.
Interest and Foreign Exchange Rate Risks
As of June 30, 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 approximately $4 billion, which
represents a decrease in the total aggregate value of approximately $0.6
billion from December 31, 1998.
With respect to the interest rate risk "value-at-risk" ("VAR") for the Company's
debt instruments, including redeemable preferred stock, was $407 million at June
30, 1999 and $121 million at June 30, 1998. The corresponding foreign currency
exchange rate VAR was $4 million at June 30, 1999 and $3 million at June 30,
1998.
25
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF AIRTOUCH COMMUNICATIONS, INC.:
We have reviewed the accompanying Consolidated Balance Sheet of AirTouch
Communications, Inc. and subsidiaries ("Company") as of June 30, 1999 and the
related Consolidated Statements of Income and of Cash Flows for the three- and
six-month periods ended June 30, 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- and six-month
periods ended June 30, 1999 and 1998 appearing on page 13 is presented for
additional analysis and is not a required part of the basic financial
statements. As discussed on page 12, 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 12, 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
August 6, 1999
26
<PAGE> 27
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Footnote G, "Contingencies", in the Notes to Consolidated Financial
Statements
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the merger of a subsidiary of Vodafone Group Public Limited
Company with and into AirTouch Communications, Inc. (the "Company") on June 30,
1999 (the "Merger"), each share of Company common stock was cancelled and
converted into the right to receive 5 ordinary shares of Vodafone AirTouch
Public Limited Company ("Vodafone AirTouch") represented by 0.5 of a Vodafone
AirTouch American Depository Shares ("ADS") and $9.00 in cash. Additionally,
each share of Company Class B preferred stock was converted into the right to
receive 4.03 Vodafone AirTouch ordinary shares represented by 0.403 of a
Vodafone AirTouch ADS and $7.25 in cash. The material terms and rights attached
to the Vodafone AirTouch ordinary shares and the Vodafone AirTouch ADSs are
summarized in the discussion under the captions "Description of Vodafone
AirTouch Ordinary Shares" and "Description of Vodafone AirTouch American
Depository Shares" in Amendment No. 2 to Vodafone AirTouch's Registration
Statement on Form 8-A/A filed with the Commission on July 30, 1999, which you
are encouraged to read. The issuances of the Vodafone AirTouch ordinary shares
and the Vodafone AirTouch ADSs were registered under the Securities Act of
1933. On June 30, 1999, the Company issued shares of common stock to Vodafone
AirTouch and became a wholly owned subsidiary of Vodafone AirTouch.
On June 29, 1999, one day prior to the Merger, the Company effected an
internal reorganization pursuant to which a wholly owned subsidiary of the
Company was merged with and into the Company. The purpose of the internal
reorganization was to amend the Company's certificate of incorporation to
satisfy requirements to permit the Merger to be tax-free to U.S. holders of
Company common stock and Company Class B preferred stock, except with respect
to cash received. The material terms of the Company's Class B preferred stock
following the internal reorganization remained the same. After the internal
reorganization, holders of Company Class C preferred stock became entitled (1)
to vote together with the holders of Company common stock on all matters to be
voted upon by holders of the Company common stock, with each share held
entitled to 1.379 votes per share; and (2) upon any redemption of Company Class
C preferred stock after the Merger, to receive that number of Vodafone AirTouch
ADSs and that amount of cash as that holder would have been entitled to receive
in the Merger had the holder held that number of Company common stock that the
holder would have received had the Company redeemed such holder's Company Class
C preferred stock immediately prior to the Merger. Pursuant to the terms of the
Company's Class C preferred stock prior to the internal reorganization, each
share of Company's Class C preferred stock (1) remains convertible into the
Merger consideration that would have been received by a holder of 1.379 shares
of Company common stock immediately prior to the Merger and (2) is expected to
be redeemable beginning on September 20, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 28, 1999, the Company held a special meeting of its stockholders. Two
matters were considered and the results are as follows:
(1) To approve and adopt the Agreement and Plan of Merger, dated as of
January 15, 1999, among Vodafone Group Public Limited Company (to be
renamed Vodafone AirTouch Public Limited Company after consummation of the
Merger contemplated therein), the Company and Apollo Merger Sub, Inc., a
wholly owned subsidiary of Vodafone Group Public Limited Company,
providing for the merger of Apollo Merger Sub, Inc. with and into the
Company, with the Company surviving the merger as a subsidiary of Vodafone
AirTouch: 400,666,388 shares voted for the proposal; 4,353,051 shares
voted against and 2,653,722 shares abstained.
27
<PAGE> 28
(2) To approve and adopt the Amended and Restated Agreement and Plan of
Merger, dated April 16, 1999, between the Company and AirTouch Merger Sub,
Inc., a wholly owned subsidiary of AirTouch, providing for an internal
reorganization involving the merger of AirTouch Merger Sub, Inc. with and
into the Company prior to the Merger for the purpose of amending the
Company's certificate of incorporation to satisfy requirements to permit
the Merger to be tax-free to U.S. holders of the Company's common stock,
except with respect to cash received: 400,653,468 voted for the proposal;
4,237,576 voted against and 2,782,117 shares abstained.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibits identified below are incorporated herein by reference as exhibits
hereto.
Exhibit
Number Description
------- -----------
15.1 Letter of PricewaterhouseCoopers LLP Re: Unaudited Interim
Financial Information
27 Financial Data Schedule
(b) Reports on Form 8-K:
Date of Report: June 11, 1999
Item 5. Other Events and Exhibits
Date of Report: June 23, 1999
Item 5. Other Events and Item 7 Exhibits
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AIRTOUCH COMMUNICATIONS, INC.
By: /s/ Edward Langston
Edward Langston
Chief Financial Officer
Date: August 6, 1999
29
<PAGE> 1
EXHIBIT 15.1
August 6, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated August 6, 1999 on our review of interim
financial information of AirTouch Communications, Inc. ("Company") for the
quarter ended June 30, 1999 and included in the Company's quarterly report on
Form 10-Q for the quarter then ended is incorporated by reference in the
Vodafone AirTouch Public Limited Company Registration Statement on Form S-8
(No. 333-81825) and the Company's Registration Statements on Form S-3 (Nos.
33-62787 and 333-56645).
Yours very truly,
/s/ PRICEWATERHOUSECOOPERS LLP
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