1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 6, 2001
REG. NO. 333-60472
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AT&T WIRELESS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4812 91-1379052
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
7277 164TH AVENUE NE, BUILDING 1
REDMOND, WASHINGTON 98052
(425) 580-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GREGORY P. LANDIS
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
AT&T WIRELESS SERVICES, INC.
7277 164TH AVENUE NE, BUILDING 1
REDMOND, WASHINGTON 98052
(425) 580-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
MARILYN J. WASSER STEVEN A. ROSENBLUM
VICE PRESIDENT - LAW AND SECRETARY WACHTELL, LIPTON, ROSEN & KATZ
AT&T CORP. 51 WEST 52ND STREET
295 NORTH MAPLE AVENUE NEW YORK, NEW YORK 10019
BASKING RIDGE, NEW JERSEY 07920 (212) 403-1000
(908) 221-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this registration statement becomes effective and the other
conditions to the commencement of the exchange offer described herein have been
satisfied or waived.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common stock, par value $0.01 per share..................... $1,500,000,000 $375,000(3)
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Preferred stock purchase rights(2).......................... n/a n/a
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
(2) One preferred stock purchase right will be issued with and initially trade
together with each share of Common Stock.
(3) $325,000 of the fee was previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS -- SUBJECT TO COMPLETION -- DATED JULY 6, 2001
PROSPECTUS
[ ] SHARES
AT&T WIRELESS SERVICES, INC.
COMMON STOCK, PAR VALUE $.01
AT&T CORP., IN ITS CAPACITY AS SELLING STOCKHOLDER FOR FEDERAL SECURITIES
LAW PURPOSES, IS OFFERING SHARES OF OUR COMMON STOCK IF AND TO THE EXTENT
CREDIT SUISSE FIRST BOSTON CORPORATION AND GOLDMAN, SACHS & CO. ACQUIRE SUCH
SHARES FROM AT&T PRIOR TO THE COMPLETION OF THE OFFERING IN EXCHANGE FOR AT&T
INDEBTEDNESS HELD BY CREDIT SUISSE FIRST BOSTON AND GOLDMAN SACHS, AS DESCRIBED
IN "UNDERWRITERS -- THE EXCHANGE." UNDER THE FEDERAL SECURITIES LAWS, AT&T IS
THE SELLING STOCKHOLDER OF THESE SHARES. HOWEVER, CREDIT SUISSE FIRST BOSTON AND
GOLDMAN SACHS, AND NOT AT&T, WILL RECEIVE THE CASH PROCEEDS FROM THE OFFERING.
CREDIT SUISSE FIRST BOSTON AND GOLDMAN SACHS ARE ALSO THE LEAD UNDERWRITERS OF
THE OFFERING.
WE WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES OF OUR COMMON
STOCK IN THE OFFERING.
WE ARE CURRENTLY A WHOLLY OWNED SUBSIDIARY OF AT&T. HOWEVER, BEFORE THE
COMPLETION OF THIS OFFERING, WE WILL BE SPLIT OFF FROM AT&T AND BECOME A
SEPARATE PUBLIC COMPANY THROUGH
(1) A REDEMPTION OF ALL OF THE OUTSTANDING SHARES OF AT&T WIRELESS GROUP
TRACKING STOCK IN EXCHANGE FOR SHARES OF OUR COMMON STOCK AND
(2) A DIVIDEND DISTRIBUTION OF ALL OF THE REMAINING SHARES OF OUR COMMON
STOCK, TO HOLDERS OF AT&T COMMON STOCK, LESS 185,308,303 SHARES TO BE
RETAINED BY AT&T.
AT&T WIRELESS GROUP TRACKING STOCK AND AT&T COMMON STOCK ARE LISTED ON THE
NEW YORK STOCK EXCHANGE UNDER THE SYMBOLS "AWE" AND "T," RESPECTIVELY. WE EXPECT
THE REDEMPTION AND DISTRIBUTION TO OCCUR ON THE SAME DAY. AS A RESULT OF THE
SPLIT-OFF, WE EXPECT THAT THERE WILL BE A PUBLIC TRADING MARKET FOR OUR SHARES.
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We have been approved to list our common stock on the New York Stock
Exchange under the symbol "AWE", subject to official notice of issuance.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 9.
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UNDERWRITING
DISCOUNTS AND
PRICE TO PUBLIC COMMISSION PROCEEDS
---------------------- ---------------------- ----------------------
Per Share................................... $ $ $
Total....................................... $ $ $
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The delivery of shares will be made on or about [ ], 2001.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
CREDIT SUISSE FIRST BOSTON GOLDMAN, SACHS & CO.
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO INCORPORATED
, 2001
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TABLE OF CONTENTS
PAGE
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Summary..................................................... 1
Risk Factors................................................ 9
Special Note Regarding Forward-Looking Statements........... 21
The Split-off and the Offering.............................. 23
Dividend Policy............................................. 27
Capitalization.............................................. 28
Selected Financial Information.............................. 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 32
Our Company................................................. 52
Management.................................................. 83
Security Ownership of Certain Beneficial Owners and
Management................................................ 98
Our Relationship with AT&T Following the Split-off.......... 101
Description of Our Capital Stock............................ 109
DoCoMo Strategic Investment................................. 116
Shares Eligible for Future Sale............................. 120
Underwriters................................................ 122
Legal Matters............................................... 124
Experts..................................................... 124
Where You Can Find More Information......................... 125
Index to Financial Statements............................... F-1
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This prospectus is based on information provided by us, AT&T and other
sources that we believe to be reliable. This prospectus summarizes documents
filed as exhibits to the registration statement of which this prospectus forms a
part, and we refer you to them for a more complete understanding of what we
discuss in this prospectus.
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[CURRENT STRUCTURE/AFTER SPLIT-OFF STRUCTURE CHART]
A chart illustrates our ownership structure currently and after the split-off.
Under a heading of "Current Structure", (1) holders of AT&T Wireless Group
tracking stock ("AWE"), (2) holders of AT&T Common Stock ("T") and (3) holders
of Liberty Media Group Class A and Class B tracking stock ("LMGA" and "LGMB")
are each represented by circles, which all connect to a box representing AT&T
Corp. The composition of AT&T Corp. is illustrated by further subdivisions
representing AT&T Wireless Group, AT&T Common Stock Group and Liberty Media
Group. AT&T Wireless Services, Inc. is under, and connected to, the AT&T
Wireless Group subdivision.
Under a heading of "After Split-Off," the holders of AT&T Wireless Services
common stock are represented by a circle, which connects to a box representing
AT&T Wireless Services. A notation in the box indicates that AT&T Wireless
Services includes all businesses that were part of AT&T Wireless Group.
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SUMMARY
The following is a summary of some of the information contained in this
prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, including the risks of investing in our common stock
discussed under "Risk Factors" and our consolidated financial statements and the
notes thereto included in this prospectus.
OUR COMPANY (SEE P. 52.)
We are one of the largest wireless communications service providers in the
United States. We seek to expand our customer base and revenue stream by
providing high-quality, innovative wireless services. As of March 31, 2001, we
had 15.7 million consolidated subscribers. For the year ended December 31, 2000
we had:
- $10.4 billion of consolidated revenues, and
- $658 million of consolidated net income.
We operate one of the largest U.S. digital wireless networks. As of March
31, 2001, we and our affiliates and partners held 850 megahertz and 1900
megahertz licenses to provide wireless services covering 98% of the U.S.
population. As of that date, we, our affiliates and our partners covered
approximately 83% of the U.S. population with at least 30 megahertz of wireless
spectrum. At the same date, our networks and those of our affiliates and
partners operated in markets including over 77% of the U.S. population and in
all 50 of the largest U.S. metropolitan areas. We supplement our operations with
roaming agreements that allow our subscribers to use other providers' wireless
services in regions where we do not have operations. With these roaming
agreements, we are able to offer customers wireless services covering over 95%
of the U.S. population. We plan to continue to increase our coverage and the
quality of our services by expanding our coverage area and the capacity of our
network through new network construction, acquisitions, and partnerships with
other wireless providers.
We currently provide our wireless voice and data services using time
division multiple access, analog and cellular digital packet data technologies.
We have focused on building our digital network and on moving our customer base
from analog to digital service. We have already upgraded our analog systems to
digital in 99% of our markets. We believe that the move to digital services
improves capital efficiency, lowers network operating costs and allows us to
offer higher quality services. Over 92% of our consolidated subscribers use
digital services and account for over 95% of our traffic. We believe that these
percentages are substantially greater than the average for others in our
industry.
To accelerate the availability of enhanced data services offerings, we
recently announced plans to adopt a technology known as the global system for
mobile communications, or GSM, for interim improvement in wireless data
capabilities. Following the adoption of GSM, we plan to move to third-
generation technology to permit us to offer voice and new data services. We
expect to install network capability using GSM technology with our current
second-generation voice network. Our chosen third-generation technology
standard, known as universal mobile telecommunications system, or UMTS, is the
same global standard that has been selected by operators throughout Europe,
Japan and other parts of the world. Third-generation standards should provide
the speed and capacity necessary to support innovative mobile multimedia
applications, including broader and more efficient access to email systems,
high-speed web browsing, e-commerce applications, on-line games and music
downloads.
We market our products and services primarily under the AT&T brand and
expect to continue to do so for at least five years under agreements that we
have entered into with AT&T in connection with the split-off. We believe that
AT&T's widely recognized brand increases consumer awareness of, and confidence
in, our products and services.
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RELATIONSHIP WITH AT&T CORP. (SEE P. 101.)
We have been a wholly owned subsidiary of AT&T Corp. since 1994 and a
member of the AT&T Wireless Group since its formation in 2000. AT&T Wireless
Group consists of the businesses, assets and liabilities the financial
performance and economic value of which are intended to be reflected by AT&T
Wireless Group tracking stock, which is a class of common stock of AT&T that is
listed on the New York Stock Exchange under the symbol "AWE." AT&T Wireless
Group is an integrated set of businesses, assets and liabilities of AT&T and its
subsidiaries, including us, and is not a separate legal entity. Historically, we
have held a significant majority of the assets and liabilities of the AT&T
Wireless Group. In connection with the split-off, AT&T has transferred to us all
of the remaining assets and liabilities of the AT&T Wireless Group that we did
not already hold.
After the split-off, we will be an independent, public company. AT&T is
retaining 185,308,303 shares, or about 7.3%, of our common stock for sale,
exchange or monetization within six months of the split-off. Of these retained
shares, AT&T expects to sell shares to Credit Suisse First Boston and
Goldman Sachs in the exchange described under "Underwriters -- The Exchange".
These shares will then be offered in the offering. See "The Split-off and the
Offering." In addition we will continue to have contractual and commercial
relationships with AT&T following the split-off. See "Our Relationship with AT&T
following the Split-off."
STRATEGY (SEE P. 56.)
Our goal is to be the premier provider of high-quality wireless
communications services, whether mobile or fixed, voice or data, to businesses
or consumers, in the United States and internationally. We believe that the
following are the key elements to enable us to meet our goal:
- continue the expansion of our domestic digital network to add capacity,
improve quality and provide consistent features regardless of location;
- continue to lower our operating costs and improve capital efficiency by
expanding our digital mobile wireless network and increasing the use of
more efficient channels of distribution;
- use GSM technology to provide enhanced services as an interim step in our
transition to third-generation technology;
- target distinct consumer and business customer segments with wireless
offers that match their needs for voice and data services to increase our
subscriber base and revenues;
- benefit from our relationship with AT&T, including the use of the AT&T
brand and AT&T's distribution channels and cross marketing opportunities;
and
- take advantage of our existing wireless spectrum, digital network and
customer base with new growth initiatives, including wireless data and
fixed wireless opportunities.
THE SPLIT-OFF (SEE P. 23.)
REDEMPTION AT&T will redeem each share of AT&T Wireless Group
tracking stock outstanding on the split-off date in
exchange for one share of AT&T Wireless Services
common stock, together with the associated
preferred stock purchase right. We refer to this
part of the split-off as the "redemption."
DISTRIBUTION Each holder of AT&T common stock on the
distribution record date will receive a dividend of
.3218 of a share of our common stock and of an
associated preferred stock purchase right for each
share of AT&T common stock held on the distribution
record date. We refer to this part of the split-off
as the "distribution."
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SPLIT-OFF DATE The split-off date is 9:00 a.m., New York City
time, on July 9, 2001. From and after the split-off
date, holders of record of AT&T Wireless Group
tracking stock as of 9:00 a.m., New York City time,
on July 9, 2001 will become holders of AT&T
Wireless Services common stock, and their rights as
holders of AT&T Wireless Group tracking stock will
cease.
DISTRIBUTION RECORD
DATE The record date for the distribution of AT&T
Wireless Services common stock to holders of AT&T
common stock was the close of business on June 22,
2001.
SECURITIES TO BE
EXCHANGED
AND DISTRIBUTED 1,136,258,587 shares of our common stock will be
issued in the distribution. The exact number of
shares of our common stock to be issued in the
redemption will be determined based on the number
of shares of AT&T Wireless Group tracking stock
outstanding at 9:00 a.m., New York City time, on
the split-off date.
As a result, we estimate that, immediately after
the split-off and the offering, approximately 2.53
billion shares of our common stock will be
outstanding. This excludes shares of common stock
issuable upon exercise of outstanding options
granted to our directors, officers, employees and
consultants under our stock plans, as described
under "Management" and warrants issued to DoCoMo,
as described under "DoCoMo Strategic Investment,"
but includes the shares to be retained by AT&T for
sale, exchange or monetization within six months of
the split-off, including the shares being offered
in the offering.
SURRENDERING SHARES AT&T Wireless Group tracking stock. Holders of
AT&T Wireless Group tracking stock who hold
physical certificates will need to surrender their
share certificates in order to receive their AT&T
Wireless Services shares. We will deliver to the
holders of record of shares of AT&T Wireless Group
tracking stock as of 9:00 a.m., New York City time,
on the split-off date a letter of transmittal
containing written instructions for exchanging
their shares for shares of our common stock.
Beginning on the split-off date, letters of
transmittal will also be available from the
information agent.
Holders of AT&T Wireless Group tracking stock who
hold shares in book-entry registered form do not
need to take any action to receive their AT&T
Wireless Services shares.
AT&T common stock. Holders of AT&T common stock do
not need to take any action to receive their AT&T
Wireless Services shares.
FRACTIONAL SHARES We will not issue fractional shares of our common
stock in the redemption or the distribution.
Instead, our transfer agent will aggregate
fractional shares and sell them in the public
market. The transfer agent will then distribute the
net cash proceeds of these sales to those
stockholders who would otherwise have received
fractional interests. These proceeds may be taxable
to those stockholders.
FEDERAL INCOME TAX
CONSEQUENCES OF THE
SPLIT-OFF AT&T has obtained a private letter ruling from the
Internal Revenue Service to the effect that, for
U.S. federal income tax purposes, the split-off is
tax-free to AT&T and to stockholders to the extent
that they receive AT&T Wireless Services common
stock in exchange for AT&T Wireless Group tracking
stock or as a distribution with respect
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to AT&T common stock. The continued validity of
this ruling is a non-waivable condition to the
split-off.
STOCK EXCHANGE LISTING We have been approved to list our common stock,
subject to official notice of issuance, on the New
York Stock Exchange under the symbol "AWE." This is
the same symbol under which AT&T Wireless Group
tracking stock has traded on the New York Stock
Exchange. However, trading in AT&T Wireless Group
tracking stock under that symbol will end on the
trading day before the split-off date, and trading
in our common stock under that symbol will begin on
the split-off date.
POST-SPLIT-OFF DIVIDEND
POLICY We do not anticipate paying any dividends on our
common stock in the foreseeable future.
THE OFFERING (SEE P. 26.)
COMMON STOCK OFFERED shares. AT&T, Credit Suisse First
Boston Corporation and Goldman, Sachs & Co.,
anticipate that the shares will be offered
exclusively or primarily to index funds whose
portfolios are primarily based on a particular
stock index, such as the Standard & Poor's
Corporation 500 Composite Index. If our common
stock is included in any of these indices after the
completion of the split-off, these index funds may
be required to acquire and hold shares of our
common stock.
TOTAL COMMON STOCK TO
BE OUTSTANDING AFTER
THE OFFERING We estimate that, immediately after the split-off
and the offering, approximately 2.53 billion shares
of our common stock will be outstanding. This
excludes shares of common stock issuable upon
exercise of outstanding options granted to our
directors, officers, employees and consultants
under our stock plans, as described under
"Management" and warrants issued to NTT DoCoMo,
Inc., as described under "DoCoMo Strategic
Investment," but includes the shares to be retained
by AT&T for sale, exchange or monetization within
six months of the split-off, including the shares
being offered in the offering.
USE OF PROCEEDS We will not receive any proceeds from the sale of
common stock in the offering.
PURPOSES OF THE
OFFERING The purpose of the offering is to allow Credit
Suisse First Boston and Goldman Sachs to sell any
shares of our common stock they receive in the
exchange. The purpose of the exchange is to allow
AT&T to retire a portion of its indebtedness in a
tax-efficient manner through the exchange with the
selling stockholders. See "Underwriters -- The
Exchange."
TIMING/RELATIONSHIP TO
SPLIT-OFF The offering is expected to occur shortly before,
on or shortly after the split-off date, and will
not occur unless the split-off has been or is
certain to be completed.
CORPORATE INFORMATION
The principal executive offices of AT&T Wireless Services are located at
7277 164th Avenue NE, Building 1, Redmond, Washington 98052. The telephone
number is (425) 580-6000.
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SUMMARY HISTORICAL FINANCIAL DATA
The following information is only a summary and you should read it together
with the financial information we include elsewhere in this document.
In the table below, we provide you with selected historical consolidated
financial data of AT&T Wireless Services, Inc. This selected historical
consolidated financial data includes the effect of certain other businesses,
assets and liabilities of AT&T that constituted AT&T Wireless Group. AT&T has
contributed to us all of the businesses and assets, and we have assumed all
liabilities, that constituted AT&T Wireless Group. We have accounted for these
contributions in a manner similar to a pooling of interests.
We derived the following information using the consolidated financial
statements of AT&T Wireless Services at and for each of the three months ended
March 31, 2001 and 2000, and each of the fiscal years in the five-year period
ended December 31, 2000. We derived the consolidated income statement and cash
flow data below for each of the three years ended December 31, 2000 and the
consolidated balance sheet data at December 31, 2000 and 1999, from consolidated
financial statements audited by PricewaterhouseCoopers LLP, independent
accountants, included elsewhere in this prospectus. We derived the remaining
data from unaudited consolidated financial statements.
The financial data presented below is not necessarily comparable from
period to period as a result of several transactions, including acquisitions and
dispositions of consolidated subsidiaries. For this and other reasons, you
should read the selected historical financial data provided below in conjunction
with our consolidated financial statements and accompanying notes beginning on
page F-1 and the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 32.
SUMMARY HISTORICAL FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS AND OTHER OPERATING DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ---------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- -------- -------- ------- ----------- -----------
INCOME STATEMENT DATA:
Revenue.................. $ 3,212 $ 2,198 $ 10,448 $ 7,627 $ 5,406 $ 4,668 $ 4,246
Operating income
(loss)................. 141 26 (38) (666) (343) (70) 234
Net (loss) income
available to common
shareowners............ (42) 13 528 (461) 108 69 261
Unaudited pro forma
(loss) earnings per
common
share -- basic(1)...... $ (.02) $ .01 $ .21 $ (.18) $ .04 $ .03 $ .10
Unaudited pro forma
(loss) earnings per
common
share -- diluted(1).... $ (.02) $ .01 $ .21 $ (.18) $ .04 $ .03 $ .10
Unaudited pro forma
weighted average
shares -- basic(1)..... 2,530 2,530 2,530 2,530 2,530 2,530 2,530
Unaudited pro forma
weighted average
shares -- diluted(1)... 2,530 2,533 2,533 2,530 2,533 2,533 2,533
BALANCE SHEET DATA:
Total assets............. $ 47,039 $ 24,890 $ 35,302 $ 23,512 $19,460 $19,040 $17,852
Total debt(2)............ 8,394 3,858 2,551 3,558 2,589 2,447 2,217
Preferred stock held by
AT&T................... 3,000 1,000 3,000 1,000 1,000 1,000 1,000
Shareowners' equity...... 27,937 14,027 21,877 12,997 10,532 10,187 9,497
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THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ---------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- -------- -------- ------- ----------- -----------
CASH FLOW DATA:
Net cash provided by
operating activities... $ 655 $ 228 $ 1,635 $ 867 $ 414 $ 1,338 $ 1,183
Capital expenditures and
other additions........ (1,407) (818) (4,012) (2,272) (1,219) (1,931) (1,832)
Net acquisitions of
licenses............... (39) (82) (247) (47) (65) (443) (327)
Equity investment
distributions and
sales.................. 2 26 360 236 1,354 294 176
Equity investment
contributions, advances
and purchases.......... (637) (74) (1,645) (284) (156) (84) (32)
Net (acquisitions)
dispositions of
businesses including
cash acquired.......... -- -- (4,763) 244 324 -- 156
Increase in long-term
debt due to AT&T....... -- 300 400 900 100 200 200
Proceeds from issuance of
long-term debt to
others, net of issuance
costs.................. 6,345 -- -- -- -- -- --
Proceeds attributed from
DoCoMo investment, net
of costs............... 6,141 -- -- -- -- -- --
Proceeds attributed from
AT&T Wireless Group
tracking stock
offering............... -- -- 7,000 -- -- -- --
Transfer from (to) AT&T,
net.................... -- 439 1,001 344 (694) 611 476
OTHER:
EBITDA(3)................ $ 717 $ 395 $ 1,648 $ 587 $ 736 $ 756 $ 894
EBITDA (excluding asset
impairment and
restructuring
charges)............... $ 717 $ 395 1,648 1,118 856 916 894
OTHER OPERATING DATA:
(in thousands, except ($)
are actual)
Consolidated
subscribers............ 15,748 9,987 15,163 9,569 7,174 5,964 5,032
Consolidated digital
subscribers............ 14,608 8,337 13,666 7,580 4,354 1,746 909
Covered population(4).... 166,425 116,990 162,896 114,217 -- -- --
Licensed population(4)... 216,444 189,821 214,188 191,742 -- -- --
Subscriber churn......... 3.0% 2.9% 2.9% 2.6% 2.7% 2.5% 2.3%
Total cost per gross
subscriber addition.... $ 327 $ 360 $ 367 $ 367 $ 392 $ 432 $ 345
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(1) AT&T Wireless Services was a wholly owned subsidiary of AT&T and did not
have publicly traded shares outstanding during the periods presented. We
have presented pro forma earnings per share information assuming 2,530
million shares outstanding, which is the number of shares estimated to be
outstanding immediately after the split-off. The estimate of 2,530 million
shares outstanding is based on the number of shares of AT&T Wireless Group
tracking stock outstanding at June 19, 2001, the number of shares
represented by AT&T's retained interest at June 19, 2001, including the 228
million new share equivalents issued to DoCoMo in January 2001, and reflects
a reduction of 12 million shares from AT&T's retained interest, which shares
will be held in treasury by AT&T Wireless Services for future employee
benefit plan obligations. The estimate of 2,530 million shares does not
include shares
6
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issuable upon exercise of outstanding options to purchase AT&T Wireless
Group tracking stock, outstanding options to purchase AT&T common stock that
will be converted into options to purchase AT&T Wireless Services common
stock, or warrants to purchase 41 million share equivalents issued to DoCoMo
in January 2001. The estimate of 2,533 million shares outstanding used to
compute diluted earnings per share includes the 2,530 million shares above
and an estimated 3 million shares associated with dilutive stock options,
with the exception of those periods in which the effect of the stock options
was considered to be anti-dilutive.
(2) Includes $4 million of long-term debt that is included in other long-term
liabilities at March 31, 2001 and 2000, and at December 31, 2000 and 1999.
(3) EBITDA is defined as operating income, plus depreciation and amortization.
We believe EBITDA to be relevant and useful information, as EBITDA is the
primary metric used by our management to measure the performance of our
business. EBITDA should be considered in addition to, but not as a
substitute for, other measures of financial performance reported in
accordance with generally accepted accounting principles, including our cash
flows from operating, investing and financing activities.
(4) Population, or POPs, represent AT&T Wireless Services' consolidated
operations and does not include partnership or affiliate markets. POPs are
counted once whether a POP is covered/licensed only by wireless licenses at
the 850 megahertz frequency or wireless licenses at the 1900 megahertz
frequency or by both. The amount of wireless spectrum licensed varies by
geographic territory.
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SUMMARY PRO FORMA FINANCIAL DATA
The following information is only a summary and should be read together
with the financial information we include elsewhere in this document.
In the table below, we provide you with our unaudited selected pro forma
condensed combined financial information. The unaudited pro forma condensed
combined financial information set forth below gives effect to:
- the settlement of all intercompany obligations between AT&T and AT&T
Wireless Services which occurred in June 2001 in accordance with the
separation and distribution agreement between AT&T and AT&T Wireless
Services as if such event had been completed on January 1, 2000 for
statement of operations purposes, and at March 31, 2001 for balance sheet
purposes;
- the $6.5 billion debt offering of Senior Notes of AT&T Wireless Services
which occurred on March 1, 2001 as if such event had been completed on
January 1, 2000 for statement of operations purposes; and
- the reclassification of the DoCoMo investment which occurred on January
22, 2001 to a mandatorily redeemable security effective with the
split-off of AT&T Wireless Services from AT&T as if such event had
occurred on March 31, 2001 for balance sheet purposes.
We have included detailed unaudited pro forma combined financial statements
at the end of this document.
SUMMARY PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AT AND FOR THE
THREE MONTHS FOR THE YEAR
ENDED ENDED
MARCH 31, 2001 DECEMBER 31, 2000
------------------ -----------------
INCOME STATEMENT DATA:
Revenue.................................... $ 3,212 $10,448
Operating income (loss).................... 141 (38)
Net (loss) income available to common
shareowners.............................. (33) 452
Pro forma (loss) earnings per
share -- basic........................... $ (.01) $ .18
Pro forma (loss) earnings per
share -- diluted......................... $ (.01) $ .18
BALANCE SHEET DATA:
Total assets............................... $42,239
Total debt................................. 6,590
Mandatorily redeemable common stock........ 8,308
Total shareowners' equity.................. 19,629
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RISK FACTORS
You should carefully consider each of the following risks and uncertainties
associated with our company and ownership of our common stock, as well as all of
the other information set forth in this document or incorporated by reference
into this document.
RISK FACTORS RELATING TO THE SPLIT-OFF
WE WILL NEED TO OBTAIN FINANCING ON A STAND-ALONE BASIS
Historically, all of our financing was done by AT&T at the parent level.
AT&T was able to use its overall balance sheet to finance our operations. After
the split-off, we will have to raise financing on a stand-alone basis without
reference to AT&T's overall balance sheet. Following the split-off, we may not
be able to secure adequate debt or equity financing on desirable terms. If
concerns generally affecting the wireless industry arise, we lose the benefit of
AT&T's current diverse business profile to support our debt. The cost to us of
stand-alone financing may be materially higher than the cost of financing that
we incurred as part of AT&T.
Our credit ratings are currently and may continue to be different than the
historical ratings of AT&T. After the split-off, our credit ratings may be
different from what they are now. Differences in credit ratings affect the
interest rate charged on financings, as well as the amounts of indebtedness,
types of financing structures and debt markets that may be available to us. We
may not be able to raise the capital we require on desirable terms.
WE MAY BE UNABLE TO MAKE THE CHANGES NECESSARY TO OPERATE AS AN INDEPENDENT
ENTITY AND MAY INCUR GREATER COSTS
We have been part of an integrated telecommunications provider since our
acquisition by AT&T in 1994. Following the split-off, however, AT&T will have no
obligation to provide financial, operational or organizational assistance to us
other than limited services. We may not be able to implement successfully the
changes necessary to operate independently. We may also incur additional costs
relating to operating independently that would cause our cash flow and results
of operations to decline materially. In addition, although we may be able to
participate in some of AT&T's supplier arrangements where those arrangements
permit or the vendors agree, our supplier arrangements may not be as favorable
as has historically been the case.
Agreements that we have entered into in connection with the split-off
provide that our business will be conducted differently and that our
relationship with AT&T will be different from what it has historically been.
These differences may have a detrimental effect on our results of operations or
financial condition.
THE HISTORICAL FINANCIAL INFORMATION OF AT&T WIRELESS GROUP MAY NOT BE
REPRESENTATIVE OF OUR RESULTS AS AN INDEPENDENT ENTITY, AND, THEREFORE, MAY NOT
BE RELIABLE AS AN INDICATOR OF OUR HISTORICAL OR FUTURE RESULTS
The historical financial information we have included in this document may
not reflect what our results of operations, financial position and cash flows
would have been had we been an independent entity during the periods presented.
This is because the financial information reflects allocations for services
provided to AT&T Wireless Group by AT&T, which allocations may not reflect the
costs we will incur for similar or incremental services as an independent
entity. In addition, the historical financial information we have included does
not reflect transactions that have occurred since March 31, 2001, or that are
expected to occur in connection with the split-off. This historical financial
information also is not reliable as an indicator of future results.
WE WILL GENERALLY BE RESPONSIBLE FOR TAX LIABILITY IF THE SPLIT-OFF IS TAXABLE
Under the separation and distribution agreement between us and AT&T,
subject to limited exceptions, we will be responsible for any tax liability and
any related liability that results from the split-off failing to
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qualify as a tax-free transaction. If the split-off fails to qualify as a
tax-free transaction, this liability would have a material adverse effect on us.
WE MAY NO LONGER RECEIVE TAX SHARING PAYMENTS FROM AT&T WHEN WE CEASE TO BE A
MEMBER OF THE AT&T CONSOLIDATED TAX RETURN GROUP, AND WE MAY INCUR OTHER TAX
LIABILITIES AS A RESULT OF THE SPLIT-OFF AND PRE-SPLIT-OFF TRANSACTIONS
As a result of the split-off, we will cease to be a member of the
consolidated federal income tax return group of which AT&T is the common parent.
Consequently, taxable income and losses, and our other tax attributes in
post-split-off taxable periods could generally no longer offset taxable income
or losses and other tax attributes of the AT&T consolidated tax return group.
For two taxable years after the split-off, under federal income tax rules, we
would generally be able to carry back any such tax losses, subject to
limitations, against taxable income, if any, of members of AT&T Wireless Group
for pre-split-off periods. Under our tax sharing agreement with AT&T, however,
we generally may only carry back net operating losses (and not other tax
attributes) from post-split-off taxable periods to pre-split-off taxable
periods, and only if those losses are significant and with the consent of AT&T,
which consent AT&T has agreed not to withhold unreasonably. To the extent we are
expected to have tax losses in post-split-off taxable periods, we would
generally no longer receive current tax sharing payments with respect to those
losses. Instead, except where those losses can be carried back, we would benefit
from those losses only if and when we generated sufficient taxable income in
future years to utilize those tax losses on a stand-alone basis.
In addition, there may be tax costs associated with the split-off that
result from our ceasing to be a member of the AT&T consolidated tax return
group, as well as from pre-split-off transactions. If incurred, these costs
could be material to our results.
VARIOUS FACTORS MAY INTERFERE WITH OUR ABILITY TO ENGAGE IN DESIRABLE STRATEGIC
TRANSACTIONS AND EQUITY ISSUANCES
We may be prevented from engaging in some desirable strategic transactions
after the split-off. The Internal Revenue Code restricts the ability of a
company which has undergone a tax-free split-off from certain issuances of
shares generally within a two-year period after the split-off. In addition, the
separation and distribution agreement prohibits us, for a period of 30 months
following the split-off, from entering into certain transactions that could
render the split-off taxable. This may discourage, delay or prevent a merger,
change of control, or other strategic or capital raising transactions involving
our issuance of equity. Provisions of our charter and bylaws, our rights plan,
applicable law and the DoCoMo agreements may also have the effect of
discouraging, delaying or preventing change of control transactions that our
stockholders find desirable.
WE MAY LOSE RIGHTS UNDER AGREEMENTS WITH AT&T IF A CHANGE OF CONTROL OCCURS
Some of the agreements that we have entered into with AT&T in connection
with the split-off, including the brand license agreement, master carrier
agreement and other commercial agreements, contain provisions that give one
party rights in the event of a change of control of the other party. These
provisions may deter a change of control. In the event of a change of control,
the exercise of these rights could have a material adverse effect on us.
AT&T'S RESTRUCTURING MAY ADVERSELY IMPACT OUR COMPETITIVE POSITION
In connection with AT&T's restructuring, there is a risk that we and AT&T's
other separated business units may not be able to create effective intercompany
agreements to facilitate effective cost sharing or to maintain or enter into
arrangements for combining their respective services in customer offerings or
other forms of bundling arrangements. Competition between us and the other AT&T
units in overlapping markets, including the consumer markets where cable
telephone, fixed wireless and digital subscriber line solutions may all be
available at the same time, although generally not all under the AT&T brand,
could
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result in more downward price pressure. We expect that the different businesses
and companies will share the AT&T brand after the restructuring, which will
likely increase this level of competition. In addition, any incremental costs
associated with implementing AT&T's restructuring plan may materially adversely
affect the different businesses and companies, including our business.
BRITISH TELECOMMUNICATIONS HAS ASSERTED THAT ITS CONSENT IS REQUIRED FOR AT&T'S
RESTRUCTURING
In a letter to AT&T dated July 6, 2001, British Telecommunications stated
that, in its view, AT&T's proposed restructuring requires British
Telecommunications' consent under agreements between AT&T and British
Telecommunications. While it is not clear whether British Telecommunications
believes that its consent is required for the split-off of AT&T Wireless
Services, and AT&T does not believe such consent is required, it is possible
that British Telecommunications will in the future assert that its consent was
required for the split-off, or assert that the agreements between AT&T and
British Telecommunications, including non-competition provisions and exclusive
purchasing requirements, would apply to AT&T Wireless Services following the
split-off.
RISK FACTORS RELATING TO OUR COMMON STOCK
AT&T'S INTENTION TO RETAIN $3 BILLION OF OUR COMMON STOCK FOR SALE, EXCHANGE OR
MONETIZATION AFTER THE SPLIT-OFF COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK
AT&T is retaining 185,308,303 shares, or about 7.3%, of our common stock
for its own account for sale, exchange or monetization within six months of the
split-off, subject to the continued validity of the IRS ruling that AT&T
received on May 29, 2001. Of these retained shares, AT&T expects to sell
shares shortly before, on or shortly after the split-off date to
Credit Suisse First Boston and Goldman Sachs in the exchange described under
"Underwriters -- The Exchange". These shares will then be offered in the
offering. Sales of these retained shares could adversely affect the market price
of our common stock.
FUTURE SALES OF OUR STOCK COULD ADVERSELY AFFECT OUR STOCK'S MARKET PRICE AND
OUR ABILITY TO RAISE CAPITAL IN THE FUTURE
Sales of substantial amounts of our common stock, including any sale by
AT&T of our shares it retains in the split-off, could hurt the market price of
our stock. This also could hurt our ability to raise capital in the future. The
shares issued in the split-off are freely tradable without restriction under the
Securities Act of 1933 by persons other than "affiliates", as defined under the
Securities Act. Any sales of substantial amounts of our common stock in the
public market, or the perception that those sales might occur, could materially
adversely affect the market price of our stock.
We will not solicit the approval of our stockholders for the issuance of
authorized but unissued shares of our stock unless this approval is deemed
advisable by our board of directors or is required by applicable law, regulation
or stock exchange listing requirements. The issuance of those shares could
dilute the value of our shares.
WE DO NOT EXPECT TO PAY DIVIDENDS ON OUR COMMON STOCK
Our board of directors will determine whether to pay dividends on our
common stock primarily based upon our financial condition, results of our
operations and our business requirements. We currently do not expect to pay any
dividends on our common stock for the foreseeable future.
THE MARKET PRICE AND TRADING VOLUME OF OUR COMMON STOCK MAY BE VOLATILE AND MAY
FACE NEGATIVE PRESSURE
Before the split-off, there was no trading market for the shares of our
common stock. Investors' interest may not lead to a liquid trading market and
the market price of our common stock may be volatile. In addition, the
percentage interest in our business that will be publicly held in the form of
our common shares after the split-off will be materially greater than the
percentage interest currently
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represented by the outstanding AT&T Wireless Group tracking stock. You should be
aware that AT&T is retaining $3 billion of shares of our common stock for its
own account for sale, exchange or monetization within six months of the
split-off, subject to the continued validity of the IRS ruling that AT&T
obtained, which could affect the trading market for our common shares in the
future.
These factors may result in short- or long-term negative pressure on the
trading price of shares of our common stock. The market price of our common
stock could fluctuate significantly for many reasons, including in response to
the risk factors listed in this document or for specific reasons unrelated to
our performance. Investors may consider our common stock as a technology stock.
Technology stocks have recently experienced extreme price and volume
fluctuations. Therefore, the market price and trading volume of our common stock
also may be extremely volatile.
FAILURE TO MEET PREVIOUSLY ANNOUNCED FINANCIAL EXPECTATIONS COULD HAVE AN
ADVERSE IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK
On April 24, 2001, we disclosed the following expectations for our
business:
"Services revenue are expected to grow in the lower end of the 30-35
percent range for the year. EBITDA growth for 2001, excluding other income,
is expected to be in the mid-60 percent range. Subscriber growth, on a
consolidated basis in 2001, is expected to be around 20 percent. For the
second quarter of 2001, net subscriber additions are expected to grow in
the mid-to high 20 percent range."
Our ability to achieve these targets is subject to a number of risks,
uncertainties and other factors affecting our business and the wireless industry
generally, many of which are beyond our control. These factors may cause actual
results to differ materially. We describe a number of these factors throughout
this document, including in these Risk Factors and in the section entitled
"Special Note Regarding Forward-Looking Statements." There is no assurance that
we will meet these targets, and if we are not able to meet these targets, it
could have an adverse impact on the market price of our common stock.
RISK FACTORS RELATING TO OUR BUSINESS
WE MAY SUBSTANTIALLY INCREASE OUR DEBT LEVEL IN THE FUTURE, WHICH COULD SUBJECT
US TO VARIOUS RESTRICTIONS AND HIGHER INTEREST COSTS AND DECREASE OUR CASH FLOW
AND EARNINGS
We may substantially increase our debt level in the future, which could
subject us to various restrictions and higher interest costs and decrease our
cash flow and earnings. It may also be difficult for us to obtain all the
financing we need to fund our business and growth strategy on desirable terms.
We currently anticipate requiring substantial additional financing for the
foreseeable future to fund capital expenditures, license purchases and costs and
expenses in connection with funding our operations, domestic and international
investments and our growth strategy and the repayment of indebtedness and
preferred equity owed to or held by AT&T and affiliated entities in connection
with the split-off. We have repaid the $1.8 billion of long-term debt and
related accrued interest and redeemed the $3.0 billion of preferred equity and
related unpaid dividends held by AT&T. We are exploring and evaluating the
relative advantages and disadvantages of various funding mechanisms. We recently
completed a $6.5 billion long-term debt offering, entered into bank credit
facilities of up to $2.5 billion and finalized agreements with a group of
commercial paper dealers to issue up to $2.5 billion of private placement
commercial paper notes. Other funding mechanisms that still may be considered
include other forms of public and private debt facilities. The decision on debt
composition is dependent on, among other things, our business and financial
plans and the market conditions at the time of financing. The agreements
governing this indebtedness may contain financial and other covenants that could
impair our flexibility and restrict our ability to pursue growth opportunities.
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OUR RELATIONSHIP WITH NTT DOCOMO, INC. CONTAINS FEATURES THAT COULD ADVERSELY
AFFECT OUR FINANCIAL CONDITION OR THE WAY IN WHICH OUR BUSINESS IS CONDUCTED
The agreements relating to DoCoMo's investment in us, which we describe on
page 115, contains requirements and contingencies that could materially
adversely affect our financial condition and technology strategies. The terms of
the DoCoMo investment enable DoCoMo to terminate its investment and require
repayment of its $9.8 billion investment, plus interest, if we fail, under some
circumstances, to commence service using an agreed technology in at least 13 of
the top 50 domestic markets by June 30, 2004. See "DoCoMo Strategic Investment."
If DoCoMo requires repayment, we will have to fund the entire repurchase
obligation. If DoCoMo requires repayment of its investment, it may also
terminate the technology rights provided to us in connection with its
investment.
We will need to obtain DoCoMo's consent to make any fundamental change in
the nature of our business or to allow another wireless operator to acquire more
than 15% but less than 50% of our equity. These limitations could prevent us
from taking advantage of some business opportunities or relationships that we
might otherwise pursue.
OUR SIGNIFICANT NETWORK BUILD OUT REQUIREMENTS MAY NOT BE COMPLETED AS PLANNED
We need to complete significant remaining build out activities, including
completion of regulatorily required build out activities in some of our existing
wireless markets. Failure or delay to complete the build out of our network and
launch of operations, or increased costs of this build out and launch of
operations, could have a material adverse effect on our operations and financial
condition.
As we continue to build out our network, we must, among other things,
continue to:
- lease, acquire or otherwise obtain rights to a large number of cell and
switch sites;
- obtain zoning variances or other local governmental or third-party
approvals or permits for network construction;
- complete the radio frequency design, including cell site design,
frequency planning and network optimization, for each of our markets;
- complete the fixed network implementation, which includes designing and
installing network switching systems, radio systems, interconnecting
facilities and systems, and operating support systems; and
- expand and maintain customer care, network management, billing and other
financial and management systems.
In addition, in the next several years, we will be implementing upgrades to
our network to access the next generation of digital technology. These events
may not occur in the time frame we assume or that the FCC requires, at the cost
we assume, or at all.
Additionally, problems in vendor equipment availability, technical
resources or system performance could delay the launch of new or expanded
operations in new or existing markets or result in increased costs in all
markets. We intend to rely on the services of various companies that are
experienced in design and build out of wireless networks in order to accomplish
our build out schedule. However, we may not be able to obtain satisfactory
contractors on economically attractive terms or ensure that the contractors
obtained will perform as we expect.
WE HAVE SUBSTANTIAL CAPITAL REQUIREMENTS THAT WE MAY NOT BE ABLE TO FUND
Our strategy and business plan will continue to require substantial
capital, which we may not be able to obtain or to obtain on favorable terms. A
failure to obtain necessary capital would have a material adverse effect on us,
and result in the delay, change or abandonment of our development or expansion
plans and the failure to meet regulatory build out requirements.
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We currently estimate that our capital expenditures for the build out of
our networks, including expenditures related to our fixed wireless operations
during 2001, will total approximately $5.5 billion, as compared to $4.1 billion
in 2000. We expect these 2001 capital expenditure amounts to include
approximately $5 billion of mobility expenditures and approximately $450 million
for fixed wireless. We also expect to incur substantial capital expenditures in
future years. The actual amount of the funds required to finance our network
build out and other capital expenditures may vary materially from management's
estimate. We have entered into various contractual commitments associated with
the development of our third-generation strategy totalling approximately $2.2
billion as of the dates the agreements were executed. These include purchase
commitments for network equipment. Additionally, we anticipate that we will
enter into material purchase commitments in the future.
We also may require substantial additional capital for, among other uses,
acquisitions of providers of wireless services, spectrum license or system
acquisitions, system development and network capacity expansion. We have also
entered into agreements for investments and ventures which have required or will
require substantial capital, including our agreement to invest $2.6 billion in
exchange for a combination of a non-controlling equity interest in and debt
securities issued by Alaska Native Wireless, which was the successful bidder for
licenses costing approximately $2.9 billion in the recently concluded 1900
megahertz auction. These agreements also may contain provisions potentially
requiring substantial additional capital in future circumstances, such as
allowing the other investors to require us to purchase assets or investments.
THE ACTUAL AMOUNT OF FUNDS NECESSARY TO IMPLEMENT OUR STRATEGY AND BUSINESS PLAN
MAY MATERIALLY EXCEED CURRENT ESTIMATES, WHICH COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The actual amount of funds necessary to implement our strategy and business
plan may materially exceed our current estimates in the event of various factors
including:
- departures from our current business plan,
- unforeseen delays,
- cost overruns,
- unanticipated expenses,
- regulatory developments,
- engineering design changes, and
- technological and other risks.
If actual costs do materially exceed our current estimates for these or other
reasons, this could have a material adverse effect on our financial condition
and results of operations.
OUR BUSINESS AND OPERATIONS WOULD BE ADVERSELY AFFECTED IF WE FAIL TO ACQUIRE
ADEQUATE RADIO SPECTRUM IN FCC AUCTIONS OR THROUGH OTHER TRANSACTIONS
Our domestic business depends on the ability to use portions of the radio
spectrum licensed by the FCC. We could fail to obtain sufficient spectrum
capacity in new and existing markets, whether through FCC auctions or other
transactions, in order to meet the expanded demands for our existing services,
as well as to enable development of third-generation services. This type of
failure would have a material adverse impact on the quality of our services or
our ability to roll out such future services in certain markets. To the extent
we determine we need additional spectrum for our mobility business, we may
utilize spectrum currently allocated to our fixed wireless business. We intend
to continue to acquire more spectrum through a combination of alternatives,
including participation in spectrum auctions, purchase of spectrum licenses from
companies that own them or purchase of these companies outright.
As required by law, the FCC periodically conducts auctions for licenses to
use certain parts of the radio spectrum. The decision to conduct auctions, and
the determination of what spectrum frequencies will
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be made available for auction, are provided for by laws administered by the FCC.
The FCC may not allocate spectrum sufficient to meet the demands of all those
wishing to obtain licenses. Even if the FCC determines to conduct further
auctions in the future, we may not be successful in those future auctions in
obtaining the spectrum that we believe is necessary to implement our business
and technology strategies.
We may also seek to acquire radio spectrum through purchases and swaps with
other spectrum licensees or otherwise, including by purchases of other licensees
outright. However, we may not be able to acquire sufficient spectrum through
these types of transactions, and we may not be able to complete any of these
transactions on favorable terms.
See "Our Company -- Regulatory Environment" for additional information
regarding the licensed radio frequency spectrum and the regulatory environment
in which we operate.
OUR BUSINESS AND OPERATIONS COULD BE HURT IF WE ARE UNABLE TO ESTABLISH NEW
AFFILIATES TO EXPAND OUR DIGITAL NETWORK OR IF OUR EXISTING OR ANY NEW
AFFILIATES DO NOT OR CANNOT DEVELOP THEIR SYSTEMS IN A MANNER CONSISTENT WITH
OURS
To accelerate the build out of widescale coverage of the United States by a
digital mobile wireless network operating on the technical standards we have
adopted, we have entered into affiliation agreements with other entities that
provide wireless service or hold spectrum licenses. Through contractual
arrangements between us and these affiliates, our customers are able to obtain
service in the affiliates' territories, and the affiliates' customers are able
to obtain service in our territory. In all markets where these affiliates
operate, we are at risk because we do not control the affiliates. As a result,
these affiliates are not obligated to implement our third-generation strategy.
Our ability to provide service on a nationwide level and to implement our
third-generation strategy would be adversely affected if these affiliates decide
not to participate in the further development of our digital network.
We may establish additional affiliate relationships to accelerate build out
of our digital mobile network. If we are unable to establish such affiliate
relationships, or if any such affiliates are unable or do not develop their
systems in a manner consistent with our network, our ability to service our
customers and expand the geographic coverage of our digital network could be
adversely affected.
IF THE FCC DENIES ALASKA NATIVE WIRELESS' APPLICATION TO ACQUIRE LICENSES FOR
WHICH IT WAS THE SUCCESSFUL BIDDER IN THE RECENT SPECTRUM AUCTION, OR, IN THE
FUTURE, REVOKES LICENSES AWARDED TO ALASKA NATIVE WIRELESS, OUR ABILITY TO
IMPLEMENT ITS THIRD-GENERATION STRATEGY COULD BE ADVERSELY AFFECTED OR WE COULD
BECOME OBLIGATED TO REPURCHASE OTHER INVESTORS' INTERESTS IN ALASKA NATIVE
WIRELESS
We have agreed to invest $2.6 billion in exchange for a combination of a
non-controlling equity interest in and debt securities issued by Alaska Native
Wireless, which was the successful bidder for licenses costing $2.9 billion in
the recently concluded 1900 megahertz auction. One auction participant has
challenged the qualifications of Alaska Native Wireless to acquire "closed"
licenses, which constituted most of the licenses for which Alaska Native
Wireless was the successful bidder. If the FCC determines that Alaska Native
Wireless was not qualified, the FCC could refuse to grant Alaska Native Wireless
the closed licenses. If this occurs, it could have a significant adverse impact
on our ability to provide or enhance services in key new and existing markets.
On June 22, 2001, a federal appeals court ruled in favor of the trustee in
the Chapter 11 bankruptcy proceeding of NextWave Telecom, Inc. and the unsecured
creditors of NextWave with respect to the litigation they commenced relating to
the 1900 megahertz auction. The court ruled that the FCC had acted improperly in
repossessing from NextWave the spectrum sold in the 1900 megahertz auction, and
that the spectrum should be returned to NextWave. The FCC had indicated prior to
the auction that the spectrum would be returned to NextWave if the court were to
rule that the spectrum had been improperly repossessed. If this decision is not
successfully appealed, or settled, or if Alaska Native Wireless is otherwise
unable to acquire the licenses for which it was the successful bidder, it could
have a significant adverse impact on our plans to provide or enhance services in
key new and existing markets.
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In specified circumstances, if a winning bid of Alaska Native Wireless in
the recently concluded 1900 megahertz spectrum auction is rejected or if any
license granted to it is revoked, we would become obligated to compensate other
investors for making capital available to the venture. In specified
circumstances, if the grant of those licenses is challenged, we may be obligated
to purchase the interests of other investors.
IF WE ARE UNABLE TO REACH AGREEMENT WITH ALASKA NATIVE WIRELESS REGARDING THE
DEVELOPMENT AND USE OF LICENSES FOR WHICH IT WAS THE SUCCESSFUL BIDDER IN THE
RECENT SPECTRUM AUCTION, OUR ABILITY TO IMPLEMENT OUR THIRD-GENERATION STRATEGY
MAY BE ADVERSELY AFFECTED
We have not reached any agreements with Alaska Native Wireless as to
whether it will participate in our digital mobile wireless network. Alaska
Native Wireless is not obligated to use or develop any spectrum it acquires in a
manner that will further, or be consistent with, our strategic objectives,
although Alaska Native Wireless is obligated to use technology that is
compatible and interoperable with our digital mobile wireless network. If Alaska
Native Wireless does not enter into agreements with us regarding the use and
development of this spectrum similar to those we have entered into with our
affiliates for our existing networks, it could have a material adverse impact on
the timing and cost of implementing our third-generation strategy.
POTENTIAL ACQUISITIONS MAY REQUIRE US TO INCUR SUBSTANTIAL ADDITIONAL DEBT AND
INTEGRATE NEW TECHNOLOGIES, OPERATIONS AND SERVICES, WHICH MAY BE COSTLY AND
TIME CONSUMING
An element of our strategy is to expand our network, which we may do
through the acquisition of licenses, systems and wireless providers. These
acquisitions may cause us to incur substantial additional indebtedness to
finance the acquisitions or to assume indebtedness of the entities that are
acquired. In addition, we may encounter difficulties in integrating those
acquired operations into our own operations, including as a result of different
technologies, systems, services or service offerings. These actions could prove
costly or time consuming or divert our management's attention from other
business matters.
FAILURE TO DEVELOP FUTURE BUSINESS OPPORTUNITIES MAY HAVE AN ADVERSE EFFECT ON
OUR GROWTH POTENTIAL
We intend to pursue a number of new growth opportunities, which involve new
services for which there are no proven markets. In addition, the ability to
deploy and deliver these services relies, in many instances, on new and unproven
technology. Our existing technology may not perform as expected and we may not
be able to successfully develop new technology to effectively and economically
deliver these services. These opportunities also require substantial capital
outlays and spectrum availability to deploy on a large scale. This capital or
spectrum may not be available to support these services. To the extent we
reallocate spectrum from our fixed wireless business to our mobility business,
it could impact our ability to deploy our fixed wireless service in the markets
covered by that spectrum.
Furthermore, each of these opportunities entails additional specific risks.
For example, on the one hand, the delivery of fixed wireless services requires
us to provide installation and maintenance services, which we have never
provided previously. This will require us to hire, employ, train and equip
technicians to provide installation and repair in each market served, or rely on
subcontractors to perform these services. We may not be able to hire and train
sufficient numbers of qualified employees or subcontract these services, or do
so on economically attractive terms. The success of wireless data services, on
the other hand, is substantially dependent on the ability of others to develop
applications for wireless devices and to develop and manufacture devices that
support wireless applications. These applications or devices may not be
developed or developed in sufficient quantities to support the deployment of
wireless data services.
These services may not be widely introduced and fully implemented at all or
in a timely fashion. These services may not be successful when they are in
place, and customers may not purchase the services offered. If these services
are not successful or costs associated with implementation and completion of the
roll-out of these services materially exceed those currently estimated by us,
our financial condition and prospects could be materially adversely affected.
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WE FACE SUBSTANTIAL COMPETITION
There is substantial competition in the wireless telecommunications
industry. We expect competition to intensify as a result of the entrance of new
competitors and the development of new technologies, products and services.
Other two-way wireless providers, including other cellular and personal
communications services, operators and resellers, serve each of the markets in
which we compete.
A majority of U.S. markets will have five or more commercial mobile radio
service providers, and all of the top 50 U.S. metropolitan markets have at least
four, and in some cases as many as seven or more, facilities-based wireless
service providers offering wireless services on cellular, personal
communications services or specialized mobile radio frequency. Competition also
may increase to the extent that smaller, stand-alone wireless providers transfer
licenses to larger, better capitalized and more experienced wireless providers.
MARKET PRICES FOR WIRELESS SERVICES MAY DECLINE IN THE FUTURE
We anticipate that market prices for two-way wireless services generally
will decline in the future due to increased competition. We expect significant
competition among wireless providers, including from new entrants, to continue
to drive service and equipment prices lower. We also expect that there will be
increases in advertising and promotional spending, along with increased demands
on access to distribution channels.
All of this may lead to greater choices for customers, possible consumer
confusion, and increasing movement of customers between competitors, which we
refer to as "churn." We may also adopt customer policies or programs to be more
competitive, including credit policies, which policies or programs may also
affect churn. Our ability to compete successfully also will depend on marketing,
and on our ability to anticipate and respond to various competitive factors
affecting the industry, including new services, changes in consumer preferences,
demographic trends, economic conditions and discount pricing strategies by
competitors.
CONSOLIDATION IN THE WIRELESS COMMUNICATIONS INDUSTRY MAY ADVERSELY AFFECT US
The wireless communications industry has been experiencing significant
consolidation and we expect that this consolidation will continue. The
previously announced mergers or joint ventures of Bell Atlantic Corporation/GTE
Corporation/Vodafone AirTouch, now called Verizon, SBC/BellSouth, now called
Cingular, and Deutsche Telekom/VoiceStream Wireless, have created large,
well-capitalized competitors with substantial financial, technical, marketing
and other resources to respond to our offerings.
These mergers or ventures have caused our ranking to decline to third in
U.S. revenue and U.S. subscriber share. In terms of U.S. population covered by
licenses, we, including our partnerships and affiliates, rank third. As a
result, these competitors may be able to offer nationwide services and plans
more quickly and more economically than us, to obtain roaming rates that are
more favorable than those obtained by us, and may be better able to respond to
our offers.
SIGNIFICANT TECHNOLOGICAL CHANGES IN THE WIRELESS INDUSTRY COULD MATERIALLY
ADVERSELY AFFECT US
The wireless communications industry is experiencing significant
technological change. This change includes the increasing pace of digital
upgrades in existing analog wireless systems, evolving industry standards,
ongoing improvements in the capacity and quality of digital technology, shorter
development cycles for new products, enhancements and changes in end-user needs
and preferences and increased importance of data and broadband capabilities.
The pace and extent of customer demand may not continue to increase, and
airtime and monthly recurring charges may continue to decline. As a result, the
future prospects of the industry and of us and the success of our competitive
services remain uncertain. Also, alternative technologies may develop for the
provision of services to customers that may provide wireless communications
service or alternative service superior to that available from us. Technological
developments may therefore materially adversely affect us.
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TERMINATION OR IMPAIRMENT OF OUR RELATIONSHIP WITH A SMALL NUMBER OF KEY
SUPPLIERS COULD ADVERSELY AFFECT OUR REVENUES AND RESULTS OF OPERATIONS
We have developed relationships with a small number of key vendors,
including Nokia Mobile Phones, Inc., Telefonaktiebolaget LM Ericsson, Mitsubishi
Corporation, and Motorola, Inc. for our supply of wireless handsets, Lucent
Technologies, Inc., Nortel Networks, Inc., Ericsson and Nokia Networks, Inc. for
our supply of telecommunications infrastructure equipment and Convergys
Information Management Group for our billing services. We do not have
operational or financial control over our key suppliers, and have limited
influence with respect to the manner in which these key suppliers conduct their
businesses. If these key suppliers were unable to honor their obligations to us,
it could disrupt our business and adversely impact our revenues and results of
operations.
OUR TECHNOLOGY MAY NOT BE COMPETITIVE WITH OTHER TECHNOLOGIES OR BE COMPATIBLE
WITH NEXT GENERATION TECHNOLOGY
There are three existing digital transmission technologies, none of which
is compatible with the others. We selected time division multiple access
technology for our second-generation network because we believe that this
technology offers several advantages over other second-generation technologies.
However, a number of other wireless service providers chose code division
multiple access or global system for mobile communications as their digital
wireless technology. For our path to next generation technology, we have chosen
a global system for mobile communications platform to make available enhanced
data services using general packet radio service technology, and
third-generation capabilities using enhanced data rates for global evolution and
ultimately universal mobile telecommunications systems technologies.
These technologies may not provide the advantages we expect. Other wireless
providers have chosen a competing wideband technology as their third-generation
technology. If the universal mobile telecommunications standard does not gain
widespread acceptance, it would materially adversely affect our business,
financial condition and prospects.
As we implement our plans for deployment of technology for third-generation
capabilities, we will continue to incur substantial costs associated with
maintaining our time division multiple access networks. Also, these networks are
not compatible, and customers with phones that operate on one network will not
initially be able to use those phones on the other network. There are risks
inherent in the development of new third-generation equipment and we may face
unforeseen costs, delays or problems that may have a material adverse effect on
us.
WE RELY ON FAVORABLE ROAMING ARRANGEMENTS, WHICH WE MAY BE UNABLE TO CONTINUE TO
OBTAIN
We may not continue to be able to obtain or maintain roaming agreements
with other providers on terms that are acceptable to us. Our customers
automatically can access another provider's analog cellular or digital system
only if the other provider allows our customers to roam on its network. We rely
on agreements to provide roaming capability to our customers in many areas of
the United States that our network does not serve. Some competitors, because of
their call volumes or their affiliations with, or ownership of, wireless
providers, however, may be able to obtain roaming rates that are lower than
those rates obtained by us.
In addition, the quality of service that a wireless provider delivers
during a roaming call may be inferior to the quality of service we or an
affiliated company provides, the price of a roaming call may not be competitive
with prices of other wireless providers for such call, and our customers may not
be able to use any of the advanced features, such as voicemail notification,
that the customer enjoys when making calls within our network. Finally, we may
not be able to obtain favorable roaming agreements for our third-generation
products and services that we intend to offer using the technologies we plan to
deploy for interim enhanced data and third-generation services.
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OUR BUSINESS IS SEASONAL AND WE DEPEND ON FOURTH QUARTER RESULTS, WHICH MAY NOT
CONTINUE TO BE STRONG
The wireless industry, including us, has experienced a trend of generating
a significantly higher number of customer additions and handset sales in the
fourth quarter of each year as compared to the other three fiscal quarters. A
number of factors contribute to this trend, including the increasing use of
retail distribution, which is dependent upon the year-end holiday shopping
season, the timing of new product and service announcements and introductions,
competitive pricing pressures, and aggressive marketing and promotions.
Strong fourth quarter results for customer additions and handset sales may
not continue for the wireless industry or for us. In the future, the number of
our customer additions and handset sales in the fourth quarter could decline for
a variety of reasons, including our inability to match or beat pricing plans
offered by competitors, failure to adequately promote our products, services and
pricing plans, or failure to have an adequate supply or selection of handsets.
If in any year fourth quarter results fail to significantly improve upon
customer additions and handset sales from the year's previous quarters, this
could adversely impact our results for the following year.
MEDIA REPORTS HAVE SUGGESTED RADIO FREQUENCY EMISSIONS MAY BE LINKED TO VARIOUS
HEALTH CONCERNS AND INTERFERE WITH VARIOUS MEDICAL DEVICES, AND WE MAY BE
SUBJECT TO POTENTIAL LITIGATION RELATING TO THESE HEALTH CONCERNS
Media and other reports have linked radio frequency emissions from wireless
handsets to various health concerns, including cancer, and to interference with
various electronic medical devices, including hearing aids and pacemakers.
Research and studies are ongoing. Whether or not such research or studies
conclude there is a link between radio frequency emissions and health, these
concerns over radio frequency emissions may discourage the use of wireless
handsets or expose us to potential litigation, which could have a material
adverse effect on our results of operations. Several class action lawsuits have
been filed against AT&T, several other wireless service operators and several
wireless phone manufacturers, asserting products liability, breach of warranty
and other claims relating to radio frequency transmissions to and from wireless
phones. The complaints seek damages for the costs of headsets for wireless phone
users as well as injunctive relief. In connection with the split-off, we will be
allocated all of the liability, if any, arising from such lawsuits.
WE MAY BE SUBJECT TO POTENTIAL LITIGATION RELATING TO THE USE OF WIRELESS PHONES
WHILE DRIVING
Some studies have indicated that some aspects of using wireless phones
while driving may impair drivers' attention in certain circumstances, making
accidents more likely. These concerns could lead to potential litigation
relating to accidents, deaths or serious bodily injuries, or to new restrictions
or regulations on wireless phone use, any of which also could have material
adverse effects on our results of operations. In connection with the split-off,
we will be allocated the liability, if any, that could arise from any such
potential litigation.
OUR OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATION, WHICH REGULATION COULD HAVE
ADVERSE EFFECTS ON OUR BUSINESS
The licensing, construction, operation, sale, resale and interconnection
arrangements of wireless communications systems are regulated to varying degrees
by the FCC, and, depending on the jurisdiction, state and local regulatory
agencies. These regulations may include, among other things, required service
features and capabilities, such as number portability or emergency 911 service.
In addition, the FCC, together with the U.S. Federal Aviation Administration,
regulates tower marking and lighting. Any of these agencies having jurisdiction
over our business could adopt regulations or take other actions that could
adversely affect our business.
FCC licenses to provide wireless services or personal communications
services are subject to renewal and revocation. There may be competition for our
licenses upon their expiration and we cannot assure you that the FCC will renew
them. FCC rules require all wireless and personal communications services
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licensees to meet specified build out requirements. We may not be able to meet
these requirements in each market. Failure to comply with these requirements in
a given license area could result in revocation or forfeiture of our license for
that license area or the imposition of fines on us by the FCC.
STATE AND LOCAL LEGISLATION RESTRICTING OR PROHIBITING WIRELESS PHONE USE WHILE
DRIVING COULD CAUSE SUBSCRIBER USAGE TO DECLINE
Some state and local legislative bodies have proposed legislation
restricting or prohibiting the use of wireless phones while driving motor
vehicles. Similar laws have been enacted in other countries. On June 28, 2001,
New York State enacted a law prohibiting the use of hand-held wireless phones
while driving motor vehicles other than through the use of hands-free equipment.
To date a small number of communities in the United States have also passed
restrictive local ordinances. These laws, or, if passed, other laws prohibiting
or restricting the use of wireless phones while driving, could have the effect
of reducing subscriber usage, which could cause a material adverse effect on our
results of operations.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements with respect to:
- AT&T's restructuring plan,
- the split-off,
- AT&T's intention to sell, exchange or monetize the shares of our common
stock that it is retaining,
- the offering,
- financial condition,
- results of operations,
- cash flows,
- dividends,
- financing plans,
- business strategies,
- operating efficiencies or synergies,
- budgets,
- capital and other expenditures,
- network build out and upgrade,
- competitive positions,
- availability of capital,
- growth opportunities for existing products,
- benefits from new technologies,
- availability and deployment of new technologies,
- plans and objectives of management, and
- other matters.
Statements in this document, or that are incorporated by reference into this
document, that are not historical facts are hereby identified as
"forward-looking statements." These forward-looking statements, including,
without limitation, those relating to the future business prospects, revenues,
working capital, liquidity, capital needs, network build out, interest costs and
income, in each case, relating to us, wherever they occur in this document, are
necessarily estimates reflecting the best judgment of senior management and
involve a number of risks and uncertainties that could cause actual results to
differ materially from those suggested by the forward-looking statements. These
forward-looking statements should, therefore, be considered in light of various
important factors, including those set forth in this document. Important factors
that could cause actual results to differ materially from estimates or
projections contained in the forward-looking statements include, without
limitation:
- the risks associated with the implementation of a third-generation
network and business strategy, including risks relating to the operations
of new systems and technologies, substantial required expenditures and
potential unanticipated costs, the need to enter into roaming agreements
with third parties, uncertainties regarding the adequacy of suppliers on
whom we must rely to provide both network and consumer equipment and
consumer acceptance of the products and services to be offered;
- the potential impact of DoCoMo's investment in us, including provisions
of the agreements that restrict our future operations, and provisions
that may require the repurchase of DoCoMo's investment if we fail to meet
specified conditions;
- the risks associated with our operating as an independent entity as
opposed to as part of an integrated telecommunications provider,
including the inability to rely on the financial and
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operational resources of the combined company and having to provide
services that were previously provided by a different part of the
combined company;
- the impact of existing and new competitors in the markets in which we
compete, including competitors that may offer less expensive products and
services, desirable or innovative products, technological substitutes, or
have extensive resources or better financing;
- the introduction or popularity of new products and services, including
pre-paid phone products, which could increase churn;
- the impact of oversupply of capacity resulting from excessive deployment
of network capacity in the markets we serve;
- the ongoing global and domestic trend towards consolidation in the
telecommunications industry, which trend may have the effect of making
our competitors larger and better financed and afford these competitors
with extensive resources and greater geographic reach, allowing them to
compete more effectively;
- the effects of vigorous competition in the markets in which we operate
and for more valuable customers, which may decrease prices charged,
increase churn and change the customer mix, profitability and average
revenue per user;
- the ability to enter into agreements to provide, and the cost of entering
new markets necessary to provide, nationwide services;
- the ability to establish a significant market presence in new geographic
and service markets;
- the availability and cost of capital and the consequences of increased
leverage;
- the impact of any unusual items resulting from ongoing evaluations of our
business strategies;
- the requirements imposed on us or latitude allowed to competitors by the
FCC or state regulatory commissions under the Telecommunications Act of
1996 or other applicable laws and regulations;
- the risks and costs associated with the need to acquire additional
spectrum for current and future services;
- the risks associated with technological requirements, technology
substitution and changes and other technological developments;
- the results of litigation filed or to be filed against us, or of some
types of litigation filed or to be filed against AT&T for which we have
agreed to assume the liability under the split-off agreements between us
and AT&T;
- the possibility of one or more of the markets in which we compete being
impacted by changes in political, economic or other factors, such as
monetary policy, legal and regulatory changes or other external factors
over which these groups have no control; and
- those factors listed under "Risk Factors."
The words "estimate," "project," "intend," "expect," "believe," "plan" and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this document.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this document. Moreover, in the
future, we and AT&T, through its senior management team, may make
forward-looking statements about the matters described in this document or other
matters concerning us.
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THE SPLIT-OFF AND THE OFFERING
THE SPLIT-OFF
The split-off consists of two steps, which may occur simultaneously, as
follows:
- Mandatory redemption of AT&T Wireless Group tracking stock. AT&T will
redeem all of the shares of AT&T Wireless Group tracking stock
outstanding on the split-off date in exchange for shares of our common
stock. Specifically, each holder of record of AT&T Wireless Group
tracking stock as of 9:00 a.m., New York City time, on the split-off date
will receive one share of AT&T Wireless Services common stock and the
associated preferred stock purchase right in exchange for each share of
AT&T Wireless Group tracking stock held. This redemption is being carried
out in accordance with AT&T's charter, which provides that the AT&T board
of directors may exchange, on a pro rata basis, all of the outstanding
shares of AT&T Wireless Group tracking stock for a number of outstanding
shares owned by AT&T of one or more subsidiaries that hold all of the
assets and liabilities attributed to AT&T Wireless Group (and hold no
other material assets or liabilities) representing in the aggregate the
same percentage interest in that subsidiary that the outstanding AT&T
Wireless Group tracking stock was intended to represent in the AT&T
Wireless Group. All of NTT DoCoMo, Inc.'s interest in AT&T Wireless Group
will be converted into AT&T Wireless Group tracking stock on the
split-off date and will be redeemed in the split-off on the same terms as
all other shares of AT&T Wireless Group tracking stock.
- Distribution on AT&T common stock. AT&T will distribute on a pro rata
basis all of the remaining shares of our common stock to holders of AT&T
common stock, less the 185,308,303 shares that AT&T is retaining.
Specifically, each holder of AT&T common stock on the distribution record
date will receive .3218 of a share of AT&T Wireless Services common stock
and of an associated preferred stock purchase right for each share of
AT&T common stock held. A total of 1,136,258,587 shares of our common
stock will be distributed to holders of AT&T common stock.
AT&T's board of directors has approved both the mandatory redemption and
the distribution. We now hold all of the AT&T Wireless Group assets and
liabilities that constitute AT&T Wireless Group.
The redemption and the distribution will be effective as of 9:00 a.m., New
York City time, on the split-off date, July 9, 2001. To receive our common stock
in the redemption, you must be a holder of record of AT&T Wireless Group
tracking stock as of 9:00 a.m., New York City time, on the split-off date. To
receive our common stock in the distribution, you must be a holder of AT&T
common stock as of the close of business on the distribution record date, June
22, 2001.
REASONS FOR THE SPLIT-OFF
On October 25, 2000, AT&T announced its plan to restructure itself into
four separate companies or business units: wireless services, business services,
consumer services and broadband/cable services. As part of this plan, AT&T's
board of directors determined to exercise AT&T's right under its charter to
split off AT&T Wireless Group into an independent company. AT&T's reasons for
the split-off consist principally of the following, all of which are supported
by our senior management:
Increase competitiveness by allowing greater managerial focus. Competition
for capital resources, conflicting business priorities and diverted management
attention within AT&T affect AT&T Wireless Group's ability to compete as
effectively as it could if AT&T Wireless Group and AT&T were separated. After
the split-off, we will be a smaller company with a more focused set of
businesses and board of directors and management team focused solely on those
businesses, without concern for the potentially conflicting capital raising or
strategic needs of AT&T's other businesses. As a result, we expect to be in a
better position to compete, grow, and serve our customers through quicker
decision making, more efficient deployment of resources, increased operational
agility and enhanced responsiveness to customers and markets.
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Enhance our ability to fund our growth strategy and digital network
expansion. We compete in a highly competitive, capital intensive industry in
which our ability to fund our growth, including acquiring new spectrum licenses,
building out our digital networks and introducing advanced technologies, is
critical to our success. Because we are part of AT&T, our ability to raise
capital is constrained both by competition for capital with AT&T's other growth
businesses and by deterioration in the debt capacity of some of AT&T's other
business units. As a result of changes affecting AT&T's businesses, many of
which changes are not related to or are beyond the control of AT&T Wireless
Group, AT&T is subject to more demand for capital, has fewer resources and
encounters different expectations from its different investor groups.
Accordingly, both we and AT&T expect that the split-off will enable us to
establish a capital structure consistent with other companies in the wireless
industry and give us the flexibility to borrow and raise debt capital from
lenders in greater amounts without adversely affecting AT&T's credit rating.
Enable us to use stock more efficiently as an acquisition currency and
capital-raising tool. The ability to expand our operations, our network and our
geographic coverage through selective acquisitions and to raise capital through
the issuance of stock is also critical to our success. This is particularly true
because we compete in an industry that has experienced and may continue to
experience significant consolidation activity. The split-off will enable us to
use our own stock as currency in acquiring, merging, making strategic
investments in or partnering with other companies, including companies that have
acquired or invested in spectrum licenses. Prior to the initial offering of AT&T
Wireless Group tracking stock in April of 2000, our ability to make stock
acquisitions was constrained by numerous other considerations and demands on
AT&T's common stock unrelated to AT&T Wireless Group. Since April 2000, we have
been able to fund strategic acquisitions using AT&T Wireless Group tracking
stock. However, AT&T Wireless Group tracking stock has proved to be a less
desirable currency than expected and has been an impediment in our negotiations
with third parties. This is due in part to market perceptions about tracking
stocks generally and in part to specific concerns about holding shares that have
no direct claim against our assets and no direct voting rights concerning our
governance. These concerns have also made AT&T Wireless Group tracking stock a
less efficient tool for capital raising. For example, due to the disadvantages
that DoCoMo perceived in an investment in tracking stock, DoCoMo insisted, as a
condition to its recent $9.8 billion investment, that AT&T commit to redeem
DoCoMo's entire investment, with interest, if AT&T does not split us off into a
separate company by March 2002 at the latest. For these reasons, we expect that
after the split-off we will have greater autonomy and control over the use of
our equity than we do now as a business unit of AT&T.
Other Considerations
The AT&T board of directors considered other factors relating to the
split-off, including its and our expectation that the split-off will not be
taxable for U.S. federal income tax purposes to AT&T or us, or to AT&T's or our
shareholders. On May 29, 2001, AT&T received a private letter ruling from the
Internal Revenue Service confirming this tax-free treatment. The continued
validity of this ruling is a non-waivable condition to the split-off.
Furthermore, the AT&T board of directors was aware and considered that both
AT&T's and our ability to engage in significant stock transactions could be
limited or restricted for up to 30 months after the split-off to preserve the
tax-free nature of the split-off to AT&T.
The AT&T board of directors also considered other potential risks and
consequences to us and to AT&T associated with the split-off, including those
relating to us that are described in "Risk Factors -- Risk Factors Relating to
the Split-off", but believed that the considerations described above outweighed
those risks. We urge you to read all of the risk factors described in this
document, including those under the following headings: "Risk Factors Relating
to the Split-off -- We will need to obtain financing on a stand-alone
basis"; "-- We may be unable to make the changes necessary to operate as an
independent entity and may incur greater costs"; and "-- Various factors may
interfere with our ability to engage in desirable strategic transactions and
equity issuances."
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THE REDEMPTION AND DISTRIBUTION; EXCHANGE RATIO
The split-off is scheduled to occur at 9:00 a.m., New York City time, on
July 9, 2001. On the split-off date:
- each holder of record of AT&T Wireless Group tracking stock as of 9:00
a.m., New York City time, on July 9, 2001 will receive one share of our
common stock and an associated preferred stock purchase right in exchange
for each share of AT&T Wireless Group tracking stock held; and
- each holder of AT&T common stock as of the close of business on the June
22, 2001 distribution record date will receive as a distribution .3218 of
a share of our common stock and of an associated preferred stock purchase
right for each share of AT&T common stock held.
Please see "Description of Our Capital Stock -- Rights Agreement" for a
description of the preferred stock purchase rights.
In addition, each option to purchase shares of AT&T Wireless Group tracking
stock issued under employee stock incentive plans and outstanding on the
split-off date will be converted into a similar option to purchase shares of our
common stock. Options to purchase AT&T common stock granted before January 1,
2001 will be converted into two separate options -- one to purchase AT&T common
stock and another to purchase our common stock. Options to purchase AT&T common
stock granted on or after January 1, 2001 will be adjusted to increase the
number of shares subject to the option, based on the relative market price of
AT&T common stock immediately before and immediately after the split-off. All of
the AT&T common stock options and AT&T Wireless Group tracking stock options
described in this paragraph are subject to adjustment, which is intended to
retain the same intrinsic value of the options immediately before and after the
adjustment. Each outstanding warrant to purchase shares of AT&T Wireless Group
tracking stock will be converted into a similar warrant to purchase shares of
our common stock.
AT&T is not seeking shareholder approval of the split-off, and holders of
AT&T Wireless Group tracking stock have no appraisal rights in connection with
the split-off. From and after the split-off date, all rights of holders of AT&T
Wireless Group tracking stock shall cease.
We will not issue fractional shares of our common stock to holders of AT&T
Wireless Group tracking stock as part of the redemption or to AT&T stockholders
as part of the distribution nor will we credit fractional shares to book entry
accounts. Instead of receiving fractional shares, each holder of AT&T Wireless
Group tracking stock or AT&T common stock who would otherwise be entitled to
receive a fractional share of our common stock will receive cash for the
fractional interest, which may be taxable to such holder. The transfer agent
will, as soon as practicable after the split-off date, aggregate fractional
shares held by holders of record into whole shares and sell them in the open
market at the prevailing market prices and distribute the aggregate proceeds
ratably to AT&T stockholders otherwise entitled to fractional interests. The
amount of this payment will depend on the prices at which the aggregated
fractional shares are sold by the transfer agent in the open market shortly
after the split-off date. We will be responsible for any payment of brokerage
fees. The amount of these brokerage fees is not expected to be material to us.
To be entitled to receive shares of our common stock in the redemption,
holders of AT&T Wireless Group tracking stock must be stockholders as of 9:00
a.m., New York City time, on the split-off date, July 9, 2001. To be entitled to
receive shares of our common stock in the distribution, holders of AT&T common
stock must be stockholders at the close of business on the distribution record
date, June 22, 2001.
RESULTS OF THE SPLIT-OFF
Upon completion of the split-off, we will be an independent public company
owning and operating all of the businesses that currently constitute AT&T
Wireless Group. See "Our Company" for a discussion of those businesses.
Immediately after the split-off, we expect to have approximately 1.6 million
holders of
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record of shares of our common stock and approximately 2.53 billion shares of
our common stock outstanding.
For information regarding options to purchase our common stock that will be
outstanding after the distribution, see "Our Relationship with AT&T Following
the Split-off -- Agreements between AT&T and Us Relating to the
Split-off -- Employee Benefits Agreement" and "Management."
The distribution will not affect the number of outstanding shares of AT&T
common stock or any rights of AT&T stockholders.
THE OFFERING
AT&T, in its capacity as selling stockholder for federal securities law
purposes, is offering shares of our common stock if and to the extent Credit
Suisse First Boston and Goldman Sachs acquire such shares from AT&T prior to the
completion of the offering in exchange for indebtedness of AT&T held by Credit
Suisse First Boston and Goldman Sachs, as described under "Underwriters -- The
Exchange". AT&T, Credit Suisse First Boston and Goldman Sachs anticipate that
the shares will be offered exclusively or primarily to index funds whose
portfolios are primarily based on a particular stock index, such as the Standard
& Poor's Corporation 500 Composite Index, assuming our common stock is included
in such indices, which is not assured. If our common stock is included in any of
these indices, these index funds may be required to acquire and hold shares of
our common stock.
AT&T expects the offering to occur shortly before, on or shortly after the
split-off date. We will not receive any proceeds from the sale of shares in the
offering.
LISTING AND TRADING OF OUR COMMON STOCK
We have been approved to list our common stock on the New York Stock
Exchange under the symbol "AWE," subject to official notice of issuance. We
cannot assure you as to the price at which our common stock will trade. The
trading prices of our common stock after the split-off may be less than, equal
to or greater than the trading price of AT&T Wireless Group tracking stock
before the split-off. "AWE" is the same symbol under which AT&T Wireless Group
tracking stock has traded on the New York Stock Exchange. However, trading in
AT&T Wireless Group tracking stock under that symbol will end on the trading day
before the split-off date, and trading in our common stock under that symbol
will begin on the split-off date.
Shares of our common stock issued in the redemption of AT&T Wireless Group
tracking stock and distribution to AT&T shareholders will be freely
transferable, except for shares received by those who may have a special
relationship or affiliation with us. Those who may be considered our affiliates
after the split-off generally include individuals or entities that control, are
controlled by, or are under common control with us. This may include some or all
of our officers and directors. Persons who are our affiliates will be permitted
to sell their shares only pursuant to an effective registration statement under
the Securities Act of 1933, as amended, or an exemption from the registration
requirements of the Securities Act, such as exemptions afforded by Section 4(2)
of the Securities Act or Rule 144 thereunder. In addition, shares held by DoCoMo
are subject to transfer restrictions. See "Shares Eligible for Future Sale".
EXPENSES
The expenses of the split-off are estimated to be approximately $21.5
million. These expenses will be borne by AT&T. The expenses of the offering are
estimated to be $1.4 million. This cost will be borne by AT&T.
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DIVIDEND POLICY
We do not anticipate paying any dividends on our common stock in the
foreseeable future because we expect to retain our future earnings for use in
the operation and expansion of our business. Our payment and amount of
dividends, however, will be subject to the discretion of our board of directors
and will depend, among other things, upon our financial condition, results of
operations, cash requirements, future prospects and other factors that may be
considered relevant by our board of directors.
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CAPITALIZATION
The following table sets forth as of March 31, 2001 our historical
consolidated cash and capitalization and our combined cash and capitalization on
an unaudited pro forma basis, which gives effect to:
- the settlement of all intercompany obligations between AT&T and AT&T
Wireless Services which occurred in June 2001 in accordance with the
separation and distribution agreement between AT&T and AT&T Wireless
Services as if such event had been completed on January 1, 2000 for
statement of operations purposes, and at March 31, 2001 for balance sheet
purposes;
- the $6.5 billion debt offering of Senior Notes of AT&T Wireless Services
which occurred on March 1, 2001 as if such event had been completed on
January 1, 2000 for statement of operations purposes; and
- the reclassification of the DoCoMo investment which occurred on January
22, 2001 to a mandatorily redeemable security effective with the
split-off of AT&T Wireless Services from AT&T as if such event had
occurred on March 31, 2001 for balance sheet purposes.
This table should be read in conjunction with the historical and pro forma
financial information included in this document.
AT MARCH 31, 2001
(IN MILLIONS)
(UNAUDITED)
-------------------------
HISTORICAL AS ADJUSTED
---------- -----------
Cash and cash equivalents................................... $ 34 $ 5,822
------- -------
Due on demand notes payable................................. 103 103
Long-term debt:
Long-term debt due to AT&T................................ 1,800 --
Long-term debt due to others.............................. 6,487 6,487
Total Long-term debt................................... 8,287 6,487
Preferred stock held by AT&T................................ 3,000 --
Mandatorily redeemable common stock......................... -- 8,308
Shareowners' Equity:
Common stock, no par value, no shares authorized, issued
or outstanding at March 31, 2001 (2,530 million shares
assumed outstanding on an unaudited pro forma
basis)(1).............................................. -- --
Shareowners' net investment............................... 28,015 19,707
Accumulated other comprehensive loss...................... (78) (78)
Total shareowners' equity.............................. 27,937 19,629
------- -------
Total capitalization................................... $39,327 $34,527
======= =======
---------------
(1) AT&T Wireless Services was a wholly owned subsidiary of AT&T and did not
have publicly traded shares outstanding during the periods presented. We
have presented pro forma earnings per share information assuming 2,530
million shares outstanding, which is the number of shares estimated to be
outstanding immediately after the split-off. The estimated 2,530 million
shares outstanding is based on the number of shares of AT&T Wireless Group
tracking stock outstanding at June 19, 2001, the number of shares
represented by AT&T's retained interest at June 19, 2001, and the 228
million new share equivalents issued to DoCoMo in January 2001, and reflects
a reduction of 12 million shares from AT&T's retained interest, which shares
will be held in treasury by AT&T Wireless Services for future employee
benefit plan obligations. The estimated 2,530 million shares does not
include shares issuable upon exercise of outstanding options to purchase
AT&T Wireless Group tracking stock or warrants to purchase 41 million share
equivalents issued to DoCoMo in January 2001.
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SELECTED FINANCIAL INFORMATION
The following information is only a summary and you should read it together
with the financial information we include elsewhere in this document.
In the table below, we provide you with selected historical consolidated
financial data of AT&T Wireless Services, Inc. This selected historical
consolidated financial data includes the effect of certain other businesses,
assets and liabilities of AT&T that constituted AT&T Wireless Group. AT&T has
contributed to us all of the remaining businesses and assets, and we have
assumed all liabilities, that constituted AT&T Wireless Group. These
contributions have been accounted for in a manner similar to a pooling of
interests.
We derived the following information using the consolidated financial
statements of AT&T Wireless Services at and for each of the three months ended
March 31, 2001 and 2000, and each of the fiscal years in the five-year period
ended December 31, 2000. We derived the consolidated income statement and cash
flow data below for each of the three years ended December 31, 2000 and the
consolidated balance sheet data at December 31, 2000 and 1999, from consolidated
financial statements audited by PricewaterhouseCoopers LLP, independent
accountants, included elsewhere in this prospectus. We derived the remaining
data from unaudited consolidated financial statements.
The financial data presented below is not necessarily comparable from
period to period as a result of several transactions, including acquisitions and
dispositions of consolidated subsidiaries. For this and other reasons, you
should read the selected historical financial data provided below in conjunction
with our consolidated financial statements and accompanying notes beginning on
page F-1 and the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 32.
SELECTED HISTORICAL FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS AND OTHER OPERATING DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------- -------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- -------- -------- ------- ------- -------
INCOME STATEMENT DATA:
Revenue......................... $ 3,212 $ 2,198 $ 10,448 $ 7,627 $ 5,406 $ 4,668 $ 4,246
Operating income (loss)......... 141 26 (38) (666) (343) (70) 234
Net (loss) income available to
common shareowners............ (42) 13 528 (461) 108 69 261
Unaudited pro forma (loss)
earnings per common
shares -- basic(1)............ $ (.02) $ .01 $ .21 $ (.18) $ .04 $ .03 $ .10
Unaudited pro forma (loss)
earnings per common
share -- diluted(1)........... $ (.02) $ .01 $ .21 $ (.18) $ .04 $ .03 $ .10
Unaudited pro forma weighted
average shares -- basic(1).... 2,530 2,530 2,530 2,530 2,530 2,530 2,530
Unaudited pro forma weighted
average
shares -- diluted(1).......... 2,530 2,533 2,533 2,530 2,533 2,533 2,533
BALANCE SHEET DATA:
Total assets.................... $ 47,039 $ 24,890 $ 35,302 $ 23,512 $19,460 $19,040 $17,852
Total debt(2)................... 8,394 3,858 2,551 3,558 2,589 2,447 2,217
Preferred stock held by AT&T.... 3,000 1,000 3,000 1,000 1,000 1,000 1,000
Shareowners' equity............. 27,937 14,027 21,877 12,997 10,532 10,187 9,497
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THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------- -------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- -------- -------- ------- ------- -------
CASH FLOW DATA:
Net cash provided by operating
activities.................... $ 655 $ 228 $ 1,635 $ 867 $ 414 $ 1,338 $ 1,183
Capital expenditures and other
additions..................... (1,407) (818) (4,012) (2,272) (1,219) (1,931) (1,832)
Net acquisitions of licenses.... (39) (82) (247) (47) (65) (443) (327)
Equity investment distributions
and sales..................... 2 26 360 236 1,354 294 176
Equity investment contributions,
advances and purchases........ (637) (74) (1,645) (284) (156) (84) (32)
Net (acquisitions) dispositions
of businesses including cash
acquired...................... -- -- (4,763) 244 324 -- 156
Increase in long-term debt due
to AT&T....................... -- 300 400 900 100 200 200
Proceeds from issuance of
long-term debt due to others,
net of issuance costs......... 6,345 -- -- -- -- -- --
Proceeds attributed from DoCoMo
investment, net
of costs...................... 6,141 -- -- -- -- -- --
Proceeds attributed from AT&T
Wireless Group tracking stock
offering...................... -- -- 7,000 -- -- -- --
Transfer from (to) AT&T, net.... -- 439 1,001 344 (694) 611 476
OTHER:
EBITDA(3)....................... $ 717 $ 395 $ 1,648 $ 587 $ 736 $ 756 $ 894
EBITDA (excluding asset
impairment and restructuring
charges)...................... $ 717 $ 395 1,648 1,118 856 916 894
OTHER OPERATING DATA:
(in thousands, except ($) are
actual)
Consolidated subscribers........ 15,748 9,987 15,163 9,569 7,174 5,964 5,032
Consolidated digital
subscribers................... 14,608 8,337 13,666 7,580 4,354 1,746 909
Covered population(4)........... 166,425 116,990 162,896 114,217 -- -- --
Licensed population(4).......... 216,444 189,821 214,188 191,742 -- -- --
Subscriber churn................ 3.0% 2.9% 2.9% 2.6% 2.7% 2.5% 2.3%
Total cost per gross subscriber
addition...................... $ 327 $ 360 $ 367 $ 367 $ 392 $ 432 $ 345
---------------
(1) AT&T Wireless Services was a wholly owned subsidiary of AT&T and has not had
publicly traded shares outstanding during the periods presented. We have
presented pro forma earnings per share information assuming 2,530 million
shares outstanding, which is the number of shares estimated to be
outstanding immediately after the split-off. The estimated 2,530 million
shares outstanding is based on the number of shares of AT&T Wireless Group
tracking stock outstanding at June 19, 2001, the number of shares
represented by AT&T's retained interest at June 19, 2001, including the 228
million new share equivalents issued to DoCoMo in January 2001, and reflects
a reduction of 12 million shares from AT&T's retained interest, which shares
will be held in treasury by AT&T Wireless Services for future employee
benefit plan obligations. The estimated 2,530 million shares does not
include shares issuable upon exercise of outstanding options to purchase
AT&T Wireless Group tracking stock or warrants to purchase 41 million share
equivalents issued to DoCoMo in January 2001. The estimate of
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2,533 million shares outstanding used to compute diluted earnings per share
includes the 2,530 million shares above and an estimated 3 million shares
associated with dilutive stock options, with the exception of those periods
in which the effect of the stock options was considered to be anti-dilutive.
(2) Includes $4 million of long-term debt that is included in other long-term
liabilities at March 31, 2001 and 2000, and at December 31, 2000 and 1999.
(3) EBITDA is defined as operating income, plus depreciation and amortization.
We believe EBITDA to be relevant and useful information, as EBITDA is the
primary metric used by our management to measure the performance of our
business. EBITDA should be considered in addition to, but not as a
substitute for, other measures of financial performance reported in
accordance with generally accepted accounting principles, including our cash
flows from operating, investing and financing activities.
(4) POPs represent AT&T Wireless Services' consolidated operations and does not
include partnership or affiliate markets. POPs are counted once whether a
POP is covered/licensed only by wireless licenses at the 850 megahertz
frequency or wireless licenses at the 1900 megahertz frequency or by both.
The amount of wireless spectrum licensed varies by geographic territory.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AT&T Wireless Services is a wireless communications company that primarily
provides domestic wireless voice and data services and products in the 850
megahertz (cellular) and 1900 megahertz (personal communications services, or
PCS) markets. Additionally, AT&T Wireless Services offers wireless local
telephone and internet services to residential customers through its Fixed
Wireless business. AT&T Wireless Services also holds equity interests in various
domestic and international wireless communications ventures and partnerships.
On October 25, 2000, AT&T Corp. announced a restructuring plan, stating its
intention to create a separate company for its wireless services' businesses,
named AT&T Wireless Services, Inc., by mid-2001, termed the split-off. AT&T
Wireless Services includes substantially the same assets and liabilities that
were represented by AT&T Wireless Group tracking stock, which AT&T created on
April 27, 2000. In conjunction with the offering of AT&T Wireless Group tracking
stock in April 2000, 15.6%, or 360 million shares, of AT&T Wireless Group
tracking stock were sold at an offering price of $29.50 per share. AT&T Wireless
Group tracking stock was a class of AT&T common stock that was intended to
provide holders with financial returns based on the financial performance and
economic value of AT&T's wireless services' businesses. As a tracking stock of
AT&T, AT&T Wireless Group was not a separate legal entity, but an integrated
business of AT&T. AT&T Wireless Group tracking stock issued in the offering
reflected only a portion of the authorized shares of AT&T Wireless Group
tracking stock. The remaining 84.4% was retained and reserved for the benefit of
AT&T Common Stock Group (which consisted of the operations of AT&T other than
those attributed to AT&T tracking stocks), the value of which was intended to be
reflected in AT&T common stock.
During May 2001, AT&T completed an exchange offer which allowed holders of
AT&T common stock to exchange shares of AT&T common stock for shares of AT&T
Wireless Group tracking stock. Approximately 372.2 million shares of AT&T common
stock were tendered in exchange for approximately 437.7 million shares of AT&T
Wireless Group tracking stock, at an exchange ratio of 1.176 shares of AT&T
Wireless Group tracking stock for each validly tendered share of AT&T common
stock. As a result of the exchange offer and the NTT DoCoMo, Inc. investment
discussed below, assuming conversion of the DoCoMo shares, AT&T's retained
portion of our value was approximately 52%.
The split-off is subject to certain conditions. These conditions include
the continued validity of the ruling on the split-off received from the Internal
Revenue Service (IRS) on May 29, 2001, and satisfaction of conditions contained
in AT&T's credit agreement.
The split-off has several steps. These steps include transferring
substantially all of the assets and liabilities of AT&T Wireless Group to AT&T
Wireless Services, mandatorily exchanging all issued and outstanding shares of
AT&T Wireless Group tracking stock, including those shares issued in the
exchange offer recently completed by AT&T as well as the shares held by DoCoMo,
for shares of AT&T Wireless Services common stock, and distributing
1,136,258,587 shares of AT&T Wireless Services common stock held by AT&T Common
Stock Group, to holders of AT&T common stock on a pro rata basis. AT&T is
retaining 185,308,303 shares of AT&T Wireless Services common stock for its own
account for sale, exchange or monetization within six months of the split-off,
subject to the continued validity of the IRS ruling that was received on May 29,
2001.
The following discussion describes the financial condition and results of
operations of AT&T Wireless Services. This discussion includes the effect of
certain other subsidiaries, assets and liabilities of AT&T that constituted AT&T
Wireless Group, AT&T has contributed to us all of the subsidiaries, assets and
liabilities that constituted AT&T Wireless Group. Consistent with our historical
financial statements, we have treated these contributions and related
transactions in a manner similar to a pooling of interests and we have
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assumed these contributions and related transactions were completed in
historical periods by the legal entity AT&T Wireless Services.
DOCOMO INVESTMENT
In January 2001, DoCoMo, a leading Japanese wireless communications
company, invested $9.8 billion in a security of AT&T that, like AT&T Wireless
Group tracking stock, is intended to reflect a portion of the financial
performance and economic value of AT&T Wireless Group. We were allocated $6.2
billion of the gross proceeds from DoCoMo's $9.8 billion investment in AT&T in
the form of an intercompany note receivable. Additionally, we were allocated $18
million of costs associated with the transaction. AT&T retained the remaining
$3.6 billion of the DoCoMo investment proceeds as consideration for the
reduction in AT&T's retained portion of our value. Following the split-off, this
investment will be converted into approximately 16% of our common shares. DoCoMo
also received warrants at an exercise price of $35 per AT&T Wireless Group
tracking share equivalent that would represent an approximate additional 1.6% of
our common shares after the split-off. As part of this investment, we have
entered into a strategic alliance with DoCoMo to develop mobile multimedia
services on a global-standard, high-speed wireless network. DoCoMo may require
the repurchase of its investment at DoCoMo's original purchase price, plus
interest, if AT&T does not complete the split-off by specified dates beginning
January 1, 2002, or if, under certain circumstances, we fail to meet specified
technological milestones.
ACQUISITIONS
On December 29, 2000, we completed the acquisition of a wireless system in
Houston, which covers a population base of approximately 5 million potential
customers and served approximately 180 thousand subscribers as of the
acquisition date. Also on December 29, 2000, our equity interest in AB Cellular,
an entity that owned cellular properties in Los Angeles, Houston and Galveston,
Texas, was redeemed. In consideration for our equity interest, we received 100%
of the net assets of the Los Angeles property. The Los Angeles property covers a
population base of approximately 15 million potential customers and had
approximately 1.3 million subscribers as of December 31, 2000. On November 14,
2000, we completed a transaction with our affiliate Telecorp PCS that resulted
in our acquisition of wireless systems in several New England markets. On
October 2, 2000, we completed the acquisition of a wireless system in
Indianapolis. Combined, the New England and Indianapolis markets cover a
population base of approximately 4 million potential customers, and served
approximately 145 thousand subscribers as of their acquisition dates.
On September 29, 2000, we completed the acquisition of a wireless system in
San Diego, which covers a population base of 3 million potential customers.
Also, during the third quarter, we completed the acquisition of a wireless
system on the Big Island of Hawaii. Combined, these two markets served more than
180 thousand subscribers as of their acquisition dates.
In June 2000, we closed the acquisition of the remaining 50% partnership
interest we previously did not own in CMT Partners (Bay Area Properties). The
Bay Area Properties cover a population base exceeding 7 million potential
customers and, as of the acquisition date, served nearly 1 million subscribers.
Also in June, we completed the acquisition of Wireless One Network, L.P.
(Wireless One). Wireless One owns and operates wireless systems in Northwest and
Southwest Florida covering a population base of 1.6 million potential customers
and had approximately 190 thousand subscribers as of the acquisition date.
In February 2000, AT&T and Dobson Communications Corporation, through a
joint venture, acquired American Cellular Corporation. AT&T contributed its
interest in the joint venture to us as of the date of the acquisition. This
acquisition increased our coverage in New York State and several mid-west
markets by adding approximately 450 thousand subscribers as of the acquisition
date.
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PREVIOUSLY ANNOUNCED FINANCIAL EXPECTATIONS
On April 24, 2001, we disclosed the following expectations for our
business:
"Services revenue are expected to grow in the lower end of the 30-35
percent range for the year. EBITDA growth for 2001, excluding other income,
is expected to be in the mid-60 percent range. Subscriber growth, on a
consolidated basis in 2001, is expected to be around 20 percent. For the
second quarter of 2001, net subscriber additions are expected to grow in
the mid-to high 20 percent range."
Our ability to achieve these targets is subject to a number of risks,
uncertainties and other factors affecting our business and the wireless industry
generally, many of which are beyond our control. These factors may cause actual
results to differ materially. We describe a number of these factors throughout
this document, including in the sections entitled "Risk Factors" and "Special
Note Regarding Forward-Looking Statements." There is no assurance that we will
meet these targets, and if we are not able to meet these targets, it could have
an adverse impact on the market price of our common stock.
CONSOLIDATED RESULTS OF OPERATIONS
The discussion below is based upon our and our subsidiaries' consolidated
results, as well as our segments, where material and applicable. We segment
results according to the way we manage our business, including Mobility, Fixed
Wireless and Corporate and other. The Mobility segment is comprised of the
domestic wireless voice and data services and products in the 850 megahertz
(cellular) and 1900 megahertz (personal communications services, or PCS)
markets, the aviation division, and the earnings and losses associated with
equity investments in domestic wireless communications ventures and
partnerships. The Fixed Wireless segment includes the results associated with
the offering of wireless local telephone and internet services to residential
customers, which began serving customers during the first quarter of 2000. The
Corporate and other segment includes primarily the results of our international
equity interests. Our primary measure of evaluating operating performance for
our segments is based upon operating income plus depreciation and amortization,
referred to as EBITDA.
Reflecting the dynamics of our business, we continually review our
management model and structure. The split-off from AT&T will result in changes
required for us to operate as an independent entity. Additionally, the
investment by DoCoMo, as well as our recently announced plans to deploy
third-generation technologies, may result in adjustments to our operating
segments in the future.
FOR THE THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 2000
Revenue
Total revenue includes wireless voice and data services, the sale of
handsets and accessories to both customers and distributors, and revenue
associated with the aviation communications and fixed wireless operations. We
record revenue as services are provided or when the product is sold. Services
revenue primarily includes monthly recurring charges, airtime and toll usage
charges, and roaming charges billed to subscribers for usage outside of our
network as well as charges billed to other wireless providers for roaming on our
network. The revenue and related expenses associated with the sales of wireless
handsets and accessories are recognized when the products are delivered and
accepted by the customer or distributor as this is considered to be a separate
earnings process from the sale of wireless services.
Total revenue increased 46.2% to $3,212 million for the three months ended
March 31, 2001, compared with the same period in the prior year. Total revenue
increased 25.7% for the three months ended March 31, 2001, compared with the
same period for 2000, when adjusted to exclude the impact of the Bay Area
Properties and the Los Angeles market for the three months ended March 31, 2001.
The revenue increase for the three months ended March 31, 2001, is nearly 100%
due to growth in our Mobility business revenue, including growth in both
services and equipment revenue, driven by strong consolidated subscriber growth
in our Mobility business, which was slightly offset by a decline in the
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average monthly revenue per user (ARPU) for our Mobility business. Our Fixed
Wireless results included $2 million of total revenue for the three months ended
March 31, 2001 and no revenue for the three months ended March 31, 2000.
Services revenue for the three months ended March 31, 2001 was $2,931
million, an increase of $939 million, or 47.2%, compared with the respective
period in 2000. The increase is nearly 100% attributable to growth in our
Mobility business.
As of March 31, 2001, our Mobility business had over 15.7 million
consolidated subscribers, an increase of 57.7%, compared with the prior year,
including approximately 3 million subscribers associated with acquisitions that
closed subsequent to the first quarter of 2000. Our strong subscriber growth was
in part due to our shift in product mix, including the expansion into the
prepaid segment. We anticipate that our prepaid customer base will continue to
grow as we increase our penetration. Net consolidated wireless subscriber
additions in the first quarter of 2001 totaled 585 thousand, a 40.0% increase
over the prior year quarter. Our average monthly churn rate in the first quarter
of 2001 was 3.0% compared with 2.9% in the first quarter of 2000.
Our ARPU for our Mobility business for the three months ended March 31,
2001, was $62.20, a decrease of $5.00, or 7.4%, compared with the same period in
2000. The decline in ARPU is primarily a result of competitive pricing
pressures, expansion into a broader base of consumer segments, including prepaid
wireless, and the impact of acquisitions which closed subsequent to the first
quarter of 2000. We expect that competitive pricing pressures will continue, as
well as our expansion into a broader base of consumer segments, which may result
in continued declines in ARPU.
Equipment revenue for the three months ended March 31, 2001 was $281
million, an increase of $75 million, or 36.6%, compared with the same period in
2000. The increase in equipment revenue is entirely due to growth in our
Mobility business. This increase was primarily due to an increase in gross
consolidated subscriber additions in our Mobility business for the three months
ended March 31, 2001, compared with the same period in 2000. We supply to our
subscribers a selection of handsets at competitive prices, which are generally
offered at or below cost.
Costs of services
Costs of services include the costs to place calls over the network
(including the costs to operate and maintain our network as well as roaming
costs paid to other wireless providers) and the charges paid to connect calls on
other networks, including those of AT&T. Additionally, costs of services include
the provision for uncollectible receivables, as well as non-income related
taxes.
Costs of services for the three months ended March 31, 2001 were $921
million, an increase of $259 million, or 39.3%, for the three months ended March
31, 2001, compared with the same period in 2000. This increase is primarily due
to growth in our Mobility subscriber base and the related increased minutes of
use. Approximately one-third of the increase was due to an increase in the
provision for uncollectible receivables, which resulted from a change in the mix
of the subscriber base as a result of broadening our market segments.
Additionally, one-half of the increase was due to an increase in charges paid to
connect calls on other networks, including AT&T's, as well as an increase in the
costs to maintain our network.
Costs of equipment sales
Costs of equipment sales include the costs of the handsets and accessories
provided to our customers. Costs of equipment sales for the three months ended
March 31, 2001 were $490 million, an increase of $99 million, or 25.2%, compared
with the same period in 2000 and relates 100% to our Mobility business. This
increase was due entirely to higher equipment sales, as well as an increase in
the number of handset subsidies resulting from the increase in gross subscriber
additions in the first quarter of 2001 compared with the first quarter of 2000.
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Selling, general and administrative
Selling, general and administrative expenses for the three months ended
March 31, 2001 were $1,084 million compared with $750 million for the three
months ended March 31, 2000. Over 90% of this increase relates to our Mobility
business. Approximately forty percent of the increase in Mobility business SG&A
was attributable to higher marketing and selling costs, including advertising
and commissions, associated with the increase in gross consolidated subscriber
additions for the three months ended March 31, 2001. Cost per gross subscriber
addition, which includes the cost of handset subsidies recorded in costs of
equipment sales in the accompanying combined statement of operations, was $327
for the three months ended March 31, 2001, compared with $360 for the three
months ended March 31, 2000. In addition, approximately one-third of the
Mobility business increase was the result of growth in the Mobility subscriber
customer base and the related increases in customer care and billing costs.
Depreciation and amortization
Depreciation and amortization expenses for the three months ended March 31,
2001 were $576 million, an increase of $207 million, or 56.1%, compared with the
three months ended March 31, 2000. Over 90% of this increase relates to our
Mobility business, with the remaining increase relating to our Fixed Wireless
business. The increase in the Mobility business depreciation expense primarily
resulted from the growth in our depreciable asset base resulting from capital
expenditures and property, plant and equipment acquired with acquisitions that
closed subsequent to the first quarter of 2000. Additionally, effective January
1, 2001, we shortened the depreciable lives of certain Mobility business
wireless communications equipment, which resulted in approximately $36 million
of additional depreciation expense for the three months ended March 31, 2001.
Total capital expenditures were $1,252 million for the three months ended March
31, 2001. Mobility business capital expenditures were $1,122 million for the
three months ended March 31, 2001. Fixed Wireless business capital expenditures
were $130 million for the three months ended March 31, 2001. Additionally,
amortization expense for the Mobility business increased from the prior year
quarter as a result of an increase in the amortization expense of licensing
costs, goodwill, and other acquisition related intangibles as a result of
acquisitions that closed subsequent to the first quarter of 2000.
As a result of our evaluation of recent changes in the wireless
telecommunications industry and the views of regulatory authorities, effective
January 1, 2001, we will use an amortization period for all licensing costs and
goodwill associated with newly acquired wireless operations not to exceed 25
years. This change did not have a material impact to our results of operations
for the three months ended March 31, 2001.
Other income
Other income primarily includes gains or losses on sales or exchanges of
assets and intercompany interest income on the note receivable from AT&T. Other
income for the three months ended March 31, 2001 was $84 million compared with
$24 million for the respective period in 2000. The increase was due primarily to
$77 million of intercompany interest income on the note receivable from AT&T for
the first quarter of 2001.
Interest expense
Interest expense consists primarily of interest on long-term debt to others
and intercompany debt due to AT&T, less interest expense capitalized. Interest
expense for the first quarter of 2001 was $47 million, a decrease of $4 million,
or 6.8%, compared with the first quarter of 2000. The decrease was primarily due
to lower levels of average outstanding debt due to AT&T. Additionally,
capitalized interest increased as a result of increased capital expenditures.
These decreases were offset by interest expense associated with the $6.5 billion
of Senior Notes issued by us in March 2001.
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Provision (Benefit) for income taxes
The provision (benefit) for income taxes for the three months ended March
31, 2001 was a provision of $79 million compared with $2 million of benefit for
the same period in 2000. The increase was due primarily to the increase in
income before net equity earnings (losses) in the current year quarter compared
with the prior year quarter. The effective income tax rate for the three months
ended March 31, 2001 was 44.4% and was primarily impacted by goodwill associated
with acquisitions that closed during 2000. Excluding a one-time gain recorded in
the first quarter of 2000, the effective income tax rate for the prior year
quarter was 48.9% and was also impacted primarily by goodwill associated with
the 2000 acquisitions.
Net equity earnings (losses) from investments
Net equity earnings (losses) from investments, net of tax, were $99 million
of losses for the three months ended March 31, 2001, compared with $25 million
of earnings for the respective period in 2000, and were associated with our
Mobility business domestic equity investments and our international equity
investments included within our Corporate and Other segment. Approximately 70%
of the decrease was due to decreased equity earnings in our Mobility business
from CMT Partners, AB Cellular, and affiliate investments during the first
quarter of 2000. We acquired the remaining interest in CMT partners that we did
not own in June 2000, and therefore, this entity was consolidated subsequent to
the acquisition. Additionally, our equity interest in AB Cellular was redeemed
in December 2000. The remaining decrease was a result of increased losses
associated with our international equity investments.
Dividend requirements on preferred stock held by AT&T
At March 31, 2001, and December 31, 2000, we had outstanding, $3.0 billion
of preferred stock held by AT&T that pays dividends at 9% per annum. Dividend
requirements on this preferred stock for the three months ended March 31, 2001,
were $42 million compared with $13 million for the respective period in 2000,
net of amounts recorded in accordance with the tax sharing agreement. The
increase was a result of the May 1, 2000, recapitalization of $2.0 billion of
outstanding intercompany indebtedness to AT&T into an additional $2.0 billion of
9% cumulative preferred stock held by AT&T. We redeemed this preferred stock in
June 2001 in connection with the split-off.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Revenue
Total revenue includes wireless voice and data services, the sale of
handsets and accessories to both customers and distributors, and revenue
associated with the aviation communications and fixed wireless operations. We
record revenue as services are provided or when the product is sold. Services
revenue primarily includes monthly recurring charges, airtime and toll usage
charges, and roaming charges billed to subscribers for usage outside of our
network as well as charges billed to other wireless providers for roaming on our
network. The revenue and related expenses associated with the sale of wireless
handsets and accessories are recognized when the products are delivered and
accepted by the customer or distributor as this is considered to be a separate
earnings process from the sale of wireless services.
Total revenue increased 37.0% to $10,448 million for the year ended
December 31, 2000, compared with the prior year. Total revenue increased 29.6%
for the year ended December 31, 2000, compared with 1999, adjusted to exclude
the Bay Area Properties for the six months ended December 31, 2000, and to
exclude Vanguard Cellular for the period of January 2000 to April 2000, to
correlate results with 1999, due to the May 1999 acquisition. The revenue
increase for the year ended December 31, 2000 was nearly 100% due to growth in
our Mobility business revenue, including both growth in services and equipment
revenue. Our Fixed Wireless results included $2 million of total revenue for the
year ended December 31, 2000 and no revenue for the year ended December 31,
1999.
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Services revenue for the year ended December 31, 2000 was $9,376 million,
an increase of $2,553 million, or 37.4%, compared with 1999. The increase in
services revenue was nearly 100% attributable to growth in our Mobility
business. The services revenue growth was driven by strong consolidated
subscriber growth in our Mobility business. Additionally, an increase in average
monthly revenue per user (ARPU) in our Mobility business for the year ended
December 31, 2000, compared with the prior year, contributed to the revenue
growth. AT&T Digital One Rate service, including additional calling plans
introduced in August 2000 as well as the AT&T Regional and Digital Advantage
plans announced during the second quarter of 2000, continues to contribute to
growth in subscribers as well as an increase in services revenue.
As of December 31, 2000, our Mobility business had nearly 15.2 million
consolidated subscribers, an increase of 58.5%, compared with the prior year, of
which 90.1% were digital subscribers, up from 79.2% as of December 31, 1999.
Consolidated subscribers at December 31, 2000, included approximately 3 million
subscribers associated with acquisitions that closed in 2000. Net consolidated
wireless subscriber additions in the year ended December 31, 2000, totaled
nearly 2.6 million, a 67.5% increase over the prior year, including 865 thousand
during the fourth quarter. Our average monthly churn rate for the year ended
December 31, 2000 was 2.9% compared with 2.6% for the year ended December 31,
1999. Our average monthly churn increased during 2000 as a result of competitive
pressures, as well as our efforts to expand the customers we serve to a broader
base of consumer segments. Total subscribers, including partnership markets in
which we do not own a controlling interest, were over 15.7 million at the end of
2000, a 28.9% increase over the prior year. Due to the redemption of our equity
interest in AB Cellular during the fourth quarter of 2000, the Houston market
subscribers of AB Cellular are no longer included in our total subscribers.
Ending total subscribers included approximately 450 thousand subscribers
associated with our acquisition of American Cellular in February 2000.
Our ARPU in our Mobility business for the year ended December 31, 2000 was
$68.20, an increase of $2.40, or 3.6%, compared with 1999. The increase was
primarily due to increased minutes of use per subscriber, driven in part by the
continued success of AT&T Digital One Rate service and other rate plans
introduced in 2000. Our ARPU trended downward during the second half of 2000 as
a result of market segmentation efforts. Despite this, our ARPU remained higher
than the wireless industry average during the year ended December 31, 2000. As a
result of our market segmentation efforts, we anticipate that ARPU will decline
in 2001 relative to 2000.
Equipment revenue for the year ended December 31, 2000 was $1,072 million,
an increase of $268 million, or 33.2%, compared with 1999. The increase in
equipment revenue was entirely due to growth in our Mobility business. This
increase was primarily due to a 53.6% increase in gross consolidated subscriber
additions during the year ended December 31, 2000, compared with 1999, which
includes gross subscriber additions associated with acquisitions closed during
2000. We supply to our subscribers a selection of handsets at competitive
prices, which are generally offered at or below cost.
Costs of services
Costs of services include the costs to place calls over the network
(including the costs to operate and maintain our network as well as roaming
costs paid to other wireless providers) and the charges paid to connect calls on
other networks, including those of AT&T. Additionally, costs of services include
the provision for uncollectible receivables, as well as non-income related
taxes.
Costs of services for the year ended December 31, 2000 were $3,169 million,
an increase of $589 million, or 22.9%, compared with 1999. This increase was due
primarily to growth in the mobility subscriber base and their increased minutes
of use.
Costs of services for the year ended December 31, 2000 related to our
Mobility business were $3,017 million, an increase of $486 million, or 19.2%,
compared with 1999. Nearly one-half of this increase was due to growth in the
mobility subscriber base and their increased minutes of use, which resulted in
an increase in the access and other connection charges paid to connect calls on
other networks, including
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AT&T. Additionally, approximately one-fourth of the increase was the result of
an increase in the costs to maintain our owned and operated network. The
remaining increase was a result of higher provisions for uncollectible
receivables, as well as an increase in non-income related taxes. Partially
offsetting these increases was a decrease in roaming costs paid to other
carriers.
Costs of services for the year ended December 31, 2000 associated with our
Fixed Wireless business were $152 million, an increase of $103 million, or
205.0%, compared with 1999. The increase was a result of the commercial launch
of service during the first quarter of 2001. Additionally, during the fourth
quarter of 2000, costs of services associated with our Fixed Wireless business
included approximately $50 million of asset write-offs associated with changes
in our strategy for markets that overlap with AT&T's broadband markets.
Costs of equipment sales
Costs of equipment sales include the cost of the handsets and accessories
sold to new as well as existing customers and relate 100% to our Mobility
business. Costs of equipment sales for the year ended December 31, 2000 were
$2,041 million. This was an increase of $775 million, or 61.2%, compared with
1999. This increase was due primarily to higher gross subscriber additions in
2000 compared with the prior year, including those gross subscriber additions
associated with acquisitions closed during 2000.
Selling, general and administrative
Selling, general and administrative expenses (SG&A) for the year ended
December 31, 2000 were $3,590 million, compared with $2,663 million for the year
ended December 31, 1999, representing an increase of 34.8%. Nearly 95% of this
increase was in our Mobility business. Approximately one-half of the increase in
the Mobility business SG&A was due to higher marketing and selling costs,
primarily advertising and commissions, associated with the increase in gross
consolidated subscriber additions for the year ended December 31, 2000, compared
to 1999. Cost per gross subscriber addition (CPGA), which includes the cost of
handset subsidies recorded in costs of equipment sales, was $367 for both the
years ended December 31, 2000 and 1999. In addition, approximately one-third of
the Mobility business SG&A increase was due to an increase in information
technology and customer care related expenses, which resulted from growth in the
mobility customer base.
Depreciation and amortization
Depreciation and amortization expenses for the year ended December 31, 2000
were $1,686 million, an increase of $433 million, or 34.5%, compared with 1999.
Nearly 95% of this increase was in the Mobility business. The increase in the
Mobility business depreciation and amortization primarily resulted from growth
in our depreciable asset base resulting from capital expenditures to increase
the capacity of the network and improve call quality. Total capital expenditures
were $4,287 million and $2,476 million for the years ended December 31, 2000 and
1999, respectively. Mobility business capital expenditures were $3,876 million
and $2,339 million for the years ended December 31, 2000 and 1999, respectively.
Fixed Wireless capital expenditures were $411 million and $137 million for the
years ended December 31, 2000 and 1999, respectively. Additionally, amortization
expense for the Mobility business, which includes amortization of licensing
costs, goodwill, and other acquisition related intangibles, increased for the
year ended December 31, 2000, as a result of the 1999 acquisitions of Vanguard
Cellular and Honolulu Cellular, as well as the 2000 acquisitions, primarily the
Bay Area Properties and Wireless One which closed during June 2000.
As a result of our evaluation of recent changes in our industry and the
views of regulatory authorities, we expect that the amortization period for all
licensing costs and goodwill associated with newly acquired wireless operations
will not exceed 25 years.
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Asset impairment and restructuring charges
During the fourth quarter of 1999, we recorded a $531 million asset
impairment charge primarily associated with the planned disposal of wireless
communications equipment associated with our Mobility business resulting from a
program to increase capacity and operating efficiency of the wireless network.
The program is intended to provide us with the newest technology available and
allow us to evolve to new next-generation digital technology, which will provide
high-speed data capabilities.
Other income
Other income primarily includes gains or losses on sales or exchanges of
assets and businesses and intercompany interest income on the note receivable
from AT&T. Other income for the year ended December 31, 2000 was $534 million,
compared with $122 million for the year ended December 31, 1999. The increase
for the year ended December 31, 2000 was due primarily to the pretax gain of
$379 million recognized on the transactions associated with our affiliate
investment in Telecorp PCS, interest income of $143 million on the note
receivable from AT&T, and pretax gains totaling $141 million associated with the
sale of two equity investments during the second quarter of 2000. These
increases were partially offset by a pretax loss of $184 million associated with
the acquisition of the Los Angeles cellular property resulting from AB
Cellular's redemption of our equity interest in AB Cellular, as well as pretax
gains on the sale of businesses and investments of $99 million recorded in 1999.
Interest expense
Interest expense consists primarily of interest on intercompany debt due to
AT&T less interest expense capitalized. Interest expense for the year ended
December 31, 2000 was $85 million, a decrease of $51 million, or 37.4%, compared
with 1999. The decrease was due to higher levels of capitalized interest as a
result of increased capital expenditures, as well as lower levels of average
outstanding debt due to AT&T. The decrease in the average outstanding debt due
to AT&T was attributable to the recapitalization of $2.0 billion of long-term
debt due to AT&T into 9% cumulative preferred stock held by AT&T in conjunction
with the offering of AT&T Wireless Group tracking stock. These decreases were
partially offset by a higher rate of interest charged on the intercompany debt
in 2000 versus the prior year.
Provision (benefit) for income taxes
The provision for income taxes for the year ended December 31, 2000 was
$141 million, compared with a benefit of $294 million for the year ended
December 31, 1999. The effective income tax rate for the year ended December 31,
2000 was 34.1%, compared with 43.2% for the year ended December 31, 1999. The
effective rate for 2000 was impacted by increased goodwill and other purchased
intangibles amortization expense associated with the 1999 and 2000 acquisitions,
as well as the sale of a foreign equity investment during 2000. The effective
income tax rate for 1999 was impacted by the benefit from a change in the
valuation allowance and other estimates, offset by amortization of goodwill and
other purchased intangibles.
Net equity earnings (losses) from investments
Net equity earnings (losses) from investments, net of tax, were $388
million of earnings for the year ended December 31, 2000, compared with $19
million of losses for 1999, and were associated with our Mobility business
domestic equity investments and our international equity investments included
within our Corporate and other segment. Approximately $327 million of the
increase was reflected within our Mobility business, and the remaining increase
was associated with decreased losses from our international equity investments.
The increase in our Mobility business net equity earnings was primarily due to a
$372 million after-tax gain included in equity earnings for our proportionate
share of the gain recognized by AB Cellular on the redemption of our equity
interest in AB Cellular.
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Dividend requirements on preferred stock held by AT&T
At December 31, 2000 and 1999, we had outstanding $3.0 billion and $1.0
billion, respectively, of preferred stock held by AT&T that pays dividends at 9%
per annum. Long-term debt due to AT&T of $2.0 billion was recapitalized into an
additional $2.0 billion of 9% cumulative preferred stock held by AT&T in
conjunction with the offering of AT&T Wireless Group tracking stock. Dividend
requirements on this preferred stock for the year ended December 31, 2000 were
$130 million and for the year ended December 31, 1999 were $56 million, net of
amounts recorded in accordance with the tax sharing agreement.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Revenue
Total revenue for the year ended December 31, 1999 was $7,627 million, an
increase of $2,221 million, or 41.1%, compared with 1998, and was 100%
attributable to our Mobility business. Our 1999 results included Vanguard
Cellular since its acquisition on May 3, 1999, and 1998 results included our
messaging business until its sale on October 2, 1998. Adjusted to exclude both
Vanguard Cellular and our messaging business, our total revenue increased by
39.0% compared with 1998.
The revenue increase was driven primarily by consolidated subscriber growth
and rising ARPU in our Mobility business. As of December 31, 1999, ending
consolidated subscribers increased 33.4% compared with 1998. AT&T Digital One
Rate service significantly contributed to the increase in ARPU and subscribers
by acquiring and retaining high value customers, who have a significantly higher
ARPU than an average subscriber.
Services revenue for the year ended December 31, 1999 was $6,823 million,
an increase of $2,044 million, or 42.8%, compared with 1998, and was 100%
attributable to our Mobility business.
As of December 31, 1999, our Mobility business had 9.6 million consolidated
subscribers, an increase of 33.4% compared with the prior year, of which 79.2%
were digital subscribers, up from 60.7% as of December 31, 1998. Included in
these figures were approximately 700 thousand subscribers from our acquisition
of Vanguard Cellular in May 1999, approximately 125 thousand subscribers from
our acquisition of Honolulu Cellular in August 1999 and approximately 45
thousand subscribers from our acquisition of Bakersfield Cellular in April 1999.
Net adds were 1,531 thousand for the year ended December 31, 1999, representing
an increase of 21.0% compared with 1998. Churn for the year ended December 31,
1999 was 2.6%, down slightly from 2.7% in 1998. Including our partnership
markets, approximately 9.4 million of the 12.2 million total subscribers were
digital subscribers as of December 31, 1999.
Our ARPU in our Mobility business for the year ended December 31, 1999 was
$65.80, an increase of $8.20, or 14.2%, compared with 1998. The increase was
primarily due to increased minutes of use per subscriber, driven in part by the
success of AT&T Digital One Rate service. Our ARPU remained significantly higher
than the wireless industry average during 1999.
Equipment revenue for the year ended December 31, 1999 was $804 million, an
increase of $177 million, or 28.2%, compared with 1998, and was 100%
attributable to our Mobility business. The increase was primarily due to a 25.1%
increase in gross consolidated subscriber additions in 1999 compared with 1998.
We supply to our subscribers a selection of handsets at competitive prices,
which are generally offered at or below cost.
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Costs of services
Costs of services for the year ended December 31, 1999 were $2,580 million,
and were nearly 100% attributable to our Mobility business. This was an increase
of $1,152 million, or 80.7%, compared with 1998.
Costs of services in our Mobility business for the year ended December 31,
1999 were $2,531 million. This was an increase of $1,136 million, or 81.4%,
compared with 1998. Approximately three-fourths of the increase was due to
increased roaming expenses associated with the success of AT&T Digital One Rate
service as off-network roaming minutes of use increased by 194.7% for the year
ended December 31, 1999, compared with 1998. The remaining increase was due
primarily to increases in the charges paid to connect calls on other networks,
including those of AT&T.
Although roaming expenses continued to impact results for the year ended
December 31, 1999, the rate of roaming expense growth declined significantly
during the latter half of 1999, as we introduced initiatives to aggressively
migrate more minutes onto our network as well as reduced intercarrier roaming
rates. We continued to seek to decrease roaming expenses through capital
spending for network expansion, acquisitions and affiliate launches. Roaming
rates also declined significantly as a result of renegotiated roaming agreements
and the deployment of IRDB technology, which assists in identifying favorable
roaming partners in areas not included in our network. All of these efforts
resulted in a reduction of approximately 18% in the average roaming rate per
minute paid to other carriers for the year ended December 31, 1999, compared
with 1998.
Costs of equipment sales
Costs of equipment sales for the year ended December 31, 1999 were $1,266
million, and were 100% attributable to our Mobility business. This was an
increase of $266 million, or 26.6%, compared with 1998. This increase was
primarily the result of increased gross subscriber additions in 1999 compared
with 1998. Gross subscriber additions increased 25.1% for the year ended 1999
compared with the prior year.
Selling, general and administrative (SG&A)
SG&A expenses for the year ended December 31, 1999 were $2,663 million,
compared with $2,122 million for the year ended December 31, 1998, and were
nearly 100% attributable to our Mobility business. Approximately one-third of
the increase in our Mobility business SG&A was due to higher marketing and
selling costs associated with the increase in gross consolidated subscriber
additions in 1999 compared with 1998. CPGA for the year ended December 31, 1999
was $367, and represented a decrease of $25, or 6.4%, compared with 1998.
Additionally, another one-third of the increase resulted from growth in customer
care related expenses associated with the larger consolidated subscriber base.
The remaining increase was the result of increased general and administrative
costs, primarily information technology related, to support the growth in the
subscriber base, and expenses to prepare systems and applications for the year
2000.
Depreciation and amortization
Depreciation and amortization expenses for the year ended December 31, 1999
were $1,253 million, an increase of $174 million, or 16.1%, of which over 95%
were attributable to our Mobility business. The increase in our Mobility
business depreciation and amortization expenses primarily resulted from a larger
asset base and additional amortization of goodwill and other acquisition related
intangibles associated with the acquisition of Vanguard Cellular. Capital
expenditures for the years ended December 31, 1999 and 1998 were $2,476 million
and $1,136 million, respectively, and were primarily associated with our
Mobility business.
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Asset impairment and restructuring charges
During the fourth quarter of 1999, we recorded a $531 million asset
impairment charge primarily associated with the planned disposal of wireless
communications equipment associated with our Mobility business resulting from a
program to increase capacity and operating efficiency of the wireless network.
The program is intended to provide us with the newest technology available and
allow us to evolve to new next generation digital technology, which will provide
high-speed data capabilities. Asset impairment and restructuring charges for the
year ended December 31, 1998 were $120 million, which represented the write-down
of unrecoverable assets associated with non-strategic businesses within our
Mobility business.
Other income
Other income for the year ended December 31, 1999 was $122 million. Other
income for the year ended December 31, 1998 was $650 million. The decrease was
due primarily to the pretax gains on sales in 1998 of LIN Television Corporation
of $342 million, SmarTone Telecommunications Holdings Limited of $128 million
and PriceCellular of $67 million.
Interest expense
Interest expense for the year ended December 31, 1999 was $136 million, an
increase of $16 million, or 13.3%, compared with 1998. The increase was due to a
higher level of average debt outstanding, partially offset by the impact of the
lower rate charged by AT&T in 1999. Interest was charged at 7.25% per annum for
the year ended December 31, 1999 and 7.75% per annum for the year ended December
31, 1998.
Provision (benefit) for income taxes
The benefit for income taxes for the year ended December 31, 1999 was $294
million, compared with an income tax provision of $59 million for the year ended
December 31, 1998. The benefit for income taxes in 1999 was primarily due to the
pretax loss for the period coupled with changes in the valuation allowance and
other estimates. The effective income tax rates for the years ended December 31,
1999 and 1998, were 43.2% and 31.6%, respectively. The effective income tax rate
for 1998 was impacted by the effect of state taxes, net of the federal benefit,
and the amortization of intangibles, partially offset by the effects of changes
in the valuation allowance and other estimates.
Net equity earnings (losses) from investments
Net equity earnings (losses) from investments, net of tax, were losses of
$19 million for the year ended December 31, 1999, compared with earnings of $36
million for 1998. Approximately $46 million of the decrease was associated with
our domestic equity investments within our Mobility business. This decrease was
primarily a result of increased losses associated with affiliate investments.
The remaining decrease was a result of increased losses associated with
international equity investments, which are included within our Corporate and
other segment. Net equity earnings in 1999 included losses associated with
financial commitments related to certain domestic and international equity
investments.
Dividend requirements on preferred stock held by AT&T
We had $1.0 billion of preferred stock held by AT&T, as of December 31,
1999 and 1998, that paid dividends at 9% per annum. Dividend requirements on
this preferred stock for each of the years ended December 31, 1999 and 1998 were
$56 million, net of amounts recorded in accordance with the tax sharing
agreement.
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LIQUIDITY AND CAPITAL RESOURCES
Historically, financing activities for us and the rest of AT&T Wireless
Group were managed by AT&T on a centralized basis and were subject to the review
of AT&T Wireless Group's capital stock committee. The AT&T Wireless Group
capital stock committee was selected by AT&T's board of directors to oversee the
interaction between businesses of AT&T Common Stock Group and AT&T Wireless
Group in accordance with the AT&T Wireless Group Policy Statement. Under the
AT&T Wireless Group Policy Statement, all material transactions between AT&T
Common Stock Group and AT&T Wireless Group were determined and governed by a
process of fair dealing. Loans from AT&T to any member of AT&T Wireless Group
were made at interest rates and on other terms and conditions designed to be
substantially equivalent to the interest rates and other terms and conditions
that AT&T Wireless Group would have been able to obtain from third parties,
including the public markets, as a non-affiliate of AT&T without the benefit of
any guaranty by AT&T. This policy contemplated that these loans be made on the
basis set forth above regardless of the interest rates and other terms and
conditions on which AT&T may have acquired the funds. If, however, AT&T incurred
any fees or charges in order to keep available funds for use by AT&T Wireless
Group, those fees or charges were allocated to AT&T Wireless Group.
We have historically funded our operations by AT&T Wireless Group tracking
stock offering proceeds attributed from AT&T, intercompany borrowings from AT&T
and internally generated funds, as well as capital contributions from AT&T prior
to the AT&T Wireless Group tracking stock offering. Capital contributions from
AT&T prior to the offering included acquisitions made by AT&T that have been
attributed to us. Noncash capital contributions from AT&T related to
acquisitions and initial investments funded by AT&T totaled $552 million for the
three months ended March 31, 2000, and $539 million, $2,553 million, and $982
million for the years ended December 31, 2000, 1999, and 1998, respectively.
The continued expansion of our network and footprint, including through
spectrum auctions, as well as service offerings and the marketing and
distribution of our products and services, will continue to require substantial
capital. We believe that our current cash and cash equivalents, credit
facilities, and cash from operations, will satisfy our expected working capital,
capital expenditures and investment requirements for at least the next twelve
months. We may also generate cash from the sale of debt or equity securities, or
from the sale of non-strategic assets or excess spectrum. Additionally, we may
evaluate alternative financing arrangements associated with our Fixed Wireless
business.
The April 2000 offering of AT&T Wireless Group tracking stock resulted in
net proceeds to AT&T after deducting underwriter's discount and related fees and
expenses of $10.3 billion. AT&T attributed $7.0 billion of the net proceeds to
us in the form of an intercompany note receivable, which was repaid by December
31, 2000, and was used primarily to fund acquisitions and capital expenditures.
On May 1, 2000, following the AT&T Wireless Group tracking stock offering,
we recapitalized $2.0 billion of outstanding intercompany indebtedness to AT&T
into an additional $2.0 billion of 9% cumulative preferred stock held by AT&T.
In conjunction with the recapitalization, our long-term debt due to AT&T was
recapitalized to be 10 year term debt that bore interest at a fixed rate of 8.1%
per annum. We have repaid all outstanding intercompany indebtedness in
connection with the split-off.
On January 22, 2001, AT&T closed its transaction with DoCoMo. AT&T
attributed $6.1 billion of the approximate $9.8 billion of net proceeds received
from the DoCoMo investment to us in the form of an intercompany note receivable.
We intend to utilize the proceeds to continue executing our strategy to expand
our capacity, enlarge our footprint, create an advanced mobile Internet and
invest in other strategic growth initiatives, as well as to satisfy intercompany
obligations.
On March 6, 2001, we completed a private placement of $6.5 billion in
unsecured and unsubordinated Senior Notes with maturity dates from March 1, 2006
to March 1, 2031. The notes pay interest at fixed rates ranging from 7.350% to
8.750% per annum, payable semi-annually, and include customary covenants. The
notes include registration rights, such that we are required to exchange the
notes for a new issue of
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notes registered under the Securities Act of 1933 and are to be declared
effective no later than 240 days after the issue date. We had $38 million of
interest expense for the quarter ended March 31, 2001 related to these notes. We
expect to incur interest payments related to these notes of approximately $265
million for the year ended December 31, 2001.
On March 23, 2001, we entered into Competitive Advance and Revolving Credit
Facilities (the "Facilities") in the aggregate amount of $2.5 billion consisting
of an up to $1.25 billion 364-day Competitive Advance and Revolving Credit
Facility and an up to $1.25 billion Five-Year Competitive Advance and Revolving
Credit Facility. The Facilities are subject to a facility fee ranging from 8 to
30 basis points, payable quarterly on the total commitment, used or unused. The
facility fees are based on the respective agreement and will fluctuate based on
our Senior Notes rating. The Facilities are also subject to a utilization fee of
12.5 basis points if borrowings exceed certain levels as defined in the
agreement. The Facilities bear interest at variable rates based upon, in various
cases, (i) LIBOR plus 32.5 to 100 basis points depending on our Senior Notes
rating, or (ii) the greater of the prime rate or the Federal funds effective
rate plus 50 basis points. The Facilities are to be used for general corporate
purposes and are subject to customary covenants, representations and warranties
and events of default. In addition, the Facilities contain financial covenants
requiring us to maintain certain financial ratios. The Facilities also specify
limitations on AT&T's and our ability to consummate the split-off including a
provision that it will constitute an event of default if the split-off is
consummated without obtaining a favorable tax ruling from the IRS or an
unqualified tax opinion that the split-off will qualify as a tax-free
transaction. In addition, the existence of an obligation by us to repurchase
equity interests from DoCoMo may under certain circumstances constitute an event
of default. No amounts had been borrowed under the Facilities at March 31, 2001.
During June 2001, we finalized agreements with a group of commercial paper
dealers to issue up to $2.5 billion of private placement commercial paper notes.
The notes will be unsecured, ranking pari passu with our other unsubordinated
and unsecured indebtedness. Maturity of the notes will be up to 365 days from
date of issue. As of June 19, 2001, we had not issued any under this program.
In association with the split-off, we and AT&T have entered into a
separation and distribution agreement that governs the terms of the split-off.
As part of this agreement we agreed, to repay the full amount of the principal
and accrued but unpaid interest or face value and accrued but unpaid dividends,
of all outstanding indebtedness owed by us to AT&T, and all of our preferred
stock held by AT&T. In June 2001, we repaid to AT&T the $1.8 billion of
long-term debt and related accrued interest, and we redeemed the $3.0 billion of
preferred equity and related unpaid dividends held by AT&T. Additionally, under
the separation and distribution agreement, AT&T has agreed to repay any amounts
owed to us by AT&T.
We have entered into various purchase commitments for network equipment as
well as handsets, related to the development of its next-generation strategy.
Those commitments totaled $2.2 billion and expire between 2001 and 2004.
We have commitments to fund spectrum acquisitions and operational funding
requirements of an equity method investment which totaled approximately $400
million as of May 31, 2001.
During November 2000, we joined with others in the formation of a venture,
Alaska Native Wireless, which participated in the Federal Communication
Commission's recent auction of license spectrum in the 1900 megahertz band,
which is used to provide wireless services. In January 2001, the auction was
completed, and Alaska Native Wireless was the high bidder on approximately $2.9
billion in licenses. We have committed to fund $2.6 billion to Alaska Native
Wireless to fund Alaska Native Wireless' purchase of licenses. As of March 31,
2001, we funded approximately $309 million of the commitment through a
combination of a non-controlling equity interest and debt securities of Alaska
Native Wireless. The remaining approximate $2.3 billion of additional funding
will be made when such licenses are granted, and will take the form of
non-convertible notes of Alaska Native Wireless. At the fifth anniversary of the
first date on which licenses won in the auction are granted to Alaska Native
Wireless, and in addition to other means by which they may transfer their
interests, the other owners of Alaska Native Wireless have the
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right to require us to purchase their equity interests. If this right were
exercised five years after license grant, the purchase price could be as much as
approximately $950 million and would be payable, at our option, in cash or
marketable securities. The right to require us to purchase these interests may
be exercised before the five-year anniversary of the license grant if the
conditions of certain FCC regulations restricting the free transferability of
certain licenses offered in this auction are met earlier. If the right were
exercised earlier, the purchase price would be calculated in generally the same
way as if exercised at five years, except that a discount would be applied. In
certain circumstances, if a winning bid of Alaska Native Wireless is rejected or
if any license granted to it is revoked, we would be obligated to compensate
other owners for making capital available to the venture. In certain
circumstances, if the grant of the licenses is challenged, we may be obligated
to purchase the interests of other owners. Depending on when such revocation or
challenge takes place, the amount may be material but would be less than the
$950 million purchase price described above.
During January 2001, AT&T closed its previously announced agreement with
DoCoMo. Pursuant to this agreement, DoCoMo may require the repurchase of its
investment at DoCoMo's original purchase price, plus interest, if AT&T does not
complete the split-off by specified dates beginning January 1, 2002, or if,
under certain circumstances, we fail to meet specified technological milestones.
As of December 31, 2000, our estimated commitments associated with leased
properties were approximately $1.4 billion.
Historically, AT&T has performed cash management functions on our behalf.
Substantially all of our cash balances were swept to AT&T on a daily basis,
where they were managed and invested by AT&T. Prior to the offering of AT&T
Wireless Group tracking stock, transfers of cash to and from AT&T were reflected
as a component of shareowners' net investment, with no interest income or
expense reflected. Subsequent to the offering, transfers have been reflected as
changes in the note receivable from or short-term debt payable to AT&T. Cash
balances maintained and reported by us primarily represented cash balances for
which no right of offset existed with AT&T. Subsequent to the split-off, we will
be responsible for our own cash management functions.
Net cash provided by operating activities for the three months ended March
31, 2001, was $655 million, compared with $228 million for the same period in
2000. The increase in cash provided by operating activities was primarily due to
a $322 million increase in operating income excluding depreciation and
amortization, resulting from revenue growth and expense leveraging as well as an
increase in deferred income taxes. These increases were partially offset by a
larger decrease in payroll and benefit related liabilities for the three months
ended March 31, 2001, compared with the prior year. Net cash used in investing
activities for the three months ended March 31, 2001 was $12,519 million,
compared with $948 million for the three months ended March 31, 2000. The
increase was due primarily to the issuance of a note receivable from AT&T
totaling $10,588 million, increased contributions into equity investments, and
higher capital expenditures to upgrade and increase network capacity. Net cash
provided by financing activities for the three months ended March 31, 2001 was
$11,836 million, compared with $725 million for the three months ended March 31,
2000. The increase was primarily due to the $6.1 billion of net proceeds from
the DoCoMo investment that AT&T attributed to us, as well as the $6.3 billion of
net proceeds from the issuance of the Senior Notes, partially offset by the
repayment of the $638 million of short-term debt due to AT&T.
Net cash provided by operating activities for the year ended December 31,
2000 was $1,635 million, compared with $867 million for the year ended December
31, 1999. Approximately one-half of the increase in cash provided by operating
activities was due to an increase in operating income excluding depreciation and
amortization, and the asset impairment and restructuring charge in 1999,
resulting from revenue growth and expense leveraging. The remaining increase was
due to an increase in operating and payroll related accruals, partially offset
by increases in inventories and accounts receivable. Net cash used in investing
activities for the year ended December 31, 2000 was $10,525 million, compared
with $2,123 million for the year ended December 31, 1999. The increase was due
primarily to the acquisitions of
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wireless systems in Houston, Indianapolis and San Diego, the Bay Area
Properties, and Wireless One totaling approximately $4.7 billion. Equity
investment purchases increased primarily due to the acquisition of approximately
$1.0 billion in equity interests in international ventures, acquired from AT&T
in association with their acquisition of MediaOne. The remaining increase was
due to increased capital expenditures as a result of efforts to increase network
capacity in existing markets as well as to expand the national footprint. Net
cash provided by financing activities for the year December 31, 2000 was $8,947
million, compared with $1,234 million for the year ended December 31, 1999. The
increase was primarily due to the $7.0 billion of proceeds attributed from the
offering of AT&T Wireless Group tracking stock, $0.6 billion of short-term debt
borrowed from AT&T, as well as increased transfers from AT&T prior to the
offering, to fund acquisitions and higher capital expenditures.
Net cash provided by operating activities for the year ended December 31,
1999 was $867 million compared with $414 million of cash provided by operating
activities in 1998. Over one-half of the increase was due to increased operating
income excluding depreciation and amortization, and the asset impairment and
restructuring charges. The remaining increase was due to larger increases in
operating accruals and accounts payable. These increases were offset by a higher
increase in accounts receivable driven by strong revenue growth. Net cash used
in investing activities for the year ended December 31, 1999 was $2,123 million,
compared with $238 million of cash provided by investing activities in 1998. The
difference was due to approximately $1.0 billion in higher capital expenditures
to upgrade and increase capacity in existing markets as well as to expand the
national footprint. Additionally, we received lower cash proceeds associated
with the sales of equity investments in 1999 versus 1998. Net cash provided by
financing activities for the year ended December 31, 1999 was $1,234 million
compared with $631 million of cash used in financing activities in 1998 due to
increased transfers and debt financing from AT&T to fund the higher capital
expenditures during 1999.
EBITDA, defined as operating income, plus depreciation and amortization, is
the primary measure used by the chief operating decision-makers to measure our
ability to generate cash flow. EBITDA may or may not be consistent with the
calculation of EBITDA for other public companies and should not be viewed by
investors as an alternative to generally accepted accounting principles,
measures of performance or to cash flows from operating, investing and financing
activities as a measure of liquidity.
EBITDA for the three months ended March 31, 2001 was $717 million compared
with $395 million for the same period in 2000. The increase was primarily the
result of growth in services revenue, partially offset by increased customer
acquisition costs associated with the increase in gross consolidated subscriber
additions, increased network costs attributable to subscriber growth and the
related minutes of use, increased provision for uncollectible receivables, and
increased customer care and billing related expenses to support growth in the
subscriber base.
For our Mobility business, EBITDA for the three months ended March 31, 2001
was $788 million compared with $431 million for the same period in 2000.
For our Fixed Wireless business, EBITDA for the three months ended March
31, 2001 was a deficit of $68 million compared with a deficit of $34 million for
the same period in 2000.
EBITDA margin, defined as EBITDA as a percent of total revenue, was 22.3%
for the first quarter of 2001, compared with 18.0% for the first quarter of
2000. The improvement in EBITDA margin was primarily due to revenue growth and
expense leveraging, primarily off-network roaming expenses, partially offset by
increased provision for uncollectible receivables.
EBITDA margin for our Mobility business was 24.5% for the first quarter of
2001 compared with 19.6% for the first quarter of 2000.
EBITDA for the year ended December 31, 2000 was $1,648 million, compared
with $587 million for the year ended December 31, 1999. On an operational basis,
adjusted to exclude the 1999 asset impairment and restructuring charge of $531
million, operational EBITDA increased $530 million or
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47.3%. The increase was primarily the result of revenue growth and lower
off-network roaming expenses. These increases were partially offset by increased
customer acquisition costs associated with the increase in gross subscriber
additions, increased network costs attributable to the growth in subscribers and
their minutes of use, and increased information technology and customer care
related costs to support growth in the subscriber base.
For our Mobility business, EBITDA for the year ended December 31, 2000 was
$1,884 million, compared with $670 million for the year ended December 31, 1999.
Excluding the 1999 asset impairment and restructuring charge, Mobility
operational EBITDA increased $686 million or 57.2%.
For our Fixed Wireless business, EBITDA for the year ended December 31,
2000 was a deficit of $228 million, compared with a deficit of $75 million for
the year ended December 31, 1999. Excluding the 1999 asset impairment and
restructuring charge, Fixed Wireless operational EBITDA decreased $156 million
or 213.4%.
EBITDA margins were 15.8% for the year ended December 31, 2000, compared
with 14.7% for the year ended December 31, 1999, excluding the 1999 asset
impairment and restructuring charge. The improvement in EBITDA margins for the
year ended December 31, 2000, compared to the year ended December 31, 1999, was
primarily driven by revenue growth and expense leveraging, primarily off-network
roaming expenses, partially offset by increased customer acquisition and
customer care costs associated with growth in the subscriber base.
EBITDA margins for our Mobility business were 18.0% for the year ended
December 31, 2000, compared with 15.7% for the year ended December 31, 1999,
excluding the 1999 asset impairment and restructuring charge.
EBITDA for the year ended December 31, 1999 was $587 million compared with
$736 million for the year ended December 31, 1998. Excluding pretax asset
impairment and restructuring charges of $531 million in 1999 and $120 million in
1998, operational EBITDA was $1,118 million for 1999, which represented an
increase of $262 million, or 30.6%, compared with 1998. This increase was
attributable to increases in total revenue and an improving margin as SG&A
expenses declined as a percentage of revenue.
For our Mobility business, EBITDA for the year ended December 31, 1999 was
$670 million, compared with $794 million for the year ended December 31, 1998.
Excluding pretax asset impairment and restructuring charges of $528 million in
1999 and $120 million in 1998, operational EBITDA was $1,198 million for 1999
compared with $914 million for 1998.
Excluding the aforementioned pretax asset impairment and restructuring
charges in 1999 and 1998, EBITDA margins were 14.7% for the year ended December
31, 1999, compared with 15.8% in 1998. The decline in EBITDA margins in 1999
compared with 1998 was driven primarily by increased roaming expenses, as well
as increased sales and marketing expenses associated with a 25.1% increase in
gross consolidated subscriber additions in 1999 compared with 1998.
Excluding the aforementioned pretax asset impairment and restructuring
charges in 1999 and 1998, EBITDA margins for our Mobility business were 15.7%
for the year ended December 31, 1999, compared with 16.9% for the year ended
December 31, 1998.
QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Prior to the split-off, our market risk was managed by AT&T, as AT&T
performed cash management and other treasury related functions on our behalf.
After the split-off, we will be responsible for managing market risk as a
separate company.
Prior to the split-off, we were subject to interest rate risk associated
with our short- and long-term debt due to AT&T. Our short-term debt due to AT&T
was in the form of a revolving loan, paying interest
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monthly at the average seven-day commercial paper rate, which was 8.37% at
December 31, 2000, and matured on December 29, 2001. The loan was repaid in full
in January 2001. Our long-term debt due to AT&T was 10 year term debt that bore
interest at a fixed rate of 8.1% per annum. Amounts owed to AT&T associated with
these agreements have been repaid in June 2001.
We will have future interest rate risk associated with $6.5 billion of
Senior Notes issued in March 2001, as well as with a $2.5 billion Competitive
Advance and Revolving Credit Facility, which was executed in March 2001.
We have equity price risk from outstanding AT&T Wireless Group tracking
stock options, which will be converted into our stock options in conjunction
with the split-off.
We may have future market risk related to derivative instruments that we
may hold in the future. Historically, we did not have any material derivative
financial instruments and did not hold derivative financial instruments for
trading purposes. Warrants issued to DoCoMo will be marked to market in periods
subsequent to the split-off date which may impact our future results of
operations.
FINANCIAL CONDITION
AT MARCH 31, 2001 COMPARED WITH DECEMBER 31, 2000
Total assets were $47,039 million as of March 31, 2001, an increase of
$11,737 million, or 33.2%, compared with December 31, 2000. The increase was due
primarily to an increase in the intercompany note receivable from AT&T of
$10,588 million, which resulted from AT&T attributing $6.1 billion of the DoCoMo
investment net proceeds to us, and our loaning of the $6.3 billion of net
proceeds from our Senior Notes to AT&T. Partially offsetting these proceeds were
the repayment of the $638 million of short-term debt due to AT&T, as well as
capital expenditures and contributions made to non-consolidated investments
during the first quarter of 2001.
Total liabilities were $16,060 million as of March 31, 2001, an increase of
$5,676 million, or 54.7%, compared with December 31, 2000. The increase was
primarily due to the issuance of the $6.5 billion of Senior Notes, as well as
increased operating accruals, partially offset by the repayment of $638 million
of short-term debt due to AT&T, and decreases in payroll and benefit related
liabilities and accounts payable.
Total preferred stock held by AT&T was $3.0 billion at March 31, 2001 and
December 31, 2000. Dividends payable on the preferred stock were paid at 9% per
annum. We redeemed all the preferred stock in June 2001.
Total shareowners' equity was $27,937 million at March 31, 2001, an
increase of $6,060 million, or 27.7% compared with December 31, 2000. The
increase was primarily due to increased shareowners' net investment associated
with the attribution of the $6.1 billion of DoCoMo investment net proceeds to us
from AT&T.
AT DECEMBER 31, 2000 COMPARED WITH DECEMBER 31, 1999
Total assets were $35,302 million as of December 31, 2000, an increase of
$11,790 million, or 50.1%, compared with December 31, 1999. The increase was due
primarily to increases in licensing costs, goodwill, and property, plant and
equipment associated with the acquisitions closed in 2000, including the
acquisitions of Wireless One, L.P. and wireless systems in the San Francisco Bay
Area, San Diego, Indianapolis, Houston and Los Angeles. In addition, the
increase in property, plant and equipment was a result of significant capital
expenditures for the year ended December 31, 2000. These increases were
partially offset by a decrease in investments as we previously held equity
interests in portions of the Bay Area Properties, and the Los Angeles market,
through our interest in AB Cellular. These markets were consolidated as of
December 31, 2000.
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Total liabilities were $10,384 million as of December 31, 2000, an increase
of $889 million, or 9.4%, compared with December 31, 1999. The increase was
primarily due to increases in deferred income taxes as a result of gains
recorded during the fourth quarter, as well as increased marketing, business tax
and other operating accruals. These increases were partially offset by a net
decrease in intercompany indebtedness to AT&T.
Total preferred stock held by AT&T increased to $3.0 billion at December
31, 2000, from $1.0 billion at December 31, 1999, due to the recapitalization of
$2.0 billion of long-term debt into preferred stock in conjunction with the
offering of AT&T Wireless Group tracking stock. Dividends payable on the
preferred stock were paid at 9% per annum.
Total shareowners' equity was $21,877 million as of December 31, 2000, an
increase of $8,880 million, or 68.4%, compared with December 31, 1999. The
increase was primarily due to increased shareowners' net investment associated
with the attribution of AT&T Wireless Group tracking stock offering proceeds to
us and net transfers from AT&T prior to the offering to fund capital expansion
and acquisitions.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board (FASB) issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- A Replacement of FASB No. 125". This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Under these standards,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. This statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001. We do not expect that the adoption of SFAS No. 140 will have a material
impact on our results of operations, financial position or cash flows.
SUBSEQUENT EVENTS
On April 27, 2001, AT&T completed the sale of its entire interest in Japan
Telecom for approximately $1.35 billion in cash. AT&T attributed $0.5 billion of
the net after-tax proceeds from the sale to us. We recognized an after-tax gain
of $298 million associated with the transaction, which was recorded in net
equity earnings from investments in the second quarter of 2001.
During the first quarter of 2001, we made unsecured term loans to Rogers
Wireless to pay for spectrum it successfully bid upon in recently completed
Canadian spectrum auctions. In April 2001, Rogers Wireless effected a rights
offering of its equity securities in which our joint venture with British
Telecommunications, JVII, participated. The participation increased JVII's
ownership interest in Rogers Wireless to 34.36%. We funded the purchase on
behalf of JVII by offsetting it against the unsecured, interest bearing note
made by us. This transaction resulted in our obtaining a controlling interest of
JVII, as well as increasing our indirect ownership percentage in Rogers
Wireless. As a result of the consolidation of JVII, which holds the equity
interest in Rogers Wireless, our investments in unconsolidated subsidiaries, as
well as minority interest liability, increased approximately $420 million in
April 2001. This transaction did not result in a transfer of control of Rogers
Wireless to JVII. On July 3, 2001, we acquired British Telecommunications'
interest in JVII for approximately $380 million in cash. As a result of this
acquisition, we now own 100% of JVII, and, through JVII, hold a 34.36% ownership
interest in Rogers Wireless Communications, Inc.
During June 2001, we finalized agreements with a group of commercial paper
dealers to issue up to $2.5 billion of private placement commercial paper notes.
The notes will be unsecured, ranking pari passu
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with our other unsubordinated and unsecured indebtedness. Maturity of the notes
will be up to 365 days from date of issue. As of June 19, 2001, we had not
issued any notes under this program.
In accordance with the Securities and Distribution Agreement between us and
AT&T, in June 2001, we repaid to AT&T the $1.8 billion of long-term debt and
related accrued interest, and redeemed the $3.0 billion of preferred equity and
related unpaid dividends held by AT&T.
In June 2001, AT&T announced that the split-off of AT&T Wireless Services
from AT&T will occur on July 9, 2001. The S-1 registration statement filed with
the Securities and Exchange Commission, which will enable the split-off, became
effective June 21, 2001.
On June 27, 2001, we entered into a preliminary agreement to consolidate
the soon to be merged Birla AT&T/Tata Cellular, Ltd. entity with BPL Mobile
Communications Ltd. and some portions of BPL Cellular Ltd. The preliminary
agreement is subject to a number of conditions, including obtaining approvals of
the boards of all of the participants to the consolidation. If all conditions
are satisfied and a consolidation occurs as contemplated in the preliminary
agreement, we estimate that our ownership will be approximately 25% of the
consolidated entity.
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OUR COMPANY
OVERVIEW
We are one of the largest wireless communications service providers in the
United States. We seek to expand our customer base and revenue stream by
providing high-quality, innovative wireless services. As of March 31, 2001, we
had 15.7 million consolidated subscribers. For the year ended December 31, 2000
we had:
- $10.4 billion of consolidated revenues, and
- $658 million of consolidated net income.
We operate one of the largest U.S. digital wireless networks. As of March
31, 2001, we and our affiliates and partners held 850 megahertz and 1900
megahertz licenses to provide wireless services covering 98% of the U.S.
population. As of that date we, our partners and our affiliates covered
approximately 83% of the U.S. population with at least 30 megahertz of wireless
spectrum. At the same date, our networks and those of our affiliates and
partners operated in markets including over 77% of the U.S. population and in
all 50 of the largest U.S. metropolitan areas. We supplement our operations with
roaming agreements that allow our subscribers to use other providers' wireless
services in regions where we do not have operations. With these roaming
agreements, we are able to offer customers wireless services covering over 95%
of the U.S. population. We plan to continue to increase our coverage and the
quality of our services by expanding our coverage area, or footprint, and the
capacity of our network through new network construction, acquisitions, and
partnerships with other wireless providers.
We currently provide our wireless voice and data services using time
division multiple access, analog and cellular digital packet data technologies.
We have focused on building our digital network and on migrating our customer
base from analog to digital service. We have already upgraded our analog systems
to digital in 99% of our markets. We believe that digitalization improves
capital efficiency, lowers network operating costs and allows us to offer higher
quality services. Over 92% of our consolidated subscribers use digital services
and account for over 95% of our traffic. We believe that these percentages are
substantially greater than the average for others in our industry.
To accelerate the availability of enhanced data services offerings, we
recently announced plans to adopt a GSM technology, or platform, for interim
improvement in wireless data capabilities. Following the adoption of GSM, we
plan to move to third-generation technology to permit us to offer voice and new
data services. We plan to begin operating a network using GSM technology in the
second half of 2001. Our chosen third-generation technology standard, known as
UMTS, is the same global standard that has been selected by operators throughout
Europe, Japan and other parts of the world. Third-generation standards should
provide the speed and capacity necessary to support innovative mobile multimedia
applications, including broader and more efficient access to email systems,
high-speed web browsing, e-commerce applications, on-line games and music
downloads.
We market our products and services primarily under the AT&T brand and
expect to continue to do so for at least five years under agreements entered
into with AT&T in connection with the split-off. We believe that AT&T's widely
recognized brand increases consumer awareness of, and confidence in, our
products and services.
We have:
- all of the wireless licenses used in our mobile and fixed wireless
businesses;
- all of AT&T's wireless networks, operations, sites on which cellular
transmitters are located, wireless customer care facilities and customer
location assets; and
- AT&T's interests in partnerships and affiliates providing wireless mobile
communications in the United States and internationally.
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We do not and will not have:
- AT&T's existing and future wireless activities that stem from
country-specific joint venture relationships that predominately are
non-wireless; and
- incidental wireless capabilities of AT&T or links in any backbone or
other communications network of AT&T that predominately are non-wireless.
AT&T Wireless Services was incorporated on July 7, 1987 as McCaw Cellular
Communications, Inc. AT&T acquired McCaw Cellular in 1994, and since that time,
AT&T Wireless Services has been a wholly-owned direct subsidiary of AT&T Corp.
In 1995, McCaw Cellular was renamed AT&T Wireless Services, Inc.
INDUSTRY OVERVIEW
General
Wireless communications systems use a variety of radio frequencies to
transmit voice and data. Broadly defined, the wireless communications industry
includes one-way radio applications, such as paging or beeper services, and
two-way radio applications, such as cellular telephone, enhanced specialized
mobile radio services, personal communications services and fixed wireless
services. The FCC licenses the radio frequency used to provide each of these
applications.
Since its introduction in 1983, wireless service has grown dramatically. As
illustrated by the following chart, domestic cellular, enhanced specialized
mobile radio and personal communications services providers experienced average
annual rates of growth of 23% and 29% in revenues and subscribers, respectively,
over the five-year period from 1994 to 1999.
WIRELESS INDUSTRY STATISTICS*
1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ------
Total service revenues (in billions)........... $ 19.1 $ 23.6 $ 27.5 $ 33.1 $ 40.0 $ 52.5
Ending subscribers (in millions)............... 33.8 44.0 55.3 69.2 86.0 110.0
Subscriber growth.............................. 40.0% 30.4% 25.6% 25.1% 24.3% 27.9%
Average monthly service revenue per subscriber,
including roaming revenue.................... $54.91 $50.61 $46.11 $44.35 $42.96 $44.59
Average monthly service revenue per subscriber,
excluding roaming revenue.................... $47.59 $44.66 $41.12 $39.66 $38.50 $41.29
Ending penetration............................. 13.0% 16.3% 20.2% 25.1% 30.9% 39.1%
---------------
* Source: Cellular Telecommunications Industry Association and Paul Kagan
Associates.
Recent industry trends
The growth in the wireless communications industry has been shaped by a
number of industry trends that are likely to continue in the near future.
Expanding penetration fuels network optimization. The U.S. wireless
industry has experienced an increase in absolute subscriber additions and
wireless penetration levels. For example, the number of ending subscribers
increased by 9.7 million in 1995 and by 24 million in 2000 at the same time as
penetration grew from 13.0% to 39.1%, respectively. Increased penetration allows
wireless providers to distribute the fixed costs of a wireless network over
greater numbers of users, thereby optimizing network usage. Wireless penetration
in other developed nations, particularly in Western Europe and Japan, is
currently substantially higher than in the United States. The experience of
wireless providers in these developed nations has shown that the market for
wireless services has an inflection point with regard to subscriber penetration
whereby the number of subscribers and penetration accelerates as wireless
service usage becomes more ubiquitous. In addition, those same international
wireless providers have experienced growth in earnings before interest, taxes,
depreciation and amortization, or EBITDA, at a greater rate than
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subscriber growth as network usage increases. We believe that the U.S. wireless
industry is approaching a similar inflection point in subscriber penetration and
is likely to develop along the same path as international wireless industries
have developed.
Rate simplification eases customer choice and drives consolidation. We
have led the industry in simplifying customer choice through pricing plans. In
May 1998, we revolutionized the industry by offering AT&T Digital One Rate
service, which, for the first time, charged one rate with no separate roaming or
long-distance fees for domestic calls across the United States. In addition, we
have introduced a simplified national prepaid wireless service that provides
wireless communications to customers with no long-term contract, credit check,
deposit or bill. AT&T Digital One Rate, prepaid wireless, and similar plans by
other service providers have increased wireless penetration in the United
States. We believe that the introduction of other simplified, targeted rate
plans, including prepaid products, will continue to increase wireless
penetration. In addition, because roaming costs to the wireless provider can
exceed the amount charged to the subscriber under these single rate plans,
wireless providers have been attempting to establish national coverage through
acquisitions, thus driving consolidation.
Declining costs of service results in mass market availability. As the
cost of wireless service has declined, it has become, in an extremely short
period of time, a mass market product rather than a luxury good. We expect that
competition in each wireless market will continue to lead to further price
declines, which should make wireless service available to an even greater number
of potential users. Experience indicates that this widespread usage will in turn
cause even more people to use wireless services, especially as the price of
wireless service declines relative to the price of wireline service. We believe
that these developments are likely to drive continued growth in the wireless
communications industry.
Digital service increases utility and functionality of wireless
services. Technological advancements, from longer battery life to improved
voice quality, have begun to make wireless service increasingly comparable to
wireline communications. Additionally, customers have begun to expect custom
calling features that are similar to those available on a wireline network.
Digital service, as opposed to analog service, permits wireless providers to
offer these types of enhanced services to users. Wireless providers will need to
continue to invest in network upgrades to offer advanced services to attract and
retain subscribers.
Wireless data applications will drive expanded wireless usage. Existing
and new wireless data technologies, coupled with the widespread use of the
Internet, have caused wireless providers to focus on wireless data services
offerings. Historically, these services predominantly have been used to date to
carry corporate data applications. We have been a leader in this emerging
market. Data network coverage is now available using our packet data network in
approximately 55% of our voice network footprint, which we believe provides a
critical advantage in the cost-effective provision of wireless data services. In
addition to our current packet-switched technology, we have announced plans to
deploy enhanced data and third-generation communications technologies capable of
greater data speeds.
The introduction of new applications for corporate and consumer users, such
as mobile originated short message services, access to email, news, sports,
weather summaries, travel services, financial information and services and
comparison shopping applications, will drive the growth for wireless data
network services. To this end, enabling technologies, such as the
industry-acknowledged wireless application protocol provide an environment that
encourages developers to create innovative data services for wireless networks.
In addition, applications, such as email, instant messages, banking, wireless
portals and web services, are being developed and marketed. We believe that the
development and deployment of so called "third-generation" wireless networks
will drive further growth in wireless data services and applications due to
increased capacity, speed and lower costs.
SEASONALITY
The wireless industry, including us, has experienced a trend of generating
a significantly higher number of customer additions and handset sales in the
fourth quarter of each year as compared to the other three fiscal quarters. A
number of factors contribute to this trend, including the increasing use of
retail distribution, which is dependent upon the year-end holiday shopping
season, the timing of new
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product and service announcements and introductions, competitive pricing
pressures, and aggressive marketing and promotions.
SPECTRUM AND TECHNOLOGY
We have licenses to use three portions of the radio spectrum that the FCC
has made available for the transmission of voice and data signals: 850
megahertz, 1900 megahertz and 2.3 gigahertz. FCC terminology distinguishes
between "cellular" licenses, which are for 850 megahertz frequency, and "PCS"
licenses, which are for 1900 megahertz frequency.
We provide mobile voice services using both 850 megahertz cellular and 1900
megahertz PCS licenses. We do not manage our business for these spectrums
separately. Rather, we manage our business to provide network coverage
irrespective of the spectrum. From a marketing and operational perspective, we
define and manage our markets geographically, usually around an urban area or
other geographic region. These geographic markets may use either 850 megahertz
or 1900 megahertz spectrum or both. Geographic markets that use predominantly
850 megahertz spectrum have been in operation longer and therefore are more
mature than those markets that exclusively use 1900 megahertz spectrum.
The 850 megahertz wireless markets originally used analog based systems,
although digital technology has been introduced in most markets. As of March 31,
2001, we have upgraded 99% of our 850 megahertz markets to digital based
systems. The 1900 megahertz markets all are digital based.
We, including our partnership and affiliate markets, held 850 megahertz and
1900 megahertz licenses to provide wireless services covering 98% of the U.S.
population as of March 31, 2001. As shown in the table below, as of March 31,
2001, approximately 83% of the U.S. population were covered by at least 30
megahertz of wireless spectrum:
LICENSED POPS % OF TOTAL NUMBER OF TOP 50
SPECTRUM (IN MILLIONS)* U.S. POPS** U.S. LICENSED MARKETS
-------- -------------- ----------- ---------------------
10-15 megahertz....................... 20 7.2% 1
20-25 megahertz....................... 21 7.3% 3
30 megahertz or greater............... 233 83.0% 46
Total....................... 274 97.5% 50
---------------
* Amount of U.S. population covered by licenses held by us, including
partnership and affiliate markets.
** Amount that "Licensed POPs" represents as a percentage of total U.S.
population, based on total U.S. population of 281 million.
Analog systems currently have several limitations, including comparative
lack of privacy and limited capacity. However, analog handsets are compatible
with all analog systems in all markets within the United States.
Second-generation digital systems in the U.S., whether in the 850 megahertz
or 1900 megahertz spectrum, convert voice or data signals into a stream of
digits that is compressed before transmission, enabling a single radio channel
to carry multiple simultaneous signal transmissions. We believe that digital
technology offers many advantages over analog technology, including
substantially increased network capacity, greater call privacy, enhanced
services and features, lower operating costs, reduced susceptibility to fraud
and the opportunity to provide improved data transmissions.
Second-generation digital systems use one of three principal signal
transmission technologies, or standards, none of which is compatible with the
others:
- TDMA, or time division multiple access,
- CDMA, or code division multiple access, or
- GSM, or global system for mobile communications.
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We believe that three of the five recognized advanced digital signal
transmission technologies, or standards, which are in various stages of
development, have more commercial momentum than the remaining two. These three
are:
- EDGE, or enhanced data rates for global evolution,
- CDMA 2000, and
- UMTS, or universal mobile telecommunications systems.
These so-called "third-generation" technologies will allow high-speed
wireless packet data services and ultimately voice services using Internet
Protocol. Widespread deployment of third-generation technology is expected to
occur in the industry beginning in 2002. A fourth technology, GPRS, or general
packet radio service, is generally considered to be an interim step between
current and third-generation technologies. GPRS standards have been developed by
recognized standards-setting bodies, and there has been some commercial
deployment by carriers outside the U.S. and some U.S. carriers have announced
plans to deploy this technology. Third-generation EDGE standards also are
complete but equipment is still under development and we are not aware of any
commercial deployment. UMTS standards address more complex data applications and
are not yet complete, but equipment development has begun. UMTS is expected to
be initially available in Japan in 2001, in Europe in 2002 and subsequently in
North America. Some carriers have selected CDMA 2000 as their path to wideband
data applications, as an alternative to the sequence of GPRS, EDGE, and UMTS
technologies we selected as our path. UMTS is also known as W-CDMA, or wideband
code division multipleband access. Despite the similarity of the acronyms, CDMA
2000 and W-CDMA are not compatible.
We selected TDMA as our second-generation digital wireless standard,
although we do continue to operate a small number of markets that were operating
with CDMA technology when we acquired them. We offer our subscribers tri-mode
handsets that permit the user to access our analog system and our digital
systems, the latter whether operating in 850 megahertz or 1900 megahertz
spectrum. We also have plans to deploy third-generation technologies to enhance
both voice and data services.
We have also acquired licenses for radio spectrum in the 2.3 gigahertz
range. We expect to use this spectrum for our fixed wireless operations.
STRATEGY
Our goal is to be the premier provider of high-quality wireless
communication services, whether mobile or fixed, voice or data, to businesses or
consumers, in the United States and internationally. We believe that the
following are the key elements to enable us to meet our goal:
- continue the expansion of our domestic digital network to add capacity,
improve quality and provide consistent features regardless of location;
- continue to lower our operating costs and improve capital efficiency by
expanding our digital, mobile wireless network and increasing the use of
more efficient channels of distribution;
- use GSM technology to provide enhanced services as an interim step in our
transition to third generation technology;
- target distinct consumer and business customer segments with wireless
offers that match their needs for voice and data services to increase our
subscriber base and revenue;
- benefit from our relationship with AT&T, including the use of the AT&T
brand and, when appropriate, AT&T's distribution channels and cross
marketing opportunities; and
- take advantage of our existing wireless spectrum, digital network and
customer base with new growth initiatives, including wireless data and
fixed wireless opportunities.
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Continue the expansion of our digital network
We believe it is competitively critical to expand and improve our network
coverage footprint, as well as to increase capacity in our existing voice
network, to provide coverage throughout the nation, and offer consistent
features regardless of location. We regularly monitor quality and identify
specific areas in existing markets where calls may be dropped or transmission
quality is sub-optimal. As a result, we have taken a number of steps to increase
our network coverage, including the purchase of 1900 megahertz licenses, to
accelerate digital build outs in 850 megahertz and 1900 megahertz markets, to
increase the capacity of our existing voice network, and to acquire or partner
with other wireless providers. We, including our partnership and affiliate
markets, have licenses covering 98% of the U.S. population, with approximately
83% of the U.S. population covered by at least 30 megahertz of wireless
spectrum, as of March 31, 2001. In addition, in many of our markets, we possess
licenses for both 850 megahertz and 1900 megahertz spectrum. In each market in
which we are not currently operating, we evaluate the benefits and costs of
building out our license versus acquiring or partnering with other experienced
wireless providers before we decide on the appropriate method of expanding into
that market. The timing of these decisions depends upon a variety of factors,
including the size of the prospective market, the location of the market
relative to our other markets, the economics of existing roaming agreements and
anticipated industry developments.
Digital build out. We have aggressively pursued the build out of our
digital network. As of March 31, 2001, we have upgraded 99% of our markets to
digital based systems. As of March 31, 2001, our 1900 megahertz licenses covered
165 million of the U.S. population; 67% of that population were in markets
served by digital transmission systems, including those of affiliates.
Acquisitions. We have and will expand our digital mobile wireless network
through acquisitions when it is economic to do so. For example, in February
2000, AT&T and Dobson Communications Corporation, through a joint venture
entered into by one of AT&T's wireless business subsidiaries, acquired American
Cellular Corporation. AT&T included its interest in the joint venture among the
assets included in AT&T Wireless Group as of the date of the acquisition. This
acquisition increased our coverage in New York State and several midwest markets
by adding approximately 450 thousand subscribers as of the acquisition date.
Further, in June 2000, we purchased the assets of Wireless One Network, L.P.,
including wireless systems in northwest and southwest Florida covering a
population base of 1.6 million potential customers and serving approximately 190
thousand subscribers as of the acquisition date.
In June 2000, we announced that we had agreed to acquire wireless systems
in Houston and San Diego, as well as the remaining 50% interest that we did not
own in CMT Partners, which operates a wireless system in the San Francisco Bay
Area. On December 29, 2000, we completed the acquisition of the wireless system
in Houston, which covers a population base of approximately 5 million potential
customers and served approximately 180 thousand subscribers as of the
acquisition date. We closed the CMT Partners transaction on June 29, 2000. CMT
Partners covers a population base exceeding 7 million potential customers and,
as of the acquisition date, served nearly 1 million subscribers. On September
29, 2000, we closed the acquisition of the San Diego wireless system, which
covers a population base of 3 million potential customers. Also, during the
third quarter of 2000, we acquired a wireless system on the big island of
Hawaii. Combined, the San Diego and Hawaii markets served more than 180 thousand
subscribers as of their acquisition dates.
On October 2, 2000, we acquired a wireless system in Indianapolis, Indiana.
On November 13, 2000, we acquired wireless systems in several New England
markets. Combined, the New England and Indianapolis wireless systems acquired
cover a population base of approximately 4 million potential customers and
served approximately 145 thousand subscribers as of their acquisition dates.
On December 29, 2000, our equity interest in AB Cellular, an entity that
owned cellular properties in Los Angeles, Houston and Galveston, Texas, was
redeemed. In consideration for our equity interest, we received 100% of the net
assets of the Los Angeles property. The Los Angeles property covers a population
of approximately 15 million potential customers and had approximately 1.3
million subscribers as of December 31, 2000.
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Establish partnerships and affiliates. We also will continue to establish
local market partnerships and affiliates with other wireless operators to
accelerate the build out of our digital mobile wireless network. In addition to
existing partnership arrangements for our 850 megahertz markets, we have entered
into a number of joint ventures and affiliations to expand our 1900 megahertz
digital coverage. Key non-consolidated partnerships and affiliates with current
operations include the following:
850 OR 1900 LICENSED
MEGAHERTZ POPS OWNERSHIP
ENTITY PARTNER OR AFFILIATE MARKETS COVERED MARKET (IN MILLIONS)* PERCENTAGE**
------ -------------------- ----------------------- ----------- -------------- ------------
PARTNERSHIPS
ACC Acquisitions, LLC Dobson Rural service areas in 850 5.3 50.0%
Communications Minnesota, New York,
(American Cellular Corporation Wisconsin, Kentucky,
Corporation) Ohio, Michigan,
Pennsylvania, Tennessee
and West Virginia;
metropolitan service
areas of Duluth,
Minnesota; Orange
County and
Poughkeepsie, New York;
Eau Claire and Wausau,
Wisconsin; and Alton,
Illinois
AFFILIATES
Cincinnati Bell Cincinnati Bell Cincinnati and Dayton, 1900 3.4 19.9%
Wireless, LLC Wireless, LLC Ohio
TeleCorp PCS, Inc.*** TeleCorp PCS, Inc. Markets in Puerto Rico 1900 34.3 23.0%
and the U.S. Virgin
Islands, Louisiana,
Arkansas, Tennessee,
Massachusetts, New
Hampshire, Missouri and
Kentucky, including San
Juan, New Orleans,
Baton Rouge, Memphis,
Little Rock,
Manchester, Concord,
Nashua, Worcester, Cape
Cod and Martha's
Vineyard, Mississippi,
Kentucky, Tennessee,
Alabama and Georgia,
including Jackson,
Vicksburg, Nashville,
Knoxville, Clarksville,
Chattanooga, Dalton,
Huntsville, Mobile,
Montgomery, Birmingham,
Louisville and
Lexington
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850 OR 1900 LICENSED
MEGAHERTZ POPS OWNERSHIP
ENTITY PARTNER OR AFFILIATE MARKETS COVERED MARKET (IN MILLIONS)* PERCENTAGE**
------ -------------------- ----------------------- ----------- -------------- ------------
Triton PCS, Inc. Triton PCS, Inc. Markets in North 1900 13.3 15.9%
Carolina, South
Carolina, Georgia,
Virginia, Tennessee and
Kentucky, including
Fayetteville, Hickory,
Wilmington, Myrtle
Beach, Charleston,
Columbia, Hilton Head,
Florence, Augusta,
Savannah, Athens,
Norfolk, Richmond and
Roanoke
---------------
* Amount of U.S. population covered by licenses held by entity, as of March
31, 2001.
** As of March 31, 2001. Ownership percentages for Telecorp and Triton reflect
our ownership of common stock, assuming conversion of all currently
convertible preferred shares to common stock.
*** In November 2000, TeleCorp PCS, Inc. announced completion of its acquisition
of Tritel, Inc. As a result of completion of the transaction and certain
additional investments, we own 23.0% of the combined entity.
Continue to lower our operating costs and improve capital efficiency by
expanding our digital mobile wireless network and increasing the use of more
efficient channels of distribution
We believe that our success also will depend in large part on our ability
to continue to lower our operating costs, to have the flexibility to offer
various pricing plans and to be cost competitive. We already have taken a number
of steps to lower our operating costs associated with providing network service,
and are taking a number of initiatives to lower our marketing and sales costs.
Lower unit network costs and capital requirements. As described above, we
are expanding our footprint across the United States. We pay other wireless
providers negotiated roaming rates when our customers make or receive wireless
calls when located in other approved wireless providers' coverage areas. Because
roaming costs to the wireless provider can be significant or exceed the amount
charged to the subscriber, it is extremely advantageous to be able to provide
services on our network. As we build out our network to achieve these roaming
savings, we purchase equipment from multiple vendors and aggressively negotiate
with each vendor for volume discounts to reduce cost.
In the interim, we have been able to reduce roaming charges significantly.
We have been able to negotiate favorable roaming rates with most wireless
providers across the United States based upon volume and growth. In addition,
our proprietary intelligent roaming data base, or IRDB, directs wireless
subscribers to preferred service providers whenever they travel outside their
wireless home-coverage area. The data base maintains a list of wireless carriers
and their frequency bands, ranked by priority. This is designed to provide
service in more areas at favorable roaming rates. The updated data base is
downloaded over the air into each digital multi-network phone periodically. When
the data base is implemented during a call, the wireless phone scans all bands
to determine which service providers are available. The phone registers, or
"locks on," immediately if it finds that our service is sufficiently strong, the
top priority. If we do not offer service in the area, the data base instructs
the phone to search for an affiliate or a partner service provider. When an
affiliate or a partner is not available, the phone scans for a "favored" service
provider, one that is preferred over a carrier not categorized in the IRDB.
Lower marketing and sales expense. We have begun a number of initiatives
designed to lower our customer acquisition cost, as well as our customer care
expenses. For example, we have been actively seeking lower cost distribution
channels for our products and services. We are increasing the number of our
company-owned stores, which are one of the lowest cost channels for distributing
and signing up customers. As of March 31, 2001, there were approximately 585
company-owned stores throughout the United States. In addition, in June 1999, we
began using the Internet as a vehicle for customer acquisition, as well as for
customer care. In addition to allowing customers to sign up for wireless
services
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over the Internet, resulting in a lower cost to add a new subscriber than other
channels, subscribers can access their account and obtain answers to routine
inquiries that would otherwise require a customer care representative. Since its
introduction, the number of visits to our Internet site has grown to
approximately 3.4 million per month as of March 31, 2001.
Deploy a GSM Platform to Implement Third-Generation Services
Third-generation technologies will allow high-speed wireless packet data
services and ultimately voice services using Internet Protocol. In order to be
successful, any third-generation strategy must allow the wireless provider to
achieve a pervasive footprint quickly and cost effectively. In addition,
third-generation networks that achieve global economies of scale and allow for
global roaming will have a significant advantage. These third-generation
services should provide the speed and capacity necessary to support innovative
mobile multimedia applications including broader and more efficient access to
email systems, high speed web browsing, e-commerce applications, on-line games
and music downloads.
The fundamental technology standard that we have selected for our eventual
third-generation services is the same global standard that has been selected by
service providers throughout Europe, in Japan and in other parts of the world.
This standard, known as UMTS, for universal mobile telecommunications system,
has generally been accepted as the successor technology to the second-generation
digital technology known as GSM, for global system for mobile communications.
UMTS is also known as wideband code division multiple access.
Starting in the second half of 2001, we plan to deploy a GSM platform for
interim improvements in wireless data capabilities on the evolutionary path to
third-generation data services, as well as associated voice services. This
platform, which will be deployed as an overlay on our second-generation voice
network, will provide a cost-effective means for us to offer customers a wide
range of data service offerings earlier than previously planned using the
interim enhanced wireless data standards GPRS, which stands for general packet
radio service, and EDGE, which stands for enhanced data rates for global
evolution. These interim standards are expected to provide faster data speeds
than our current data network technology. Much of the GSM and GPRS equipment for
this overlay network is technologically mature and readily available in the
market today from a highly competitive source of supply. Similarly customer data
devices based on GPRS technology are also readily available. In the longer term,
this platform is expected to provide multi-media services using the anticipated
global standard of UMTS.
We plan to sell phones combining our current digital voice technology and
voice and interim enhanced data technologies that we expect to deploy in the
next few years, which would provide customers the benefit of access to our
current voice network as well as the new higher-speed data services. We are in
discussions with manufacturers to develop phones compatible with such services,
based on industry specifications. When these new data services become available,
we will be able to sell data service devices in a variety of forms (e.g.,
phones, handheld scheduling devices called personal digital assistants, or PDAs,
laptops), to address a broad range of customer needs. The eventual deployment of
third-generation technology in our network is expected to enable the
transmission of multimedia services (e.g., streaming audio and video) to
customer devices.
We plan to make interim enhanced data capabilities available on GPRS
technology available starting in 2001 and third-generation capabilities
available on EDGE technology starting in 2002. We currently plan to deploy
third-generation UMTS technology beginning in 2003, depending on the
availability of network equipment and customer devices.
Due to its broad international acceptance, the network equipment needed to
deploy a GSM technology platform is readily available in the market. The overlay
strategy also will allow us to utilize our existing cell site facilities and
spectrum. Because of these efficiencies, we expect that our network capital
expenditures over the period of deployment associated with the high speed data
technology in our third generation plans will be only modestly greater than our
earlier third-generation migration plan, but may occur in earlier periods.
The customer benefits of this strategy include earlier availability of a
broad array of enhanced and high-speed data services and devices, and enhanced
international roaming capability. Overall, this strategy
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provides us with an opportunity for more rapid and greater penetration of the
wireless data market than previously planned.
Target distinct consumer and business customer segments with wireless offers
that match their needs for voice and data services in order to increase our
subscriber base and revenue
We believe that one key to success in the wireless industry is the ability
to target customer segments and provide offers that match the needs of those
segments. Certain segments respond to pricing plans tailored to their usage
patterns while other segments are more attuned to customized service features.
We have been a leader in differentiating our services through our use of
targeted offerings and our introduction of new features and services.
AT&T Digital One Rate service. In May 1998, we introduced our AT&T Digital
One Rate service, which targets high value customers (i.e., customers that spend
over $60 per month on wireless services) who travel frequently and make frequent
long-distance calls. In August 2000, we introduced six new AT&T Digital One Rate
calling plans, giving customers more minutes for the same monthly charge. The
introduction of AT&T Digital One Rate service redefined the industry by charging
one rate with no roaming or long-distance fees for domestic calls across the
United States.
AT&T Regional Advantage and AT&T Digital Advantage services. We have
created other service plans because we believe there are other opportunities to
segment the market with simplified pricing plans. AT&T Regional Advantage is
designed for mobile individuals who travel across a multi-state, regional
calling area. When traveling in the regional area customers pay no roaming or
domestic long-distance charges. This program addresses customers that frequently
travel to neighboring states, but do not travel across the nation. We also offer
AT&T Digital Advantage for customers that spend most of their time within a
local area. AT&T Digital Advantage offers these customers a large number of
local minutes to use in their home calling area.
AT&T group plans. We have developed offers for groups that are in frequent
contact with a predetermined number of other wireless subscribers. For consumers
and small businesses, we developed the AT&T Shared Advantage Plan. With the AT&T
Shared Advantage Plan, each member has his or her own wireless number that
allows for unlimited calls between wireless numbers on the account within a
defined calling area. All of the users' charges are then provided on a single
wireless bill. For businesses, we offer AT&T Group Calling, the wireless
industry's first business offer with unlimited calling among a wireless group of
up to 200 subscribers and to as many as five wireline numbers within a
designated group calling area. AT&T Group Calling is designed for local, mobile
businesses, such as sales and service, delivery and distribution, dispatch and
contractors, that operate within a specific geographic area.
AT&T Corporate Digital Advantage program. The AT&T Corporate Digital
Advantage program was created for large and middle sized businesses. This
program combines simplified wireless purchasing and management with nationally
consistent service, airtime, and equipment pricing in all of our markets.
Prepaid Wireless Services. We market our current prepaid program under two
product names, depending upon the target segment. Free2Go Wireless targets the
youth market, while AT&T Prepaid Advantage targets the mass market. Both offer
digital prepaid wireless service as a pay-in-advance wireless product that
provides wireless communications to customers with no annual contract, no credit
check, no deposit and no monthly bill. In addition, both offer customers the
choice of a Local or National Calling Plan, the ability to use any compatible
Digital multi-network phone, access to enhanced digital PCS features, and both
plans include domestic long- distance for all calls placed in the United States.
Our prepaid wireless service is designed to meet the needs of customers that
want to manage their expenses, prefer to pay in cash, lack credit or have
difficulty obtaining credit.
Enhanced features. We have been an industry leader in the migration of
subscribers from analog to digital service. At March 31, 2001, over 95% of our
traffic is digital, which we believe is substantially greater than the average
for others in our industry. The ability to migrate customers to digital service
has permitted us to further differentiate our wireless offerings through
enhanced features. During October 2000, we announced the launch of AT&T Text
Messaging service. AT&T Text Messaging service allows subscribers to send and
receive short text messages from their compatible phones. We offer custom
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calling services, such as voice mail, call forwarding, call waiting and
three-way calling to all of our customers. The digital network allows us to
offer enhanced features to our customers, including extended battery life,
message waiting indicator, text messaging and caller ID. It also offers a
variety of other enhanced features, including enhanced directory assistance,
which enables callers to be connected to the party whose number is sought
without hanging up and redialing.
Benefits from AT&T Wireless Group's relationship with AT&T
We believe that our relationship with AT&T has provided us with significant
competitive advantages. As part of the split-off, AT&T entered into certain
contracts and other arrangements that after the split-off will be intended to
continue many of the advantages we enjoyed before the split-off. For more
information, please see "The Split-off" and "Our Relationship with AT&T
Following the Split-off." These continued advantages may include:
- use of the powerful AT&T brand name substantially in the same manner as
we have used up to now;
- an opportunity to use AT&T sales force through cross marketing
arrangements and, when appropriate and as may be agreed by us and AT&T,
to offer combinations of wireless services with other AT&T businesses;
- use of specified AT&T intellectual property and technology on license
terms as of the time of the split-off;
- use of the AT&T network on contractual terms; and
- potential benefits from certain of AT&T's purchasing contracts with
suppliers where already permitted by existing contracts or where
arrangements can be made with such suppliers.
AT&T brand. The AT&T brand is one of the best known and respected brand
names in the United States. We believe that the AT&T brand positively impacts
consumer awareness of, and confidence in, our products and services. In
addition, as competition in the wireless communications industry intensifies, we
believe that the power of a strong national brand plays an increasingly
important role in consumers' purchasing decisions.
Marketing. We believe that our relationship with AT&T has and can continue
to provide substantial marketing advantages. We will be able to enter into cross
marketing relationships with the AT&T sales force whereby AT&T's customers can
be solicited for wireless services. In addition, we and AT&T will have the
opportunity to cooperate in offers of combined services designed for targeted
markets.
Technology. We will continue to have the advantage of being able to use
not only intellectual property and technology but also, under license terms as
of the time of the split-off, specified AT&T's proprietary intellectual property
and technology as well as specified intellectual property that AT&T has the
right to use through licensing or other arrangements.
Purchasing power. AT&T is one of the largest communications carriers in
the world, and, as such, has substantial leverage in the industry with major
equipment and other suppliers. AT&T's ability to purchase large amounts of goods
has enabled it to obtain favorable pricing and other terms with those suppliers.
Through contractual and other arrangements, we may be able to participate in
certain of AT&T's supplier arrangements either directly or in making our own
purchasing arrangements where those arrangements allow for this and the vendors
agree to this. In addition, we have already developed our own relationships with
many of these vendors and believe that we will be able to effectively negotiate
independent agreements where necessary or appropriate.
Take advantage of wireless spectrum, digital networks, customer base and brand
with new growth initiatives, including wireless data and fixed wireless
opportunities
We have been an industry leader in developing new growth initiatives that
take advantage of our existing wireless spectrum, digital networks, customer
base and brand. Working with AT&T Labs and
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outside vendors, we have targeted two growth areas for near-term expansion:
wireless data and fixed wireless.
Wireless Data
We have been an industry leader in wireless data services since we
introduced the first packet-switched data network in March 1995, using cellular
digital packet data technology. Our packet data network currently covers a
population of 106 million. Our data network customers can also roam on the data
networks of other wireless providers. Cellular digital packet data is an
industry standard using Internet Protocol, which allows most applications
written for the Internet as well as many corporate applications to run
efficiently over the network without modification. Relative to data services
carried over circuit-switched analog or digital wireless networks, our
packet-switched data service is a significantly more cost effective means of
sending data for the majority of applications because it allows a channel to be
shared by many users. We believe that our early introduction of packetized
wireless data services provided us with a first mover advantage that
significantly contributed to our current leadership position. We also believe
that our successful deployment and operation of a wireless data network, and our
competitive position in that market, will provide us significant advantages in
the deployment of interim and third-generation technology networks and advanced
data applications and services.
The development of compelling data applications will be critical to the
growth in usage of wireless data network services. We are developing such
applications as well as supporting applications developed by third parties. We
expend considerable effort to sign up corporate customers to carry our
applications because these customers exhibit lower churn and often provide
relatively high revenue per subscriber. Examples of these applications include
those for public safety, dispatch, wireless credit card validation and automated
vehicle location. In addition, we have launched our consumer data service known
as "AT&T Digital PocketNet" service. This service provides customers with access
to the wireless Internet, including wireless web sites providing content,
shopping services and other Internet-based services such as email and personal
calendars. Because of the efficiencies in using our cellular digital
packet-based data network, we have been able to offer this service at flat rates
to customers who also subscribe to a certain wireless voice calling plan.
New devices are now driving the development of applications targeted more
broadly to consumers. These include applications involving hand-held devices,
like the Palm(TM) Vx units, as well as those involving phones and laptop
computers. Applications that are currently available allow users to access their
personal information, including contact lists and calendars, as well as email,
Internet content and two-way messaging services. We may collaborate with
Internet service providers or other content providers to develop devices and
applications suitable for wireless customers, as well as access to the Internet
service providers' communications services and online distribution channels.
Additionally, we have introduced new applications including e-commerce and
shopping services. By providing or facilitating these applications, we believe
we can generate new revenue streams and develop personalized relationships with
our customers.
We expect that the development and introduction of third-generation
networks will drive wireless data usage growth by offering greater bandwidth and
network coverage at lower costs. For our third-generation strategy, we have
decided to deploy another digital technology platform that will facilitate the
implementation of enhanced interim and third-generation data services.
In the fourth quarter of 2000, we and AT&T entered into an agreement with
DoCoMo, a leading Japanese wireless communications company, for DoCoMo's
investment in AT&T reflecting the financial performance and our economic value
and for the formation of a strategic alliance. The parties completed this
investment on January 22, 2001. For more information, please see "DoCoMo
Strategic Investment." In addition, we and DoCoMo formed a strategic alliance to
develop the next generation of mobile multimedia services on a global-standard,
high-speed wireless network. We created a new, wholly owned subsidiary to
develop and encourage the development of multimedia content, applications and
services offerable over our current network and a new, high-speed wireless
network built to global standards for third-generation services, such as graphic
presentation of data, video email, high-quality music downloads and streaming
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audio and video. Both we and DoCoMo will share technical resources and support
staffing of the new subsidiary. In addition, we will be able to license from
DoCoMo, without additional payment, rights to DoCoMo's "i-mode" technology and
related technology as long as the relationship is in effect and for 18 months
thereafter. We and DoCoMo will also become partners in the U.S. and Japan for
handling the roaming traffic in each other's network. Subject to some
exceptions, DoCoMo has agreed that in the U.S., Mexico or Canada, other than
through us, it will not undertake certain activities itself or form certain
relationships with third parties. We have made the same agreements with respect
to DoCoMo in Japan.
Fixed Wireless
We believe there is a significant business opportunity to use wireless
technology to provide residential and small business customers with high speed
broadband access coupled with wireline quality voice access. Fixed wireless
service provides customers with a high-speed packet data channel that can be
used by up to five data devices simultaneously (for example, five personal
computers simultaneously accessing the Internet) at download speeds of up to 512
kilobits per second. The service became capable of speeds of up to one megabit
per second in the fourth quarter of 2000. In addition, the offering provides up
to four lines of wireline quality voice telephony, including custom calling
features currently available over wireline networks (e.g., call waiting, caller
ID, three-way calling). The technology is currently serving customers in
Anchorage, Alaska, Dallas/Fort Worth and Houston, Texas and in San Diego and Los
Angeles, California, and as of June 2001, Oklahoma City, Oklahoma. As of March
31, 2001 we were serving more than 15,000 customers with this technology. We
initially had focused our deployment of fixed wireless in markets not covered by
AT&T's or its affiliates' broadband properties.
OUR BUSINESS
We offer wireless mobile and fixed voice and data communications service to
consumers and businesses in the United States, provide air-to-ground wireless
services and have interests in wireless providers in the United States and
internationally. Our mobile wireless voice services are capable of operating in
virtually all of the United States over our own network or our partners'
networks or through roaming agreements.
Services and products
Basic Services. We offer a variety of services for both voice and data
communications. Service can include wireless voice transmission as well as
custom calling services for digital services, such as extended battery life,
message waiting indicator, text messaging and caller ID. We also offer a variety
of other enhanced features, including enhanced directory assistance, which
enables callers to be connected to the party whose number was sought without
hanging up and redialing.
Specialized Wireless Offers and Services. We have developed a number of
specialized wireless offers and services to target distinct customer segments:
- AT&T Digital One Rate(SM)
- AT&T Regional Advantage and AT&T Digital Advantage services
- AT&T group plans
- AT&T Corporate Digital Advantage program
- Prepaid Wireless Services
- AT&T WorldConnect(R) service
The AT&T WorldConnect(R) service program allows our customers to make and
receive wireless calls for a flat roaming rate plus long-distance charges in
over 100 countries across Europe, Australia, Asia, Latin America, Africa and the
Middle East, all while using their existing wireless phone number. AT&T
WorldConnect(R) service enables customers to enjoy the convenience of wireless
service at rates less than those charged by many international hotels. A
customer using a GSM wireless phone with AT&T WorldConnect(R) service and a
laptop computer with a GSM compatible modem card is able to send and
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receive email and originate faxes, check a calendar, browse the Internet and
carry out other online transactions. AT&T WorldConnect(R) service also provides
discounted international calling from our markets in the U.S. and roaming with
our U.S. Digital multi-network phone in select countries. For simplicity,
international and domestic wireless charges are both included on the customer's
regular monthly AT&T Wireless bill. We describe each of the other specialized
wireless offers and services under "-- Strategy."
Data Services
Cellular digital packet data network service. As a packet-switched data
network, our current data network takes advantage of the fact that with many
data applications, data is sent in bursts with intermittent quiet periods, which
allows many users to share the network channel. As a result, relative to data
services carried over circuit-switched analog or digital wireless networks, our
cellular digital packet-switched data service is a significantly more
cost-effective means of sending data for the majority of applications because it
allows a channel to be shared by many users. For example, for many applications,
our packet-switched data network allows us to offer our customers unlimited
usage, most often for a flat monthly fee. This makes the data service on this
network service attractive for a variety of new applications. We have created
applications and offers using the cellular digital packet data network for
businesses, public agencies and consumers.
To date, corporations and public agencies have been significant users of
our packet data service. These customers typically use this service to carry
industry-specific applications. Examples of such applications include public
safety applications, dispatch applications, wireless credit card validation and
automated vehicle location services.
New devices are driving the development of broader applications targeted to
consumers. Users may access these applications with hand-held devices, like the
Palm Vx, as well as phones and laptop computers.
Applications on hand-held devices. For hand-held devices, we now have
access to CDPD-standard modems that work with the Palm Vx device. Users can
access Internet-based information from devices equipped with these modems. A
leading example of this is the OmniSky service available for the Palm Vx. With a
Palm Vx equipped with a modem that connects to our current packet data network,
an OmniSky subscriber can access email as well as several hundred content
providers that have created information specifically for hand-held devices.
Applications on phones. We have been instrumental in the formation of a
worldwide standard called the Wireless Application Protocol. This standard
allows a micro "browser" in a wireless phone to link into a gateway service in
our network in such a way that web developers can easily develop new services
available to wireless phone users.
In the first half of 2000, we launched AT&T Digital PocketNet service and
two new phones that combine our tri-mode voice capability, in analog and
digital, the latter in both 850 and 1900 megahertz, with a CDPD-standard modem
and a micro browser in a single package. We first developed our own wireless
data applications for phones four years ago with the introduction of AT&T
PocketNet service. We believe that the introduction of these new phones has and
will continue to accelerate the adoption of AT&T Digital PocketNet service as
well as drive the introduction of new applications.
AT&T Digital PocketNet service for businesses. In the first quarter of
2000, we introduced AT&T Digital PocketNet service for businesses. This service
allows corporations to build applications that provide access to corporate
intranet information to employees who are out of their offices. Two key
applications illustrate this service. The first is Mobile Services for Domino,
which is available from International Business Machines Corporation/Lotus
Development Corporation. This application provides for real time access to Lotus
Notes email, calendar and contacts from compatible phones available from us via
AT&T Digital PocketNet service. The second application provides similar
capabilities using Microsoft Exchange email and Outlook calendar/contacts
information. We are offering this service in cooperation with Wireless Knowledge
LLC. These applications open up the ability for Lotus Notes and Microsoft
Exchange users to
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have real time and easy control of their email and other corporate information
when away from their offices. All of these are currently available at flat
monthly rates, and can be bundled with AT&T Digital One Rate service or any of
our other wireless voice rate plans.
AT&T Digital PocketNet service for the consumer. In May 2000, we announced
the launch of a version of AT&T Digital PocketNet service for the consumer. As
with AT&T Digital PocketNet service for businesses, these services provide
unlimited usage at flat monthly rates. With the consumer version, customers can
browse a variety of consumer oriented branded and nonbranded content including
news, sports, financial information, directories, directions, travel
reservations and weather. In addition, applications that allow consumer users to
shop, access their personal information, including contact lists and calendars,
and read, write and respond to emails are also available. We currently offer
applications and services from approximately 100 content providers. In the third
quarter of 2000, we announced that we have chosen Qpass to provide AT&T Digital
PocketNet subscribers the ability to easily and securely buy content, goods and
services via their Internet enabled phones.
In the future, we expect a number of additional applications will be
developed, including instant messaging shopping services and services that are
enhanced by information about the user's location. By providing or facilitating
such applications, we believe we can generate new revenue streams, as well as
develop personalized relationships with our customers.
AT&T Text Messaging service. For the last several years we have offered
digital customers the ability to receive and store short alphanumeric messages
and pages right on their wireless phones. In October 2000, we launched AT&T Text
Messaging service, which allows customers to send, receive and reply to short
text messages from any compatible digital wireless phone. We provide customers
the choice to either pay on a per message basis or purchase a bucket of messages
for use each month. AT&T Text Messaging service also allows customers to receive
updated news, sports, weather and other relevant information in the form of
short text messages. Two-way text messaging is extremely popular in Europe and
Asia, and we view AT&T Text Messaging as an important part of our overall offer
portfolio in the future.
Products. We offer a variety of products as complements to our wireless
service, including handsets and accessories, such as chargers, headsets, belt
clips, faceplates and batteries. As part of our basic service offering, we
provide easy-to-use, interactive menu-driven handsets that can be activated over
the air. These handsets primarily feature word prompts and menus rather than
numeric codes to operate handset functions. Some handsets allow mobile access to
the Internet.
In addition, we offer tri-mode handsets, which are handsets compatible with
analog and digital networks, the latter with 850 and 1900 megahertz frequencies
and service modes. Tri-mode handsets permit customers to roam across a variety
of wireless networks and incorporate our proprietary intelligent roaming data
base system, which is designed to provide service in more areas at favorable
roaming rates. We offer our customers use of Nokia, Ericsson, Mitsubishi and
Motorola handsets. Tri-mode handsets offer significantly extended battery life
over earlier technologies, providing up to 14 days of stand-by battery life.
Handsets operating on a digital system are capable of sleep-mode while turned on
but not in use, thus improving efficiency for incoming calls, as users will be
able to leave these phones on for significantly longer periods than they can
with wireless phones using an earlier technology. The tri-mode handsets further
extends battery life by using a digital system for roaming when in areas covered
by digital systems.
Marketing
We develop customer awareness through our marketing and promotion efforts
and have been a leader in differentiating our products through our use of
targeted pricing plans and the introduction of new products and services. We
also use the AT&T brand name, provide superior customer care and may continue to
be able to engage in cross marketing arrangements with the AT&T sales force and,
when appropriate and as may be agreed with AT&T, to offer certain of our
services combined with the communications services offered by AT&T under the
terms of agreements to take effect at the split-off.
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Targeted marketing. We target groups of customers who share common
characteristics or have common needs. Common characteristics may be usage
(frequent travelers), social group (families), age (youth market) or any other
distinctive measure. We then attempt to create a compelling offer by combining
rate plans, product promotions and features that meet the particular needs of
that targeted group and that we can provide at a competitive advantage. We have
expanded our targeted marketing efforts to include groups of customers who are
more casual or lower-minute users, and as a result expect to experience upward
pressure on churn rates. Also consistent with this strategic initiative, we
expect to continue to experience a decrease in average revenue per user.
The AT&T brand name. We prominently feature the AT&T brand name and logo
on our products and services. We have benefited from AT&T's national advertising
to build our brand awareness. We believe that the use of the AT&T brand name,
one of the most well known in the United States, will continue to be a distinct
marketing advantage.
Marketing with AT&T. We have had the opportunity to cross market with
AT&T's other divisions and capitalize on the size and breadth of AT&T's customer
base in long-distance and broadband service. After the split-off, we may
continue to have certain marketing opportunities with AT&T, as set forth in the
terms of agreements to become effective at the time of the split-off.
Customer care and support
We place a high priority on providing our customers with the best customer
care and support. J.D. Power and Associates' 2000 U.S. Wireless Customer
Satisfaction Survey rated us the highest in overall customer satisfaction in
nine out of 12 markets studied. In two of the nine markets, we were tied for
first place. We employ approximately 7,050 customer care representatives located
in 14 call centers and contract for outsourced customer care service with
approximately 2,800 additional representatives in eleven locations. In addition,
subscribers can access their account and obtain answers to routine inquiries
through our website. Customers can reach our customer care representatives or
access our website on a 24 hour/seven day a week basis for answers regarding
their service, activation, changing service plans and other service options.
Customer care representatives are accessible from any point within the network
on an AT&T Wireless Services handset at no charge or through any other telephone
by calling a toll-free number. In addition, certain large enterprise customers
may utilize a customized extranet for ease of customer service.
As part of our customer care program, we seek to identify customers who are
at risk of changing service providers. In these cases, we have programs that
assist customers in upgrading their equipment to the latest technology, in
changing their rate plan so they are on a plan that is appropriate for their
calling needs and in understanding how to get the full benefits from their
service. We communicate these programs through individualized and general
communications, and utilize these programs to minimize the risk of customers
switching to another service provider.
Sales and distribution
We market our wireless services in our managed markets under the AT&T brand
name. We market wireless services to business and residential customers through
a direct sales force of approximately 2,100, through sales points of presence in
approximately 585 company-owned stores, and kiosks and other customer points of
presence, including the Internet and inbound call centers, and through local and
national non-affiliated retailers throughout the United States. If agreed upon
by AT&T and AT&T Wireless, AT&T's sales force may sell wireless services to
customers as part of offerings of AT&T services to those customers.
We also rely upon dealers to market our services in some locations. Dealers
are independent contractors that solicit customers for our service, and,
typically, include specialized wireless stores, specialized electronics stores
and department stores. We generally pay our dealers a commission for each
customer that uses our service for a specified period, and may make residual or
account management payments to the dealer based on the customer's ongoing
service charges.
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We have begun a number of initiatives designed to lower our costs of adding
subscribers as well as our customer care expenses.
Rates and billing
Our charges may include fees for service activation, monthly access,
per-minute airtime and customer-calling features, which may include a fixed
number of minutes or packets of data per month at a set price. We generally
offer a variety of pricing options, most of which combine a fixed monthly access
fee for a fixed number of minutes or packets of data and additional charges for
usage in excess of those allotted. Customers may also incur long-distance and
roaming fees. We manage our exposure to bad debt by reviewing prospective
customers for creditworthiness and by deactivating accounts that reach a
specific date past due.
Other assets
We also possess certain other assets not described above. The most
significant of these assets include a number of equity interests in
international wireless operations and an air-to-ground wireless operation.
International. We own minority interests in wireless carriers in a number
of countries including Canada, India, Europe, Southeast Asia and Taiwan. Our
international objectives are focused on enlarging our footprint to extend
throughout North America as well as enhancing our ability to service the global
needs of our multinational customers. To achieve our international objectives,
we may, from time to time, acquire interests in additional entities or dispose
of or consolidate our existing international holdings.
POPS COVERED
COUNTRY ENTITY DESCRIPTION (IN MILLIONS)(1) OWNERSHIP(2)
-------------- ----------------------- ----------------------- ---------------- ------------
Canada Rogers Wireless Nationwide TDMA network 28 34.4%(3)
Communications, Inc.
Czech Republic EuroTel Praha, spol. Nationwide NMT 450 and 10 24.5%(4)
s.r.o GSM 900 networks
India Birla AT&T GSM networks in Goa, 37 49%(5)
Communications Ltd. Gujarat and
Maharashtra, India
India BPL Cellular Ltd. GSM networks in Tamil 52 49%(4)
Nadu, Kerala, and
Maharashtra
Indonesia PT AriaWest Fixed line local NA 35%(4)
International network and unbuilt PCS
license in West Java
Malaysia Maxis Communications GSM 900 wireless and 16 12.6%(4)
Bhd fixed domestic &
international networks
Slovakia EuroTel Bratislava a.s. Nationwide NMT 450 and 5 24.5%(4)
GSM 900 networks
Taiwan Far EasTone Nationwide GSM 900 and 22 22.7%(6)
Communications Ltd. 1800 networks
---------------
(1) Amount of population covered by the entity's network in its country, as of
March 31, 2001.
(2) As of March 31, 2001, except as to Canada, which is as of July 5, 2001.
(3) Our long-standing relationship with Rogers Wireless allows two of North
America's largest providers of service based on time division multiple
access, or TDMA, technology to offer cross-border capabilities. Wireless
customers throughout Canada can enjoy wireless services under the Rogers
AT&T Wireless name. This arrangement increases our built network North
American population coverage by 28 million. During the first quarter of
2001, we made unsecured term loans to Rogers Wireless to pay for spectrum it
successfully bid upon in recently completed Canadian spectrum auctions. In
April 2001, Rogers Wireless effected a rights offering of its equity
securities in which our
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joint venture entity with British Telecommunications, JVII, participated.
The participation increased JVII's ownership interest in Rogers Wireless to
34.36%. On July 3, 2001, we acquired British Telecommunications' interest in
JVII for approximately $380 million in cash. As a result of this
acquisition, we now own 100% of JVII, and, through JVII, hold a 34.36%
ownership interest in Rogers Wireless Communications, Inc.
(4) In October 2000, we completed our acquisition of several equity interests in
international ventures acquired by AT&T as a result of its acquisition of
MediaOne in June 2000. We paid approximately $1 billion to AT&T for these
properties, which was based upon a third-party valuation. In March 2001, we
entered into an agreement with other shareholders of Maxis Communications
Bhd for the sale of our entire interest in that entity and the resolution of
claims asserted by these shareholders in an arbitration proceeding. We do
not expect the transactions to have a material impact on our financial
position, results of operations or cash flows.
(5) In the fourth quarter of 2000, Birla AT&T executed definitive documents for
two transactions that will expand its coverage area in India. First, Birla
AT&T entered into an agreement to merge with the wireless operations of Tata
Cellular, Ltd. Tata Cellular, Ltd. owns and operates a cellular business in
the Indian state of Andhra Pradesh. The transaction received conditional
court approval in the second quarter of 2001. Final approval is expected
prior to the close of the third quarter of the year. When completed we will
own a 33% stake in the new merged entity. In a second transaction, we, Birla
AT&T and Tata Cellular, Ltd. completed a cash acquisition of cellular
operations in the Indian state of Madhya Pradesh. Each acquiror will
contribute their interest to the new merged Birla AT&T/Tata Cellular, Ltd.
entity concurrent with the completion of the merger. Subsequent to the
contribution, the post-merger entity will have covered population of
approximately 63 million. On June 27, 2001, we entered into a preliminary
agreement to consolidate the post-merger Birla AT&T/Tata Cellular entity
with BPL Mobile Communications Ltd. and some portions of BPL Cellular Ltd.
BPL Mobile Communications Ltd. owns and operates a cellular business in the
city of Mumbai, India. It is currently owned by BPL Communications Ltd.
(74%) and France Telecom (26%). BPL Cellular Ltd., a company owned by BPL
Communications Ltd. (51%) and AT&T Wireless (49%), owns and operates
cellular businesses in the Indian states of Maharastra, Kerala and Tamil
Nadu. In connection with the planned consolidation, BPL Cellular Ltd. will
separate its Maharastra cellular business and only combine its Kerala and
Tamil Nadu cellular businesses with those of the post-merger Birla AT&T/Tata
Cellular entity and BPL Mobile Communications Ltd. There can be no assurance
that the consolidation will occur. The preliminary agreement is subject to a
number of conditions, including obtaining approvals of the boards of all of
the participants to the consolidation. If all conditions are satisfied and a
consolidation occurs as contemplated in the preliminary agreement, we
estimate that our direct and indirect ownership will be approximately 25% of
the consolidated entity.
(6) In September 2000, we signed an agreement to exercise our options to
purchase additional shares of stock in Far EasTone. In December 2000, we
completed this transaction, investing an additional $205 million, resulting
in a total ownership interest of 22.7%.
In the first quarter of 2000, we were allocated a portion of AT&T's
interest in Japan Telecom, which provides local, long-distance, Internet and
mobile wireless communications to businesses and consumers in Japan. AT&T's
interest in Japan Telecom is held through a joint venture with British
Telecommunications. On April 27, 2001, AT&T completed the sale of its entire
interest in Japan Telecom for approximately $1.35 billion in cash. AT&T
attributed $0.5 billion of the net after-tax proceeds from the sale to us. We
recognized an after-tax gain of $298 million associated with the transaction,
which was recorded in net equity earnings from investments in the second quarter
of 2001.
Air-to-ground. Our Aviation Communications Division provides air-to-ground
communications services. A minority ownership interest in this division is held
by Rogers Wireless.
Our Aviation Communications Division owns and operates a network of
ground-based and airborne telecommunications equipment and related assets that
deliver digital telephone service to commercial and private aircraft in North
America. Our Aviation Communications Division's North American installed
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customer base represents over 1,500 commercial aircraft. Our North American
Terrestrial System network of ground stations provides coverage on substantially
all major routes flown by our commercial airlines customers equipped with the
Aviation Communications Division's telephony equipment. Outside the United
States, our Aviation Communications Division is a supplier of airborne
telecommunications equipment and product support to airlines and other service
providers, with a current installed customer base of over 300 commercial
aircraft. Our Aviation Communications Division also serves general aviation
aircraft.
Wireless network
Our ownership position in U.S. markets was obtained through FCC comparative
hearings, FCC auctions and the FCC lottery and settlement process as well as
through acquisitions of, and purchases and exchanges of, operating systems and
licenses from or with other wireless service licenses. We continue to
participate in FCC spectrum auctions or other acquisitions of licenses when
commercially and strategically reasonable to do so. We may enter into agreements
with third parties with regard to their participation in such auctions, within
the parameters legally permitted and disclosed to the extent required by law. We
agreed to invest $2.6 billion in exchange for a combination of a non-controlling
equity interest in and debt securities issued by Alaska Native Wireless, LLC, in
connection with Alaska Native Wireless' successful bids in the C and F Block
reauction (FCC Auction 35), which ended January 26, 2001. At the conclusion of
the auction, Alaska Native Wireless was the high bidder on approximately $2.9
billion in licenses. One auction participant has challenged the qualifications
of Alaska Native Wireless to acquire "closed" licenses, which constituted most
of the licenses for which Alaska Native Wireless was the successful bidder. In
addition, the trustee in NextWave Telecom, Inc.'s Chapter 11 bankruptcy
proceeding and the unsecured creditors of NextWave commenced litigation that
challenged the right of the FCC to re-auction the 1900 megahertz licenses that
NextWave acquired in prior FCC auctions but which were later reclaimed by the
FCC. On June 22, 2001, a federal appeals court ruled in favor of the trustee in
the Chapter 11 bankruptcy proceeding of NextWave Telecom, Inc. and the unsecured
creditors of NextWave with respect to that litigation. The court ruled that the
FCC had acted improperly in repossessing from NextWave the spectrum sold in the
1900 megahertz auction, and that the spectrum should be returned to NextWave.
The FCC had indicated prior to the auction that the spectrum would be returned
to NextWave if the court were to rule that the spectrum had been improperly
repossessed. If this decision is not successfully appealed, or settled, or if
Alaska Native Wireless is otherwise unable to acquire the licenses for which it
was the successful bidder, it could have a significant adverse impact on our
plans to provide or enhance services in key new and existing markets.
Our spectrum, together with the spectrum of our affiliates and partners,
which does not include Alaska Native Wireless, would be sufficient to serve over
70 of the top 100 markets with our selected third-generation technology, UMTS.
Although Alaska Native Wireless is obligated to use technology that is
compatible and interoperable with our digital mobile wireless network, no
commitments have been made by Alaska Native Wireless concerning the deployment
of the licenses for which it was high bidder and not all affiliates may be
obligated to implement our third-generation technology strategy. Under certain
conditions, and in addition to other means by which they may transfer their
interests, the other owners of Alaska Native Wireless have the right to require
us to purchase their equity interests. If this right were exercised five years
after license grant, the price could be as much as approximately $950 million
and would be payable, at our option, in cash or marketable securities. The
amount would be less if the right were exercised earlier. Formal grant to Alaska
Native Wireless of the licenses successfully bid upon in the auction has not yet
occurred and is subject to resolution of the matters described above and
administrative procedures.
Mobile wireless network
Coverage. As of March 31, 2001, our built network, including partnership
and affiliate markets, covered 98% of the U.S. population, including operations
in all 50 of the largest U.S. metropolitan areas. Our wireless network operates
using both 850 megahertz and 1900 megahertz licenses. Where agreements
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are in place, we are able to offer service to customers of other wireless
providers when they travel through our service area, and our subscribers can
roam through other wireless providers' service areas.
Analog and digital technologies. We offer both analog and digital service
in our 850 megahertz markets and digital service in our 1900 megahertz markets.
We believe that digital technology offers many advantages over analog
technology, including substantially increased network capacity, greater call
privacy, enhanced services and features, lower operating costs, reduced
susceptibility to fraud and the opportunity to provide improved data
transmissions. Moving customers to digital service has been a key component of
our overall wireless strategy. Digital service enables us to provide added
benefits and services to our customers, including extended battery life, caller
ID, text messaging and voicemail with message waiting indicator.
We have pursued a strategy to convert our analog networks and subscriber
base to digital. The primary goals of this program are capacity expansion, cost
reduction, and product improvement. As of March 31, 2001, over 92% of our
consolidated subscribers use digital service, accounting for over 95% of our
traffic.
As we grow our customer base and add new services and applications, such as
data services, we will need to increase capacity to support higher network
traffic. Digital voice paths require less radio frequency spectrum capacity than
do analog voice paths. Further capacity improvements are possible using other
digital techniques, and we believe that we are currently yielding from our
digital mobile systems as much as four times the capacity of an analog system
using equivalent spectrum. Further capacity improvements are possible using
other digital techniques that would yield as much as or more than six times
analog capacity. We and our suppliers currently are developing and intend to
deploy such additional capacity-enhancing technology within our existing
spectrum.
We intend to deploy our national GSM digital technology platform, adding
interim enhanced wireless data services using GPRS technology as well as
third-generation EDGE technology within our existing spectrum resources, and
eventually including third-generation capabilities using UMTS technology,
largely using our existing spectrum resources. The deployment of new technology
is expected to be one factor that increases the spectrum efficiency of our
existing digital mobile network, in combination with increased network capacity
through cell site construction. We believe that our competitors that have not
converted to digital will not have the same flexibility in deploying high-speed
data services.
We believe that our continued success depends on having a competitive cost
structure. In addition to enhancing capacity, digital technology allows us to
produce network minutes with less capital and operating expense than analog
technology. Not only is the cost of digital network equipment lower per voice
path than analog network equipment, but also fixed costs, such as towers,
shelters and other common equipment, are reduced by spreading them over a larger
number of minutes. Digital has also allowed us to improve our roaming costs
substantially using over-the-air programming, which enables phones to select the
most cost-effective roaming partners. We believe that our prompt implementation
of digital technology gives us a cost advantage over our competitors that are
more dependent on analog.
Moving customers to digital service is a key component of our overall
wireless strategy. Digital technology provides a host of feature improvements to
our customers. To date, we have delivered on our digital networks such features
as caller ID, voicemail with message waiting indicator, short alphanumeric
message service, and Wireless Office Service.
TDMA network. We chose time division multiple access, or TDMA, technology
for our second-generation voice digital network, although we do operate a small
number of markets utilizing code division multiple access, or CDMA, that were
operating that technology when we acquired them. TDMA permits the use of
advanced tri-mode handsets that allow for roaming across analog and digital
systems and across 850 megahertz and 1900 megahertz spectrums. This digital
technology allows for enhanced services and features, such as short alphanumeric
message service, extended battery life, added call security and improved voice
quality. TDMA's hierarchical cell structure enables us to enhance network
coverage with lower incremental investment through the deployment of smaller,
lower range cell sites than
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are generally used. This enables us to offer customized billing options and to
track billing information per individual cell site, which is practical for
advanced wireless applications such as fixed wireless and wireless office
applications. TDMA technology served an estimated 61 million subscribers
worldwide and 30 million subscribers in North America as of December 31, 2000,
according to the Universal Wireless Communications Consortium, an association of
TDMA service providers and manufacturers. TDMA equipment is available from
leading telecommunication vendors such as Lucent, Ericsson and Nortel Networks
Inc. A number of other wireless service providers have chosen CDMA or GSM as
their current digital wireless technology. We intend to deploy an overlay of GSM
technology to our TDMA network, as part of our third-generation development
strategy.
Cellular digital packet data network
Our existing network utilizing packet-switched data technology, called
CDPD, covers a U.S. population of 106 million as of March 31, 2001, which
represents approximately 55% of our built network. Our customers on this data
network can roam on the data networks of other wireless providers who use the
same cellular digital packet data technology, which, together, cover additional
U.S. population of 74 million. Cellular digital packet data is an industry
standard using Internet Protocol, which allows most applications written for the
Internet as well as many corporate applications to run efficiently over the
network without modification. Using this technology, data files and transactions
are divided into small packets and sent on a dedicated wireless channel. In many
data applications, data is sent in bursts with intermittent quiet periods.
Packet transmission technologies take advantage of this fact and allow user data
to be efficiently carried on the same network channel. As a result, relative to
data services carried over circuit-switched analog or digital wireless networks,
our packet-switched data service is a significantly more cost-effective means of
sending data for the majority of applications because it allows many users to
share the same channel.
Third-generation development strategy
Third-generation technologies will allow carriers to provide high-speed
wireless packet data services and ultimately voice services using Internet
Protocol. We believe that a sound third-generation strategy should allow the
wireless provider to achieve a pervasive footprint quickly and cost effectively.
In addition, we believe third-generation networks that achieve global economies
of scale and allow for global roaming will have a significant advantage. We had
previously chosen TDMA-EDGE as our next generation wireless architecture, to be
deployed on our TDMA network platform, as a means of accomplishing all of these
goals. With this strategy, we expected to be able to offer initial TDMA-EDGE
services sometime in 2002, with substantial deployment continuing into 2003.
However, in November 2000, we announced that we have selected for our
eventual third-generation services the technological standard that is the same
global standard that has been selected by service providers throughout Europe,
in Japan and in other parts of the world. This standard, known as UMTS (for
universal mobile telecommunications system), has generally been accepted as the
successor technology to the second-generation digital technology known as GSM
(for global system for mobile communications). UMTS is also known as W-CDMA, or
wideband code division multipleband access. Despite the similarity of the
acronyms, CDMA 2000 and W-CDMA are not compatible.
To accelerate the availability of enhanced data services offerings, we
recently announced plans to deploy a GSM platform for interim improvements in
wireless data capabilities on the evolutionary path to third-generation
services, as well as associated voice services. This platform will be deployed
as an overlay on our second-generation voice network. GSM platform deployment is
planned to begin in the second half of 2001. We plan to make interim enhanced
data services available using GPRS technology deployed on the GSM network
starting in 2001. Third-generation EDGE technology service is expected to be
available in 2002. We currently plan to deploy third-generation UMTS technology
beginning in 2003, depending on the availability of network equipment and
customer devices. By making services on GPRS technology available in 2001, we
expect to be able to make enhanced data services available to customers earlier
than our originally planned deployment of TDMA-EDGE in 2002.
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Due to its broad international acceptance, the GSM platform equipment
needed is readily available in the market. The overlay strategy also will allow
us to use our existing cell site facilities and spectrum. Because of these
efficiencies, we expect that our network capital expenditures associated with
the high speed data technology included in our third-generation plans over the
period of deployment will be only modestly greater than our earlier
third-generation migration plan, but may occur in earlier periods.
Like our current packet data network, the technology standards we have
selected for our enhanced and third-generation data services strategy are also
Internet Protocol based. As a result, we expect that our near term use of our
existing packet data network to develop innovative solutions will provide
migration for our data customers. We expect that all the applications developed
and deployed today will migrate to GPRS-based and eventually to EDGE-based
services as customers upgrade their equipment to the new technologies to be
deployed. However, when deployed using GPRS and EDGE technologies, these
applications are expected to operate at higher speeds where deployed.
This plan is expected to enable us to provide customers with earlier
availability of a wide range of data service offerings on a broad array of
devices (phones, personal data assistants or PDA's, laptops, etc.). We plan to
sell handsets combining our current TDMA transmission technology and the GSM
technology platform we plan to deploy with enhanced and third-generation GPRS
and EDGE technologies, which would provide customers the benefit of access to
our current voice network as well as the new enhanced and high-speed data
services when available. Industry specifications for the combined technology
handsets were jointly developed by the Universal Wireless Communications
Consortium and the North American GSM Alliance. We are in discussions with
manufacturers to develop such devices.
In November 2000, AT&T announced nonbinding letters of intent with
Ericsson, Lucent Technologies, Nokia and Nortel Networks for third-generation
network equipment and, in the case of Nokia and Ericsson, for future generation
wireless customer terminals. We began negotiating definitive agreements with
these and other vendors during the fourth quarter of 2000 and have executed
several of these agreements.
Fixed Wireless
Fixed wireless service provides customers with a high-speed packet data
channel that can be used by up to five data devices simultaneously (for example,
five personal computers simultaneously accessing the Internet) at download
speeds of up to 512 kilobits per second. The service became capable of speeds of
up to one megabit per second in the fourth quarter of 2000. In the future, the
fixed wireless technology may evolve to provide higher than one megabit of
bandwidth per second. Currently, the offering provides expansion up to four
lines of wireline quality voice telephony, including custom calling features
available today over wireline networks (e.g., call waiting, caller ID, three-way
calling).
Both the data and voice channels are delivered over the existing telephone
wiring within the residence or small business premises, allowing customers to
utilize their existing telephones. Once connected to the existing telephone
wiring within the premises, the fixed wireless equipment (in combination with
installation of third party hardware) supports multiple simultaneous PC
connections to the Internet within the premises. Data and telephone equipment
are connected within the premises using the standard jacks that already exist on
the premises. All data transmissions are secured for customer privacy and fraud
protection by use of proprietary protocols. Voice transmissions are encrypted
for customer privacy and fraud protection.
The data aspect of fixed wireless service will be further developed to
create an environment in which customers may select and easily change their
third party Internet service provider.
In order to install fixed wireless service in a customer's premises, we
must mount a flat panel antenna on the outside of a customer's premises and
certain electronic equipment, including a backup battery supply, inside the
premises. Once installed, the antenna on the customer's premises communicates
with a neighborhood antenna and base station that, in many cases, shares its
physical location with an antenna
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and base station site used to serve our mobile wireless service. Thus, in many
cases the mobile and fixed wireless networks will share a common infrastructure
for towers and base station sites.
COMPETITION
Competition for subscribers among wireless service providers is based
principally upon the services and features offered, call quality, customer
service, system coverage and price. Our ability to compete successfully will
depend, in part, on our ability to anticipate and respond to various competitive
factors affecting the industry, including new services that may be introduced,
changes in consumer preferences, demographic trends, economic conditions and
pricing strategies. Increased competitive pressures, the introduction of
popularity of new products and services, including prepaid phone products, as
well as a general softening of the economy, could adversely affect our results,
increase our churn and decrease our average revenue per user. Our primary
national competitors are Cingular, Verizon Wireless, Nextel Communications,
Inc., Deutsche Telekom/VoiceStream Wireless and Sprint PCS.
In addition, the wireless communications industry has been experiencing
significant consolidation and we expect that this consolidation will continue.
The previously announced, or recently completed, mergers or joint ventures of
Bell Atlantic/GTE/Vodafone AirTouch (now called Verizon), SBC/Bell South/
Ameritech (now called Cingular) and Deutsche Telekom/VoiceStream Wireless have
created large, well-capitalized competitors with substantial financial,
technical, marketing and other resources to respond to our offerings. These
mergers or ventures have caused our ranking to decline to third in U.S. revenue
and U.S. subscriber share. In terms of U.S. population covered by licenses, or
POPs, we, including partnerships and affiliates, rank third. As a result, these
competitors may be able to offer nationwide services and plans more quickly and
more economically than us and to obtain roaming rates that are more favorable
than those we obtained, and may be better able to respond to our offers.
Our cellular operations have always experienced direct competition from the
second cellular licensee in each market. Beginning in 1997, we began
experiencing competition from as many as six license holders in certain markets.
Competition from new providers in our markets will continue to increase as the
networks of license holders are built out over the next several years. In
addition, the FCC is likely to offer additional spectrum for wireless mobile
licenses in the future using existing or new technologies. See also "Risk
Factors -- Risk Factors Relating to the Split-off -- AT&T's restructuring may
adversely impact our competitive position."
PATENTS AND TRADEMARKS
We, AT&T and our respective subsidiaries own numerous patents in the United
States and foreign countries. The foreign patents are generally counterparts of
the U.S. patents. Our U.S. patents and licensed patents have remaining lives
generally ranging from one to 19 years. Our foreign patents and licensed patents
have remaining lives generally in a similar but shorter range as our U.S.
patents. Many of these patents are licensed to others and AT&T, and our
subsidiaries are licensed to use certain patents licensed from others. Until
now, patents sometimes have been managed by the AT&T group originating or
utilizing the patent, and sometimes have been managed by a different AT&T group;
patents utilized by us have been managed by the group that has managed it
historically. After the split-off, we and AT&T Common Stock Group will
cross-license to each other their patents owned as of the time of the split-off
as well as certain patents issuing from patent applications pending at the time
of the split-off. This arrangement is intended to preserve each group's right to
use the patents managed by the other group, or with respect to which either has
the power to grant such rights, for appropriate business activities. There will
be no royalty or licensing fees related to these arrangements for patents owned
by the respective group.
AT&T has numerous trademarks registered throughout the world. AT&T
considers many of its trademarks to be valuable assets, particularly the AT&T
brand name and globe logo. We currently have access to these trademarks,
including the AT&T brand name and globe logo, in the United States and other
countries. After the split-off, we will be licensed by AT&T to use a number of
AT&T's trademarks
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that we have been using to date, including the AT&T brand name and globe logo.
The initial term of the license will be five years, with the right to renew the
license for an additional five years. The license will be royalty free, but will
include a brand maintenance fee computed as a percentage of our gross revenue on
services using the licensed trademarks. That percentage during the initial term
declines over one- or two-year increments; and, during the renewal term, the
percentage remains at the percentage set for the final year of the initial term.
This license will be exclusive and world-wide for wide-area mobile cellular
wireless services, with the exception of certain countries in which AT&T has
already licensed the brand for these services. The license to use the brand for
fixed wireless is non-exclusive and is limited to residential markets, and if
certain preconditions are met, the license may be extended to small business
markets; but in neither case does the license extend to the service areas of
cable systems currently owned and operated by AT&T (other than in certain areas
of Dallas, Texas) or in which AT&T currently has an attributable ownership
interest, or to certain designated market areas.
In total, these patents, patent applications, trademarks and licenses are
material to our business.
EMPLOYEES
As of March 31, 2001, we employed approximately 29,500 individuals in our
operations, including our fixed wireless operations, virtually all of whom are
located in the United States.
PROPERTIES
Our corporate headquarters consist of leased office space in six buildings
in Redmond, Washington occupying approximately 582,000 combined square feet. We
also have additional administrative office space in approximately 120 buildings
throughout the United States and maintain 16 customer service centers. Our
customer service centers are located in the following cities:
- Anaheim, California
- Austin, Texas
- Bethlehem, Pennsylvania
- Bothell, Washington
- Greensboro, North Carolina
- Harrisburg, Pennsylvania
- Livermore, California
- Minneapolis, Minnesota
- Oklahoma City, Oklahoma
- Orlando, Florida
- Paramus, New Jersey
- Plano, Texas
- Portland, Oregon
- Sacramento, California
- San Francisco, California
- Santa Rosa, California
We lease all of our office space, with the exception of three buildings in
Alaska, Hawaii and Florida, which we own. Our total national office space,
including our corporate headquarters, administrative office space and customer
service centers, totals approximately 4,913,000 square feet.
We also operate approximately 585 company stores, four of which are in
facilities in Hawaii and Florida that we own and the remainder of which are in
leased facilities. Moreover, we operate 190 kiosks that are located in shopping
malls or within another retail store.
We store inventory and conduct distribution from numerous small facilities,
none of which are significant to our business.
At the end of December 31, 2000, we own, or control through leases or
licenses, approximately 14,000 properties consisting of cell and switching
equipment sites, and other plant and equipment used to provide wireless
communications services. These leases generally have a term of five years with
four options to renew for another five years. These properties are located
throughout 43 states and each of which occupies less than 300 square feet. These
properties include land, interior and rooftop office space, and space on
existing structures of various types used to support equipment used to provide
wireless communications services. Most of the leased properties are owned by
private entities and the balance is owned by municipal entities.
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Plant and equipment used to provide wireless services consist of:
- switching, transmission and receiving equipment,
- connecting lines (cables, wires, poles and other support structures,
conduits, etc.),
- land and buildings,
- easements, and
- other miscellaneous properties (work equipment, furniture and plants
under construction).
The majority of the lines connecting our services to other
telecommunications services and power sources are on or under public roads,
highways and streets. The remainder are on or under private property.
As of December 31, 2000, our estimated commitments associated with these
leases were approximately $1.4 billion.
REGULATORY ENVIRONMENT
The FCC regulates the licensing, construction, operation, acquisition, sale
and resale of wireless systems in the United States pursuant to the
Communications Act of 1934 and the associated rules, regulations and policies
promulgated by the FCC. FCC terminology distinguishes between "cellular"
licenses, which utilize a frequency of 850 megahertz, and "PCS" licenses, which
utilize a frequency of 1900 megahertz. The different types of licenses and their
associated systems may have differing technical characteristics.
Licensing of wireless services systems
We own protected geographic service area licenses granted by the FCC to
provide cellular service and PCS. We also own licenses granted by the FCC to
provide point-to-multi-point communications services in various bands.
A cellular system operates on one of two 25 megahertz frequency blocks that
the FCC allocates for cellular radio service. Cellular systems generally are
used for two-way mobile voice applications, although they may be used for data
applications and fixed wireless services as well. Cellular license areas are
issued for either metropolitan service areas or rural service areas. Initially,
one of the two cellular licenses available in each metropolitan service area or
rural service area was awarded to a local exchange telephone company by the FCC,
while the other license was awarded either through competitive processes or
lotteries. Licenses were issued beginning in 1983, and over the years numerous
license transfers and corporate reorganizations have obscured the original
pattern of distributing one set of licenses to local telephone company
affiliates and the other to companies that do not have local exchange service in
the license area.
A PCS system operates on one of six frequency blocks allocated for personal
communications services. PCS systems generally are used for two-way voice
applications although they may carry two-way data communications as well. For
the purpose of awarding PCS licenses, the FCC has segmented the United States
into 51 large regions called major trading areas, which are comprised of 493
smaller regions called basic trading areas. The FCC awarded two PCS licenses for
each major trading area and four licenses for each basic trading area. The two
major trading area licenses authorize the use of 30 megahertz of spectrum. One
of the basic trading area licenses was initially for 30 megahertz of spectrum,
and the other three are for 10 megahertz each. Subject to some conditions, the
FCC permits licensees to split their licenses and assign a portion, on either a
geographic or frequency basis or both, to a third party.
The FCC awarded initial PCS licenses by auction. Auctions began with the 30
megahertz major trading area licenses and concluded in 1998 with the last of the
basic trading area licenses. However, in March 1998, the FCC adopted an order
that allowed troubled entities that won PCS 30 megahertz C-Block licenses at
auction to obtain financial relief from their payment obligations and to return
some or
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all of their C-Block licenses to the FCC for reauctioning. The FCC completed the
reauction of the returned licenses in April 1999. In addition, certain of the
C-Block licenses are currently in bankruptcy proceedings. The FCC cancelled some
of these licenses, and completed the reauction of the licenses in January 2001.
The FCC's cancellation of the licenses has been challenged by one of the
bankrupt licensees, and there is no guarantee that the reauction or the award of
any licenses pursuant to the reauction will not be affected by this challenge.
Under the FCC's current spectrum aggregation rules, no entity may hold
attributable interests, generally 20% or more of the equity of, or an officer or
director position with, the licensee, in licenses for more than 45 megahertz of
PCS, cellular and certain specialized mobile radio services where there is
significant overlap in any geographic area. Significant overlap will occur when
at least 10% of the population of the PCS licensed service area is within the
cellular and/or specialized mobile radio service area(s). The FCC recently
increased this limit to 55 megahertz for rural areas. These spectrum aggregation
rules are subject to a pending FCC proceeding that could revise or eliminate
them.
All wireless licenses have a 10-year term, at the end of which term they
must be renewed. The FCC will award a renewal expectancy to a wireless licensee
that has provided substantial service during its past license term, and has
substantially complied with applicable FCC rules and policies and the
Communications Act. Licenses may be revoked for cause and license renewal
applications denied if the FCC determines that a renewal would not serve the
public interest. FCC rules provide that competing renewal applications for
licenses will be considered in comparative hearings, and establish the
qualifications for competing applications and the standards to be applied in
hearings.
All wireless licenses must satisfy specified coverage requirements.
Cellular licenses were required, during the five years following the grant of
the license, to construct their systems to provide service (at a specified
signal strength) to the territory encompassed by their service area. Failure to
provide such coverage resulted in reduction of the relevant license area by the
FCC. All 30 megahertz A, B and C block PCS licensees must construct facilities
that offer coverage to one-third of the population of the service area within
five years of the initial license grants and to two-thirds of the population
within ten years. All D, E, F block PCS licensees and certain 10 or 15 megahertz
C block licensees must construct facilities that offer coverage to one-fourth of
the population of the licensed area or "make a showing of substantial service in
their license area" within five years of the original license grants. Other
point-to-multi-point licenses require a showing of substantial service at
renewal. Licensees that fail to meet the coverage requirements may be subject to
forfeiture of the license.
In an effort to balance the competing interests of existing microwave users
in the PCS bands and newly authorized PCS licensees, the FCC has adopted a
transition plan to relocate such microwave operators to other spectrum blocks
and a cost sharing plan so that if the relocation of an incumbent benefits more
than one PCS licensee, those licensees will share the cost of the relocation.
The transition period contemplates negotiations between microwave licensees and
PCS licensees to accomplish the transition and to govern the terms and
conditions of the transition of microwave licensees from the PCS spectrum.
Generally, there is a "voluntary" negotiation period during which incumbent
microwave licensees can, but do not have to, negotiate with PCS licensees. This
is followed by a "mandatory" negotiation period during which incumbent microwave
licensees must negotiate in good faith with PCS licensees.
Wireless systems are subject to certain FAA regulations governing the
location, lighting and construction of transmitter towers and antennas and are
subject to regulation under federal environmental laws and the FCC's
environmental regulations. State or local zoning and land use regulations also
apply to tower siting and construction activities. We expect to use common
carrier point-to-point microwave facilities to connect certain wireless cell
sites, and to link them to the main switching office. The FCC licenses these
facilities separately and they are subject to regulation as to technical
parameters and service.
The Communications Act preempts state and local regulation of the entry of,
or the rates charged by, any provider of private mobile radio service or of
commercial mobile radio service, which includes PCS and cellular service. The
FCC does not regulate commercial mobile radio service or private mobile radio
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service rates. However, commercial mobile radio service providers are common
carriers and are required under the Communications Act to offer their services
to the public without unreasonable discrimination. The FCC's rules currently
require providers to permit others to resell their services for a profit;
however, these rules will expire in 2002.
Transfers and assignments of spectrum licenses
Except for transfers of control or assignments that are considered "pro
forma," the Communications Act and FCC rules require the FCC's prior approval
for the assignment of a license or transfer of control of a license for a PCS or
cellular system and other types of wireless licenses. In addition, the FCC has
established transfer disclosure requirements that require licensees who assign
or transfer control of a PCS license within the first three years of their
license terms to file associated sale contracts, option agreements, management
agreements or other documents disclosing the total consideration that the
licensee would receive in return for the transfer or assignment of its license.
Non-controlling interests in an entity that holds an FCC license generally may
be bought or sold without FCC approval subject to the FCC's spectrum aggregation
limits. However, notification and expiration or earlier termination of the
applicable waiting period under Section 7A of the Clayton Act by either the
Federal Trade Commission or the Department of Justice may be required if we sell
or acquire interests over a certain size. Approval by state or local regulatory
authorities having competent jurisdiction may also be required in some
circumstances.
Foreign ownership
Under existing law, no more than 20% of an FCC licensee's capital stock may
be owned, directly or indirectly, or voted by non-U.S. citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation. If an FCC licensee is controlled by another entity, as is the case
with our ownership structure before the split-off, up to 25% of that entity's
capital stock may be owned or voted by non-U.S. citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation. Foreign ownership above the 25% level may be allowed should the FCC
find such higher levels not inconsistent with the public interest. The FCC has
ruled that higher levels of foreign ownership, even up to 100%, are
presumptively consistent with the public interest with respect to investors from
certain nations. If our foreign ownership were to exceed the permitted level,
the FCC could revoke our FCC licenses, although we could seek a declaratory
ruling from the FCC allowing the foreign ownership or take other actions to
reduce our foreign ownership percentage in order to avoid the loss of our
licenses. We have no knowledge of any present foreign ownership in violation of
these restrictions.
Recent regulatory developments
The FCC has announced rules for making emergency 911 services available by
cellular, PCS and other commercial mobile radio service providers, including
enhanced 911 services that provide the caller's telephone number, location and
other useful information. Commercial mobile radio service providers are required
to take actions enabling them to relay a caller's automatic number
identification and location (initially the location of the cell site first
transmitting the call, and ultimately by an approximation of the caller's actual
location) if requested to do so by a public safety dispatch agency. Providers
may use either network or handset-based technologies to provide the
approximation of the caller's actual location. There is no requirement that
dispatch agencies reimburse the provider for their costs of deploying such
technologies. 911 service must be made available to users with speech or hearing
disabilities, but this requirement does not apply to providers of digital
wireless services until 2002. Finally, wireless handsets capable of receiving
analog signals must be able to complete 911 calls using the strongest analog
signal available to the caller, even if the caller does not subscribe to the
carrier providing the strongest signal. State actions incompatible with the FCC
rules are subject to preemption by the FCC. We have sought a waiver of certain
aspects of the FCC's Phase II location rules to permit us to implement certain
location technologies. There can be no assurance that the request will be
granted.
On August 8, 1996, the FCC released its order implementing the
interconnection provisions of the Telecommunications Act. Although many of the
provisions of this order were struck down by the U.S.
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Court of Appeals for the Eighth Circuit, on January 25, 1999, the U.S. Supreme
Court reversed the Eighth Circuit and upheld the FCC in all respects material to
our operations. On June 10, 1999, the Eighth Circuit issued an order requesting
briefs on certain issues it did not address in its earlier order, including the
pricing regime for interconnection. While appeals have been pending, the
rationale of the FCC's order has been adopted by many states' public utility
commissions, with the result that the charges that cellular and PCS operators
pay to interconnect their traffic to the public switched telephone network have
declined significantly from pre-1996 levels. In July 2000, the Eighth Circuit
rejected certain aspects of the FCC's pricing methodology, but stayed its order
pending appeal by affected parties to the U.S. Supreme Court. The U.S. Supreme
Court has agreed to review this case.
In its implementation of the Telecommunications Act, the FCC established
federal universal service requirements that affect commercial mobile radio
service operators. Under the FCC's rules, commercial mobile radio service
providers are potentially eligible to receive universal service subsidies for
the first time; however, they are also required to contribute to the federal
universal service fund and can be required to contribute to state universal
funds. Many states are moving forward to develop state universal service fund
programs. A number of these state funds require contributions, varying greatly
from state to state, from commercial mobile radio service providers. The FCC's
universal service order was modified on appeal in the U.S. Court of Appeals for
the Fifth Circuit. The court's ruling has had the effect of reducing commercial
mobile radio service provider support payments required for the federal
universal service programs. The U.S. Supreme Court has agreed to address the
constitutionality of the FCC's universal service order, in particular as it
affects the amount of funds to which telephone companies are entitled to help
defray the costs of providing basic telephone service. The Court's determination
may also affect the FCC's interconnection pricing methodology.
On August 1, 1996, the FCC released a report and order expanding the
flexibility of cellular, PCS and other commercial mobile radio service providers
to provide fixed as well as mobile services. These fixed services include, but
need not be limited to, wireless local loop services, for example, to apartment
and office buildings, and wireless backup services to private branch exchange or
switchboards and local area networks, to be used in the event of interruptions
due to weather or other emergencies. If the fixed services are provided as an
ancillary service to a carrier's mobility services, the FCC has decided that
such fixed services should be regulated as commercial mobile radio services. The
FCC declined to render a prospective ruling on how fixed services provided on a
co-primary basis with mobility services should be regulated or if they should be
subjected to universal service obligations. Rather, it has announced its
intention to decide such matters on a case-by-case basis depending on the
characteristics of a provider's fixed service offering. The FCC has been
presented with one such case, but has not yet ruled on it. It is unclear what
effect, if any, such a ruling would have on our business.
The FCC has adopted rules on telephone number portability that will enable
customers to migrate their landline and cellular telephone numbers to cellular
or PCS providers and from a cellular or PCS provider to another service
provider. On February 8, 1999, the FCC extended the deadline for compliance with
this requirement to November 24, 2002, subject to any later determination that
number portability is necessary to conserve telephone numbers. The FCC has also
adopted rules requiring cellular and PCS providers to provide certain functions
to facilitate electronic surveillance by law enforcement officials by June 30,
2000. Carriers must be able to provide additional surveillance capabilities by
September 30, 2001. We have sought permission for a flexible deployment schedule
from the FCC. The FCC has not ruled on the request and there can be no assurance
that the FCC will grant the request. In addition, in August 2000, the U.S. Court
of Appeals for the District of Columbia Circuit invalidated some of these rules
and remanded them to the FCC for further consideration. Various other petitions
are pending before the FCC seeking suspension or further extensions of the
deadlines applicable to providing surveillance capabilities. It is not known how
the FCC will revise its rules or whether it will extend either or both of the
compliance deadlines or what the scope of penalties for failing to comply may
be.
In 1997, the FCC determined that the rate integration requirement of the
Communications Act applies to the interstate, interexchange services of
commercial mobile radio service providers. Rate integration requires a carrier
to provide service between the continental U.S. and offshore U.S. states and
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territories under the same rate structure applicable to service between two
points in the continental U.S. The FCC delayed implementation of the rate
integration requirements with respect to the wide area rate plans we offer
pending further reconsideration of its rules. The FCC also delayed the
requirement to integrate commercial mobile radio service long-distance rates
among commercial mobile radio service affiliates. On December 31, 1998, the FCC
reaffirmed, on reconsideration, that its interexchange rate integration rules
apply to interexchange commercial mobile radio service services. The FCC
announced it would initiate a further proceeding to determine how integration
requirements apply to typical commercial mobile radio service offerings,
including one-rate plans. In July 2000, the U.S. Court of Appeals for the
District of Columbia Circuit reversed the FCC's holding that the Communications
Act unambiguously extends rate integration to providers of commercial mobile
services. The court remanded the matter to the FCC for further consideration.
Pending conclusion of this further proceeding, the rate integration requirement
does not apply to commercial mobile services. To the extent that we are required
to offer services subject to the FCC's rate integration requirements, our
pricing flexibility will be reduced. We cannot assure you that the FCC will
decline to impose rate integration requirements on us or decline to require us
to integrate our commercial mobile radio service long-distance rates across our
commercial mobile radio service affiliates.
In 1998, the FCC adopted new rules limiting the use of customer proprietary
network information by telecommunications carriers in marketing a broad range of
telecommunications and other services to their customers and the customers of
affiliated companies. The rules were struck down by the U.S. Court of Appeals
for the Tenth Circuit in 1999, and their effectiveness has been stayed pending
the court's review of a petition to the FCC for reconsideration. Even if the
rules are reinstated, we do not anticipate that they will result in a
significant adverse impact on our financial position, results of operation or
liquidity.
State commissions have become increasingly aggressive in their efforts to
conserve numbering resources. Examples of state conservation methods include:
number pooling, number rationing and code sharing. A number of states have
petitioned the FCC for authority to adopt "technology specific" overlays that
would require wireless providers to obtain telephone numbers out of a separate
area code and may require wireless providers to change their customers'
telephone numbers. These efforts may impact wireless service providers by
imposing additional costs or limiting access to numbering resources.
The FCC has adopted detailed billing rules for landline telecommunications
service providers and applied a number of these rules to commercial mobile radio
services providers. The FCC is considering whether carriers that decide to pass
through their mandatory universal service contributions to their customers
should be required to provide a full explanation of the program, and whether to
ensure that the carriers that pass through their contribution do not recover
amounts greater than their mandatory contributions from their customers.
Adoption of some of the FCC's proposals could increase the complexity of our
billing processes and restrict our ability to bill customers for services in the
most commercially advantageous way.
The FCC has adopted an order that determines the obligations of
telecommunications carriers to make their services accessible to individuals
with disabilities. The order requires telecommunications services providers to
offer equipment and services that are accessible to and useable by persons with
disabilities. While the rules exempt telecommunications carriers from meeting
general disability access requirements if such results are not readily
achievable, it is not clear how liberally the FCC will construe this exemption.
Accordingly, the rules could require us to make material changes to our network,
product line, or services at our expense.
The FCC has adopted rules specifying standards and the methods to be used
in evaluating radio frequency emissions from radio equipment, including network
equipment and handsets used in connection with commercial mobile radio service.
These rules were upheld on appeal by the U.S. Court of Appeals for the Second
Circuit. The U.S. Supreme Court declined to review the Second Circuit's ruling.
Our network facilities and the handsets we sell to customers comply with these
standards.
Media reports have suggested that some radio frequency emissions from
wireless handsets may be linked to health concerns, including the incidence of
cancer. Although some studies have suggested that
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radio frequency emissions may cause certain biological effects, all of the
expert reviews conducted to date have concluded that the evidence does not
support a finding of adverse health effects but that further research is
appropriate. Earlier this year, CTIA entered into a Cooperative Research and
Development Agreement to sponsor such research.
Studies have shown that some hand-held digital telephones may interfere
with some medical devices, including hearing aids and pacemakers. The FDA has
recently issued guidelines for the use of wireless phones by pacemaker wearers.
Additional studies are underway to evaluate and improve the compatibility of
hearing aids and digital wireless phones.
State and local regulation
State and local governments are preempted from regulating either market
entry by, or the rates of, wireless operators. However, state governments can
regulate other terms and conditions of wireless service and several states have
imposed, or have proposed legislation that will impose, various consumer
protection regulations on the wireless industry. As noted above, states also may
impose their own universal service support regimes on wireless and other
telecommunications carriers, similar to the requirements that have been
established by the FCC and have been delegated certain authority by the FCC in
the area of number allocation and administration. At the local level, wireless
facilities typically are subject to zoning and land use regulation. However,
under the federal Telecommunications Act, neither local nor state governments
may categorically prohibit the construction of wireless facilities in any
community or unreasonably discriminate against a carrier. Numerous state and
local jurisdictions have considered imposing conditions on a driver's use of
wireless technology while operating a motor vehicle, and a few have actually
done so.
LEGAL PROCEEDINGS
Several lawsuits have been filed asserting claims that we collected charges
for local government taxes from customers that were not properly subject to
those charges. We have entered into a settlement of one of these cases, although
the settlement has been challenged on appeal. We have asserted in those cases
that any recovery should come from the municipalities to which the taxes were
paid.
Several class action lawsuits have been filed in which claims have been
asserted that we did not have sufficient network capacity to support the influx
of new subscribers who signed up for AT&T Digital One Rate service beginning in
May 1998 and therefore have failed to provide service of a quality allegedly
promised to subscribers. The plaintiffs in these cases have not asserted
specific claims for damages, with the exception of one case filed in Texas in
which the named plaintiffs have asserted claims for compensatory and punitive
damages totaling $100 million.
Several other class action or representative lawsuits have been filed
against us that allege, depending on the case, breach of contract,
misrepresentation or unfair practice claims relating to our billing practices
(including rounding up of partial minutes of use to full minute increments and
billing send to end), coverage, dropped calls, price fixing and/or mistaken
bills. Although the plaintiffs in these cases have not specified alleged
damages, the damages in two of the cases are alleged to exceed $100 million. One
of these two cases was dismissed and the dismissal was affirmed in part on
appeal. Settlement negotiations are ongoing in both cases.
Several class action lawsuits have been filed against AT&T, several other
wireless service operators and several wireless phone manufacturers, asserting
products liability, breach of warranty and other claims relating to radio
frequency transmissions to and from wireless phones. The complaints seek damages
for the costs of headsets for wireless phone users as well as injunctive relief.
In connection with the split-off, we will be allocated all of the liability, if
any, arising from such lawsuits.
We are involved in a patent infringement action against GTE in the U.S.
District Court in Seattle, Washington. GTE claims that the Nokia phones
manufactured for us infringe a GTE patent for over-the-air activation and
over-the-air programming. We are seeking a declaratory judgment that use of
over-the-air activation does not infringe GTE's patent. GTE has not specified
amounts of claimed damages.
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We are involved in an international arbitration proceeding concerning
interests in a Malaysian telecommunications joint venture, Maxis Communications
Bhd, a former MediaOne business acquired by AT&T and sold to us in the fourth
quarter of 2000. In the arbitration, a group of Malaysian stockholders claim
that MediaOne breached fiduciary duties and contractual obligations owed to the
joint venture. The arbitration claim asserts damages of $400 million. If the
split-off is completed, we will assume a portion of the liabilities, if any,
relating to this action, subject to certain adjustments. In March 2001, we
entered into an agreement with other shareholders of Maxis Communications Bhd
who are the claimants in this arbitration, for the sale of our entire interest
in that entity and the resolution of the claims asserted in the arbitration
proceeding. The parties agreed to suspend the arbitration proceeding pending
closing of this transaction, and expect to terminate the arbitration proceeding
when the sale has been completed.
Stockholders of a former competitor of our air-to-ground business are
plaintiffs in a lawsuit filed in 1993, alleging that we breached a
confidentiality agreement, used trade secrets to unfairly compete, and
tortiously interfered with the business and potential business of the
competitor. Plaintiffs sought damages in an unspecified amount in excess of $3.5
billion. We obtained partial summary judgment and then prevailed on the
remainder of the claims at a trial on the validity of a release of plaintiffs'
claims. Final judgment was entered against plaintiffs on their claims, and
plaintiffs appealed. On appeal, the Appellate Court of Illinois, Second
District, reversed and remanded the case for trial indicating that certain
issues decided by the judge needed to be resolved by a jury.
We are vigorously defending each of these claims. We cannot predict the
final outcome of these disputes.
Several lawsuits have been filed against AT&T, certain executives of AT&T
and us and a group of investment banking firms, seeking class certification and
asserting claims under federal securities laws. The complaints assert claims
that AT&T made material misstatements concerning the company's earnings and
financial condition, while omitting other material information, allegedly to
maximize proceeds from the public offering of AT&T Wireless Group tracking stock
in April 2000 and/or to avoid paying a cash guarantee in connection with the
MediaOne acquisition. The complaints do not specify amounts of damages claimed,
although the plaintiffs are seeking to recover for declines in stock prices of
AT&T securities, including the AT&T Wireless Group tracking stock. In connection
with the split-off, we will be allocated a portion of the liabilities, if any,
arising out of these actions to the extent relating to AT&T Wireless Group
tracking stock.
We are also a defendant in other legal actions involving claims incidental
to the normal conduct of the running of our business. We believe that the
amounts that may be paid in these actions will not be material to our financial
position, results of operations or cash flow.
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MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth information as to persons who serve or who
are expected to serve as our directors, executive officers or key employees
immediately following the split-off. Our board of directors will be comprised of
eight directors, divided into three classes. It is expected that two will be
Class 1 directors, with terms expiring at the annual meeting of stockholders to
be held in 2002, three will be Class 2 directors, with terms expiring at the
annual meeting of stockholders to be held in 2003, and three will be Class 3
directors, with terms expiring at the annual meeting of stockholders to be held
in 2004.
NAME AGE POSITION
---- --- --------
John D. Zeglis............... 54 Chairman of the Board and Chief Executive Officer
Mohan S. Gyani............... 49 President and Chief Executive Officer, AT&T Mobility
Services
Michael G. Keith............. 53 President, AT&T Fixed Wireless Services
Jordan M. Roderick........... 43 President, AT&T Wireless Services, International
Andre Dahan.................. 52 President, Mobile Multimedia Services
Robert H. Johnson............ 47 Executive Vice President, National Wireless Operations
Harold W. Burlingame......... 61 Executive Vice President, Communications
Joseph McCabe Jr............. 50 Executive Vice President and Chief Financial Officer
Michael R. Benson............ 46 Senior Vice President and Chief Information Officer
Lewis W. Chakrin............. 53 Senior Vice President, Corporate Strategy and Planning
William W. Hague............. 46 Senior Vice President, Business Development
Gregory P. Landis............ 50 Senior Vice President, General Counsel and Corporate
Secretary
D. Jane Marvin............... 42 Senior Vice President, Human Resources
Roderick D. Nelson........... 41 Senior Vice President and Chief Technology Officer
Philip H. Osman.............. 47 Executive Vice President, Mobile Multimedia Services
Gregory L. Slemons........... 47 Senior Vice President, Wireless Network Services
Laurence C. Seifert.......... 62 Executive Vice President, AT&T Fixed Wireless Services
Walter Y. Elisha............. 68 Director Nominee
Donald V. Fites.............. 67 Director Nominee
Ralph S. Larsen.............. 62 Director Nominee
John W. Madigan.............. 64 Director Nominee
Nobuharu Ono................. 55 Director Nominee
A. Barry Rand................ 56 Director Nominee
Carolyn M. Ticknor........... 54 Director Nominee
John D. Zeglis is our Chairman of the Board and Chief Executive Officer,
positions he has held since 1999. From 1997 to 1999, Mr. Zeglis served as
President of AT&T, and from June to November 1997, he served as its Vice
Chairman. He was AT&T's Senior Executive Vice President and General Counsel from
1996 to 1997, and Senior Vice President and General Counsel from 1986 to 1996.
Mr. Zeglis began his career with AT&T in 1984. Mr. Zeglis is a director of AT&T,
Helmerich and Payne Inc., Georgia-Pacific Corporation and Sara Lee Corporation.
He is expected to leave the AT&T board of directors at the time of the
split-off.
Mohan Gyani is our President and Chief Executive Officer, AT&T Mobility
Services, and has been President and Chief Executive Officer, AT&T Wireless
Group for the AT&T Wireless Group since 2000. From 1995 to 1999, Mr. Gyani
served as Executive Vice President and Chief Financial Officer of Airtouch
Communications (now part of Verizon Communications, Inc.), a wireless
communication provider. Mr. Gyani began his career with AT&T Wireless Services
in 2000. Mr. Gyani is a director of At Home Corporation, and is a member of the
Executive Committee of the Cellular Telecommunications Industry Association. He
is currently one of our directors, but is expected to resign at the time of the
split-off.
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Michael G. Keith is our President, AT&T Fixed Wireless Services, a position
he has held since 1999. From 1998 to 1999, Mr. Keith served as President, AT&T
Business Services. Prior to that, he was Vice President & General Manager, AT&T
Global Services from 1997 to 1998 and Vice President and General Manager, AT&T
Business Customer Care from 1996 to 1997. Mr. Keith began his career with AT&T
in 1978. Mr. Keith is a director of Tality, Inc.
Jordan M. Roderick is our President, AT&T Wireless Services, International,
a position he has held since 2000. From 1998 to 2000, Mr. Roderick served as
Executive Vice President, Wireless Technology and Products. He was Executive
Vice President, National Operations in 1997 and prior to that served as
President, Messaging Division, in 1996. Mr. Roderick began his career with AT&T
Wireless Services in 1992. Mr. Roderick is a director of Rogers Wireless
Communications, Inc., Rohn Industries, Inc., Far Eastone Telecommunications,
Inc. and PrairieComm, Inc.
Andre Dahan will become the President of our Mobile Multimedia Services
subsidiary in July 2001. From 2000 to 2001, Mr. Dahan served as Senior Vice
President, Electronic Commerce of The Dun & Bradstreet Corporation, a worldwide
provider of business information and related decision-support services, and from
1999 to 2001, served as President of eccelerate.com, Inc. (a subsidiary of Dun &
Bradstreet). Prior to that, he served as President of Dun & Bradstreet, North
America and Global Accounts, from 1999 to 2000, and as President of Dun &
Bradstreet U.S. from 1997 to 1999. From 1996 to 1997, Mr. Dahan was Senior Vice
President of Worldwide Operations of Sequent Computer Systems, Inc., a provider
of high- and mid-range servers and related products.
Robert H. Johnson is our Executive Vice President, National Wireless
Operations, a position he has held since 1999. In 1999, Mr. Johnson also served
as Senior Vice President, National Markets. Prior to that, he was President,
Western Region in 1998, and from 1996 to 1998 was President, Aviation
Communications Division. Mr. Johnson began his career with AT&T Wireless
Services in 1988.
Harold W. Burlingame is our Executive Vice President, Communications, a
position he has held since 2000. In 1999, Mr. Burlingame served as Executive
Vice President, Merger and Joint Venture Integration of AT&T. Prior to that he
was Executive Vice President, Human Resources of AT&T, from 1987 to 1999. Mr.
Burlingame began his career with AT&T in 1978. Mr. Burlingame is a director of
Unisource Energy Corp. He is currently one of our directors, but is expected to
resign at the time of the split-off.
Joseph McCabe Jr. is our Executive Vice President and Chief Financial
Officer, positions he has held since 2001. From 1999 to 2001, Mr. McCabe served
as Vice President and Chief Financial Officer. From 1997 to 1999, Mr. McCabe
served as Vice President and Chief Financial Officer, AT&T Consumer, Local
Services and AT&T Wireless Services. Prior to that he served as Vice President
and Chief Financial Officer, International Operations of AT&T from 1996 to 1997.
Mr. McCabe joined AT&T in 1983.
Michael R. Benson is our Senior Vice President and Chief Information
Officer, positions he has held since 2000. From 1998 to 2000, Mr. Benson served
as Vice President, Retail and Distribution Systems. Prior to that he was Vice
President and Chief Information Officer, Messaging Division from 1995 to 1996.
Mr. Benson began his career with AT&T Wireless Services in 1987.
Lewis M. Chakrin is our Senior Vice President and Chief Strategy Officer,
positions he has held since 2000. From 1998 to 2000, Mr. Chakrin served as Vice
President, Product Management/Consumer Services of AT&T. Prior to that he was
Vice President, AT&T Strategic Business Development from 1996 to 1998. Mr.
Chakrin began his career with AT&T in 1969.
William W. Hague is our Senior Vice President, Business Development and
Acquisition, a position he has held since 1997. From 1995 to 1997, Mr. Hague
served as Vice President, Acquisitions and Corporate Development. Mr. Hague
began his career with AT&T Wireless Services in 1995. Mr. Hague is a director of
Telecorp PCS, Inc. and Triton PCS Holdings, Inc.
Gregory P. Landis is our Senior Vice President and General Counsel,
positions he has held since 1995 and also is our Corporate Secretary, a position
he has held since 2001. Mr. Landis began his career with AT&T Wireless Services
in 1995.
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D. Jane Marvin is our Senior Vice President, Human Resources, a position
she has held since 2001. Prior to that, Ms. Marvin served as Executive Vice
President of Human Resources for Covad Communications Group Inc., a high speed
internet connection provider, from 1999 to 2001. Ms. Marvin served as Vice
President, Human Resources for Ameritech, General Business Services from 1997 to
1999 and from 1995 to 1999 served as Director, Leadership and Executive
Development for Ameritech Institute. Ms. Marvin joined AT&T Wireless Services in
June 2001.
Roderick D. Nelson is our Senior Vice President and Chief Technology
Officer, positions he has held since 1998. From 1993 to 1998, Mr. Nelson served
as Vice President, Technology Development. Mr. Nelson began his career with AT&T
Wireless Services in 1985.
Philip H. Osman is our Executive Vice President, Mobile Multimedia
Services, a position he has held since 2001. In 2000, Mr. Osman served as Senior
Vice President, Customer Platform Development and later became our Senior Vice
President and Chief Administrative Officer. In 1999, Mr. Osman served as Senior
Vice President, Consumer Franchise Operations of AT&T, and Senior Vice
President, Consumer Services of AT&T, in 1998. Prior to that, he was Senior Vice
President, Business Planning and Operations of AT&T, from 1995 to 1997. Mr.
Osman began his career with AT&T in 1997.
Gregory L. Slemons is our Senior Vice President, Wireless Network Services,
a position he has held since 1997. Prior to that, Mr. Slemons served as Vice
President, Technical Services, Central Region, from 1995. Mr. Slemons began his
career with AT&T in 1973.
Laurence C. Seifert is our Executive Vice President, AT&T Fixed Wireless
Services, a position he has held since 2000. In 1999, Mr. Seifert served as Vice
President, Wireless Local Technology. Prior to that, Mr. Seifert served as
Senior Vice President, AT&T Wireless Services from 1996 to 1999. Mr. Seifert
began his career with AT&T in 1957. Mr. Seifert is a director of Entomo, Inc.
Walter Y. Elisha will become one of our directors on the split-off date.
From 1983 until his retirement in 1998, Mr. Elisha served as Chairman of the
Board of Springs Industries Inc., a textile manufacturing company, and as Chief
Executive Officer of Springs Industries from 1981 to 1997. Mr. Elisha is a
director of AT&T and Cummins Engine Company and is a Trustee of Wabash College.
He also is a member of the Business Council and a former member of the
President's Advisory Committee for Trade Policy and Negotiations. He is expected
to leave AT&T's board of directors at the time of the split-off.
Donald V. Fites will become one of our directors on the split-off date.
From 1990 until his retirement in 1999, Mr. Fites served as Chairman of the
Board and Chief Executive Officer of Caterpillar Inc., a manufacturer of
construction and mining equipment, diesel and natural gas engines, and
industrial gas turbines, and as President and Chief Operating Officer of
Caterpillar from 1989 to 1990. Mr. Fites has previously served as Chairman of
The Business Roundtable, the U.S.-Japan Business Council, the National Foreign
Trade Council, and the Equipment Manufacturers' Institute. He is a director of
the National Association of Manufacturers, and is a member of the Business
Council and a former member of the President's Advisory Committee for Trade
Policy and Negotiations. Mr. Fites is a director of AT&T, Oshkosh Truck
Corporation, AK Steel Corporation, Exxon Mobil Corporation, Georgia-Pacific
Corporation, and Wolverine World Wide, Inc. He is expected to leave AT&T's board
of directors at the time of the split-off.
Ralph S. Larsen will become one of our directors on the split-off date.
Since 1989, Mr. Larsen has served as Chairman of the Board and Chief Executive
Officer of Johnson & Johnson, a pharmaceutical, medical, and consumer products
company. Mr. Larsen is a former Chairman of the Board and is a member of the
Executive Committee of The Business Council, and is a member of the Policy
Committee of The Business Roundtable. He is a director of AT&T and Xerox
Corporation. He is expected to leave AT&T's board of directors at the time of
the split-off.
John W. Madigan will become one of our directors on the split-off date.
Since 1995, Mr. Madigan has served as Chief Executive Officer of Tribune
Company, a media company, and has served as the
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Chairman of the Board of Tribune since 1996. He also has served as President of
Tribune since 1994. Mr. Madigan is a director of Morgan Stanley Dean Witter &
Co.
Nobuharu Ono will become one of our directors on the split-off date. Since
2000, Mr. Ono has served as Executive Vice President and Senior Executive
Manager of the Mobile Multimedia Division of NTT DoCoMo, Inc., a Japanese
company providing a range of wireless telecommunications services and two-
thirds owned by Nippon Telegraph and Telephone Company (NTT). Prior to that, Mr.
Ono served as Senior Vice President of the Multimedia Business Department of NTT
East Corp., an affiliate of NTT. From 1998 to 1999, he served as Senior Vice
President of the Multimedia Business Department of NTT, and from 1994 to 1998,
served as Vice President of the Multimedia Business Department of NTT. Prior to
that, Mr. Ono served in various positions at NTT and other NTT affiliates since
beginning with NTT in 1968. Mr. Ono is a director of NTT DoCoMo, Inc.
A. Barry Rand will become one of our directors on the split-off date. Since
March 2001, Mr. Rand has served as Chairman Emeritus of Avis Group Holdings,
Inc., a worldwide car rental provider. From 1999 to March 2001, Mr. Rand served
as Chairman of the Board and Chief Executive Officer of Avis Group Holdings,
Inc. From 1992 to 1998, Mr. Rand served as Executive Vice President of Xerox
Corporation, a photocopier and printer manufacturer, and also served in various
positions since beginning with Xerox in 1968, including various executive
positions. Mr. Rand is a director of Agilent Corp. and Abbott Laboratories. He
also serves on the board of directors of the Urban Family Institute and is a
member of the Board of Trustees of Howard University.
Carolyn M. Ticknor will become one of our directors on the split-off date.
From 1999 until her retirement in March 2001, Ms. Ticknor served as President,
Imaging and Printing Systems, of Hewlett Packard Company, a global provider of
computing, printing, and imaging products and services. She also served in
various management roles since beginning with Hewlett-Packard in 1977, including
serving as its President, LaserJet Solutions from 1994 to 1999. Ms. Ticknor is a
director of Boise Cascade Corporation. She also serves on the Advisory Council
of the Stanford Graduate School of Business.
COMMITTEES OF THE BOARD OF DIRECTORS
Shortly after the split-off, our board of directors intends to establish an
audit committee and a compensation committee. In addition, our board, by
resolution, may from time to time establish other committees of the board,
consisting of one or more of our directors. Any committee so established will
have the powers delegated to it by resolution of the board, subject to
applicable law.
DIRECTOR COMPENSATION
Currently, all of our directors are also our employees and do not receive
compensation for their service on our board of directors. After the split-off,
directors who are not employees will receive an annual cash retainer of $42,000,
AT&T Wireless common stock units with a then-current market value of $42,000 and
options valued at $42,000 to purchase AT&T Wireless common stock. The
chairpersons of each committee will receive an additional annual retainer of
$10,000. No fees will be paid for attendance at regularly scheduled board and
committee meetings; however, directors will receive a fee of $1,250 for each
special board or committee meeting attended. Board members will be entitled to
receive additional restricted shares in lieu of cash payment due to them for
board service. In addition, they will be entitled to defer all or a portion of
their board fees. In addition, non-employee Directors who will join the board in
connection with the split-off will receive an option to acquire 30,000 shares of
AWS common stock.
The cash portion of the salary for the director that DoCoMo nominated to
our board of directors will be paid directly to DoCoMo.
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EXECUTIVE COMPENSATION
The following table sets forth information relating to compensation for our
Chief Executive Officer and our four other most highly compensated executive
officers for the year ended December 31, 2000. These executive officers are
collectively referred to as our "named executive officers." Awards of options
and stock appreciation rights ("SARs") relating to shares of AT&T common stock
("AT&T Shares") and AT&T Wireless Group tracking stock ("AWE Shares") are stated
separately.
At the completion of the split-off, the options and other employee benefits
of the named executive officers will be subject to certain adjustments to
reflect the split-off. See "Our Relationship with AT&T Following the
Split-Off -- Agreements between AT&T and Us Relating to the
Split-off -- Employee Benefits Agreement."
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION(3)
--------------------------------- ------------------------
AWARDS
------------------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
COMPEN- OPTIONS/SARS(#) COMPEN-
NAMED OFFICER AND SATION(2) ------------------------ SATION(4)
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) AT&T SHARES AWE SHARES ($)
------------------ ---- --------- --------- --------- ----------- ---------- ---------
John D. Zeglis............. 2000 975,000 1,075,000 922,121 -- 2,400,000 126,855
Chairman and Chief
Executive Officer
Mohan S. Gyani............. 2000 562,500 1,036,772 11,047 839,000 1,500,000 4,500
President and Chief
Executive Officer, AT&T
Mobility Services
Michael G. Keith........... 2000 481,250 450,000 226,406 -- 1,100,000 56,142
President, AT&T Fixed
Wireless Services
Jordan M. Roderick......... 2000 344,054 297,287 28,559 -- 700,000 13,654
President, AT&T Wireless
Services International
Robert H. Johnson.......... 2000 368,460 340,892 22,880 -- 1,000,000 14,450
Executive Vice President,
National Wireless
Operations
---------------
(1) Compensation deferred at the election of named executive officers is
included in the category (e.g., bonus) in which it would have otherwise been
reported had it not been deferred.
(2) Includes (a) payments of above-market interest on deferred compensation, (b)
dividend equivalents paid during the year with respect to long-term
incentive compensation, and (c) tax payment reimbursements.
(3) Certain of the named executive officers hold restricted stock or restricted
stock unit awards granted under a long-term incentive plan of AT&T. The
aggregate number (and value) at December 31, 2000 of the awards held by
these officers was: Mr. Zeglis, 102,000 ($1,759,500); Mr. Keith, 42,900
($740,025); Mr. Roderick, 24,000 ($414,000); and Mr. Johnson, 18,500
($319,125).
(4) Includes (a) 401(k) matching contributions (Mr. Zeglis, $6,800; Mr. Gyani,
$4,500; Mr. Keith, $6,800; Mr. Roderick, $4,304; and Mr. Johnson, $5,100);
(b) profit sharing contributions (Mr. Roderick, $9,350; and Mr. Johnson,
$9,350); (c) payments equal to lost 401(k) matching contributions caused by
IRS limitations (Mr. Zeglis, $27,944; and Mr. Keith, $9,850); and (d) dollar
value of the benefit of premiums paid for universal life insurance policies
(unrelated to term insurance coverage) calculated on an actuarial basis (Mr.
Zeglis, $92,110; and Mr. Keith, $39,492).
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AGGREGATED OPTION/SAR EXERCISES
IN 2000 AND YEAR-END OPTION/SAR VALUES
The following table sets forth information about options and SARs exercised
by our named executive officers in 2000, and the number and value of options and
SARs for AT&T Shares and AWE Shares held by the named executive officers at the
end of that year.
EXERCISABLE/UNEXERCISABLE
EXERCISABLE/UNEXERCISABLE ---------------------------------
--------------------------- VALUE OF VALUE OF
NUMBER OF NUMBER OF UNEXERCISED UNEXERCISED
AT&T SHARES AWE SHARES IN-THE-MONEY IN-THE-MONEY
NUMBER OF UNDERLYING UNDERLYING OPTIONS/SARS OPTIONS/SARS
SHARES UNEXERCISED UNEXERCISED FOR AT&T FOR AWE
ACQUIRED ON VALUE OPTIONS/SARS OPTIONS/SARS SHARES SHARES
NAME EXERCISE (#) REALIZED ($) AT YEAR END AT YEAR END AT YEAR END ($) AT YEAR END ($)
---- ------------ ------------ ------------ ------------ --------------- ---------------
John D. Zeglis........ 77,124(1) 4,660,561(1) 1,202,185 375,000 338,991 --
720,000 2,025,000 -- --
Mohan S. Gyani........ -- -- -- 250,000 -- --
839,000 1,250,000 -- --
Michael G. Keith...... 17,001 502,861 116,430 175,000 -- --
275,502 925,000 -- --
Jordan M. Roderick.... -- -- 73,142 90,000 -- --
72,501 610,000 -- --
Robert H. Johnson..... -- -- 81,001 150,000 -- --
78,000 850,000 -- --
---------------
(1) Includes exercises of SARs of Lucent Technologies, Inc., a former affiliate
of AT&T.
OPTION/SAR GRANTS IN 2000
The following tables set forth information relating to options and SARs
relating to AT&T Shares and AWE Shares granted to our named executive officers
in 2000.
INDIVIDUAL GRANTS IN AT&T SHARES
-----------------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTION/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE (2)
NAME GRANTED FISCAL YEAR ($/SH) DATE ($)
---- ----------- ---------------- ----------- ---------- -----------------
John D. Zeglis........................ -- -- -- -- --
Mohan S. Gyani(1)..................... 750,000 1.01% 48.4063 2/14/10 $10,980,000
89,000 0.12% 48.4063 2/14/10 $ 1,302,960
Michael G. Keith...................... -- -- -- -- --
Jordan M. Roderick.................... -- -- -- -- --
Robert H. Johnson..................... -- -- -- -- --
---------------
(1) The option granted to Mr. Gyani for 750,000 AT&T Shares becomes exercisable
to the extent of one-third of the grant on each of the first, second and
third anniversaries of the grant date. The other option granted to Mr. Gyani
becomes exercisable to the extent of one-fourth of the grant on each of the
first, second, third and fourth anniversaries of the grant date.
(2) The Black-Scholes option pricing model was used to estimate the Grant Date
Present Value of the options in this table. Use of this model should not be
construed as an endorsement of its accuracy. All stock option valuation
models, including the Black-Scholes model, require a prediction about the
future movement of the stock price. The following assumptions regarding the
options and AT&T Shares were made for purposes of calculating the Grant Date
Present Value: option term of four years, volatility of 31%, dividend yield
of 1.7%, and interest rate of 6.75%.
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INDIVIDUAL GRANTS IN AWE SHARES
-----------------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTION/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE (2)
NAME GRANTED (1) FISCAL YEAR ($/SH) DATE ($)
---- ----------- ---------------- ----------- ---------- -----------------
John D. Zeglis........................ 900,000 1.17% $29.50 4/27/10 $13,122,000
1,500,000 1.95% $29.50 4/27/10 $21,870,000
Mohan S. Gyani........................ 500,000 0.65% $29.50 4/27/10 $ 7,290,000
1,000,000 1.30% $29.50 4/27/10 $14,580,000
Michael G. Keith...................... 400,000 0.52% $29.50 4/27/10 $ 5,832,000
700,000 0.91% $29.50 4/27/10 $10,206,000
Jordan M. Roderick.................... 340,000 0.44% $29.50 4/27/10 $ 4,957,200
360,000 0.47% $29.50 4/27/10 $ 5,248,800
Robert H. Johnson..................... 400,000 0.52% $29.50 4/27/10 $ 5,832,000
600,000 0.78% $29.50 4/27/10 $ 8,748,000
---------------
(1) The options granted to Messrs. Zeglis, Gyani, Keith, Roderick and Johnson
for 900,000, 500,000, 400,000, 340,000 and 400,000 AWE Shares, respectively,
become exercisable to the extent of one-third of the grant on each of the
first, second and third anniversaries of the grant date. The remaining
options become exercisable to the extent of one-fourth of the grant six
months following the grant date and an additional one-twelfth of the grant
at the end of each three months thereafter.
(2) The Black-Scholes option pricing model was used to estimate the Grant Date
Present Value of the options in this table. Use of this model should not be
construed as an endorsement of its accuracy. All stock option valuation
models, including the Black-Scholes model, require a prediction about the
future movement of the stock price. The following assumptions regarding the
options and AWE Shares were made for purposes of calculating the Grant Date
Present Value: option term of four years, volatility of 55%, dividend yield
of 0%, and interest rate of 6.56%.
PENSION PLANS
Messrs. Zeglis and Keith participate in one or more AT&T-sponsored defined
benefit pension plans and, upon the split-off, their accrued benefits under
these plans will fully vest. See "Our Relationship with AT&T Following the
Split-off -- Agreements between AT&T and Us Relating to the Split-off --
Employee Benefits Agreement." We do not separately maintain any defined benefit
pension plan and do not anticipate adopting any such plan in the foreseeable
future.
EMPLOYMENT AGREEMENTS AND RETENTION ARRANGEMENTS
We have entered or will enter into employment or retention agreements with
Mohan S. Gyani, President and Chief Executive Officer, AT&T Mobility Services
and Michael G. Keith, President, AT&T Fixed Wireless Services, as follows:
Employment Agreement with Mr. Gyani
We entered into an agreement with Mr. Gyani, effective as of the completion
of the split-off, in connection with his employment as President and Chief
Executive Officer of AT&T Mobility Services. The agreement amends and restates
Mr. Gyani's prior employment agreement with AT&T and supersedes all prior
agreements between AT&T and Mr. Gyani. The agreement provides for an initial
base salary of $700,000 per year and annual cash incentive bonuses based on
measures of company, unit and individual performance. The target annual
incentive bonus for 2001 is 100% of Mr. Gyani's base salary. The agreement
provides for an incentive payment of $600,000, $500,000 payable on the effective
date of the agreement and $100,000 on January 15, 2002 or earlier upon
termination of Mr. Gyani's employment because of his death, long term
disability, termination by us without cause or termination by Mr. Gyani for good
reason.
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Mr. Gyani will receive a non-qualified stock option under the 2001 Plan for
360,000 shares of our common stock, with a term of ten years and vesting in
three equal annual installments on each of October 28, 2001, February 14, 2002
and February 14, 2003. The per share exercise price of the option is equal to
the fair market value of our common stock on the date of grant. If before
January 31, 2004 the price of AT&T common stock is equal to or greater than $58
for ten consecutive trading days, the option will immediately vest and,
effective six months and one day from that date, the option will be canceled.
Mr. Gyani also will receive a restricted stock unit award under the 2001
Plan for 200,000 shares of our common stock. Assuming continued employment, the
restricted stock unit award will vest on the same schedule as the option
described above. The award will vest earlier upon termination of Mr. Gyani's
employment because of his death, long term disability, termination by us without
cause or termination by Mr. Gyani for good reason, or upon a change in control.
A deferred compensation account will be established in Mr. Gyani's name and
credited with a balance of $3,500,000. This amount will bear interest on a
quarterly basis. Amounts credited to this account, including interest, will be
paid to Mr. Gyani in five annual installments following his retirement, provided
retirement occurs at or after age 55. In the event of Mr. Gyani's death,
payments will be made to a designated beneficiary or Mr. Gyani's estate. The
account will vest fully $2,500,000 on August 1, 2001 and $1,000,000 on February
14, 2002. The account will vest fully and be paid out upon termination of Mr.
Gyani's employment because of his death or long term disability or upon a change
in control. The account will also fully vest and be paid out upon termination of
Mr. Gyani's employment for any reason, including a voluntary termination, after
February 14, 2002 but before age 55. If before February 14, 2002 and before a
change in control Mr. Gyani terminates his employment for good reason or we
terminate his employment other than for cause, $2,500,000 of the account will
vest and be paid out and the remaining $1,000,000 will be forfeited.
We have also assumed the obligation of AT&T under another deferred
compensation account established under the January 15, 2000 agreement as
amended, which was credited with a balance of $6,000,000. This account will also
be credited with interest on a quarterly basis and be paid out in five annual
installments following Mr. Gyani's retirement, provided retirement occurs after
age 55. In the event of Mr. Gyani's death, payments will be made to a designated
beneficiary or Mr. Gyani's estate. If Mr. Gyani's employment terminates prior to
age 55 for any reason, including a voluntary termination, all amounts credited
to the account will be paid to Mr. Gyani.
Mr. Gyani's agreement provides for certain severance benefits in the event
of his termination of employment under specified circumstances. Pursuant to the
agreement, in the event of (1) any company-initiated termination, or termination
by Mr. Gyani for good reason, other than termination by reason of death,
disability or for cause, Mr. Gyani will be entitled to the following benefits:
- a severance payment equal to 200% of the sum of his annual base salary
and target annual bonus in effect on the date of termination, payable
in the month following the month of termination;
- his target annual bonus for the year of termination (prorated for the
total period of eligibility calculated as of the date of termination),
payable within 20 days of termination;
- distributions under outstanding performance shares and restricted
stock units following each remaining three-year performance period;
- full vesting of all outstanding stock options and exercisability of
all such options for the remainder of the original term of each grant;
and
- full vesting and pay out of all special payments and deferred
compensation accounts except as described above.
Mr. Gyani will be entitled to continued eligibility for life for medical
benefits for himself and his dependents to same extent as other similarly
situated former executives. Mr. Gyani will also be eligible for this benefit in
the event of his voluntary resignation without good reason.
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In the event of Mr. Gyani's death or long term disability, Mr. Gyani or his
beneficiaries, estate or representatives will be entitled to the benefits
enumerated in the second, third and fourth bullet points above.
Upon termination of Mr. Gyani's employment for any reason, all stock
options granted prior to the completion of the split-off will fully vest and
remain exercisable until the expiration of their original term and all
performance shares and restricted stock units granted prior to the completion of
the split-off will fully vest and be distributed to Mr. Gyani at the end of the
relevant three-year cycle.
Mr. Gyani's agreement provides that in the event of a change in control,
all amounts and benefits to which he is entitled but which are not yet vested
will become fully vested. In addition, if during the two years following a
change in control Mr. Gyani's employment is terminated by us for any reason or
Mr. Gyani terminates his employment for good reason, Mr. Gyani will be entitled
to all the benefits described in the first through fourth bullet points above,
except that he will be entitled to a severance payment equal to 300% of the sum
of his annual base salary and target annual bonus in effect on the date of such
termination. In the event the payments in this paragraph are determined to
constitute a payment under Section 280G(b)(2) of the Internal Revenue Code and
such payment is subject to an excise tax under Section 4999 of the Code, we will
provide Mr. Gyani with a tax gross-up payment to negate the excise tax.
Pursuant to the agreement, Mr. Gyani is also entitled to five weeks paid
vacation each year and participation in our other benefit programs available to
our senior executives. The agreement has no fixed termination date, and Mr.
Gyani's employment may be terminated by him or us at any time.
The employment agreement prohibits Mr. Gyani from disclosing at any time
confidential information or trade secrets concerning us without our express
written consent. Mr. Gyani is also subject to a number of non-competition
constraints, violation of which could result in forfeiture of certain employee
benefits.
Retention Agreement with Mr. Keith
We have assumed the obligations of AT&T under a retention agreement AT&T
entered into with Mr. Keith on January 3, 2000 in connection with his employment
as Executive Vice President of the AT&T Wireless Group.
Pursuant to the agreement a deferred compensation account was established
in Mr. Keith's name that was credited with $850,000, which will vest on December
1, 2005, contingent on Mr. Keith's continued employment with us through that
date. This amount will be credited with interest on a quarterly basis and paid
in a single installment following his retirement. If Mr. Keith's employment is
terminated prior to December 1, 2005 by us without cause, or by Mr. Keith
voluntarily for good reason, all amounts credited to the account through
December 1, 2005 will be paid to Mr. Keith within the calendar quarter following
that date. If Mr. Keith's employment is terminated prior to December 1, 2005
because of death or long-term disability, all amounts credited to the account
through the date of termination will be paid within the calendar quarter. If Mr.
Keith's employment is terminated for any other reason before December 1, 2005,
all amounts in the account will be forfeited.
The agreement provides for severance benefits in the event of Mr. Keith's
termination before December 1, 2002 under specified circumstances. In the event
of any company-initiated termination without cause, including a termination by
Mr. Keith for good reason, Mr. Keith would be entitled to the following
benefits:
(i) a severance payment equal to 200% of the sum of his annual base
salary and target annual bonus in effect on the date of termination. Mr.
Keith has elected to defer any such payment for five years after the date
of termination, with payment in five annual installments;
(ii) his target annual bonus for the year of termination (prorated for
the total period of eligibility calculated as of the date of termination);
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(iii) continued vesting of all outstanding stock options and
performance shares/stock units and exercisability of stock options as if he
were eligible for retirement-related benefits; and
(iv) payment of all amounts credited under the deferred compensation
account within the calendar quarter following December 1, 2005.
Any nonvested special awards, as defined in the agreement, will be forfeited
upon such termination unless Mr. Keith is eligible for retirement-related
benefits as of the termination date. If Mr. Keith terminates his employment
before December 1, 2002 for any reason other than good reason, he will be
entitled to the benefits enumerated in (i) through (iii) above but will forfeit
all amounts credited under the deferred compensation account and any nonvested
special awards. Mr. Keith will be entitled to continued eligibility for life for
medical benefits to the same extent as other similarly situated former
executives.
We have also assumed the obligations of AT&T under a non-qualified
supplemental retirement arrangement AT&T entered into with Mr. Keith on April
14, 2001. Pursuant to the agreement, a deferred compensation account was
established in Mr. Keith's name that was credited with $580,000, which will vest
on the earlier of the split-off date or September 1, 2001. This amount will be
credited with interest on a quarterly basis contingent on Mr. Keith's continued
employment with us through the vesting date and paid in a single installment
following his retirement. If Mr. Keith's employment is terminated before the
vesting date by us without cause, by Mr. Keith voluntarily for good reason, or
because of his death or long-term disability, all amounts credited to the
account will be paid. If Mr. Keith's employment is terminated for any other
reason prior to the vesting date, all amounts in the account will be forfeited.
AT&T Force Management Program
For a period of one year after the split-off date, we have agreed to
provide a severance benefit equal to the benefit Mr. Zeglis and one other of our
executives would have received under the AT&T Force Management Program. Under
the program, Mr. Zeglis and the other executive officer are entitled to benefits
under the AT&T Senior Officer Severance Plan. Under the plan, if the covered
executives (i) are terminated by us for other than cause, or (ii) self-initiated
termination for good reason they will be provided a severance payment equivalent
to two times the sum of base salary plus target annual incentive in effect at
termination. The severance amount payable may be deferred for up to five years
with five annual payments thereafter and will be credited with interest based on
the interest rate formula in effect for AT&T's Senior Management Incentive Award
Deferral Plan on the effective date of the Senior Officer Severance Plan. In
addition, covered executives who terminate under the terms of the plan will be
entitled to certain other post-termination benefits that are generally made
available from time to time to retired executive officers.
2001 LONG TERM INCENTIVE PLAN
In June 2001, our board of directors and our sole stockholder approved and
adopted the AT&T Wireless Services, Inc. 2001 Long Term Incentive Plan, which
will become effective as of the split-off date. The purpose of the 2001
Incentive Plan is to give selected employees, directors and consultants of us
and our affiliates a proprietary and vested interest in our growth and
performance, to increase incentives to contribute to our future success and
prosperity, to enhance stockholder value and to enhance our ability to attract
and retain individuals of exceptional managerial talent upon whom, in large
measure, our sustained progress, growth and profitability depends.
Administration -- The Compensation Committee
The 2001 Incentive Plan will be administered by the compensation committee
of the board, each of the members of which will be a "non-employee director" as
defined for purposes of Section 16 of the Securities Exchange Act of 1934, and
an "outside director" as defined for purposes of Section 162(m) of the Internal
Revenue Code of 1986 (the "Code"). The committee has the authority to administer
the plan, including the power to select individuals to whom awards are granted,
to determine the types of awards and the number of shares covered, to set the
terms, conditions and provisions of such awards, to determine whether and to
what extent an award other than stock options may be deferred or settled in
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cash and to cancel or suspend awards. The committee may delegate to a committee
of one or more of our directors or officers, to the extent permitted by Delaware
law, the right to grant, cancel or suspend awards with respect to employees who
are not officers or directors. However, any action or determination by the
committee specifically affecting or relating to an award to a non-employee
director must be approved and ratified by the board.
Types of Awards
The 2001 Incentive Plan permits the granting of any or all of the following
types of awards: (1) stock options, including incentive stock options under the
Code, (2) stock appreciation rights whether alone or with stock options, (3)
restricted stock, (4) performance shares and performance units conditioned upon
meeting performance criteria and (5) other awards of stock or awards valued in
whole or in part by reference to, or otherwise based on, our stock or other
property. In connection with any award or any deferred award, payments may also
be made representing dividends or their equivalent.
Stock Options. Stock options entitle the holder to purchase a specified
number of shares of our common stock at a specified price, which is called the
exercise price, subject to the terms and conditions of the option grant. The
exercise price will be determined by the committee, but will be at least 100% of
the fair market value of the stock on the date of grant for an incentive stock
option, or ISO. The term of each option will be fixed by the committee, but if
no term is fixed or if the option is an ISO, the option will expire ten years
after the option is granted. The fair market value with respect to ISOs first
exercisable in any one year as to any participant may not exceed the maximum
limitation in Section 422 of the Code. Options may be exercised by payment in
full of the purchase price, either in cash or, at the discretion of the
committee, in whole or in part in our common stock or other consideration.
Stock Appreciation Rights (SARs). SARs may be granted alone, with new
options or after the grant of a related option that is not an ISO. Upon exercise
of an SAR, the holder is entitled to receive the excess of the fair market value
of the shares for which the right is exercised over the grant price of the SAR.
Unless the committee sets a term, the term of the SAR will be ten years. Payment
upon such exercise will be in cash, stock, other property or any combination of
cash, stock or other property as determined by the committee. Unless otherwise
determined by the committee, any related option will no longer be exercisable to
the extent the SAR has been exercised, and the related SAR will be canceled to
the extent the option has been exercised.
Restricted Stock. Recipients may not dispose of their restricted stock
until the lapse of the restrictions established by the committee. Recipients of
restricted stock are not required to provide consideration other than the
rendering of services or the payment of any minimum amount required by law. Upon
termination of employment during the restriction period, all restricted stock
will be forfeited, subject to any exceptions that may be authorized by the
committee.
Performance Awards. Performance awards may be in the form of performance
shares, which are units valued by reference to shares of stock, or performance
units, which are units valued by reference to cash or property other than stock.
Performance awards may be paid in entirely or in a combination of cash, stock,
other property in the discretion of the committee. Recipients of performance
awards are not required to provide consideration other than the rendering of
service or the payment of any minimum amount required by law.
Other Stock Unit Awards. To enable us and the committee to respond quickly
to significant developments in tax and other laws and legislation and to trends
in executive compensation practices, the committee is also authorized to grant
to participants, either alone or in addition to other awards granted under the
2001 Incentive Plan, awards of stock and other awards that are valued in whole
or in part by reference to our common stock or other property. These other stock
unit awards may be paid in common stock, cash or any other form of property as
the committee may determine. The committee may determine the consideration, if
any, for stock, including securities convertible into stock, purchased pursuant
to other stock unit awards, but this price must be at least the fair market
value of the stock or other securities on the date of grant.
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Shares Subject to the 2001 Incentive Plan
Subject to adjustment, 86 million shares of our common stock will be
authorized for issuance under the 2001 Incentive Plan, plus an automatic annual
increase of 2.75% of the common stock outstanding on January 1 of each year,
starting on January 1, 2002, throughout the life of the 2001 Incentive Plan. The
number of shares available for awards under the 2001 Incentive Plan will also be
increased due to awards that are forfeited or otherwise terminated without
issuance of shares, shares withheld by or tendered to us in connection with the
exercise of an option or other award or the satisfaction of tax withholding
obligations. The maximum number of shares that may be granted as ISOs is 86
million. The shares of stock deliverable under the 2001 Incentive Plan may
consist in whole or in part of authorized and unissued shares, treasury shares
or shares purchased in the open market or otherwise. The committee may adjust
the aggregate number of shares or the awards under the plan in the event of a
change affecting shares of common stock, such as stock dividends,
recapitalization, reorganization or mergers.
Nonassignability of Awards
Unless the committee determines otherwise at the time of an award, no award
granted under the 2001 Incentive Plan may be assigned, transferred, pledged or
otherwise encumbered by a participant, otherwise than by will, by designation of
a beneficiary after death or by the laws of descent and distribution. Each award
may be exercisable, during the participant's lifetime, only by the participant,
or, if permissible under applicable law, by the participant's guardian or legal
representative.
Section 162(m) of the Code -- Performance-Based Compensation
If the committee determines at the time restricted stock, a performance
award or other stock unit award is granted to a participant who is then an
officer and such participant is likely to be a "covered employee" under Section
162(m) of the Code, then the committee may provide that the award is subject to
the achievement of one or more objective performance goals established by the
committee. These performance goals will be based upon our, or an affiliate's or
a division's achievement of specified levels of one or any combination of the
following: net cash provided by operating activities, earnings per share from
continuing operations, operating income, revenues, operating margins, return on
operating assets, return on equity, economic value added, stock price
appreciation, total stockholder return, cost control, strategic initiatives,
market share, net income, return on invested capital or subscriber, cash
management or asset management metrics. These performance goals also may be
based upon the achievement of specified levels of our performance relative to
the performance of other corporations. These performance goals will be set by
the committee in compliance with the requirements and regulations of Section
162(m) of the Code. The committee is authorized to make adjustments in
performance award criteria or in the terms and conditions of other awards in
recognition of unusual or non-recurring events affecting our business or our
financial statements or changes in applicable laws, regulations or accounting
principles.
The 2001 Incentive Plan provides that in any calendar year period, subject
to any adjustments, no participant may be granted options, SARs, or restricted
stock or performance awards with respect to more than three million shares and
that a maximum of $10 million is payable with respect to other performance units
or other stock unit awards that are not valued with reference to common stock.
Termination and Amendment
The board may amend, alter or discontinue all or a portion of the 2001
Incentive Plan at any time, as long as the rights of a participant are not
impaired without the participant's consent and stockholder approval is not
required. The committee may amend the terms of any award granted, prospectively
or retroactively but cannot impair the rights of any participant without the
participant's consent. Also, generally, no change or adjustment may be made to
an outstanding ISO, without the consent of the participant, which would cause
the ISO to fail to continue to qualify as an ISO under the Code.
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Change in Control
To maintain all of the participants' rights in the event of a change in
control of our company (as described below), unless the committee determines
otherwise at the time of grant with respect to a particular award:
(1) any options and SARs outstanding as of the date such change in
control is determined to have occurred, and which are not then exercisable
and vested, will become fully exercisable and vested to the full extent of
the original grant;
(2) the restrictions and deferral limitations applicable to any
restricted stock will lapse, and the restricted stock will become free of
all restrictions and limitations and become fully vested and transferable
to the full extent of the original grant;
(3) all performance awards will be considered to be earned and payable
in full and any deferral or other restriction will lapse and such
performance awards will be immediately settled or distributed; and
(4) the restrictions and deferral limitations and other conditions
applicable to any other stock unit awards or any other awards will lapse
and the other stock unit awards or other awards will become free of all
restrictions, limitations or conditions and fully vested and transferable
to the full extent of the original grant.
If in connection with a corporate transaction, however, a successor company
assumes or substitutes for an option or SAR, then outstanding options, SARs or
shares of restricted stock will not be accelerated as described in paragraphs
(1) and (2) above.
A change in control of our company means the occurrence of any of the
following events:
(1) an acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of 25% or more of either (A) the then outstanding shares of our common
stock or (B) the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors,
excluding acquisitions by or from us or by our employee benefit plans or
some stockholder approved merger or sale transactions;
(2) the individuals who constitute the board immediately after the
split-off date cease for any reason to constitute at least a majority of
the board, unless the change of board composition is approved by certain
members of the current board;
(3) generally, the consummation of a merger, reorganization or
consolidation or sale or other disposition of all or substantially all of
our assets; or
(4) the approval by our stockholders of our complete liquidation or
dissolution.
ADJUSTMENT PLAN
In June 2001, our board of directors and our sole stockholder approved and
adopted the AT&T Wireless Services, Inc. Adjustment Plan, which will become
effective as of the split-off date. The Adjustment Plan is subject to the terms
of the employee benefits agreement entered into between us and AT&T. The purpose
of the Adjustment Plan is to permit selected employees and directors of AT&T,
us, and both of our affiliates to retain and preserve the value of the
equity-based incentive compensation that would otherwise be lost as a result of
the split-off. Specifically, pursuant to the Adjustment Plan, the committee may
(i) grant options to purchase our common stock, as part of and in connection
with the adjustment of options granted under prior equity-based incentive
compensation plans required in connection with the split-off and resulting in
two separately exercisable options, one to purchase our common stock and one to
purchase AT&T common stock, (ii) grant options to purchase our common stock, as
a result of the conversion of certain options to purchase shares of AT&T
Wireless Group
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common stock (iii) grant other options or awards after the split-off and (iv)
administer all of the types of options and awards granted pursuant to the
Adjustment Plan.
Shares Subject to the Adjustment Plan
Subject to adjustment as described below, the number of shares authorized
for issuance under the Adjustment Plan is equal to that number of shares of our
common stock issuable upon exercise of the adjusted options, the converted
options and other existing awards under AT&T equity-based incentive compensation
plans based on AT&T common stock in connection with the split-off and in
accordance with the terms of the employee benefits agreement between us and
AT&T. The number of shares available for awards under the 2001 Incentive Plan
will also be increased due to awards that are forfeited or otherwise terminated
without issuance of shares, shares withheld by or tendered to us in connection
with the exercise of an option or other award or the satisfaction of tax
withholding obligations. The shares of stock deliverable under the Adjustment
Plan may consist in whole or in part of authorized and unissued shares, treasury
shares or shares purchased in the open market or otherwise.
The Adjustment Plan otherwise has terms that are substantially similar to
the 2001 Incentive Plan except that in all cases options will be accelerated
upon a change in control.
EMPLOYEE STOCK PURCHASE PLAN
In June 2001, our board of directors and our sole stockholder approved and
adopted the AT&T Wireless Services Employee Stock Purchase Plan, or ESPP, which
will be effective as of the split-off date. The purpose of the plan is to assist
our employees and the employees of our participating subsidiaries to acquire our
common stock, to help employees provide for their future security and to
encourage employees to remain employed by us and our subsidiaries.
Under the ESPP, eligible employees may purchase shares of our common stock
through payroll deductions or other payment arrangements at a 15% discount from
fair market value. The shares of stock that may be issued under the ESPP may be
newly issued shares, treasury shares or shares bought in the open market or
otherwise. Our board authorized the issuance under the ESPP of a total of
5,200,000 shares of our common stock, plus an automatic annual increase, to be
added on the first day of our fiscal year beginning in 2002, equal to the least
of (1) 9,100,000 shares, (2) 0.0035% of the outstanding shares of our common
stock as of the end of our immediately preceding fiscal year on a fully diluted
basis and (3) a lesser amount determined by our board of directors. Any shares
from increases in previous years that are not actually issued will be added to
the aggregate number of shares available for issuance in future periods.
Eligibility
An employee who (1) has completed one bi-weekly payroll cycle with us or a
participating subsidiary, (2) is still an employee on the first day of the
offering period and (3) does not own 5% or more of the combined voting power or
value of our capital stock or that of any subsidiary as measured on the first
day of the offering period is eligible to participate in the ESPP. The committee
may also adjust eligibility criteria for future offerings as follows: (1) any
other minimum employment period not exceeding two years; (2) customary
employment for up to 20 hours or more per week; and (3) customary employment for
up to five months per year.
Offering Periods
Other than the first offering period after the split-off, we will implement
the ESPP with three-month offering periods that begin on the first day of each
calendar quarter and end, respectively, on the last day of each calendar
quarter. The committee may establish different offering and purchase periods in
the future. During each offering period, participating employees accumulate
funds in an account used to buy our common stock through payroll deductions or
other payment arrangements. Funds in the employee's account accrue at a rate
between 1% and 10% of the employee's base pay, bonuses and commissions
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received during each payroll period in the offering period. At the end of each
three-month offering period, the purchase price is determined and the
participating employees' accumulated funds are used to purchase the appropriate
number of whole shares of our common stock. Under the ESPP, no employee may
purchase more than $25,000 worth of our common stock, based on the fair market
value of the common stock on the first day of an offering period, under all of
our employee stock purchase plans or those of a subsidiary in any calendar year.
Purchase Price
The purchase price per share of our common stock is 85% of the lesser of
(1) the fair market value of our common stock on the first day of an offering
period and (2) the fair market value of our common stock on the last day of a
purchase period.
Effect of Termination
Generally, employees have no right to acquire shares under the ESPP more
than three months after the employee retires, dies or otherwise terminates
employment with us or a participating subsidiary, including as a result of a
corporation ceasing to be our subsidiary. Upon termination of employment, no
further amounts will be credited to the participant's account from any pay owing
after such termination. All amounts already credited will be used at the end of
the offering period in which the termination occurred to purchase stock. The
employee's account will then be closed.
Restrictions on Transfer
Neither funds credited to an employee's account under the ESPP nor any
rights with regard to the purchase of shares under the ESPP may be assigned,
transferred, pledged or otherwise disposed of in any way by the employee, other
than by will or the laws of descent and distribution.
Administration
The ESPP is administered by a committee, each member of which is appointed
by our board or a delegate of our board. The committee has the power to
administer the ESPP, including interpreting the ESPP and the options granted
under it, determining when offering periods and purchase periods start and end
and establishing any rules consistent with Section 423 of the Code. The
committee can also adjust the aggregate number of shares or the awards under the
ESPP in the event of a change affecting shares of common stock, such as stock
dividends, recapitalization, reorganization, mergers or other changes in
control. The board in its absolute discretion may exercise any and all rights
and duties of the committee, and the committee may delegate any of its
responsibilities under the ESPP.
Amendment and Termination of the ESPP
The ESPP terminates on April 1, 2011. The board, or its delegate, may
amend, suspend or terminate the ESPP at any time. No offering periods may
commence during any period of suspension of the ESPP. If the amendment would
increase the number of shares of stock available for purchase under the ESPP,
the amendment must be approved by our stockholders.
TRANSACTIONS WITH CERTAIN OFFICERS
In June 1991, Robert H. Johnson, our Executive Vice President -- National
Wireless Operations, and in August 1991, Gregory L. Slemons, our Senior Vice
President -- Wireless Network Services, each issued to us a promissory note in
the principal amount of $99,900 in connection with interest-free relocation
loans made by us to them, either to be repaid or forgiven over a ten-year
period. Since January 1, 1998, the largest principal balance due under Mr.
Johnson's note was $99,900, and the largest principal balance due under Mr.
Slemons' note was $74,925. We forgave all of the unpaid balance of Mr. Johnson's
note in June 1999, and, as of the date of this prospectus, we have forgiven
$74,925 of the amount due under Mr. Slemons' note.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF OUR COMMON STOCK
Before the split-off, all of the outstanding shares of our common stock are
and will be held beneficially and of record by AT&T. The following table sets
forth, as of June 19, 2001, information concerning expected beneficial ownership
of our common stock after giving effect to the split-off by:
- AT&T and by each person or entity known to us who will beneficially own
more than five percent of the outstanding shares of our common stock;
- each person who we currently know will be one of our directors or named
executive officers at the time of the split-off; and
- as a group, all persons who we currently know will be our directors and
executive officers at the time of the split-off.
The following information:
- gives effect to the split-off as if it had occurred on June 19, 2001;
- in the case of percentage ownership information, assumes that immediately
after the split-off there are 2,529,974,082 shares of our common stock
outstanding, which is the number that would have been outstanding if the
split-off had occurred on June 19, 2001;
- reflects a redemption ratio of one share of our common stock for each
share of AT&T Wireless Group tracking stock held by persons listed in the
table below;
- assumes a distribution ratio of .32 of a share of our common stock for
each share of AT&T common stock held on the distribution record date;
- gives effect to the conversion, at an assumed conversion ratio of one to
one, of each option to purchase shares of AT&T Wireless Group tracking
stock issued under employee stock incentive plans and outstanding on the
split-off date into an option on substantially the same terms to purchase
shares of our common stock; and
- gives effect to the adjustment of each option to purchase a share of AT&T
common stock granted before January 1, 2001 and held by persons listed in
the table below into two separate options -- one fully vested option to
purchase an adjusted number of shares of AT&T common stock and another to
purchase .32 of a share of our common stock, with a vesting schedule
which carries over from the original AT&T options.
The actual number of shares of common stock outstanding as of the split-off
date may differ to the extent that outstanding stock options or warrants are
exercised between June 19, 2001 and the split-off date and to the extent the
assumed distributions and conversion ratios differ from the actual ratios.
Based on information furnished to us or on filings made pursuant to Section
13(d) or (g) under the Securities Exchange Act by or on behalf of such person or
entity, except as otherwise indicated in the footnotes below, we believe that,
subject to community property laws where applicable, each person or entity has
sole voting and investment power with respect to the shares of common stock set
forth opposite such person's or entity's name. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally attributes beneficial ownership of securities to
persons who possess sole or shared voting or investment power with respect to
such securities. Shares of our common stock subject to options, warrants or
other convertible securities that are currently exercisable for or convertible
into shares of our common stock, or that will be exercisable for or convertible
into shares of our common stock within 60 days after June 19, 2001, are deemed
to be outstanding and beneficially owned by the person holding such options,
warrants or other convertible securities for the purpose of computing the
percentage ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. Except as
otherwise noted below, the address for
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each person listed in the following table is: c/o AT&T Wireless Services, Inc.,
7277 164th Avenue NE, Building 1, Redmond, Washington 98052.
NUMBER OF SHARES PERCENTAGE OF SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
IMMEDIATELY IMMEDIATELY
NAME AFTER SPLIT-OFF AFTER SPLIT-OFF
---- ----------------------- --------------------
5% STOCKHOLDERS
NTT DoCoMo, Inc................................... 448,004,162(1) 17.42%
Sanno Park Tower -- 41st Floor
11-1, Nagata-cho 2-chome
Chiyoda-ku
Tokyo 100-6150
AXA............................................... 168,785,311(2) 6.67%
25, avenue Matignon
75008 Paris, France
AT&T Corp......................................... 125,391,850(3) 4.96%(3)
295 North Maple Avenue
Basking Ridge, New Jersey 07920
DIRECTORS AND EXECUTIVE OFFICERS
John D. Zeglis.................................... 1,265,268(4)(5) *
Walter Y. Elisha.................................. 19,700(6) *
Donald V. Fites................................... 19,667(7) *
Ralph S. Larsen................................... 12,776(8) *
John W. Madigan................................... -- *
Nobuharu Ono...................................... --(9) *
A. Barry Rand..................................... -- *
Carolyn M. Ticknor................................ -- *
Mohan S. Gyani.................................... 625,785(10) *
Michael G. Keith.................................. 445,349(11) *
Jordan M. Roderick................................ 299,497(12) *
Robert H. Johnson................................. 395,049(13) *
All directors and executive officers as a group
(24 persons)................................... 5,557,837(14)(5) *
---------------
* Less than 1%
(1) Represents, according to information furnished in a Schedule 13D/A filed on
January 8, 2001 by Nippon Telegraph and Telephone Corporation on its own
behalf and on behalf of NTT DoCoMo, Inc. and DCM Capital USA (UK) Limited,
406,255,889 shares issuable upon conversion of shares of a special series
of AT&T preferred stock, and 41,748,273 shares issuable upon conversion of
shares of a special series of AT&T preferred stock that such persons have
the right to acquire upon exercise of warrants to acquire shares of such
preferred stock.
(2) According to information furnished in a Schedule 13G/A jointly filed on
June 11, 2001 by AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie
Mutuelle, AXA Conseil Vie Assurance Mutuelle, AXA Courtage Assurance
Mutuelle, AXA and AXA Financial, Inc., each of these six entities, other
than AXA Financial, Inc., beneficially owns 168,785,311 shares of our
common stock, has sole voting power with respect to 66,617,426 shares of
our common stock and has sole dispositive power with respect to 168,763,655
shares of our common stock. AXA Financial, Inc. beneficially owns
164,635,113 shares of our common stock, has sole voting power with respect
to 62,488,884 shares of our common stock and has sole dispositive power
with respect to 164,635,113 shares of our common stock. Each of these
filing entities has shared voting power with respect to 56,973,225 shares
of our common stock, and shared dispositive power with respect to 21,656
shares of our common stock. The following AXA entities have sole voting and
sole dispositive power with respect
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to the following number of shares of our common stock: AXA, 37,756 shares;
AXA Investment Managers (France), 1,262,711 shares; AXA Investment Managers
(Hong Kong), 193,815 shares; AXA Investment Managers (U.K.), 2,300,162
shares; AXA Investment Managers (Den Haag), 118,900 shares; and AXA Colonia
Konzern AG (Germany), 215,198 shares. The following AXA Financial, Inc.
subsidiaries beneficially own shares of our common stock: (a) Alliance
Capital Management L.P. (162,196,213 shares, with sole voting power with
respect to 61,996,184 shares, sole dispositive power with respect to
162,196,213 shares, shared voting power with respect to 56,973,225 shares
and shared dispositive power with respect to 21,656 shares), and (b) The
Equitable Life Assurance Society of the United States (2,438,900 shares,
with sole voting power with respect to 492,700 shares and sole dispositive
power with respect to 2,438,900 shares). Addresses of these filers are: AXA
Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle and AXA Conseil
Vie Assurance Mutuelle, 370, rue Saint Honore, 75001 Paris, France; AXA
Courtage Assurance Mutuelle, 26, rue Louis le Grand, 75002 Paris, France;
AXA, 25, avenue Matignon, 75008 Paris, France; and AXA Financial, Inc.,
1290 Avenue of the Americas, New York, New York 10104.
(3) Assumes that AT&T (a) retains 188,087,774 shares of our common stock from
the distribution, which is the number of shares having a value of $3
billion based on the closing price of AT&T Wireless Group tracking stock on
June 19, 2001, and (b) disposes of one-third of those shares shortly before
or on the split-off date to Credit Suisse First Boston Corporation and
Goldman, Sachs & Co., Inc., which entities are then expected to dispose of
such shares in the concurrent offering. If the disposition to Credit Suisse
First Boston and Goldman Sachs does not occur, AT&T would be the beneficial
owner of 188,087,774 shares, or approximately 7.43% of our shares, and to
the extent AT&T disposes of more than or fewer than half of these shares,
AT&T's beneficial ownership may be greater than or less than 4.96%.
(4) Includes 1,251,689 shares issuable upon exercise of options to purchase
shares of our common stock, and 2,579 shares issuable as a distribution on
shares of AT&T common stock held by Mr. Zeglis.
(5) Includes 1,000 shares held by Chalice Partners, of which Mr. Zeglis,
Gregory P. Landis, our Senior Vice President and General Counsel, and
Philip H. Osman, our Senior Vice President, Chief Administrative Officer,
are partners and share voting and investment power.
(6) Includes 4,375 shares issuable upon exercise of options to purchase shares
of our common stock, and 5,325 shares issuable as a distribution on shares
of AT&T common stock held by Mr. Elisha.
(7) Includes 4,375 shares issuable upon exercise of options to purchase shares
of our common stock.
(8) Includes 4,375 shares issuable upon exercise of options to purchase shares
of our common stock; 3,401 shares issuable as a distribution on shares of
AT&T common stock held by Mr. Larsen, including 96 shares issuable to a
family trust, of which Mr. Larsen is a trustee; 604 shares issuable as a
distribution on shares of AT&T common stock held by J.S. Johnson Sr. Trust
dated 1961, of which Mr. Larsen is a trustee; and 1,260 shares issuable as
a distribution on shares of AT&T common stock held by J.S. Johnson Sr.
Trust dated 1963, of which Mr. Larsen is a trustee.
(9) Does not include any shares beneficially owned by NTT DoCoMo, of which Mr.
Ono is a director and executive vice president and senior executive manager
of its mobile multimedia division.
(10) Includes 620,785 shares issuable upon exercise of options to purchase
shares of our common stock.
(11) Includes 438,211 shares issuable upon exercise of options to purchase
shares of our common stock, and 4,138 shares issuable as a distribution on
shares of AT&T common stock held by Mr. Keith.
(12) Includes 278,138 shares issuable upon exercise of options to purchase
shares of our common stock, and 4,236 shares issuable as a distribution on
shares of AT&T common stock held by Mr. Roderick. Mr. Roderick and his
wife, Joyce Roderick, beneficially own and share voting and dispositive
power with respect to 25,686 shares of our common stock.
(13) Includes 390,013 shares issuable upon exercise of options to purchase
shares of our common stock, and 1,036 shares issuable as a distribution on
shares of AT&T common stock held by Mr. Johnson.
(14) Includes 5,404,977 shares issuable upon exercise of options to purchase
shares of our common stock; and 46,295 shares issuable as a distribution on
shares of AT&T common stock held by such persons.
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OUR RELATIONSHIP WITH AT&T FOLLOWING THE SPLIT-OFF
The specific terms and conditions of the split-off are governed by a
separation and distribution agreement between AT&T and us.
In addition, we and AT&T have entered into a number of other agreements in
connection with the split-off. These agreements include:
- asset transfer agreement,
- brand license agreement,
- master carrier agreement and other commercial agreements,
- agency and referral agreement,
- employee benefits agreement,
- intellectual property agreement,
- tax sharing agreement, and
- interim and other services agreements and
- registration rights agreement.
The material terms of the separation and distribution agreement and these
other agreements are described below. The separation and distribution agreement,
the brand license agreement, the network services agreements, the agency and
referral agreement, the employee benefits agreement, the intellectual property
agreement, the tax sharing agreement, and the registration rights agreement have
been filed as exhibits to the registration statement of which this prospectus
forms a part, and the summaries of these documents that follow are qualified in
their entirety by reference to the full text of these documents, which are
incorporated into this document by reference.
AGREEMENTS BETWEEN AT&T AND US RELATING TO THE SPLIT-OFF
Separation and Distribution Agreement
The separation and distribution agreement sets forth the agreements between
us and AT&T with respect to the principal corporate transactions required to
effect the split-off, and a number of other agreements governing the
relationship between us and AT&T following the split-off. The asset transfer
agreement with AT&T, which is incorporated into, and superseded by, the
separation and distribution agreement, relates to the assets to be transferred
in connection with the separation. We expect to finalize the transfers called
for under the asset transfer agreement immediately before the split-off.
However, we will only complete the split-off, if specified conditions are met.
These conditions include, among others, the continued validity of the favorable
ruling on the split-off received from the IRS and the satisfaction by AT&T of a
number of conditions in its credit facility.
Specifically, this credit agreement provides that AT&T cannot effect
specified transactions, including the distribution of AT&T Wireless Group in the
split-off, unless:
- AT&T's public debt rating for its long-term senior debt is at least BBB+
by Standard & Poor's Ratings Services and Baa1 by Moody's Investors
Service, Inc.;
- there are no defaults or events of default under the credit agreement;
- the preferred equity interest in AT&T Wireless Group held by, and
intercompany indebtedness owed by AT&T Wireless Group to, AT&T is repaid;
and
- required prepayments of the credit facility are made.
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AT&T's current long-term debt ratings are A on CreditWatch with negative
implications by Standard and Poor's and A2 under review for possible downgrade
by Moody's. We have redeemed the preferred equity interest in AT&T Wireless
Group and repaid all intercompany indebtedness owed to AT&T.
Even if these conditions are satisfied, other events or circumstances,
including litigation, could occur that could impact the timing or terms of the
split-off or our ability or plans to complete the split-off. For example,
several large stockholders of AT&T associated with unions that represent AT&T
employees have publicly announced their opposition to AT&T's restructuring plan,
and some of these shareholders have commenced litigation relating to a proposed
amendment to AT&T's charter that is related to AT&T's restructuring plan. As a
result of these factors, the split-off may not occur and, if it does occur, it
may not occur on the terms or in the manner described, or in the time frame
contemplated.
The Separation. Pursuant to the asset transfer agreement and the
separation and distribution agreements, AT&T has transferred, or caused its
subsidiaries to transfer, to us:
- all assets allocated to AT&T Wireless Group by AT&T's charter that are
not then held by us;
- all assets reflected in the most recent balance sheet of AT&T Wireless
Group that are not then held by us;
- specified contracts that relate to AT&T Wireless Group; and
- other specified assets.
These assets are referred to as the "additional wireless group assets."
We will also agree to assume or fulfill:
- all liabilities allocated to AT&T Wireless Group by AT&T's charter to
which we or our subsidiaries are not then subject;
- all liabilities reflected in the most recent balance sheet of AT&T
Wireless Group to which we are not then subject;
- all liabilities to the extent arising out of, relating to or resulting
from the operations of AT&T Wireless Group, including its contracts and
assets;
- all liabilities to the extent arising out of, relating to or resulting
from terminated, divested or discontinued businesses and operations that
were part of AT&T Wireless Group immediately before termination,
divestiture or discontinuation;
- all liabilities to the extent arising out of, relating to or resulting
from, a specified list of litigations;
- all liabilities to the extent arising out of, relating to or resulting
from the provision of, or failure to provide, telecommunications services
by AT&T Wireless Group;
- a portion of the liabilities, if any, resulting out of an action relating
to AT&T Wireless Group's assets in Malaysia, subject to certain
adjustments;
- a portion of the liabilities, if any, arising out of specified purported
securities class actions litigations to the extent relating to AT&T
Wireless Group tracking stock;
- specified liabilities resulting from the split-off;
- obligations and commitments under specified contracts; and
- other specified liabilities.
These liabilities are referred to as "additional wireless group liabilities."
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Generally, neither we nor AT&T will make any representation or warranty as
to:
- the assets, businesses or liabilities transferred or assumed;
- any consents or approvals required in connection with that transfer or
assumption;
- the value or freedom from any lien or other security interest of any of
the additional wireless group assets; and
- the absence of any defenses or freedom from counterclaim relating to any
claim of any person, or as to the legal sufficiency of any assignment,
document or instrument delivered to convey title to any asset
transferred.
In addition, the wireless group assets were transferred on an "as is," "where
is" basis, and we will bear the economic and legal risks that the conveyance is
insufficient to vest good and marketable title, free and clear of any lien or
other security interest.
We and AT&T generally also have agreed to terminate all agreements,
understandings and arrangements among us and AT&T with specified exceptions. We
have repaid the full amount of the principal and accrued but previously unpaid
interest of all outstanding indebtedness owed by AT&T Wireless Group to AT&T and
the face value and accrued but previously unpaid dividends on all preferred
stock in AT&T Wireless Group held by AT&T.
Reduction in AT&T Common Stock Group's Retained Portion of the Value of
AT&T Wireless Group. We will assume specified related obligations and
liabilities, including the obligation to assume a portion of AT&T's employee
stock options. In connection with this assumption, AT&T will, effective
immediately before the split-off, reduce AT&T Common Stock Group's retained
portion of the value of AT&T Wireless Group by the equivalent of 12,577,650
shares of AT&T Wireless Group tracking stock. This will have the effect of
reducing the total number of shares of our common stock distributed to holders
of AT&T common stock in the split-off by that number of shares. Based on the
closing trading price of AT&T Wireless Group tracking stock on June 19, 2001,
this reduction had a value of approximately $200.6 million. For more information
on the liabilities and obligations that we have assumed in the employee benefits
agreement, please see "-- Employee Benefits Agreement."
Releases and Indemnification. The separation and distribution agreement
generally provides for a full and complete release and discharge as of the date
of the completion of the mandatory exchange of all liabilities existing or
arising from all acts and events occurring or failing to occur or alleged to
have occurred or to have failed to occur and all conditions existing or alleged
to have existed on or before the date of the completion of the mandatory
exchange between or among AT&T and its affiliates, on the one hand, and us and
our affiliates, on the other hand, including any contractual agreements or
arrangements existing or alleged to exist between or among those parties on or
before that date.
We have agreed to indemnify, defend and hold harmless AT&T and its
affiliates, and each of their directors, officers and employees, from and
against all liabilities relating to, arising out of or resulting from:
- the failure of us, or our affiliates, or any other person to pay, perform
or otherwise promptly discharge any of the liabilities of AT&T Wireless
Group or additional wireless group liabilities;
- any liabilities of AT&T Wireless Group or additional wireless group
liabilities;
- any breach by us or our affiliates of the separation and distribution
agreement or any of the ancillary agreements entered into in connection
with the separation and distribution agreement; and
- specified disclosure liabilities.
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AT&T has agreed to indemnify, defend and hold us and our affiliates
harmless, and each of our directors, officers and employees, from and against
all liabilities relating to, arising out of or resulting from:
- the failure of AT&T or its affiliates or any other person to pay, perform
or otherwise promptly discharge any liabilities of AT&T, other than
liabilities of AT&T Wireless Group or additional wireless group
liabilities;
- any liabilities of AT&T, other than liabilities of AT&T Wireless Group or
additional wireless group liabilities;
- any breach by AT&T or its affiliates of the separation and distribution
agreement or any of the ancillary agreements entered into in connection
with the separation and distribution agreement; and
- specified disclosure liabilities.
The separation and distribution agreement also specifies procedures for
claims for indemnification made under the provisions described above.
Agreement on Split-off Taxes and Limitations on Future Transactions. Under
the separation and distribution agreement, we are responsible for any tax
liability and any related liability (e.g. interest, penalties, accounting, legal
and other professional fees, etc.) that results from the split-off failing to
qualify as a tax-free transaction, unless any such liability was caused by:
- the inaccuracy of certain factual representations made by AT&T in
connection with obtaining a private letter ruling from the IRS (or in
connection with obtaining a tax opinion); or
- a post-split-off transaction with respect to the stock or assets of AT&T.
In addition, we have agreed that, for a period of 30 months from the date
of the distribution:
- we will continue to be a company engaged in the active conduct of a trade
or business as defined in Section 355(b) of the Internal Revenue Code;
and
- we will not enter into any transaction or transactions as a result of
which any person or group of related persons would acquire, or have the
right to acquire, our stock that represents more than 5% of the vote or
value of all outstanding shares of our stock and we will not take any
other action (including action inconsistent with the representations made
to the IRS or counsel in connection with split-off rulings or opinions)
that could be reasonably likely (taken together with other relevant
transactions) to jeopardize the tax-free status of the split-off to AT&T
or its stockholders, in each case unless
-- AT&T determines that the transaction or transactions would not render
the split-off taxable; or
-- We or AT&T, at AT&T's election, obtain a tax opinion or private letter
ruling from the IRS confirming that the subsequent transaction will
not render the split-off taxable.
Termination. The separation and distribution agreement will provide that
it may be terminated at any time before the completion of the distribution by
AT&T in its sole discretion. If AT&T terminates the separation and distribution
agreement, neither party will have any liability or further obligation to any
other party.
Amendments and Waivers. The separation and distribution agreement provides
that no provisions of it or any ancillary agreement will be deemed waived,
amended, supplemented or modified by any party unless the waiver, amendment,
supplement or modification is in writing and signed by the authorized
representative of the party against whom that waiver, amendment, supplement or
modification is sought to be enforced.
Brand License Agreement
We and AT&T have entered into a brand license agreement. This agreement
gives us rights to continue to use specified AT&T brands, including the AT&T
globe design and the AT&T trade dress. The
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rights are granted royalty free, although we are required to pay a maintenance
fee. The brand license agreement allows us to use these AT&T brands, alone or in
combination with our other marks, for the following:
- provision of our mobile cellular services (including so-called
third-generation services),
- residential fixed wireless services, and
- certain ancillary products and services.
We have these rights for five years following the completion of the
split-off. After the initial five-year period, we may renew our rights to these
AT&T brands for an additional five-year period. During the initial or renewal
period, we may terminate the brand license agreement on 12 months prior notice.
In addition, we may continue to use these AT&T brands during a transition period
after the brand license agreement is terminated.
We are able to use these AT&T brands exclusively in connection with the
following:
- wide-area mobile cellular services,
- aircraft to ground services,
- specified ancillary wireless services, and
- certain wireless devices and portals.
We are able to use these AT&T brands non-exclusively in connection with the
following:
- residential fixed wireless services in some territories;
- specified content, equipment and software associated with our services;
and
- some wireless devices, portals and promotional products.
During the term of the brand license agreement and within certain areas,
AT&T will not license these brands to third parties for providing residential
local telephony or high speed internet access services through services that
directly compete with our residential fixed wireless services, unless AT&T, or
its present or future affiliates, has an equity interest in the third party,
provides a core component of those services or has a direct relationship with
the end-user customers.
In the two years following the split-off, we can obtain a non-exclusive
license to use these AT&T brands for specified small business fixed wireless
services if we enter into a distribution agreement with AT&T relating to fixed
wireless services.
We can generally use these AT&T brands worldwide except where AT&T has
already granted exclusive brand licenses or where another AT&T unit has
exclusive rights. AT&T also has granted a non-exclusive brand license in the
Republic of China, and accordingly we do not have exclusive use of the AT&T
brands in that area. With some conditions, we can extend some rights to use
these AT&T brands to authorized dealers.
To maintain our rights, we must comply with specified quality, customer
care, graphics and marketing standards in connection with our use of these AT&T
brands. While we are using the AT&T brands, we must also pay AT&T a brand
maintenance fee. AT&T may terminate the brand license agreement in the event of
a significant breach or a change of control of us.
Master Carrier Agreement and Other Commercial Agreements
We and AT&T have entered into a master carrier agreement. This agreement
requires AT&T to provide voice and data telecommunications services to us for
five years. AT&T will provide both wholesale services, which we will use as a
component of wireless services we provide to our customers, and administrative
services, for example corporate usage that we will use ourselves.
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We are required to purchase in each year an amount of wholesale domestic
voice services equal to our actual usage in 2001. The pricing at which AT&T
provides these services is subject to internal and external benchmarking. We are
not required to purchase from AT&T wholesale domestic voice services in excess
of this commitment, although AT&T has a right to match any third party offers
until 2003 for 80% of any excess. From 2003 until the agreement ends, we may
purchase such service in excess of the commitment from any carrier.
We are also required to purchase all international voice services from
AT&T. AT&T will provide these services at the price AT&T receives from Concert,
its joint venture with British Telecommunications.
We are required each year to purchase domestic administrative services,
data and voice, at a level equal to 80% of our purchases in 2000. We will
purchase our local connectivity and business needs from AT&T if AT&T meets
committed levels of performance, and offers price and performance terms at least
as favorable as those offered by other providers.
We and AT&T also have entered into other commercial agreements. These
agreements include agreements:
- governing the physical interconnection of their networks and other
intercarrier arrangements;
- SS7 signaling services to be provided by us to AT&T's business services
unit;
- a 38 GHz license to be provided by us to AT&T's business services unit;
- agreements under which AT&T will provide space and power in various AT&T
locations for our equipment; and
- an agreement under which we will provide wireless services to AT&T for
administrative purposes.
Upon either party being acquired by a significant competitor of the other,
the party not being acquired has a right to terminate certain of the agreements,
including the network service agreement. Alternatively, the party not being
acquired may elect to keep the network service agreement in effect with certain
modifications. Those modifications will include eliminating AT&T's right to
match third party offers, and, if we are acquired, changing the domestic voice
purchase requirement to 90% of the past twelve months usage, eliminating
internal benchmarking, and increasing the frequency of external benchmarking.
Agency and Referral Agreement
We and AT&T also entered into an agency and referral agreement. This
agreement covers AT&T's acting as an agent on our behalf to assist us in
obtaining business with AT&T's business customers. Upon either party being
acquired by a significant competitor of the other, the party not being acquired
has the right to terminate this agreement.
Employee Benefits Agreement
We and AT&T entered into an employee benefits agreement that covers a wide
range of compensation and benefit issues. In general, we are responsible for all
obligations and liabilities relating to current and former employees of us and
the AT&T Wireless Group and their dependents and beneficiaries after the
split-off date, and AT&T is responsible for the obligations and liabilities
before the split-off date. We refer to individuals who were employees of AT&T or
its affiliates and were transferred to us or our affiliates as transferred
individuals.
Our plans recognize and credit transferred individuals with their full
service with AT&T or its affiliates for purposes of participation, vesting and
the schedule of benefits, but not for purposes of benefit accruals under defined
benefit pension plans. Account balances of transferred individuals under AT&T
defined contribution plans will vest on the split-off date, and they will be
allowed to make a one-time election to transfer their accounts to our 401(k)
Plan. Each transferred individual will vest in his accrued benefit under the
AT&T pension plans on the split-off date. Transferred individuals will also be
entitled to a distribution of their accounts under the AT&T Employee Stock
Ownership Plan.
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Employee options to purchase AT&T common stock or AT&T Wireless Group
tracking stock will be adjusted as part of the split-off. The nature of the
adjustment will depend upon whether the option was granted for AT&T common stock
or AT&T Wireless Group tracking stock. Options to purchase AT&T Wireless Group
tracking stock will be converted into options to purchase our common stock.
Options to purchase AT&T common stock granted before January 1, 2001 will be
converted into two separate options, one to purchase AT&T common stock and
another to purchase our common stock. Options to purchase AT&T common stock
granted on or after January 1, 2001 will be adjusted to increase the number of
shares subject to the option, based on the relative market price of AT&T common
stock immediately before and immediately after the split-off. All of the AT&T
common stock options and AT&T Wireless Group tracking stock options referred to
in this paragraph are subject to adjustment, which is intended to retain the
same intrinsic value of the options immediately before and after the adjustment.
AT&T options held by our employees and AT&T Wireless Services options held by
AT&T employees after the split-off will be fully vested and continue to be
exercisable for the scheduled option term. In all other respects, options to
purchase our common stock and options to purchase AT&T common stock held by
transferred individuals and current and former AT&T employees will be subject to
the same terms and conditions as set forth respectively in the original AT&T
Wireless Group tracking stock option grant and the AT&T stock option grant.
Similar adjustments will be made to grants of restricted shares, restricted
stock units, and performance shares under the AT&T plans, although the awards
for each individual will be denominated in shares of that individual's employer.
Intellectual Property Agreements. We and AT&T entered into an intellectual
property agreement. The intellectual property agreement specifies the ownership
and license rights in patents, software, copyrights, and trade secrets, but not
the AT&T brands. Under the terms of the intellectual property agreement, we and
AT&T will grant each other a non-exclusive, fully paid-up, worldwide, perpetual
and irrevocable license under its patents to make, use and sell any and all
products and services in the conduct of its present and future business. The
parties also grant special rights under certain of each other's patents for
defensive protection, special affiliate licensing, and supplier licensing. In
addition, AT&T will refrain from licensing some of its patents to our ten
largest domestic mobile service competitors for a period of five years and will
grant us a nonexclusive right to direct the licensing of certain AT&T patents to
certain third parties and receive half of the net royalties.
We and AT&T will each own all the software, trade secrets, and copyrights
created by it before the split-off. We and AT&T will grant each other a
non-exclusive, fully paid-up, worldwide, perpetual and irrevocable license to
use each other's software, trade secrets, and copyrights that the other
currently possesses for use in its present and future business. The agreement
also protects proprietary information related to customers. In the event of a
change of control of us involving parties of a certain nature, the scope of the
intellectual property rights granted to us would automatically narrow, our
special rights would terminate and AT&T's agreement not to license to our
competitors would terminate.
Tax Sharing Agreement. We and AT&T have also amended our existing tax
sharing agreement. The amended tax sharing agreement provides that:
- AT&T will be responsible for any tax item resulting from asset transfers
from AT&T Wireless Group to AT&T Common Stock Group before the split-off;
- the accounts between AT&T and AT&T Wireless Group will be adjusted for
unpaid amounts under the tax sharing agreement before the split-off; and
- no tax sharing payments will be made with respect to taxable periods (or
portions thereof) beginning after the split-off date.
The tax sharing agreement also contains provisions that govern tax contests
and other related matters with respect to tax periods before the split-off date.
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Services Agreement. We and AT&T entered into a services agreement. This
agreement will govern the following corporate support services:
- common support services;
- inter-unit services; and
- systems replication and systems services.
The agreement generally runs for 18 months and the individual services are
generally terminable on 30 to 180 days' notice.
- Common support services. Common support services include services
historically provided at a corporate headquarters level, such as financial
management, tax, media relations, human resources administration, procurement,
real estate management and other administrative functions. Charges for these
services will allow the provider to recover the costs of such service, plus all
out-of-pocket costs and expenses, but without any profit.
- Inter-unit services. Inter-unit services include services historically
provided by one business unit to another, such as billing, systems development
and customer care. The charges for these services will allow the provider to
recover the cost of such service, plus all out-of-pocket costs and expenses. In
some instances the company providing the service will recover a profit.
- Systems Replication and Systems Service. AT&T will supply to us with
technology systems and support services. For example, AT&T will provide
information linkages between our web site and att.com. The charges for these
services will be based on a "cost plus" formula intended to allow AT&T to
recover its fully-allocated cost, plus a profit.
Registration Rights Agreement. We and AT&T have entered into a
registration rights agreement which gives AT&T the right to require us to
register some or all of the shares of our common stock that AT&T is retaining,
including the shares to be offered in the concurrent offering. Under the
agreement, AT&T can require us to register those shares on not more than two
occasions, not including the concurrent offering. Our obligation to register the
shares is subject to customary black-outs in our discretion, and, after January
31, 2002, we are not required to register any shares that AT&T could otherwise
sell pursuant to the applicable provisions of Rule 144 under the Securities Act.
HISTORICAL RELATIONSHIP WITH AT&T
We have been, and until the split-off will be, a wholly owned subsidiary of
AT&T. As a result, in the ordinary course of our business, we incurred expenses
in connection with miscellaneous corporate, legal, finance, planning, strategy,
marketing, human resource, cash management, payment processing and other
services, including long-distance and other network-related services obtained
from or through AT&T and use of the AT&T brand, which expenses were either
reimbursed by us to AT&T or charged to us as part of the general allocation of
AT&T's consolidated corporate overhead expenses. For a summary of some of these
expenses, see Note 12 of the Notes to Consolidated Financial Statements of AT&T
Wireless Services, Inc. and Subsidiaries.
In October 2000, we completed our acquisition from AT&T of several equity
interests in EuroTel Praha, spol. s.r.o in the Czech Republic, BPL Cellular Ltd.
in India, PT Aria West International in Indonesia, Maxis Communications Bhd in
Malaysia and EuroTel Bratislava a.s. in Slovakia. Each of these are
international ventures acquired by AT&T as a result of its acquisition of
MediaOne in June 2000. We paid approximately $1 billion to AT&T for these
properties, which was based upon a third-party valuation.
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DESCRIPTION OF OUR CAPITAL STOCK
The following description of the material expected terms of our capital
stock does not purport to be complete, and is qualified in its entirety by
reference to the form of our charter and by-laws, as these documents are
expected to be in effect at the time of the split-off. Copies of these forms
have been filed as exhibits to the registration statement, of which this
document is a part. For more information on how you can obtain copies of these
documents, see "Where You Can Find More Information." You are urged to read the
forms of charter and by-laws in their entirety.
AUTHORIZED CAPITAL STOCK
Our authorized capital stock will consist of 1,000,000,000 shares of
preferred stock, par value $.01, and 10,000,000,000 shares of common stock, par
value $0.01. We estimate that approximately 2.53 billion shares of our common
stock will be outstanding immediately after the split-off (assuming no options
or warrants to purchase shares of AT&T Wireless tracking stock are exercised
before the split-off). No shares of our preferred stock would be outstanding.
OUR COMMON STOCK
The holders of our common stock will be entitled to one vote for each share
on all matters voted on by stockholders, including elections of directors, and,
except as otherwise required by law or provided in any resolution adopted by our
board of directors with respect to any series of preferred stock (a "preferred
stock designation"), the holders of our common stock will possess all of the
voting power. Our charter will not provide for cumulative voting in the election
of directors. Subject to any preferential rights of any outstanding series of
our preferred stock created by our board of directors from time to time, the
holders of our common stock will be entitled to the dividends as may be declared
from time to time by our board of directors from funds legally available for
dividends, and, upon liquidation, will be entitled to receive pro rata all
assets available for distribution to the holders of our common stock. For a more
complete discussion of our dividend policy, see "-- Our Preferred
Stock -- Dividend Policy."
OUR PREFERRED STOCK
Our charter authorizes our board of directors to establish one or more
series of preferred stock and to determine, with respect to any series of
preferred stock, the terms and rights of such series, including, but not limited
to:
- the designation of the series;
- the number of shares of the series, which number our board of directors
may later, except where otherwise provided in the preferred stock
designation, increase or decrease, but not below the number of shares
thereof then outstanding;
- whether dividends, if any, will be cumulative or noncumulative, and, in
the case of shares of any series having cumulative dividend rights, the
date or dates or method of determining the date or dates from which
dividends on the shares of the series having cumulative dividend rights
shall be cumulative;
- the rate of any dividends, or method of determining the dividends,
payable to the holders of the shares of the series, any conditions upon
which the dividends will be paid and the date or dates or the method for
determining the date or dates upon which the dividends will be payable;
- the redemption rights and price or prices, if any, for shares of the
series;
- the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series;
- the amounts payable on and the preferences, if any, of shares of the
series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of our affairs;
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- whether the shares of the series will be convertible or exchangeable into
shares of any other class or series, or any other security, of us or any
other corporation, and, if so, the specification of the other class or
series or the other security, the conversion or exchange price or prices
or rate or rates, any adjustments thereof, the date or dates as of which
the shares will be convertible or exchangeable and all other terms and
conditions upon which the conversion or exchange may be made;
- restrictions on the issuance of shares of the same series or of any other
class or series; and
- the voting rights, if any, of the holders of the shares of the series.
We believe that the ability of our board of directors to issue one or more
series of preferred stock will provide us with flexibility in structuring
possible future financings and acquisitions, and in meeting other corporate
needs that might arise. The authorized shares of our preferred stock, as well as
shares of our common stock, will be available for issuance without further
action by our stockholders unless required by applicable law or the rules of any
stock exchange or automated quotation system on which our securities may be
listed or traded. The New York Stock Exchange currently requires stockholder
approval as a prerequisite to listing shares in several instances, including
where the present or potential issuance of shares could result in an increase of
at least 20% in the number of outstanding shares of common stock, or in the
amount of voting securities, outstanding. If the approval of our stockholders is
not required for the issuance of shares of our preferred stock or common stock,
our board of directors may determine not to seek stockholder approval.
Although we believe our board of directors will have no intention of
immediately doing so, it could issue a series of preferred stock that could,
depending on the terms of the series, impede the completion of a merger, tender
offer or other takeover attempt. Our board of directors will make any
determination to issue the shares of preferred stock based on its judgment as to
the best interests of us and our stockholders. Our board of directors, in so
acting, could issue preferred stock having terms that could discourage an
acquisition attempt through which an acquiror may be able to change the
composition of our board of directors, including a tender offer or other
transaction that some, or a majority, of our stockholders might believe to be in
their best interests or in which our stockholders might receive a premium for
their stock over the then-current market price of our common stock.
We expect that, as of the completion split-off, 50,000,000 shares of our
Series A junior participating preferred stock will be reserved for issuance upon
exercise of the rights issued under our rights agreement. For a more complete
discussion of our rights plan, see "-- Rights Agreement."
Dividend Policy
We currently do not expect to pay dividends on shares of our common stock
following completion of the split-off in the foreseeable future.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR CHARTER AND BY-LAWS
Board of Directors
Our charter provides that, except as otherwise provided in any preferred
stock designation relating to the rights of the holders of any class or series
of preferred stock to elect additional directors under specified circumstances,
the number of directors will be fixed from time to time exclusively by a
resolution adopted by a majority of the total number of directors that we would
have if there were no vacancies, or the whole board, but shall not be less than
three. Our directors, other than those who may be elected by the holders of any
class or series of our preferred stock having the right under a preferred stock
designation to elect additional directors under specified circumstances, will be
classified into three classes, as nearly equal in number as possible, one class
originally to be elected for a term expiring at the annual meeting of
stockholders to be held in 2002, another class to be originally elected for a
term expiring at the annual meeting of stockholders to be held in 2003 and
another class to be originally elected for a term expiring at the annual meeting
of stockholders to be held in 2004, with each director to hold office until his
or her successor is duly elected and qualified. Commencing with the 2002 annual
meeting of
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stockholders, directors elected to succeed directors whose terms then expire
will be elected for a term of office to expire at the third succeeding annual
meeting of stockholders after their election, with each director to hold office
until such person's successor is duly elected and qualified.
Our charter will provide that, except as otherwise provided in any
preferred stock designation relating to the rights of the holders of any class
or series of preferred stock to elect directors under specified circumstances,
newly created directorships resulting from any increase in the number of
directors and any vacancies on our board of directors resulting from death,
resignation, disqualification, removal or other cause will be filled by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the board of directors, and not by the
stockholders. Any director elected in accordance with the preceding sentence
will hold office for the remainder of the full term of the class of directors in
which the new directorship was created or the vacancy occurred and until the
director's successor shall have been duly elected and qualified. No decrease in
the number of directors constituting our board of directors will shorten the
term of any incumbent director. Subject to the rights of any class or series of
preferred stock having the right under a preferred stock designation to elect
directors under specified circumstances, any director may be removed from office
only for cause by the affirmative vote of the holders of at least a majority of
the voting power of all voting stock then outstanding, voting together as a
single class.
These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of our board by filling the
vacancies created by removal with its own nominees. Under the classified board
provisions described above, it would take at least two elections of directors
for any individual or group to gain control of our board of directors.
Accordingly, these provisions could discourage a third party from initiating a
proxy contest, making a tender offer or otherwise attempting to gain control of
us.
No Stockholder Action by Written Consent; Special Meetings
Our charter and by-laws provide that stockholders must effect any action
required or permitted to be taken at a duly called annual or special meeting of
stockholders and that those actions may not be effected by any consent in
writing by the stockholders. Except as otherwise required by law or by any
preferred stock designation, special meetings of stockholders may be called only
by a majority of the whole board or by our chairman. No business other than that
stated in the notice of meeting may be transacted at any special meeting. These
provisions may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting unless a special meeting is called by our
board or the chairman of the board of directors.
Advance Notice Procedures
Our by-laws to establish an advance notice procedure for stockholders to
make nominations of candidates for election as directors or to bring other
business before an annual meeting of stockholders. These stockholder notice
procedures provide that only persons who are nominated by our board of
directors, or by a stockholder who was a stockholder of record at the time of
giving notice and has given timely written notice to our secretary before the
meeting at which directors are to be elected, will be eligible for election as
directors. These stockholder notice procedures will also provide that at an
annual meeting only the business as has been brought before the meeting by our
board of directors, or by a stockholder who has given timely written notice to
our secretary of the stockholder's intention to bring the business before the
meeting, may be conducted. Under these stockholder notice procedures, for notice
of stockholder nominations to be made at an annual meeting to be timely, the
notice must be received by our secretary not later than the close of business on
the 90th calendar day nor earlier than the close of business on the 120th
calendar day before the first anniversary of the preceding year's annual
meeting, except that, if the date of the annual meeting is more than 30 calendar
days before or more than 60 calendar days after such anniversary date, notice by
the stockholder to be timely must be so delivered not earlier than the close of
business on the 120th calendar day before the annual meeting and not later than
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the close of business on the later of the 90th calendar day before the annual
meeting or the tenth calendar day following the day on which public announcement
of a meeting date is first made by us.
Nevertheless, if the number of directors to be elected to our board of
directors is increased and there is no public announcement by us naming all of
the nominees for director or specifying the size of our increased board of
directors at least 100 calendar days before the first anniversary of the
preceding year's annual meeting, a stockholder's notice also will be considered
timely, but only with respect to nominees for any new positions created by the
increase, if it shall be delivered not later than the close of business on the
10th calendar day following the day on which the public announcement is first
made by us. Under these stockholder notice procedures, for notice of a
stockholder nomination to be made at a special meeting at which directors are to
be elected to be timely, we must receive notice not earlier than the close of
business on the 120th calendar day before the special meeting and not later than
the close of business on the later of the 90th calendar day before the special
meeting or the 10th calendar day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
our board to be elected at the meeting.
In addition, under these stockholder notice procedures, a stockholder's
notice to us proposing to nominate a person for election as a director or
relating to the conduct of business other than the nomination of directors will
be required to contain some specified information. If the chairman of a meeting
determines that an individual was not nominated, or other business was not
brought before the meeting, in accordance with our stockholder notice procedure,
the individual will not be eligible for election as a director, or the business
will not be conducted at the meeting, as the case may be.
Amendment
Our charter will provide that the affirmative vote of the holders of at
least 80% of our voting stock then outstanding, voting together as a single
class, is required to amend provisions of our charter relating to stockholder
action; the number, election and tenure of directors; the nomination of director
candidates and the proposal of business by stockholders; the filling of
vacancies; and the removal of directors. Our charter will further provide that
the related by-laws described above, including the stockholder notice procedure,
may be amended only by the affirmative vote of a majority of the whole board or
by the affirmative vote of the holders of at least 80% of the voting power of
the outstanding shares of voting stock, voting together as a single class. We
expect that the affirmative vote of holders of at least 66 2/3% of the voting
power of outstanding shares of voting stock, voting as a single class, will be
required to amend our by-laws.
RIGHTS AGREEMENT
Our board of directors will adopt a rights agreement on or before the
completion of the split-off. Under the rights agreement, we expect to issue one
preferred share purchase right for each outstanding share of our common stock.
Each right will entitle the registered holder to purchase from us one one-
hundredth of a share of our Series A junior participating preferred stock, par
value $.01 per share, at a price of $100, subject to adjustment in some
circumstances. The description and terms of the rights is set forth in a rights
agreement between us and the designated rights agent. The description set forth
below is intended as a summary only and is qualified in its entirety by
reference to the form of the rights agreement, which is filed as an exhibit to
the registration statement of which this document is a part.
The rights will be evidenced by the certificates representing our common
stock until the earlier to occur of:
- ten days following a public announcement that a person or group of
affiliated or associated persons has acquired beneficial ownership of at
least 15% or more of the outstanding shares of our common stock; or
- ten business days or a later date determined by our board of directors
following the commencement of, or announcement of an intention to make, a
tender offer or exchange offer the completion of
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which would result in the beneficial ownership by a person or group of
15% or more of such outstanding shares of our common stock (the
"distribution date").
The rights agreement exempts DoCoMo's ownership of more than 15% of our
common stock, but only to the extent of the shares of our common stock that
DoCoMo owns as a result of its January 22, 2001 investment in us and any shares
of common stock that DoCoMo could purchase as a result of their investment
rights, as described under "DoCoMo Strategic Investment." We expect the rights
agreement to provide that, until the distribution date or earlier redemption or
expiration of the rights, the rights will be transferred with and only with our
common stock. Until the distribution date or earlier redemption or expiration of
the rights, our common stock certificates will contain a notation incorporating
the rights agreement by reference. As soon as practicable following the
distribution date, separate certificates evidencing the rights will be mailed to
holders of record of our common stock as of the close of business on the
distribution date and the separate right certificates alone will evidence the
rights.
The rights will not be exercisable until the distribution date. The rights
will expire on the 10th anniversary of the rights agreement, unless the final
expiration date is extended or unless the rights are earlier redeemed or
exchanged by us, in each case, as summarized below.
In the event that any person or group of affiliated or associated persons
becomes an acquiring person, proper provision shall be made so that each holder
of a right, other than rights beneficially owned by the acquiring person, which
will thereafter be void, will later have the right to receive upon exercise that
number of shares of our common stock having a market value of two times the
exercise price of the right. If we are acquired in a merger or other business
combination transaction or 50% or more of our consolidated assets or earning
power are sold after a person or group of affiliated or associated persons
becomes an acquiring person, proper provision will be made so that each holder
of a right will thereafter have the right to receive, upon the exercise thereof
at the then-current exercise price of the right, that number of shares of common
stock of the acquiring company which at the time of the transaction will have a
market value of two times the exercise price of the right.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of our outstanding
common stock and before the acquisition by the person or group of 50% or more of
our outstanding common stock, our board of directors may exchange the rights,
other than rights owned by the person or group which, have become void, in whole
or in part, at an exchange ratio of one share of our common stock, or one
one-hundredth of one of our junior preferred shares, or of a share of a class or
series of preferred stock having equivalent rights, preferences and privileges,
per right subject to adjustment.
At any time before the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of our outstanding
common stock, our board of directors may redeem the rights in whole, but not in
part, at a price of $.01 per right, as adjusted. The redemption of the rights
may be made effective at such time on such basis and with such conditions as our
board of directors, in its sole discretion, may establish. Immediately upon any
redemption of the rights, the right to exercise the rights will terminate and
the only right that the holders of the rights will be eligible to receive will
be the redemption price.
The terms of the rights may be amended by our board of directors without
the consent of the holders of the rights; provided, however, that, our board may
not reduce the threshold at which a person or group becomes an acquiring person
to below 10% of our outstanding common stock, and from and after such time as
any person or group of affiliated or associated persons becomes an acquiring
person, no amendment may adversely affect the interests of the holders of the
rights.
Until a right is exercised, the holder of that right, as a holder, will
have no additional rights as our stockholder solely by virtue of holding that
right, including, without limitation, the right to vote or to receive dividends.
The number of outstanding rights and the number of one one-hundredths of
our junior preferred shares issuable upon exercise of each right also will be
subject to adjustment in the event of a stock split
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of our common stock or a stock dividend on our common stock payable in our
common stock or subdivisions, consolidations or combinations of our common stock
occurring, in any case, before the distribution date.
The purchase price payable, and the number of our junior preferred shares
or other securities or property issuable, upon exercise of the rights will be
subject to adjustment from time to time to prevent dilution:
- in the event of a stock dividend on, or a subdivision, combination or
reclassification of, our junior preferred shares;
- upon the grant to holders of our junior preferred shares of some rights
or warrants to subscribe for or purchase our junior preferred shares at a
price, or securities convertible into our junior preferred shares with a
conversion price, less than the then-current market price of our junior
preferred shares; or
- upon the distribution to holders of our junior preferred shares of
evidences of indebtedness or assets excluding regular periodic cash
dividends paid out of earnings or retained earnings or dividends payable
in our junior preferred shares or of subscription rights or warrants
other than those referred to above.
With some exceptions, no adjustment in the purchase price will be required
until cumulative adjustments require an adjustment of at least 1% in the
purchase price. No fractional junior preferred shares will be issued, other than
fractions that are integral multiples of one one-hundredth of one of our junior
preferred shares, which may, at our election, be evidenced by depositary
receipts and instead, an adjustment in cash will be made based on the market
price of our junior preferred shares on the last trading day before the date of
exercise.
Our junior preferred shares purchasable upon exercise of the rights will
not be redeemable. Each of our junior preferred shares will be entitled to a
minimum preferential quarterly dividend payment of $1.00 per share but will be
entitled to an aggregate dividend of 100 times the dividend declared per share
of our common stock. In the event of liquidation, the holders of our junior
preferred shares will be entitled to a minimum preferential liquidation payment
of $100 per share but will be entitled to an aggregate payment of 100 times the
payment made per share of common stock. Each of our junior preferred shares will
have 100 votes voting together with our common stock. Finally, in the event of
any merger, consolidation or other transaction in which shares of common stock
are exchanged, each one of our junior preferred shares will be entitled to
receive 100 times the amount received per one share of common stock. These
rights are protected by customary anti-dilution provisions.
Due to the nature of our junior preferred shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in one of our junior
preferred shares purchasable upon exercise of each right should approximate the
value of one share of common stock.
The rights have anti-takeover effects. The rights will cause substantial
dilution to a person or group of persons that attempts to acquire us on terms
not approved by our board of directors. The rights should not interfere with any
merger or other business combination approved by our board before the time that
a person or group has acquired beneficial ownership of 15% percent or more of
the common stock since the rights may be redeemed by us at the redemption price
until such time.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the Delaware General Corporation Law provides that, subject
to some exceptions, an interested stockholder of a Delaware corporation shall
not engage in any business combination, including
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mergers or consolidations or acquisitions of additional shares of the
corporation, with the corporation for a three-year period following the date
that the stockholder becomes an interested stockholder unless:
- before the date of the business combination, the board of directors of
the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder;
- upon completion of the transaction that resulted in the stockholder
becoming an "interested stockholder," the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding some shares; or
- on or after that date, the business combination is approved by the board
of directors of the corporation and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of
the outstanding voting stock that is not owned by the interested
stockholder.
Except as otherwise specified in Section 203, an interested stockholder
is defined to include:
- any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately
before the date of determination; and
- the affiliates and associates of the stockholder.
Under some circumstances, Section 203 makes it more difficult for a person
that would be an interested stockholder to effect various business combinations
with a corporation for a three-year period. We are not electing to be exempt
from the restrictions imposed under Section 203. However AT&T and its affiliates
are excluded from the definition of interested stockholder for purposes of
Section 203. The provisions of Section 203 may encourage persons interested in
acquiring us to negotiate in advance with our board, since the stockholder
approval requirement would be avoided if a majority of the directors then in
office approves either the business combination or the transaction that results
in any person becoming an interested stockholder. These provisions also may have
the effect of preventing changes in our management. It is possible that these
provisions could make it more difficult to accomplish transactions which our
stockholders may otherwise deem to be in their best interests.
DOCOMO STANDSTILL
Under the terms of its investment in us, DoCoMo is subject to standstill
restrictions that limit its ability to acquire or participate with any other
person seeking to acquire control of our company. These restrictions are
described under "DoCoMo Strategic Investment."
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DOCOMO STRATEGIC INVESTMENT
On January 22, 2001 NTT DoCoMo, Inc., a leading Japanese wireless
communications company, invested approximately $9.8 billion for shares of a new
class of AT&T preferred stock that are convertible into 406,255,889 shares of
AT&T Wireless Group tracking stock, which we call "DoCoMo wireless tracking
stock," and that are intended to reflect approximately 16% of the financial
performance and economic value of AT&T Wireless Group. As part of this
investment, DoCoMo also received five-year warrants to purchase the equivalent
of an additional 41,748,273 shares of AT&T Wireless Group tracking stock at $35
per share, and we and DoCoMo formed a strategic alliance to develop the next
generation of mobile multimedia services on a global-standard, high-speed
wireless network. Of the 406,255,889 AT&T Wireless Group tracking stock share
equivalents issued to DoCoMo, 228,128,307 shares represented new share
equivalents at $27.00 each, and the remaining 178,127,582 share equivalents
represented a reduction of AT&T Common Stock Group's retained portion of the
value of AT&T Wireless Group at $20.50 each. Accordingly, AT&T Common Stock
Group retained $3,651,615,431 of the proceeds of the DoCoMo investment and
allocated $6,159,464,289 to AT&T Wireless Group.
Immediately before the completion of the split-off, each share of DoCoMo
wireless tracking stock automatically will be converted into 500 shares of AT&T
Wireless Group tracking stock, subject to anti-dilution protection, and will be
redeemed in exchange for 406,255,889 shares of our common stock on the same
terms as all other shares of AT&T Wireless Group tracking stock in the
split-off. After the split-off, each warrant will be exercisable for 500 shares
of the our common stock at an exercise price of $35 per share, subject to
adjustments to reflect the exchange ratio and customary anti-dilution
adjustments. The warrants are subject to the transfer restrictions described
below. The shares of our common stock issuable upon exercise of the warrant will
represent newly issued interests, and will not decrease AT&T's retained interest
in us. Following the split-off, DoCoMo will own approximately 16% of our common
stock and have warrants at an exercise price of $35 per common stock equivalent
that would represent approximately an additional 1.6% of our common stock.
The following is a summary of the material provisions of the agreements
among DoCoMo, AT&T and us that apply to us after the split-off. This summary is
qualified in its entirety by reference to the full text of these documents,
which have been filed as exhibits to the registration statement of which this
prospectus forms a part, which is incorporated into this document by reference.
Warrants
DoCoMo acquired 83,496.546 warrants, each of which, after the split-off,
will be exercisable for 500 shares of our common stock, or a total of 41,784,273
shares, at an exercise price of $35 per share, subject to customary
anti-dilution adjustments. The warrants are subject to the transfer restrictions
described under "-- DoCoMo Investment Rights and Obligations."
DoCoMo Investment Rights and Obligations
In addition to the rights inherent in the shares of our common stock, under
the agreements, DoCoMo has additional rights and obligations with respect to its
investment in us.
Transfer Restrictions. Without our consent, for 18 months following the
investment, DoCoMo may not transfer any warrants or any shares of our common
stock that it receives on conversion of DoCoMo wireless tracking stock, except
if specified events occur. Those events are:
- a sale of all or substantially all of our assets or business through
merger or other business combination unless our stockholders continue to
own two-thirds of the successor corporation;
- our acquisition or acquisitions of business or assets, other than radio
spectrum rights, totaling more than $25 billion; or
- a tender offer or exchange offer approved by our board of directors.
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In addition, subject to a limited exception, without our consent, DoCoMo
may not transfer any of our securities to any person if after the transfer the
recipient's interest in us would exceed 6%, or exceed 10% in the case of
recipients, principally financial institutions, who are eligible to report their
interest on Schedule 13G under the Securities Exchange Act.
None of DoCoMo's special rights are transferable by DoCoMo along with the
shares, except that DoCoMo may transfer its demand registration rights described
below to any transferee of more than $1 billion of our securities, and DoCoMo
may transfer one demand registration right to a transferee of the warrants. Any
transfer of registration rights will be subject to overall limitations on the
registration rights and will not increase our aggregate registration
obligations.
Repurchase Obligations for failure to meet primary third-generation
technology benchmarks within specified time frame. DoCoMo may require us to
repurchase the warrants and the stock that DoCoMo still holds if, prior to June
30, 2004:
- We abandon wideband code division multiple access as our primary technology
for third-generation services, or
- We fail to launch services based on a wireless communications technology known
as universal mobile telecommunications systems, or wideband code division
multiple access, in at least 13 of the top 50 U.S. markets, unless
-- DoCoMo ceases to actively support and promote wireless services using
wideband code division multiple access technology as its standard for
wireless third-generation services;
-- such failure is due to factors outside our reasonable power to affect or
control, including due to the unavailability, or a delay in the
availability, of equipment, software, spectrum, or cell sites;
-- such failure is due to our inability to obtain regulatory approvals,
permits, or licenses without the imposition of burdensome conditions or
restrictions; or
-- our board of directors determines that, due to regulatory or legal
issues, or other external factors, deployment of such a system is no
longer advisable from a business perspective.
The repurchase price will be DoCoMo's original purchase price plus interest
of a predetermined rate. If DoCoMo requires repayment because of our failure to
commence service using an agreed technology as described above, we will be
obligated to fund the entire amount of the repurchase obligation, which is $9.8
billion, plus interest. In lieu of paying all or a portion of the repurchase
price, we will have the right to cause DoCoMo to sell any portion of its shares
in a registered sale, and to pay DoCoMo the difference between the repurchase
price and the proceeds from the registered sales.
Standstill. Until the fifth anniversary of the closing of the investment,
DoCoMo, its controlled subsidiaries, when acting on behalf of DoCoMo, its
officers, directors or agents, or any subsidiary to which DoCoMo has disclosed
confidential information regarding its investment may not take a number of
actions, including the following, without our consent:
- acquire or agree to acquire any voting securities of AT&T or us, except
in connection with DoCoMo's exercise of its preemptive rights, conversion
rights or warrants;
- solicit proxies with respect to AT&T's or our voting securities or become
a participant in any election contest relating to the election of the
directors of AT&T or us;
- call or seek to call a meeting of the AT&T or our stockholders or
initiate a stockholder proposal;
- contest the validity of the standstill in a manner that would lead to
public disclosure;
- form or participate in a group that would be required to file a Schedule
13D with the SEC as a "person" within the meaning of Section 13(d)(3) of
the Securities Exchange Act; or
- act in concert with any person for the purpose of effecting a transaction
that would result in a change of control of AT&T or us.
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After the fifth year anniversary of the investor agreement, DoCoMo will
continue to be subject to the standstill for so long as DoCoMo has the right to
nominate at least one director. However, DoCoMo will be released from the
standstill 91 days after the resignations of all of its representatives on our
board of directors, all of DoCoMo's nominated committee members and all of
DoCoMo's nominated management. After these resignations, we may take steps to
terminate or sequester all of the other DoCoMo nominated employees.
If NTT, which owns approximately two-thirds of DoCoMo, or any of NTT's
subsidiaries other than DoCoMo takes any action contrary to the standstill
restrictions and the action leads to any vote of our stockholders, then DoCoMo
either must vote its shares as our board of directors directs, or must vote its
shares in proportion to the votes cast by the stockholders that are not
affiliated with either DoCoMo or NTT. In addition, if NTT or any of its
subsidiaries commences a tender offer for AT&T or our securities, DoCoMo cannot
tender or transfer any of its securities into that offer until all of the
conditions to that offer have been satisfied.
The standstill provisions described above will terminate in the following
circumstances:
- a third party unaffiliated with us commences a tender or exchange offer
of 15% of our outstanding voting securities and we do not publicly
recommend that our stockholders reject to the offer;
- we enter into a definitive agreement to merge into or sell all or
substantially all of our assets to a third party unless our stockholders
retain at least 50% of the economic and voting power of the surviving
corporation; or
- we enter into a definitive agreement that would result in any one person
or groups of persons acquiring more than 35% of our voting power, unless,
among other things, this person or group agrees to a standstill.
The standstill provisions terminate with respect to AT&T two years after
the split-off (or, if sooner, upon any of the foregoing three events as applied
to AT&T).
Registration Rights. Subject to certain exceptions and conditions, DoCoMo
is entitled to require us to register shares of our common stock on up to six
occasions, with each demand involving not less than $500 million worth of
shares. DoCoMo cannot exercise more than one demand right in any seven and a
half month period. DoCoMo also is entitled to require us to register securities
for resale in an unlimited number of incidental registrations, commonly known as
piggy-back registrations. DoCoMo will cease to be entitled to these registration
rights if it owns less than $1 billion of our securities, as the case may be,
and securities reflecting less than 2% of the financial performance and economic
value of us.
Board Representation. DoCoMo is entitled to nominate a number of
representatives on our board of directors proportional to its economic interest
acquired as a result of its investment. The DoCoMo nominees for these board
seats must be senior officers of DoCoMo that are reasonably acceptable to us.
DoCoMo will lose these board representation rights if its economic interest in
us falls below 10% for 60 consecutive days. However, as long as it retains 62.5%
of the shares of its original investment or shares of our common stock, DoCoMo
will lose its board representation rights only if its economic interest in us
falls below 8% for 60 consecutive days.
Management Rights. Since it made its investment, DoCoMo has been entitled
to appoint one of its senior executives that is reasonably acceptable to AT&T
Wireless Group to AT&T Wireless Group's senior leadership team. In addition,
subject to our reasonable approval, DoCoMo can appoint between two and five of
its employees as our employees, including the Manager-Finance and Director of
Technology. DoCoMo will lose these rights under the same circumstances as it
would lose board representation rights.
Right to Approve Specified Actions. We may not take any of the following
actions without DoCoMo's prior approval:
- change the scope of our business such that AT&T Wireless Group's
businesses (including those in its business plan) cease to constitute our
primary businesses; or
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- enter into a strategic alliance with another wireless operator so that
the wireless operator would own more than 15% but less than 50% of the
economic interest in us.
DoCoMo will lose these approval rights under the same circumstances as it
would lose board representation rights.
Preemptive Rights. DoCoMo has limited preemptive rights that entitle it to
maintain its ownership interest by purchasing shares in some of our new equity
issuances. In the event of a new equity issuance of the type covered by the
preemptive right, then:
- if DoCoMo holds 12% or more of the economic interest of us at the time of
the new issuance, DoCoMo may purchase a number of additional shares that
would bring DoCoMo's economic interest back up to 16%; and
- if DoCoMo holds less than 12% of the economic interest of us at the time
of the new issuance, DoCoMo may purchase a number of additional shares
that would maintain DoCoMo's economic interest at the level it was at
just before the new issuance.
In most cases, the purchase price for these additional shares will be the
issuance price. DoCoMo will lose these preemptive rights under the same
circumstances as it would lose board representation rights.
Strategic Alliance
In connection with DoCoMo's investment, we and DoCoMo formed a strategic
alliance to develop the next generation of mobile multimedia services on a
global-standard, high-speed wireless network. We will create a new, wholly owned
subsidiary to foster the development of multimedia content, applications and
services offerable over our current network, as well as on new, high-speed
wireless networks built to global standards for third-generation services. We
will contribute, among other things, our rights to content and applications used
in our PocketNet service to the new multimedia subsidiary. Both we and DoCoMo
plan to provide technical resources and support staffing. In addition, we will
be able to license from DoCoMo, without additional payment, certain rights to
DoCoMo's "i-mode" service, which provides access to the Internet from wireless
telephones, and related technology.
The strategic alliance is expected to enable us and DoCoMo to offer
market-appropriate wireless services to customers throughout the United States
and Japan respectively. In addition, each of us has agreed, subject to technical
and commercial feasibility, to recognize the other as its primary and preferred
roaming partner in the other party's home territory.
We and DoCoMo have agreed to certain non-competition commitments that
restrict each other's ability to provide mobile wireless services in Japan and
the United States, respectively. We and DoCoMo have also agreed to limit the
extent to which we and DoCoMo will be able to participate in certain mobile
multimedia activities and investments in each other's home territory. We and
DoCoMo will generally be bound by the non-competition commitments until DoCoMo
loses its board representation and management rights, either due to any of the
events described under "-- Board Representation" and "-- Management Rights," or
due to voluntary relinquishment of such rights by DoCoMo.
Some of DoCoMo's rights under the investment agreement, including the
repurchase rights and veto rights, could limit our flexibility to finance our
operations or engage in some types of strategic transactions that we might
otherwise pursue.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public
market, or the perception that substantial sales may occur, could adversely
affect the prevailing market price of our common stock. After completion of the
redemption and distribution that constitute the split-off, and the offering,
there would be 2,529,974,082 shares of our common stock outstanding, based upon
the number of shares of AT&T Wireless Group tracking stock outstanding on June
19, 2001, the number of shares of AT&T Wireless Group tracking stock that DoCoMo
beneficially holds and the percentage interest of AT&T Wireless Group reserved
for the benefit of AT&T (assuming no options or warrants to purchase shares of
AT&T Wireless Group tracking stock are exercised between June 19, 2001 and the
split-off). All of these shares will be freely transferable without restriction
under the Securities Act except for shares that are owned by our "affiliates",
as that term is defined in Rule 144 under the Securities Act, which includes our
directors and our significant stockholders. Shares of our common stock held by
affiliates may not be sold unless they are registered under the Securities Act
or are sold pursuant to an exemption from registration, including an exemption
contained in Rule 144 under the Securities Act. Further, as described below, we
plan to file a registration statement to cover the shares issued under our
option plans.
RULE 144
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who beneficially owns
"controlled securities" or "restricted securities" may not sell within any
three-month period a number of shares in excess of the greater of:
- 1% of the then outstanding shares of common stock (approximately 25.3
million shares immediately after the split-off); and
- the average weekly trading volume of the common stock on the New York
Stock Exchange during the four calendar weeks preceding the date on which
notice of the sale is filed with the SEC.
Sales under Rule 144 are subject to restrictions relating to manner of
sale, notice and the availability of current public information about us and may
be effected only through unsolicited brokers' transactions.
In general, a person (or persons whose shares are aggregated), including an
affiliate, who beneficially owns "restricted securities" may not sell those
securities, even under the foregoing limitations, until they have beneficially
owned such shares for at least one year. Shares received by our affiliates in
the split-off or upon exercise of stock options may be "controlled securities"
rather than "restricted securities".
SHARES RETAINED BY SIGNIFICANT STOCKHOLDERS
AT&T is retaining 185,308,303 shares of our common stock for its own
account for sale, exchange or monetization within six months of the split-off,
subject to the continued validity of the IRS ruling that AT&T received on May
29, 2001. These shares will be restricted securities and may only be sold
pursuant to an exemption from registration, including an exemption contained in
Rule 144 under the Securities Act. Of these retained shares, AT&T expects that
shares will be sold to Credit Suisse First Boston and Goldman Sachs shortly
before, on or shortly after the split-off date and then offered by those two
firms in the offering, as described under "Underwriters -- The Exchange." The
sale, exchange or monetization of any remaining shares held by AT&T could
adversely affect the prevailing market prices for our common stock. We have
granted AT&T limited registration rights with respect to the shares AT&T is
retaining. See "Our Relationship with AT&T after the Split-off -- Agreements
between AT&T and Us Relating to the Split-off."
In addition, at the completion of the split-off, DoCoMo will hold
406,255,889 shares of our common stock, assuming DoCoMo does not exercise any of
its warrants to purchase shares of AT&T Wireless Group tracking stock prior to
that time. DoCoMo holds warrants that, at the completion of the split-off, will
be exercisable for a total of 41,784,273 shares of our common stock, at an
exercise price of $35 per share. The shares of our common stock held by DoCoMo,
the warrants and the shares of our common stock underlying those warrants are
all subject to the transfer restrictions described under "DoCoMo Strategic
Investment -- DoCoMo Investment Rights and Obligations."
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STOCK PLANS
As of June 19, 2001, options to purchase approximately 76 million shares of
AT&T Wireless Group tracking stock were outstanding and held by our and AT&T's
employees. We estimate that as a result of the split-off these options will
become options to purchase approximately 76 million shares of our common stock.
In addition, we expect that immediately after the split-off additional options
to purchase approximately 77 million shares of our common stock will be
outstanding as a result of adjustment to outstanding options to purchase shares
of AT&T common stock, as described under "Our Relationship with AT&T after the
Split-off -- Employee Benefits Agreement." As a result, we expect that employees
and former employees of us and AT&T will hold options to purchase approximately
153 million shares, or approximately 5.7%, of our common stock immediately after
the split-off; however the actual number will not be determined until after the
redemption and distribution. From time to time, we plan to issue additional
options to our employees under new plans we may adopt. As soon as practicable
after the split-off, we intend to file registration statements on Form S-8 under
the Securities Act covering the shares of common stock reserved for issuance
under our stock option plans. The registration statements are expected to
automatically become effective upon filing. Accordingly, shares registered under
these registration statements will, subject to vesting provisions and Rule 144
volume limitations applicable to our affiliates, be available for sale in the
open market shortly after the distribution.
No prediction can be made as to the effect, if any, that market sales of
restricted shares or shares received upon exercise of options or the
availability of restricted shares or shares received upon exercise of options
for sale will have on the market price of our common stock prevailing from time
to time. Nevertheless, sales of substantial amounts of common stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices for our common stock and could impair our future ability to raise capital
through an offering of our equity securities.
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UNDERWRITERS
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Credit Suisse First Boston and Goldman Sachs, in their capacity as
underwriters, are acting as representatives, have severally agreed to purchase,
and Credit Suisse First Boston and Goldman Sachs, in their capacity as owners of
the shares they acquire from AT&T in the exchange described below, have agreed
to sell, shares of our common stock. AT&T is not a party to the
underwriting agreement. Under federal securities laws, however, AT&T is the
selling stockholder of the shares of our common stock that Credit Suisse First
Boston and Goldman Sachs acquire from AT&T pursuant to the exchange agreement
described below and sell in this offering. Credit Suisse First Boston and
Goldman Sachs, and not AT&T, will receive the cash proceeds from the sale of
these shares in the offering.
NUMBER
NAME OF SHARES
---- ---------
Credit Suisse First Boston Corporation......................
Goldman, Sachs & Co. .......................................
ABN Amro Incorporated.......................................
Total..................................................
The underwriters are offering the shares of our common stock subject to
their acceptance of the shares and subject to prior sale. The underwriting
agreement provides that the obligation of the underwriters, to pay for and
accept delivery of these shares of our common stock is subject to the approval
of legal matters by the underwriters' counsel, Davis Polk & Wardwell, and to
some other conditions. The underwriters are obligated to take and pay for all of
these shares of our common stock, if any such shares are taken.
It is expected that the underwriting agreement discussed above will be
entered into after binding exchange agreements between AT&T and Credit Suisse
First Boston and Goldman Sachs, and, in each case, for limited purposes, us is
signed. The terms of the exchange agreements are more fully described below
under "-- The Exchange." If AT&T, Credit Suisse First Boston, Goldman Sachs and
we enter into the binding exchange agreements, Credit Suisse First Boston and
Goldman Sachs will be the owners of the shares of our common stock they acquire
in the exchange, regardless of whether the underwriting agreement is entered
into or this offering is completed. Under federal securities laws, Credit Suisse
First Boston and Goldman Sachs are the underwriters of the shares that they
acquire under the exchange agreements.
THE EXCHANGE
Credit Suisse First Boston and Goldman Sachs have advised us that AT&T,
Credit Suisse First Boston and Goldman Sachs expect to enter into binding
exchange agreements dated the date of this prospectus, which agreements would be
substantially in the form filed as an exhibit to the registration statement of
which this prospectus forms a part. The expected terms of the exchange, as
described below, assume each exchange agreement is executed in the form so filed
with the registration statement. Under those agreements, Credit Suisse First
Boston and Goldman Sachs, each as a principal for its own account, would
exchange debt obligations of AT&T held by Credit Suisse First Boston and Goldman
Sachs for shares of our common stock held by AT&T. We would also be a party to
the exchange agreements for the limited purpose of granting registration rights
to Credit Suisse First Boston and Goldman Sachs. In the exchange, Credit Suisse
First Boston and Goldman Sachs each would acquire one half of the total number
of shares being sold in the offering. For purposes of determining the amount of
AT&T indebtedness that AT&T would receive from Credit Suisse First Boston and
Goldman Sachs in exchange for such shares, AT&T expects that the debt
obligations will be valued at fair market value on the date each exchange
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agreement is signed, and the aggregate fair market value of the debt obligations
to be exchanged will equal the amount of total proceeds, as shown on the cover
page of this prospectus. The purpose of the exchange, if it occurs, will be to
retire a portion of AT&T's outstanding indebtedness in a tax-efficient manner
because a sale of our common stock by AT&T in exchange for AT&T's debt
obligations would not be taxable to AT&T.
Under federal securities laws, AT&T is the selling stockholder of any
shares of our common stock that Credit Suisse First Boston and Goldman Sachs
acquire from AT&T in the exchange and sell in this offering. Similarly, under
the federal securities laws, Credit Suisse First Boston and Goldman Sachs are
deemed to be the underwriters with respect to any shares of our common stock
that they acquire in the exchange and sell in this offering. Credit Suisse First
Boston and Goldman Sachs, however, will each acquire and sell our common stock
as a principal for its own account, rather than on AT&T's behalf. If we, AT&T,
Credit Suisse First Boston and Goldman Sachs, enter into the binding exchange
agreements, as described above, Credit Suisse First Boston and Goldman Sachs
will be the owners of our shares of common stock they acquire in the exchange,
regardless of whether this offering is completed. Credit Suisse First Boston and
Goldman Sachs, and not AT&T, will receive the cash proceeds from the sale of the
shares of our common stock in the offering.
As of immediately prior to the exchange described under
"Underwriters -- Exchange", Credit Suisse First Boston and Goldman Sachs each
will have held indebtedness of AT&T having principal amount of approximately
$1.0 billion, for an aggregate of approximately $2.0 billion, all of which was
accumulated through market purchases from third-party holders on or before June
22, 2001.
None of AT&T, Credit Suisse First Boston, Goldman Sachs or us have an
obligation to participate in the exchange. If the exchange occurs but Credit
Suisse First Boston and Goldman Sachs are unable to sell in this offering all of
the common stock they receive, we are required to grant registration rights to
Credit Suisse First Boston and Goldman Sachs. Regardless of whether the exchange
does or does not occur, Credit Suisse First Boston and Goldman Sachs will pay
their own expenses and discounts in connection with the shares acquired by them
in the exchange.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
our common stock offered by them.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of various bids for or purchases of common stock made by
the underwriters in the open market prior to the completion of the offering.
Purchases to cover a short position and stabilizing transactions may have the
effect of preventing or retarding a decline in the market price of our stock,
and together with the imposition of a penalty bid, may stabilize, maintain or
otherwise affect the market price of the common stock. As a result the price of
the common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued at any
time. These transactions may be effected on the New York Stock Exchange, in the
over-the-counter market or otherwise.
RELATIONSHIPS WITH THE UNDERWRITERS
From time to time, the underwriters have provided, and may continue to
provide, investment banking services to us and to AT&T for which they have
received, and are expected in the future to receive, customary fees and
commissions.
We, Credit Suisse First Boston and Goldman Sachs, in their capacity as
owners of the shares they acquire in the exchange, and the underwriters have
agreed to indemnify each other against some liabilities, including liabilities
under the Securities Act.
123
128
PRICING OF THIS OFFERING
Because Credit Suisse First Boston and Goldman Sachs are the underwriters
and may each receive up to $ million of proceeds in this offering if
the exchange described above takes place, the underwriters may be deemed to have
a "conflict of interest" under Rule 2710(c)(8) of the Conduct Rules of the
National Association of Securities Dealers. Accordingly, this offering will be
made in compliance with the applicable provisions of Rule 2720 of the Conduct
Rules. In accordance with this rule, the offering price can be no higher than
that recommended by a "qualified independent underwriter" meeting certain
standards. In accordance with this requirement, ABN Amro has assumed the
responsibilities of acting as a qualified independent underwriter and will
recommend a price in compliance with the requirements of Rule 2720. ABN Amro in
its role as qualified independent underwriter, has performed due diligence
investigations and reviewed and participated in the preparation of this
prospectus and the registration statement of which this prospectus is a part.
ABN Amro will receive no fee for acting in this capacity; however, we have
agreed to indemnify ABN Amro for acting as a qualified independent underwriter
against specified liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be
passed upon by Gregory P. Landis. As of June 20, 2001, Mr. Landis was the
beneficial owner of approximately 179,783 shares of AT&T Wireless group tracking
stock and 154,507 shares of AT&T common stock, and had options to purchase
additional shares. Certain legal matters will be passed upon for the
underwriters by Davis Polk & Wardwell, New York, New York.
EXPERTS
The audited financial statements included in this Prospectus, except as
they relate to Vanguard Cellular Systems, Inc. and its subsidiaries, have been
audited by PricewaterhouseCoopers LLP, independent accountants, and, insofar as
they relate to Vanguard Cellular Systems, Inc. and its subsidiaries, by Arthur
Andersen LLP, independent public accountants, whose reports thereon appear
herein. Such financial statements have been so included in reliance on the
reports of such independent accountants given on the authority of such firms as
experts in auditing and accounting.
124
129
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933 with respect to the shares of our common stock being sold
in the offering. This prospectus, which forms a part of the registration
statement, does not contain all the information included in the registration
statement and the exhibits thereto, which reference is hereby made. You should
refer to the registration statement, including its exhibits and schedules, for
further information about us and our common stock.
We will become subject to the informational requirements of the Securities
Exchange Act of 1934. Accordingly, we will file annual, quarterly and other
reports and other information with the SEC. In addition, AT&T files annual,
quarterly and special reports, proxy statements and other information with the
SEC, and such reports, proxy statements and other information may contain
important information about us. For so long as AT&T Wireless Group tracking
stock has been outstanding, AT&T has included in its SEC filings consolidated
financial statements of AT&T and combined financial statements of AT&T Wireless
Group (of which we have been the primary operating unit).
You may read and copy the registration statement and the reports and other
information we file and any reports and other information AT&T has filed at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings and AT&T's SEC filings are also
available to the public from commercial document retrieval services and at the
Internet world wide website maintained by the SEC at www.sec.gov. Please note
that information included in our website and in AT&T's website does not form a
part of this prospectus.
No person is authorized to give any information or to make any
representations other than those contained in this prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized. Neither the delivery of this prospectus nor any distribution of
securities made hereunder shall imply that there has been no change in the
information set forth herein or in our affairs since the date hereof.
125
130
INDEX TO FINANCIAL STATEMENTS
HISTORICAL FINANCIAL STATEMENTS
AT&T WIRELESS SERVICES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations for the
three months ended March 31, 2000 and 2001................ F-3
Unaudited Consolidated Balance Sheets at December 31, 2000
and March 31, 2001........................................ F-4
Unaudited Consolidated Statements of Changes in Shareowners'
Equity for the three months ended March 31, 2000 and
2001...................................................... F-5
Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 2001................ F-6
Unaudited Notes to Consolidated Financial Statements........ F-7
Report of Independent Accountants........................... F-22
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000.......................... F-23
Consolidated Balance Sheets at December 31, 1999 and 2000... F-24
Consolidated Statements of Changes in Shareowners' Equity
for the years ended December 31, 1998, 1999 and 2000...... F-25
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000.......................... F-26
Notes to Consolidated Financial Statements.................. F-27
AB CELLULAR HOLDING, LLC
Unaudited Condensed Consolidated Statements of Income for
the nine months ended September 30, 2000 and 1999......... F-60
Unaudited Condensed Consolidated Balance Sheets at September
30, 2000 and December 31, 1999............................ F-61
Unaudited Condensed Consolidated Statements of Changes in
Members' Capital for the nine months ended September 30,
2000 and 1999............................................. F-62
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999..... F-63
Unaudited Notes to Condensed Consolidated Financial
Statements................................................ F-64
Unaudited Consolidated Statements of Income for the year
ended December 31, 1999 and for the period from November
13, 1998 (inception) through December 31, 1998............ F-67
Unaudited Consolidated Balance Sheets at December 31, 1999
and 1998.................................................. F-68
Unaudited Consolidated Statements of Changes in Members'
Capital for the year ended December 31, 1999 and for the
period from November 13, 1998 (inception) through December
31, 1998.................................................. F-69
Unaudited Consolidated Statements of Cash Flows for the year
ended December 31, 1999 and for the period from November
13, 1998 (inception) through December 31, 1998............ F-70
Unaudited Notes to Consolidated Financial Statements........ F-71
CMT PARTNERS
Unaudited Consolidated Income Statements and Changes in
Partners' Equity for the three months ended March 31, 2000
and 1999.................................................. F-79
Unaudited Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999......................................... F-80
Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999................ F-81
Unaudited Notes to Consolidated Financial Statements........ F-82
Report of Independent Accountants........................... F-85
F-1
131
INDEX TO FINANCIAL STATEMENTS -- CONTINUED
Consolidated Income Statements and Changes in Partners'
Equity for the years ended December 31, 1999 (unaudited)
and 1998.................................................. F-86
Consolidated Balance Sheets at December 31, 1999 (unaudited)
and 1998.................................................. F-87
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 (unaudited) and 1998.................... F-88
Notes to Consolidated Financial Statements.................. F-89
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 1999 and 1998........ F-96
Unaudited Condensed Consolidated Balance Sheets at March 31,
1999 and December 31, 1998................................ F-97
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998........ F-98
Unaudited Notes to Consolidated Financial Statements........ F-99
Report of Independent Public Accountants.................... F-110
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997................................ F-111
Consolidated Statements of Comprehensive Income (Loss) for
the years ended December 31, 1998 and 1997................ F-112
Consolidated Balance Sheets at December 31, 1998 and 1997... F-113
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998 and 1997............ F-114
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997................................ F-115
Notes to Consolidated Financial Statements.................. F-116
L.A. CELLULAR DIVISION OF AB CELLULAR HOLDING, LLC
Report of Independent Accountants........................... F-140
Combined Income Statement for the year ended December 31,
1998...................................................... F-141
Combined Balance Sheet at December 31, 1998................. F-142
Combined Statement of Cash Flows for the year ended December
31, 1998.................................................. F-143
Notes to Combined Financial Statements...................... F-144
PRO FORMA FINANCIAL STATEMENTS
AT&T WIRELESS SERVICES, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Financial
Statements................................................ F-150
Unaudited Pro Forma Condensed Combined Balance Sheet at
March 31, 2001............................................ F-151
Unaudited Pro Forma Condensed Combined Statement of
Operations for the three months ended March 31, 2001...... F-152
Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 2000........... F-153
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements................................................ F-154
FINANCIAL STATEMENT SCHEDULE
AT&T WIRELESS SERVICES, INC. AND SUBSIDIARIES
Report of Independent Accountants on Financial Statement
Schedule.................................................. F-155
Schedule II -- Valuation and Qualifying Accounts............ F-156
F-2
132
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE
MONTHS ENDED
MARCH 31,
----------------
2000 2001
------ ------
REVENUE
Services.................................................... $1,992 $2,931
Equipment................................................... 206 281
------ ------
Total revenue............................................... 2,198 3,212
OPERATING EXPENSES
Costs of services (excluding depreciation of $227 and $353
included below)........................................... 662 921
Costs of equipment sales.................................... 391 490
Selling, general and administrative......................... 750 1,084
Depreciation and amortization............................... 369 576
------ ------
Total operating expenses.................................... 2,172 3,071
------ ------
OPERATING INCOME............................................ 26 141
Other income................................................ 24 84
Interest expense............................................ 51 47
------ ------
(Loss) income before income taxes and net equity earnings
(losses) from investments................................. (1) 178
(Benefit) provision for income taxes........................ (2) 79
Net equity earnings (losses) from investments............... 25 (99)
------ ------
NET INCOME.................................................. 26 --
Dividend requirements on preferred stock held by AT&T,
net....................................................... 13 42
------ ------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREOWNERS........... $ 13 $ (42)
====== ======
PRO FORMA NET INCOME (LOSS) PER SHARE:
Basic..................................................... $ .01 $ (.02)
Diluted................................................... $ .01 $ (.02)
WEIGHTED AVERAGE SHARES USED TO COMPUTE PRO FORMA NET INCOME
(LOSS) PER SHARE:
Basic..................................................... 2,530 2,530
Diluted................................................... 2,533 2,530
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
133
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
AT AT
DECEMBER 31, MARCH 31,
2000 2001
------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................... $ 62 $ 34
Accounts receivable, less allowances of $193 and $190....... 1,892 1,811
Note receivable from AT&T................................... -- 10,588
Inventories................................................. 335 362
Income tax receivable....................................... 118 109
Deferred income taxes....................................... 93 170
Prepaid expenses and other current assets................... 82 115
------- -------
TOTAL CURRENT ASSETS........................................ 2,582 13,189
Property, plant and equipment, net of accumulated
depreciation of $4,743 and $5,078......................... 9,892 10,725
Licensing costs, net of accumulated amortization of $1,761
and $1,856................................................ 13,627 13,568
Investments in and advances to unconsolidated
subsidiaries.............................................. 3,385 3,904
Goodwill, net of accumulated amortization of $241 and
$272...................................................... 4,696 4,686
Other assets, net of accumulated amortization of $264 and
$299...................................................... 1,120 967
------- -------
TOTAL ASSETS................................................ $35,302 $47,039
======= =======
LIABILITIES
Accounts payable............................................ $ 1,080 $ 800
Payroll and benefit-related liabilities..................... 432 263
Advertising and promotion accruals.......................... 179 156
Business tax accruals....................................... 258 247
Due on demand notes payable................................. 109 103
Short-term debt due to AT&T................................. 638 --
Other current liabilities................................... 958 1,175
------- -------
TOTAL CURRENT LIABILITIES................................... 3,654 2,744
Long-term debt due to AT&T.................................. 1,800 1,800
Long-term debt due to others................................ -- 6,487
Deferred income taxes....................................... 4,659 4,739
Other long-term liabilities................................. 271 290
------- -------
TOTAL LIABILITIES........................................... 10,384 16,060
COMMITMENTS AND CONTINGENCIES (NOTES (H) & (I))
MINORITY INTEREST........................................... 41 42
PREFERRED STOCK HELD BY AT&T................................ 3,000 3,000
SHAREOWNERS' EQUITY
Common stock, no par value, no shares authorized, issued or
outstanding at March 31, 2001 and December 31, 2000 (2,530
shares assumed outstanding on an unaudited pro forma
basis).................................................... -- --
Shareowners' net investment................................. 21,885 28,015
Accumulated other comprehensive loss........................ (8) (78)
------- -------
TOTAL SHAREOWNERS' EQUITY................................... 21,877 27,937
------- -------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $35,302 $47,039
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
134
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(IN MILLIONS)
(UNAUDITED)
ACCUMULATED
OTHER
SHAREOWNERS' COMPREHENSIVE TOTAL
COMMON NET INCOME SHAREOWNERS'
STOCK INVESTMENT (LOSS) EQUITY
------ ------------ ------------- ------------
Balance at December 31, 1999............... $-- $12,971 $ 26 $12,997
Net income available to common
shareowners.............................. 13 13
Transfers from AT&T, net................... 991 991
Other comprehensive income................. 26 26
-- ------- ---- -------
Balance at March 31, 2000.................. $-- $13,975 $ 52 $14,027
== ======= ==== =======
Balance at December 31, 2000............... $-- $21,885 $ (8) $21,877
Net loss available to common shareowners... (42) (42)
Proceeds attributed from DoCoMo investment,
net of costs............................. 6,141 6,141
Proceeds from AT&T Wireless Group tracking
stock shares issued for employee plans... 31 31
Other comprehensive loss................... (70) (70)
-- ------- ---- -------
Balance at March 31, 2001.................. $-- $28,015 $(78) $27,937
== ======= ==== =======
FOR THE THREE
MONTHS ENDED
MARCH 31,
--------------
2000 2001
---- ----
SUMMARY OF TOTAL COMPREHENSIVE INCOME (LOSS):
Net income (loss) available to common shareowners........... $13 $(42)
Dividend requirements on preferred stock held by AT&T,
net....................................................... 13 42
--- ----
Net income.................................................. 26 --
Net revaluation of investments (net of taxes of $16 and
$--)...................................................... 26 --
Net revaluation of financial instruments (net of taxes of
$-- and $(41))............................................ -- (70)
--- ----
TOTAL COMPREHENSIVE INCOME (LOSS)........................... $52 $(70)
=== ====
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
135
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,_
---------------------
2000 2001
------- ----------
OPERATING ACTIVITIES
Net income.................................................. $ 26 $ --
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gains on sale/exchange of businesses and
investments............................................ (21) --
Depreciation and amortization............................. 369 576
Deferred income taxes..................................... (12) 78
Net equity (earnings) losses from investments............. (13) 90
Minority interests in consolidated subsidiaries........... (4) (4)
Provision for uncollectible receivables................... 55 147
Increase in accounts receivable........................... (85) (68)
Decrease (increase) in inventories........................ 16 (27)
Decrease in accounts payable.............................. (55) (25)
Net change in other operating assets and liabilities...... (48) (112)
----- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 228 655
INVESTING ACTIVITIES
Net increase in note receivable from AT&T................. -- (10,588)
Capital expenditures and other additions.................. (818) (1,407)
Net acquisitions of licenses.............................. (82) (39)
Equity investment distributions and sales................. 26 2
Equity investment contributions, advances and purchases... (74) (637)
Refund of deposit on long-lived assets.................... -- 150
----- --------
NET CASH USED IN INVESTING ACTIVITIES....................... (948) (12,519)
FINANCING ACTIVITIES
Net decrease in short-term debt due to AT&T............... -- (638)
Increase in long-term debt due to AT&T.................... 300 --
Proceeds from issuance of long-term debt to others, net of
issuance costs......................................... -- 6,345
Proceeds attributed from DoCoMo investment, net of
costs.................................................. -- 6,141
Proceeds from AT&T Wireless Group tracking stock shares
issued for employee plans.............................. -- 31
Dividend requirements on preferred stock, net............. (13) (42)
Transfers from AT&T, net.................................. 439 --
Other financing activities, net........................... (1) (1)
----- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 725 11,836
----- --------
Net increase (decrease) in cash and cash equivalents........ 5 (28)
Cash and cash equivalents at beginning of period............ 5 62
----- --------
Cash and cash equivalents at end of period.................. $ 10 $ 34
===== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
136
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
(A) BACKGROUND AND BASIS OF PRESENTATION
For purposes of preparing these financial statements, the transactions
described in Note (a) below are assumed to have been consummated in historical
periods by the legal entity, AT&T Wireless Services, Inc., and its subsidiaries,
in a manner similar to a pooling of interests.
BACKGROUND
On October 25, 2000, AT&T Corp. announced a restructuring plan, stating its
intention to create a separate company for its wireless services' businesses,
named AT&T Wireless Services, Inc., by mid-2001, termed the split-off. AT&T
Wireless Services includes substantially the same assets and liabilities that
were represented by AT&T Wireless Group tracking stock, which AT&T created on
April 27, 2000. In conjunction with the offering of AT&T Wireless Group tracking
stock in April 2000, 15.6%, or 360 million shares, of AT&T Wireless Group
tracking stock were sold at an offering price of $29.50 per share. AT&T Wireless
Group tracking stock was a class of AT&T common stock which was intended to
provide holders with financial returns based on the financial performance and
economic value of AT&T's wireless services' businesses. As a tracking stock of
AT&T, AT&T Wireless Group was not a separate legal entity, but an integrated
business of AT&T. AT&T Wireless Group tracking stock issued in the offering
reflected only a portion of the authorized shares of AT&T Wireless Group
tracking stock. The remaining 84.4% was retained and reserved for the benefit of
AT&T Common Stock Group (which consisted of the operations of AT&T other than
those attributed to AT&T tracking stocks), the value of which is intended to be
reflected in AT&T common stock. See Note (c) for discussion of the investment by
NTT DoCoMo which closed in January 2001.
During May 2001, AT&T completed an exchange offer which allowed AT&T common
shareowners to exchange shares of AT&T common stock for shares of AT&T Wireless
Group tracking stock. Approximately 372.2 million shares of AT&T common stock
were tendered in exchange for approximately 437.7 million shares of AT&T
Wireless Group tracking stock, at an exchange ratio of 1.176 shares of AT&T
Wireless Group tracking stock for each validly tendered share of AT&T common
stock. As a result of the exchange offer and the DoCoMo investment, assuming
conversion of the DoCoMo shares, AT&T Common Stock Group retained an approximate
52% economic interest in AT&T Wireless Group.
The split-off of AT&T Wireless Services is subject to certain conditions.
These conditions include the continued validity of a favorable ruling on the
split-off from the Internal Revenue Service (IRS), which was received on May 29,
2001, and satisfaction of conditions contained in AT&T's credit agreement.
The split-off has several steps. These steps include transferring
substantially all of the assets and liabilities of AT&T Wireless Group to AT&T
Wireless Services, Inc., mandatorily exchanging all issued and outstanding
shares of AT&T Wireless Group tracking stock, including those shares issued in
the exchange offer as well as the shares held by DoCoMo, for shares of AT&T
Wireless Services, Inc. common stock, and distributing 1,136,258,587 shares of
AT&T Wireless Services, Inc. common stock held by AT&T Common Stock Group, to
holders of AT&T common stock on a pro rata basis. AT&T is retaining 185,308,303
shares of AT&T Wireless Services, Inc. common stock for its own account for sale
or exchange within six months of the split-off, subject to the continued
validity of the IRS ruling that was received on May 29, 2001.
AT&T Wireless Services was incorporated on July 7, 1987. Prior to the
split-off, AT&T Wireless Services was a 100% owned direct subsidiary of AT&T
Corp. AT&T Wireless Services had authorized 500
F-7
137
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
shares of $.01 par value common stock, of which 100 shares were outstanding to
AT&T Corp. prior to the split-off. These shares have not been assumed to be
outstanding for purposes of the historical financial statements presented, due
to the recapitalization which will be effected with the split-off. Subsequent to
the split-off it is anticipated that AT&T Wireless Services will have
approximately 2,530 million common shares issued and outstanding. These shares
have been assumed outstanding for purposes of the pro forma earnings per share
calculations in the financial statements presented.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC) and, in
the opinion of management, includes all adjustments necessary for a fair
statement of the consolidated result of operations, financial position and cash
flows for each period presented. The consolidated financial statements reflect
the results of operations, financial position, changes in shareowners' equity
and cash flows of AT&T Wireless Services as if it were a separate entity for all
periods presented and are in conformity with generally accepted accounting
principles in the United States of America. The consolidated financial
statements reflect the assets, liabilities, revenue and expenses directly
attributable to AT&T Wireless Services and are representative of those
previously reported by AT&T Wireless Group. The assets and liabilities included
represent the assets and liabilities which have been transferred to AT&T
Wireless Services in accordance with the separation and distribution agreement
between AT&T and AT&T Wireless Services (see Note (i)). As of June 2001,
substantially all of the assets and liabilities represented by AT&T Wireless
Group have been transferred to AT&T Wireless Services. Additionally, the
consolidated financial statements include allocations deemed reasonable by
management, to present the results of operations, financial position and cash
flows of AT&T Wireless Services as a separate entity and are not necessarily
indicative of those that would be incurred on a stand-alone basis for the
periods presented. The methodologies have been described within the notes to the
consolidated financial statements where appropriate. Additionally, the
consolidated results for the interim periods presented are not indicative of
results for the full year. These consolidated financial statements should be
read in conjunction with AT&T Wireless Services' consolidated financial
statements for the three years ended December 31, 2000.
The April 2000 offering of AT&T Wireless Group tracking stock resulted in
net proceeds to AT&T, after deducting underwriter's discount and related fees
and expenses, of $10.3 billion. AT&T attributed $7.0 billion of the net proceeds
to AT&T Wireless Services, in the form of a note receivable, which was repaid by
December 31, 2000, primarily to fund acquisitions and capital expenditures.
Interest on the note receivable was calculated based upon the average daily
balance outstanding at a rate equal to the one month London InterBank Offered
Rate (LIBOR) minus six basis points, a rate intended to be equivalent to the
rate AT&T Wireless Services would have received if it were a stand-alone entity.
Prior to the offering of the AT&T Wireless Group tracking stock, the
capital structure of AT&T Wireless Services had been assumed based upon AT&T's
historical capital ratio adjusted for certain items. In determining the
allocation between short- and long-term debt and preferred stock, AT&T
considered factors such as prospective financing requirements for the business,
working capital commitments and future requirements, and peer group analysis.
This resulted in $3.4 billion in long-term debt due to AT&T at December 31,
1999, paying annual interest at 7.25%. In addition, as of December 31, 1999,
AT&T Wireless Services had issued and outstanding, $1.0 billion of 9% cumulative
preferred stock held by AT&T that, subject to the approval of AT&T Wireless
Group capital stock committee, was redeemable at the option of AT&T.
F-8
138
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
On May 1, 2000, following the offering of AT&T Wireless Group tracking
stock, $2.0 billion of AT&T Wireless Service outstanding long-term debt due to
AT&T was recapitalized into an additional $2.0 billion of 9% cumulative
preferred stock issued to AT&T. In conjunction with the recapitalization, the
remaining long-term debt due to AT&T of $1.8 billion was recapitalized to be 10
year term debt that bore interest at a fixed rate of 8.1% per annum. The
interest rate was intended to be substantially equivalent to the interest rate
that AT&T Wireless Services would have been able to obtain from third parties,
including the public markets, as a non-affiliate of AT&T without the benefit of
any guaranty by AT&T. The intercompany debt and preferred stock was repaid to
AT&T in June 2001.
During December 2000, AT&T Wireless Services obtained a short-term
revolving loan from AT&T, which is included in "Short-term debt due to AT&T" in
the accompanying consolidated balance sheets. At December 31, 2000, the amount
outstanding under the loan was $638, paying interest monthly at the average
seven-day commercial paper rate, which was 8.37% at December 31, 2000. The loan
was repaid in full in January 2001.
Changes in shareowners' net investment prior to the offering of AT&T
Wireless Group tracking stock represented net transfers to or from AT&T, after
giving effect to the net income or loss of AT&T Wireless Services during the
period, and were assumed to be settled in cash. AT&T's capital contributions for
purchase business combinations and initial investments in joint ventures and
partnerships which AT&T attributed to AT&T Wireless Services have been treated
as noncash transactions prior to the offering. Changes in shareowners' net
investment subsequent to the offering of AT&T Wireless Group tracking stock
represented AT&T Wireless Group tracking stock offering proceeds attributed to
AT&T Wireless Services from AT&T, proceeds from additional AT&T Wireless Group
tracking stock share issuances, proceeds from the DoCoMo investment attributed
to AT&T Wireless Services from AT&T, and the net income or loss for the period
subsequent to the offering. AT&T Wireless Services will begin accumulating its
retained earnings effective with the split-off.
Historically, AT&T has performed cash management functions on behalf of
AT&T Wireless Services. Substantially all of the AT&T Wireless Services' cash
balances were swept to AT&T on a daily basis, where they were managed and
invested by AT&T. Prior to the offering of AT&T Wireless Group tracking stock,
transfers of cash to and from AT&T were reflected as a component of shareowners'
net investment, with no interest income or expense reflected. Subsequent to the
offering, transfers have been reflected as changes in the note receivable from
or short-term debt payable to AT&T. Cash balances maintained and reported by
AT&T Wireless Services primarily represented cash balances for which no right of
offset existed with AT&T. Subsequent to the split-off, AT&T Wireless Services
will be responsible for its own cash management functions.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Wireless Services as it was
not deemed practicable to specifically identify such common costs to AT&T
Wireless Services. These allocations were based on the ratio of AT&T Wireless
Services' external costs and expenses to AT&T's consolidated external costs and
expenses, adjusted for any functions that AT&T Wireless Services performs on its
own. However, the costs of these services charged to AT&T Wireless Services are
not necessarily indicative of the costs that would have been incurred if AT&T
Wireless Services had performed these functions entirely as a stand-alone
entity, nor are they indicative of costs that will be charged or incurred in the
future. Subsequent to the split-off, AT&T Wireless Services will perform these
functions using its own resources or purchased services. AT&T Wireless Services
will be responsible for all costs and expenses associated with the operations
and management of a separate company.
F-9
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
Consolidated income tax provision or benefit, related tax payments or
refunds, and deferred tax balances of AT&T have been allocated to AT&T Wireless
Services based principally on the taxable income and tax credits directly
attributable to AT&T Wireless Services. These allocations reflect AT&T Wireless
Services' contribution to AT&T's consolidated taxable income and the
consolidated tax liability and tax credit position. Subsequent to the offering
of AT&T Wireless Group tracking stock, AT&T Common Stock Group and AT&T Wireless
Group entered into a tax sharing agreement that provided for tax sharing
payments based on the taxes or tax benefits of a hypothetical affiliated group
consisting of AT&T Common Stock Group and AT&T Wireless Group. Based on this
agreement, the consolidated tax liability before credits was allocated between
the groups, based on each group's contribution to consolidated taxable income of
the hypothetical group. For purposes of the tax sharing agreement, the 9%
cumulative preferred stock held by AT&T was treated as if it were an
intercompany debt instrument and, accordingly, tax sharing payments were
calculated by treating coupon payments on the preferred stock as interest
expense to AT&T Wireless Services and interest income to AT&T Common Stock
Group. Consolidated tax credits of the hypothetical group have been allocated
between groups based on each group's contribution to each tax credit. See Note
(i) for discussion of amendments to the tax sharing agreement as a result of the
split-off. Subsequent to the split-off, AT&T Wireless Services will be a
separate taxable entity.
(B) SIGNIFICANT ACCOUNTING POLICIES
PROPERTY, PLANT AND EQUIPMENT
Effective January 1, 2001, AT&T Wireless Services implemented the results
of a review of the estimated service lives of certain wireless communications
equipment, primarily electronics. Lives were shortened to fully depreciate all
such equipment within seven years. Similar equipment acquired after January 1,
2001, will have useful lives no longer than seven years. The impact of this
change for the three months ended March 31, 2001, was an increase in
depreciation expense of approximately $36 and a reduction in net income of
approximately $22.
LICENSING COSTS AND GOODWILL
As a result of AT&T Wireless Services' evaluation of recent changes in the
wireless telecommunications industry and the views of regulatory authorities,
AT&T Wireless Services, effective January 1, 2001, will use an amortization
period for all licensing costs and goodwill associated with newly acquired
wireless operations not to exceed 25 years. This change did not have a material
impact to AT&T Wireless Services' results of operations for the three months
ended March 31, 2001.
FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Among other provisions, it
requires that entities recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. Gains and losses resulting from changes in the fair values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. In June 2000, the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" as an amendment to SFAS No. 133. This statement provides
clarification with regard to certain implementation issues under
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
SFAS No. 133 on specific types of hedges. The adoption of SFAS No. 133 in
January 2001, did not have a material impact to AT&T Wireless Services' results
of operations, financial position or cash flows.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
with current year presentations.
(C) DOCOMO INVESTMENT
In January 2001, NTT DoCoMo, a leading Japanese wireless communications
company, invested $9.8 billion in a security of AT&T that, like AT&T Wireless
Group tracking stock, is intended to reflect a portion of the financial
performance and economic value of AT&T Wireless Group. AT&T Wireless Services
was allocated $6.2 billion of the gross proceeds from DoCoMo's $9.8 billion
investment in AT&T in the form of an intercompany note receivable, which is
included in "Note receivable from AT&T" on the accompanying consolidated balance
sheets. Additionally, AT&T Wireless Services was allocated $18 of costs
associated with the transaction. AT&T retained the remaining $3.6 billion of the
DoCoMo investment proceeds as consideration for the reduction in AT&T's retained
portion of AT&T Wireless Services' value. Following the split-off, this
investment will be converted into approximately 16% of AT&T Wireless Services'
common shares. DoCoMo also received warrants at an exercise price of $35 per
AT&T Wireless Group tracking share equivalent that would represent an
approximate additional 1.6% of AT&T Wireless Services' common shares after the
split-off. As part of this investment, AT&T Wireless Services has entered into a
strategic alliance with DoCoMo to develop mobile multimedia services on a
global-standard, high-speed wireless network. DoCoMo may require the repurchase
of its investment at DoCoMo's original purchase price, plus interest, if AT&T
does not complete the split-off by specified dates beginning January 1, 2002, or
if, under certain circumstances, AT&T Wireless Services fails to meet specified
technological milestones.
(D) EARNINGS PER SHARE
AT&T Wireless Services has not been a separate legal entity with public
shares outstanding subsequent to being acquired by AT&T Corp. in September 1994
and prior to the split-off. Therefore, historical earnings per share has not
been presented in the consolidated financial statements. Unaudited pro forma
earnings per share has been presented to reflect the capital structure
associated with the anticipated split-off of AT&T Wireless Services from AT&T.
Pro forma basic earnings per share (EPS) for AT&T Wireless Services for the
three months ended March 31, 2001 and 2000 have been computed by dividing net
income (loss) available to common shareowners by the estimated 2,530 million
common shares assumed to be outstanding effective with the split-off. The
estimated 2,530 million shares outstanding is based on the number of shares of
AT&T Wireless Group tracking stock outstanding at June 19, 2001, the number of
shares represented by AT&T's retained interest at June 19, 2001, including the
228 million new share equivalents issued to DoCoMo in January 2001 (see Note
(c)), and reflects a reduction of 12 million shares from AT&T's retained
interest which shares will be held in treasury by AT&T Wireless Services for
future employee benefit plan obligations.
Pro forma diluted EPS for the three months ended March 31, 2000 has been
computed by dividing net income (loss) available to common shareowners, by the
estimated 2,530 million of common shares assumed to be effective with the
split-off plus the estimated effect of dilutive stock options as of the split-
F-11
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
off, which total approximately 3 million shares. The estimated effect of
dilutive stock options was determined under the treasury stock method.
Assumptions used to determine the dilutive effect included (1) an assumed 34%
conversion rate for the approximately 249 million of AT&T common stock options
which will be converted at the split-off date into AT&T common stock and AT&T
Wireless Services stock options, (2) relative converted option prices of 1.1:1.0
which was based upon the market values of AT&T common stock and AT&T Wireless
Group tracking stock at March 31, 2001, of $21.30 and $19.18, respectively, and
(3) the weighted average market value of AT&T Wireless Group tracking stock for
the three months ended March 31, 2001, of $21.86. The impact of the stock
options for the three months ended March 31, 2001 was not included in the
calculation of pro forma diluted EPS as they were considered to be
anti-dilutive. The estimated $76 million AT&T Wireless Group tracking stock
options outstanding, as well as an estimated 84 million of AT&T Wireless
Services common stock options assumed to be converted and outstanding effective
with the split-off, and the DoCoMo warrants issued in January 2001 (see Note
(c)) were assumed to be anti-dilutive as of the split-off date and therefore
were not included in the determination of the pro forma diluted EPS for both the
three months ended March 31, 2001 and 2000.
(E) INVESTMENTS
On February 8, 2001, AT&T Wireless Services completed its previously
announced transaction with Dobson Communications Corporation. AT&T Wireless
Services purchased $200 in Series AA preferred stock from Dobson, which has a
liquidation preference of $1,000 per share and is exchangeable into Series A
convertible preferred stock. If the Series AA preferred stock is exchanged into
Series A convertible preferred stock, AT&T Wireless Services will increase its
ownership interest in Dobson, on an as converted to common stock basis, from its
current ownership of 4.6% to approximately 11.6%.
(F) LONG-TERM DEBT
On March 6, 2001, AT&T Wireless Services completed a private placement of
$6.5 billion in unsecured and unsubordinated Senior Notes with maturity dates
from March 1, 2006 to March 1, 2031. The notes pay interest at fixed rates
ranging from 7.350% to 8.750% per annum, payable semi-annually and include
customary covenants. The notes include registration rights, such that AT&T
Wireless Services is required to exchange the notes for a new issue of notes
registered under the Securities Act of 1933 and are to be declared effective no
later than 240 days after the issue date. AT&T Wireless Services had $38 of
interest expense for the quarter ended March 31, 2001 related to these notes.
On March 23, 2001, AT&T Wireless Services, entered into Competitive Advance
and Revolving Credit Facilities (the "Facilities") in the aggregate amount of
$2.5 billion consisting of an up to $1.25 billion 364-day Competitive Advance
and Revolving Credit Facility and an up to $1.25 billion Five-Year Competitive
Advance and Revolving Credit Facility. The Facilities are subject to a facility
fee ranging from 8 to 30 basis points, payable quarterly on the total
commitment, used or unused. The facility fees are based on the respective
agreement and will fluctuate based on AT&T Wireless Services' Senior Notes
rating. The Facilities are also subject to a utilization fee of 12.5 basis
points if borrowings exceed certain levels as defined in the agreement. The
Facilities bear interest at variable rates based upon, in various cases, (i)
LIBOR plus 32.5 to 100 basis points depending on AT&T Wireless Services' Senior
Notes rating, or (ii) the greater of the prime rate or the Federal funds
effective rate plus 50 basis points. The Facilities are to be used for general
corporate purposes and are subject to customary covenants, representations and
warranties and events of default. In addition, the Facilities contain financial
covenants requiring AT&T Wireless Services to maintain certain financial ratios.
The Facilities also specify
F-12
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
limitations on AT&T's and AT&T Wireless Services' ability to consummate the
split-off including a provision that it will constitute an event of default if
the split-off is consummated without obtaining a favorable tax ruling from the
IRS or an unqualified tax opinion that the split-off will qualify as a tax-free
transaction. In addition, the existence of an obligation by AT&T Wireless
Services to repurchase equity interests from DoCoMo may under certain
circumstances constitute an event of default. No amounts had been borrowed under
the Facilities at March 31, 2001.
(G) RELATIONSHIP WITH AT&T
The financial statements of AT&T Wireless Services reflect an assumed
capital structure allocated from AT&T, as well as allocated costs associated
with AT&T's common support divisions as discussed in Note (a). Additionally,
AT&T Wireless Services purchases various network and selling, general and
administrative services from AT&T, primarily at market-based prices.
FOR THE
THREE MONTHS
ENDED
MARCH 31,
------------
2000 2001
---- ----
COSTS OF SERVICES:
Long-distance and other network related services............ $ 52 $ 63
Provision for uncollectible receivables related to bundled
customers................................................. 10 9
---- ----
Total costs of services..................................... $ 62 $ 72
SELLING, GENERAL AND ADMINISTRATIVE:
General corporate overhead allocations...................... $ 13 $ 15
Sales employee, commissions and marketing support related
costs(1).................................................. 60 --
Administrative telephone services........................... 24 42
Remittance processing services.............................. 5 7
Billing and collection services related to bundled
customers................................................. 11 9
---- ----
Total selling, general and administrative................... $113 $ 73
INTEREST INCOME ON NOTE RECEIVABLE FROM AT&T(2)............. -- 77
INTEREST EXPENSE............................................ 72 40
PREFERRED STOCK DIVIDENDS(3)................................ 13 42
---- ----
$260 $304
==== ====
CAPITALIZED INTEREST DEDUCTED FROM INTEREST EXPENSE......... $ 24 $ 33
==== ====
---------------
(1) Effective April 1, 2000, the direct sales employees previously employed by
AT&T became employees of AT&T Wireless Services.
(2) The intercompany interest income was determined based upon the average daily
balance outstanding of the intercompany note receivable from AT&T, at a rate
equal to the average 30 day commercial paper rate reset on the first day of
each month, which was 5.615% at March 31, 2001, a rate designed to be
equivalent to the rate the AT&T Wireless Services would receive if it were a
stand-alone entity. The intercompany interest income is included within
other income in the accompanying consolidated statements of operations.
(3) Recorded net of tax, in accordance with the tax sharing agreement discussed
in Note (a).
F-13
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
RELATIONSHIP WITH AT&T AFTER THE SPLIT-OFF:
For purposes of governing certain of the ongoing relationships between AT&T
Wireless Services and AT&T at and after the separation and to provide for an
orderly transition, AT&T Wireless Services and AT&T entered into various
agreements. A brief description of each of the agreements follows.
Separation and Distribution Agreement
The separation and distribution agreement sets forth the agreements among
AT&T and AT&T Wireless Services with respect to the principal corporate
transactions required to effect the split-off, and a number of other agreements
governing the relationship between AT&T Wireless Services and AT&T following the
split-off. The asset transfer agreement with AT&T, which is incorporated into,
and superseded by, the separation and distribution agreement, relates to the
assets to be transferred in connection with the separation. AT&T Wireless
Services expects to finalize the transfers called for under the asset transfer
agreement immediately prior to the split-off.
Brand License Agreement
The brand license agreement gives AT&T Wireless Services rights to continue
to use specified AT&T brands, including the AT&T globe design and the AT&T trade
dress. The rights are granted royalty free, although AT&T Wireless Services will
be required to pay a maintenance fee.
AT&T Wireless Services has these rights for five years following the
completion of the split-off. After the initial five-year period, AT&T Wireless
Services may renew its right to these AT&T brands for an additional five-year
period. During the initial or renewal period, AT&T Wireless Services may
terminate the brand license agreement on 12 months prior notice. In addition,
AT&T Wireless Services may continue to use these AT&T brands during a transition
period after the brand license agreement is terminated.
In order for AT&T Wireless Services to maintain its rights, it must comply
with specified quality, customer care, graphics and marketing standards in
connection with its use of these AT&T brands. AT&T may terminate the brand
license agreement in the event of a significant breach or change in control of
AT&T Wireless Services.
Master Carrier Agreement
The master carrier agreement requires AT&T to provide voice and data
telecommunications services to AT&T Wireless Services for five years. AT&T will
provide both wholesale services, which AT&T Wireless Services will use as a
component of wireless services it provides to its customers, and administrative
services, for example corporate usage which AT&T Wireless Services will use
itself.
AT&T Wireless Services is required to purchase in each year an amount of
wholesale domestic voice services equal to AT&T Wireless Services actual usage
in 2001. The pricing at which AT&T provides these services will be subject to
internal and external benchmarking. AT&T Wireless Services is not required to
purchase from AT&T wholesale domestic voice services in excess of this
commitment, although AT&T has a right to match any third party offers until 2003
for 80% of any excess. From 2003 until the agreement ends, AT&T Wireless
Services may purchase such service in excess of the commitment from any carrier.
F-14
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
AT&T Wireless Services is also required to purchase all international voice
services from AT&T. AT&T will provide these services at the price AT&T receives
from Concert, its joint venture with British Telecommunications.
AT&T Wireless Services is required each year to purchase domestic
administrative services, data and voice, at a level equal to 80% of its
purchases in 2000. AT&T Wireless Services will purchase its local connectivity
business needs from AT&T if AT&T meets committed levels of performance and
offers price and performance terms at least as favorable as those offered by
other providers.
Agency and Referral Agreement
The agency and referral agreement covers AT&T's acting as an agent on
behalf of AT&T Wireless Services to assist in obtaining business with AT&T's
business customers. Upon either party being acquired by a significant competitor
of the other, the party not being acquired will have the right to terminate this
agreement.
Employee Benefits Agreement
The employee benefits agreement covers a wide range of compensation and
benefit issues. In general, AT&T Wireless Services is responsible for all
obligations and liabilities relating to employees and former employees of AT&T
Wireless Services and their dependents and beneficiaries after the split-off
date, and AT&T is responsible for the obligations and liabilities before the
split-off date.
Intellectual Property Agreement
The intellectual property agreement specifies the ownership and license
rights in patents, software, copyrights, and trade secrets, but not the AT&T
brands. Under the terms of the agreement, AT&T and AT&T Wireless Services will
grant each other a non-exclusive, fully paid, worldwide, perpetual and
irrevocable license under its patents to make, have made, use and sell any and
all products and services in the conduct of its present and future business. The
parties also grant special rights under certain of each other's patents for
defensive protection, special affiliate licensing, and supplier licensing. In
addition, AT&T will refrain from licensing some of its patents to AT&T Wireless
Services' ten largest domestic mobile service competitors for a period of five
years and will grant us a nonexclusive right to direct the licensing of certain
AT&T patents to certain third parties and receive half of the net royalties.
Tax Sharing Agreement
AT&T and AT&T Wireless Services amended their existing tax sharing
agreement. The amended tax sharing agreement provides that:
- AT&T will be responsible for any tax item resulting from asset transfers
from AT&T Wireless Services to AT&T Common Stock Group before the
split-off;
- The accounts between AT&T and AT&T Wireless Services will be adjusted for
unpaid amounts under the tax sharing agreement as of the time of the
split-off; and
- No tax sharing payments will be made with respect to taxable periods (or
portions thereof) beginning after the split-off date.
The tax sharing agreement also contains provisions that govern tax contests and
other related matters with respect to tax periods before the split-off date.
F-15
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
Services Agreement
The services agreement governs the following corporate support services:
common support services, inter-unit services, and systems replication and
systems services. The agreement will generally run for 18 months and the
individual services are generally terminable on 90 days' notice.
Common support services include services historically provided at a
corporate headquarters level, such as financial management, tax, media
relations, human resources administration, procurement, real estate management
and other administrative functions. Charges for these services will allow the
provider to recover the costs of such service, plus all out-of-pocket costs and
expenses, but without any profit.
Inter-unit services include services historically provided by one business
unit to another such as billing, remittance processing, systems development and
customer care. Charges for these services will allow the provider to recover the
costs of such service, plus all out-of-pocket costs and expenses. In some
instances the company providing the service will recover a profit.
AT&T will also supply to AT&T Wireless Services technology, systems and
support services. The formula for these charges is intended to allow AT&T to
recover its fully-allocated cost plus a profit.
(H) COMMITMENTS
AT&T Wireless Services has commitments to fund spectrum acquisitions and
operational funding requirements of an equity method investment which totaled
approximately $400 as of May 31, 2001.
During January 2001, AT&T closed its previously announced agreement with
DoCoMo. Pursuant to this agreement, DoCoMo may require the repurchase of its
investment at DoCoMo's original purchase price, plus interest, if AT&T does not
complete the split-off by specified dates beginning January 1, 2002, or if,
under certain circumstances, AT&T Wireless Services fails to meet specified
technological milestones. See Note (c) for further discussion related to the
DoCoMo investment.
AT&T Wireless Services has various purchase commitments for network
equipment as well as handsets, related to the development of its next-generation
strategy. Those commitments totaled $2.2 billion as of March 31, 2001. These
commitments expire between 2001 and 2004.
During November 2000, AT&T Wireless Services joined with others in the
formation of a venture, Alaska Native Wireless, which participated in the
Federal Communication Commission's recent auction of license spectrum in the
1900 megahertz band, which is used to provide wireless services. In January
2001, the auction was completed, and Alaska Native Wireless was the high bidder
on approximately $2.9 billion in licenses. AT&T Wireless Services has committed
to fund $2.6 billion to Alaska Native Wireless to fund Alaska Native Wireless'
purchase of licenses. As of March 31, 2001, AT&T Wireless Services funded
approximately $309 of the commitment through a combination of a non-controlling
equity interest and debt securities of Alaska Native Wireless. The remaining
approximate $2.3 billion of additional funding will be made when such licenses
are granted, and will take the form of non-convertible notes of Alaska Native
Wireless. At the fifth anniversary of the first date on which licenses won in
the auction are granted to Alaska Native Wireless, and in addition to other
means by which they may transfer their interests, the other owners of Alaska
Native Wireless have the right to require AT&T Wireless Services to purchase
their equity interests. If this right were exercised five years after license
grant, the purchase price could be as much as approximately $950 and would be
payable, at AT&T Wireless Services' option, in cash or marketable securities.
The right to require AT&T Wireless Services to purchase these interests may be
exercised before the five-year anniversary of the license grant if the
conditions of certain FCC regulations
F-16
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
restricting the free transferability of certain licenses offered in this auction
are met earlier. If the right were exercised earlier, the purchase price would
be calculated in generally the same way as if exercised at five years, except
that a discount would be applied. In certain circumstances, if a winning bid of
Alaska Native Wireless is rejected or if any license granted to it is revoked,
AT&T Wireless Services would be obligated to compensate other owners for making
capital available to the venture. In certain circumstances, if the grant of the
licenses is challenged, AT&T Wireless Services may be obligated to purchase the
interests of other owners. Depending on when such revocation or challenge takes
place, the amount may be material but would be less than the $950 purchase price
described above.
AT&T Wireless Services also has various other purchase commitments for
materials, supplies and other items incidental to the ordinary course of
business which are not significant individually, nor in the aggregate.
(I) CONTINGENCIES
Several lawsuits have been filed asserting claims that AT&T Wireless
Services collected charges for local government taxes from customers that were
not properly subject to those charges. AT&T Wireless Services has entered into a
settlement of one of these cases, although the settlement has been challenged on
appeal. AT&T Wireless Services has asserted in those cases that any recovery
should come from the municipalities to which the taxes were paid.
Several class action lawsuits have been filed in which claims have been
asserted that AT&T Wireless Services did not have sufficient network capacity to
support the influx of new subscribers who signed up for AT&T Digital One Rate
service beginning in May 1998 and therefore has failed to provide service of a
quality allegedly promised to subscribers. The plaintiffs in these cases have
not asserted specific claims for damages, with the exception of one case filed
in Texas in which the named plaintiffs have asserted claims for compensatory and
punitive damages totaling $100.
Several other class action or representative lawsuits have been filed
against AT&T Wireless Services that allege, depending on the case, breach of
contract, misrepresentation or unfair practice claims relating to AT&T Wireless
Services billing practices (including rounding up of partial minutes of use to
full minute increments and billing send to end), coverage, dropped calls, price
fixing and/or mistaken bills. Although the plaintiffs in these cases have not
specified alleged damages, the damages in two of the cases are alleged to exceed
$100. One of these two cases was dismissed and the dismissal was affirmed in
part on appeal. Settlement negotiations are ongoing in both cases.
Several class actions have been filed against AT&T Corp. and several
wireless phone manufacturers and carriers, asserting products liability, breach
of warranty and other claims relating to radio frequency transmissions to and
from wireless phones. The complaints seek damages for the costs of headsets for
wireless phone users as well as injunctive relief. In connection with the
split-off, AT&T Wireless Services will be allocated all of the liability, if
any, arising from such lawsuits.
AT&T Wireless Services is involved in a patent infringement action against
GTE in the U.S. District Court in Seattle, Washington. GTE claims that the Nokia
phones manufactured for AT&T Wireless Services infringe a GTE patent for
over-the-air activation and over-the-air programming. AT&T Wireless Services is
seeking a declaratory judgment that its use of over-the-air activation does not
infringe GTE's patent. GTE has not specified amounts of claimed damages.
AT&T Wireless Services is involved in an international arbitration
proceeding concerning interests in a Malaysian telecommunications joint venture,
Maxis Communications Bhd, a former MediaOne business
F-17
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
acquired by AT&T and sold to AT&T Wireless Services in the fourth quarter of
2000. In the arbitration, a group of Malaysian shareholders claim that MediaOne
breached fiduciary duties and contractual obligations owed to the joint venture.
The arbitration claim asserts damages of $400. AT&T Wireless Services will
assume a portion of the liabilities, if any, relating to this action, subject to
certain adjustments. In March 2001, AT&T Wireless Services entered into an
agreement with other shareholders of Maxis Communications Bhd who are the
claimants in this arbitration, for the sale of AT&T Wireless Services' entire
interest in that entity and the resolution of the claims asserted in the
arbitration proceeding. The parties agreed to suspend the arbitration proceeding
pending closing of this transaction, and expect to terminate the arbitration
proceeding when the sale has been completed.
Stockholders of a former competitor of AT&T Wireless Services air-to-ground
business are plaintiffs in a lawsuit filed in 1993, alleging that AT&T Wireless
Services breached a confidentiality agreement, used trade secrets to unfairly
compete, and tortiously interfered with the business and potential business of
the competitor. Plaintiffs sought damages in an unspecified amount in excess of
$3.5 billion. AT&T Wireless Services obtained partial summary judgment and then
prevailed on the remainder of the claims at a trial on the validity of a release
of plaintiffs' claims. Final judgment was entered against plaintiffs on their
claims, and plaintiffs appealed. On appeal, the Appellate Court of Illinois,
Second District, reversed and remanded the case for trial indicating that
certain issues decided by the judge needed to be resolved by a jury.
Several lawsuits have been filed against AT&T, certain executives of AT&T
and AT&T Wireless Services and a group of investment banking firms, seeking
class certification and asserting claims under federal securities laws. The
complaints assert claims that AT&T made material misstatements concerning the
company's earnings and financial condition, while omitting other material
information, allegedly to maximize proceeds from the public offering of AT&T
Wireless Group tracking stock in April 2000 and/or to avoid paying a cash
guarantee in connection with the MediaOne acquisition. The complaints do not
specify amounts of damages claimed, although the plaintiffs are seeking to
recover for declines in stock prices of AT&T securities, including the AT&T
Wireless Group tracking stock. In connection with the split-off, AT&T Wireless
Services will be allocated a portion of the liabilities, if any, arising out of
these actions to the extent relating to AT&T Wireless Group tracking stock.
While these matters could affect the operating results of any one quarter
when resolved in future periods, AT&T Wireless Services is unable to ascertain
the ultimate aggregate amount of monetary liability or financial impact with
respect to these matters.
AT&T Wireless Services also is a defendant in other legal actions involving
claims incidental to the normal conduct of the running of its business. Such
matters are subject to many uncertainties and outcomes are not predictable with
assurance. Additionally, AT&T Wireless Services also makes routine filings with
the Federal Communications Commission and state regulatory authorities. However,
AT&T Wireless Services believes that the amounts that may be paid in these
actions will not be material to its financial position, or its results of
operations or cash flow.
(J) SEGMENT REPORTING
AT&T Wireless Services' results are segmented according to the way AT&T
Wireless Services manages its business: Mobility, Fixed Wireless and Corporate
and other. The Mobility segment is comprised of AT&T Wireless Services' domestic
wireless voice and data services and products in the 850 megahertz (cellular)
and 1900 megahertz (PCS) markets, the aviation division, and the earnings and
losses associated with equity investments in domestic wireless communications
ventures and partnerships.
F-18
148
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
The Fixed Wireless segment includes the results associated with AT&T Wireless
Services' offering of wireless local telephone and internet services to
residential customers. The Corporate and other segment includes primarily the
results of AT&T Wireless Services' international equity investments.
The accounting policies of the segments are the same as those used for the
accompanying consolidated financial statements. There are no material
intercompany transactions between the segments. AT&T Wireless Services' primary
measure of evaluating operating performance is based upon operating income plus
depreciation and amortization, referred to as EBITDA.
Geographic information is not presented due to the immateriality of
international revenues. Additionally, AT&T Wireless Services is not dependent
upon a single customer.
Segment information is as follows:
FOR THE THREE
MONTHS
ENDED MARCH 31,
----------------
2000 2001
------ ------
Revenue:
Mobility -- Services........................................ $1,992 $2,929
Mobility -- Equipment....................................... 206 281
------ ------
Total Mobility.............................................. 2,198 3,210
Fixed Wireless.............................................. -- 2
Corporate and other......................................... -- --
------ ------
Total revenue............................................... $2,198 $3,212
====== ======
Reconciliation of operating income plus depreciation and
amortization (EBITDA) to (loss) income before income taxes
and net equity earnings (losses) from investments:
Mobility.................................................... $ 431 $ 788
Fixed Wireless.............................................. (34) (68)
Corporate and other......................................... (2) (3)
------ ------
Total EBITDA................................................ 395 717
Depreciation and amortization............................... 369 576
Other income................................................ 24 84
Interest expense............................................ 51 47
------ ------
Total (loss) income before income taxes and net equity
earnings (losses) from investments........................ $ (1) $ 178
====== ======
AT AT
DECEMBER 31, MARCH 31,
2000 2001
------------ ---------
Total Assets:
Mobility.................................................... $32,428 $43,908
Fixed Wireless.............................................. 937 1,039
Corporate and other......................................... 1,937 2,092
------- -------
Total Assets................................................ $35,302 $47,039
======= =======
F-19
149
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
Reflecting the dynamics of AT&T Wireless Services' business, AT&T Wireless
Services continually reviews its management model and structure, which may
result in adjustments to our operating segments in the future.
(K) RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board (FASB) issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- A Replacement of FASB No. 125". This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Under these standards,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. This statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001. AT&T Wireless Services does not expect that the adoption of SFAS No. 140
will have a material impact on its results of operations, financial position or
cash flows.
(L) SUBSEQUENT EVENTS
On April 27, 2001, AT&T completed the sale of its entire interest in Japan
Telecom for approximately $1.35 billion in cash. AT&T attributed $0.5 billion of
the net after-tax proceeds from the sale to AT&T Wireless Services. AT&T
Wireless Services recognized an after-tax gain of $298 associated with the
transaction, which was recorded in net equity earnings from investments in the
second quarter of 2001.
During the first quarter of 2001, AT&T Wireless Services made unsecured
term loans to Rogers Wireless to pay for spectrum it successfully bid upon in
the recently completed Canadian spectrum auctions. In April 2001, Rogers
Wireless effected a rights offering of its equity securities in which AT&T
Wireless Group's joint venture with British Telecommunications, JVII,
participated. The participation increased JVII's ownership interest in Rogers
Wireless to 34.36%. AT&T Wireless Services funded the purchase on behalf of JVII
by offsetting it against the unsecured, interest bearing note made by AT&T
Wireless Services. This transaction resulted in AT&T Wireless Services obtaining
a controlling interest of JVII, as well as increasing the indirect ownership
percentage in Rogers Wireless. As a result of the consolidation of JVII, which
holds the equity interest in Rogers Wireless, AT&T Wireless Services'
investments in unconsolidated subsidiaries, as well as minority interest
liability, increased approximately $420 in April 2001. This transaction did not
result in a transfer of control of Rogers Wireless to JVII. On July 3, 2001,
AT&T Wireless Services acquired British Telecommunications' interest in JVII for
approximately $380 in cash. As a result of this acquisition, AT&T Wireless
Services now owns 100% of JVII, and, through JVII, holds a 34.36% ownership
interest in Rogers Wireless Communications, Inc.
During June 2001, AT&T Wireless Services finalized agreements with a group
of commercial paper dealers to issue up to $2.5 billion of private placement
commercial paper notes. The notes will be unsecured, ranking pari passu with
AT&T Wireless Services' other unsubordinated and unsecured indebtedness.
Maturity of the notes will be up to 365 days from date of issue. As of June 19,
2001, AT&T Wireless Services had not issued any notes under this program.
F-20
150
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
In accordance with the Separation and Distribution Agreement between AT&T
Wireless Services and AT&T, in June 2001, AT&T Wireless Services repaid to AT&T
the $1.8 billion of long-term debt and related accrued interest, and redeemed
the $3.0 billion of preferred equity and related unpaid dividends held by AT&T.
In June 2001, AT&T announced that the split-off of AT&T Wireless Services
from AT&T will occur on July 9, 2001. The S-1 registration statement filed with
the Securities and Exchange Commission, which will enable the split-off, became
effective June 21, 2001.
On June 27, 2001, AT&T Wireless Services entered into a preliminary
agreement to consolidate the soon to be merged Birla AT&T/Tata Cellular, Ltd.
entity with BPL Mobile Communications Ltd. and some portions of BPL Cellular
Ltd. The preliminary agreement is subject to a number of conditions, including
obtaining approvals of the boards of all of the participants to the
consolidation. If all conditions are satisfied and a consolidation occurs as
contemplated in the preliminary agreement, AT&T Wireless Services estimates that
its ownership will be approximately 25% of the consolidated entity.
F-21
151
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners
of AT&T Wireless Services, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in shareowners' equity
and of cash flows present fairly, in all material respects, the financial
position of AT&T Wireless Services, Inc. and its subsidiaries at December 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
March 30, 2001, except as to Note 1
which is as of June 21, 2001
F-22
152
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
-------- -------- ---------
REVENUE
Services.................................................... $4,779 $6,823 $ 9,376
Equipment................................................... 627 804 1,072
------ ------ -------
Total revenue............................................... 5,406 7,627 10,448
------ ------ -------
OPERATING EXPENSES
Costs of services (excluding depreciation of $599, $732, and
$1,047 included below).................................... 1,428 2,580 3,169
Costs of equipment sales.................................... 1,000 1,266 2,041
Selling, general and administrative......................... 2,122 2,663 3,590
Depreciation and amortization............................... 1,079 1,253 1,686
Asset impairment and restructuring charges.................. 120 531 --
------ ------ -------
Total operating expenses.................................... 5,749 8,293 10,486
------ ------ -------
OPERATING LOSS.............................................. (343) (666) (38)
Other income................................................ 650 122 534
Interest expense............................................ 120 136 85
------ ------ -------
Income (loss) before income taxes and net equity earnings
(losses) from investments................................. 187 (680) 411
Provision (benefit) for income taxes........................ 59 (294) 141
Net equity earnings (losses) from investments............... 36 (19) 388
------ ------ -------
NET INCOME (LOSS)........................................... 164 (405) 658
Dividend requirements on preferred stock held by AT&T,
net....................................................... 56 56 130
------ ------ -------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREOWNERS........... $ 108 $ (461) $ 528
====== ====== =======
UNAUDITED PRO FORMA NET INCOME (LOSS) PER SHARE:
Basic..................................................... $ .04 $ (.18) $ .21
Diluted................................................... $ .04 $ (.18) $ .21
WEIGHTED AVERAGE SHARES USED TO COMPUTE UNAUDITED PRO FORMA
NET INCOME (LOSS) PER SHARE:
Basic..................................................... 2,530 2,530 2,530
Diluted................................................... 2,533 2,530 2,533
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
153
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
AT DECEMBER 31,
------------------
1999 2000
------- -------
ASSETS
Cash and cash equivalents................................... $ 5 $ 62
Accounts receivable, less allowances of $130 and $193....... 1,300 1,892
Inventories................................................. 162 335
Income tax receivable....................................... -- 118
Deferred income taxes....................................... 127 93
Prepaid expenses and other current assets................... 34 82
------- -------
TOTAL CURRENT ASSETS........................................ 1,628 2,582
Property, plant and equipment, net.......................... 6,349 9,892
Licensing costs, net of accumulated amortization of $1,519
and $1,761................................................ 8,571 13,627
Investments in and advances to unconsolidated
subsidiaries.............................................. 4,502 3,385
Goodwill, net of accumulated amortization of $168 and
$241...................................................... 2,135 4,696
Other assets, net of accumulated amortization of $217 and
$264...................................................... 327 1,120
------- -------
TOTAL ASSETS................................................ $23,512 $35,302
======= =======
LIABILITIES
Accounts payable............................................ $ 780 $ 1,080
Payroll and benefit-related liabilities..................... 291 432
Advertising and promotion accruals.......................... 162 179
Business tax accruals....................................... 139 258
Due on demand notes payable................................. 154 109
Short-term debt due to AT&T................................. -- 638
Other current liabilities................................... 771 958
------- -------
TOTAL CURRENT LIABILITIES................................... 2,297 3,654
Long-term debt due to AT&T.................................. 3,400 1,800
Deferred income taxes....................................... 3,750 4,659
Other long-term liabilities................................. 48 271
------- -------
TOTAL LIABILITIES........................................... 9,495 10,384
------- -------
COMMITMENTS AND CONTINGENCIES (NOTES 13 AND 14)
MINORITY INTEREST........................................... 20 41
PREFERRED STOCK HELD BY AT&T................................ 1,000 3,000
SHAREOWNERS' EQUITY
Common stock, no par value, no shares authorized, issued or
outstanding at December 31, 1999 and 2000 (2,530 shares
assumed outstanding on an unaudited pro forma basis)...... -- --
Shareowners' net investment................................. 12,971 21,885
Accumulated other comprehensive income (loss)............... 26 (8)
------- -------
TOTAL SHAREOWNERS' EQUITY................................... 12,997 21,877
------- -------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $23,512 $35,302
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
154
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(IN MILLIONS)
ACCUMULATED TOTAL
SHAREOWNERS' OTHER SHARE-
COMMON NET COMPREHENSIVE OWNERS'
STOCK INVESTMENT INCOME (LOSS) EQUITY
------ ------------ ------------- -------
Balance at December 31, 1997........................ $-- $10,139 $ 48 $10,187
--- ------- ---- -------
Net income available to common shareowners.......... 108 108
Transfers from AT&T, net............................ 288 288
Net revaluation of investments (net of taxes of
$(31))............................................ (51) (51)
--- ------- ---- -------
Balance at December 31, 1998........................ $-- $10,535 $ (3) $10,532
--- ------- ---- -------
Net loss available to common shareowners............ (461) (461)
Transfers from AT&T, net............................ 2,897 2,897
Net revaluation of investments (net of taxes of
$18).............................................. 29 29
--- ------- ---- -------
Balance at December 31, 1999........................ $-- $12,971 $ 26 $12,997
--- ------- ---- -------
Net income available to common shareowners.......... 528 528
Proceeds attributed from AT&T
Wireless Group tracking stock offering............ 7,000 7,000
Proceeds from AT&T Wireless Group tracking stock
shares issued for employee plans.................. 41 41
Transfers from AT&T, net............................ 1,345 1,345
Net revaluation of investments (net of taxes of
$(22))............................................ (34) (34)
--- ------- ---- -------
Balance at December 31, 2000........................ $-- $21,885 $ (8) $21,877
=== ======= ==== =======
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1998 1999 2000
---- ----- ----
SUMMARY OF TOTAL COMPREHENSIVE INCOME (LOSS):
Net income (loss) available to common shareowners........... $108 $(461) $528
Dividend requirements on preferred stock held by AT&T,
net....................................................... 56 56 130
---- ----- ----
Net income (loss)........................................... 164 (405) 658
Net revaluation of investments (net of taxes of $(31), $18,
and $(22))................................................ (51) 29 (34)
---- ----- ----
TOTAL COMPREHENSIVE INCOME (LOSS)........................... $113 $(376) $624
==== ===== ====
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
155
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1999 2000
--------- --------- ----------
OPERATING ACTIVITIES
Net income (loss)........................................... $ 164 $ (405) $ 658
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Net gains on sale/exchange of businesses and
investments............................................ (600) (99) (362)
Asset impairment and restructuring charges................ 120 531 --
Depreciation and amortization............................. 1,079 1,253 1,686
Deferred income taxes..................................... (39) (85) 585
Net equity earnings from investments...................... (115) (149) (505)
Minority interests in consolidated subsidiaries........... (35) (17) (28)
Provision for uncollectible receivables................... 99 200 314
Increase in accounts receivable........................... (307) (514) (853)
(Increase) decrease in inventories........................ (32) 27 (142)
Increase (decrease) in accounts payable................... 123 (11) (48)
Net change in other operating assets and liabilities...... (43) 136 330
------- ------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 414 867 1,635
------- ------- --------
INVESTING ACTIVITIES
Capital expenditures and other additions.................. (1,219) (2,272) (4,012)
Net acquisitions of licenses.............................. (65) (47) (247)
Equity investment distributions and sales................. 1,354 236 360
Equity investment contributions, advances and purchases... (156) (284) (1,645)
Net dispositions (acquisitions) of businesses including
cash acquired.......................................... 324 244 (4,763)
Deposits on long-lived assets............................. -- -- (218)
------- ------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... 238 (2,123) (10,525)
------- ------- --------
FINANCING ACTIVITIES
Increase in short-term borrowings......................... 43 65 --
Net increase in short-term debt due to AT&T............... -- -- 638
Increase in long-term debt due to AT&T.................... 100 900 400
Proceeds attributed from AT&T Wireless Group tracking
stock offering......................................... -- -- 7,000
Proceeds from AT&T Wireless Group tracking stock shares
issued for employee plans.............................. -- -- 41
Dividend requirements on preferred stock, net............. (56) (56) (130)
Transfers (to) from AT&T.................................. (694) 344 1,001
Other financing activities, net........................... (24) (19) (3)
------- ------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES......... (631) 1,234 8,947
------- ------- --------
Net increase (decrease) in cash and cash equivalents........ 21 (22) 57
Cash and cash equivalents at beginning of year.............. 6 27 5
------- ------- --------
Cash and cash equivalents at end of year.................... $ 27 $ 5 $ 62
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
156
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
1. BACKGROUND AND BASIS OF PRESENTATION
For purposes of preparing these financial statements, the transactions
described in Note 1 below are assumed to have been consummated in historical
periods by the legal entity, AT&T Wireless Services, Inc., and its subsidiaries,
in a manner similar to a pooling of interests.
AT&T Wireless Services is a wireless telecommunications company which
primarily provides domestic wireless voice and data services and products in the
850 megahertz (cellular) and 1900 megahertz (personal communications services,
or PCS) markets. Additionally, AT&T Wireless Services offers wireless local
telephone and internet services to residential customers through its Fixed
Wireless business. AT&T Wireless Services also holds equity interests in various
domestic and international wireless communications ventures and partnerships.
BACKGROUND
On October 25, 2000, AT&T Corp. announced a restructuring plan, stating its
intention to create a separate company for its wireless services' businesses,
named AT&T Wireless Services, Inc., by mid-2001, termed the split-off. AT&T
Wireless Services includes substantially the same assets and liabilities that
were represented by AT&T Wireless Group tracking stock, which AT&T created on
April 27, 2000. In conjunction with the offering of AT&T Wireless Group tracking
stock in April 2000, 15.6%, or 360 million shares, of AT&T Wireless Group
tracking stock were sold at an offering price of $29.50 per share. AT&T Wireless
Group tracking stock was a class of AT&T common stock which was intended to
provide holders with financial returns based on the financial performance and
economic value of AT&T's wireless services' businesses. As a tracking stock of
AT&T, AT&T Wireless Group was not a separate legal entity, but an integrated
business of AT&T. AT&T Wireless Group tracking stock issued in the offering
reflected only a portion of the authorized shares of AT&T Wireless Group
tracking stock. The remaining 84.4% was retained and reserved for the benefit of
AT&T Common Stock Group (which consisted of the operations of AT&T other than
those attributed to AT&T tracking stocks), the value of which was intended to be
reflected in AT&T common stock.
During May 2001, AT&T completed an exchange offer which allowed AT&T common
shareowners to exchange shares of AT&T common stock for shares of AT&T Wireless
Group tracking stock. Approximately 372.2 million shares of AT&T common stock
were tendered in exchange for approximately 437.7 million shares of AT&T
Wireless Group tracking stock, at an exchange ratio of 1.176 shares of AT&T
Wireless Group tracking stock for each validly tendered share of AT&T common
stock. As a result of the exchange offer and the DoCoMo investment (See Note
18), assuming conversion of the DoCoMo shares, AT&T Common Stock Group retained
an approximate 52% economic interest.
The split-off of AT&T Wireless Services is subject to certain conditions.
These conditions include the continued validity of the ruling on the split-off
received from the Internal Revenue Service (IRS) on May 29, 2001, and
satisfaction of conditions contained in AT&T's credit agreement.
The split-off has several steps. These steps include transferring
substantially all of the assets and liabilities of AT&T Wireless Group to AT&T
Wireless Services, Inc., mandatorily exchanging all issued and outstanding
shares of AT&T Wireless Group tracking stock, including those shares issued in
the exchange offer as well as the shares held by DoCoMo, for shares of AT&T
Wireless Services common stock, and distributing 1,136,258,587 shares of AT&T
Wireless Services common stock held by AT&T Common Stock Group, to holders of
AT&T common stock on a pro rata basis. AT&T is retaining 185,308,303 shares of
AT&T Wireless Services common stock for its own account for sale or exchange
F-27
157
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
within six months of the split-off, subject to the continued validity of the IRS
ruling that was received on May 29, 2001.
AT&T Wireless Services was incorporated on July 7, 1987. Prior to the
split-off, AT&T Wireless Services was a 100% owned direct subsidiary of AT&T
Corp. AT&T Wireless Services had authorized 500 shares of $.01 par value common
stock, of which 100 shares were outstanding to AT&T Corp. prior to the
split-off. These shares have not been assumed to be outstanding for purposes of
the historical financial statements presented, due to the recapitalization which
will be effected with the split-off. Subsequent to the split-off it is
anticipated that AT&T Wireless Services will have approximately 2,530 million
common shares issued and outstanding. These shares have been assumed outstanding
for purposes of the unaudited pro forma earnings per share calculations in the
financial statements presented.
BASIS OF PRESENTATION
The consolidated financial statements reflect the results of operations,
financial position, changes in shareowners' equity and cash flows of AT&T
Wireless Services as if it were a separate entity for all periods presented and
are in conformity with generally accepted accounting principles in the United
States of America. The consolidated financial statements reflect the assets,
liabilities, revenue and expenses directly attributable to AT&T Wireless
Services and are representative of those previously reported by AT&T Wireless
Group. The assets and liabilities included represent the assets and liabilities
which have been transferred to AT&T Wireless Services in accordance with the
separation and distribution agreement between AT&T and AT&T Wireless Services
(see Note 12). As of June 2001, substantially all of the assets and liabilities
represented by AT&T Wireless Group have been transferred to AT&T Wireless
Services. Additionally, the consolidated financial statements include
allocations deemed reasonable by management, to present the results of
operations, financial position and cash flows of AT&T Wireless Services as a
separate entity and are not necessarily indicative of those that would be
incurred on a stand-alone basis. The allocation methodologies have been
described within the notes to the consolidated financial statements where
appropriate.
The April 2000 offering of AT&T Wireless Group tracking stock resulted in
net proceeds to AT&T, after deducting underwriter's discount and related fees
and expenses, of $10.3 billion. AT&T attributed $7.0 billion of the net proceeds
to AT&T Wireless Services, in the form of a note receivable, which was repaid by
December 31, 2000, primarily to fund acquisitions and capital expenditures.
Interest on the note receivable was calculated based upon the average daily
balance outstanding at a rate equal to the one month London InterBank Offered
Rate (LIBOR) minus six basis points, a rate intended to be equivalent to the
rate AT&T Wireless Services would have received if it were a stand-alone entity.
Prior to the offering of the AT&T Wireless Group tracking stock, the
capital structure of AT&T Wireless Services had been assumed based upon AT&T's
historical capital ratio adjusted for certain items. In determining the
allocation between short- and long-term debt and preferred stock, AT&T
considered factors such as prospective financing requirements for the business,
working capital commitments and future requirements, and peer group analysis.
This resulted in $3.4 billion in long-term debt due to AT&T at December 31,
1999, paying annual interest at 7.25%. In addition, as of December 31, 1999,
AT&T Wireless Services had issued and outstanding, $1.0 billion of 9% cumulative
preferred stock held by AT&T that, subject to the approval of AT&T Wireless
Group capital stock committee, was redeemable at the option of AT&T. On May 1,
2000, following the offering of AT&T Wireless Group tracking stock, $2.0 billion
of AT&T Wireless Service's outstanding long-term debt due to AT&T was
recapitalized into an additional $2.0 billion of 9% cumulative preferred stock
issued to AT&T. In conjunction with the recapitalization, the remaining
long-term debt due to AT&T of $1.8 billion was recapitalized to be 10 year
F-28
158
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
term debt that bore interest at a fixed rate of 8.1% per annum. The interest
rate was intended to be substantially equivalent to the interest rate that AT&T
Wireless Services would have been able to obtain from third parties, including
the public markets, as a non-affiliate of AT&T without the benefit of any
guaranty by AT&T. The intercompany debt and preferred stock was repaid to AT&T
in June 2001.
During December 2000, AT&T Wireless Services obtained a short-term
revolving loan from AT&T, which is included in "Short-term debt due to AT&T" in
the accompanying consolidated balance sheets. At December 31, 2000, the amount
outstanding under the loan was $638, paying interest monthly at the average
seven-day commercial paper rate, which was 8.37% at December 31, 2000. The
revolving loan matures on December 29, 2001. The loan was repaid in full in
January 2001.
Changes in shareowners' net investment prior to the offering of AT&T
Wireless Group tracking stock represented net transfers to or from AT&T, after
giving effect to the net income or loss of AT&T Wireless Services during the
period, and were assumed to be settled in cash. AT&T's capital contributions for
purchase business combinations and initial investments in joint ventures and
partnerships which AT&T attributed to AT&T Wireless Services have been treated
as noncash transactions prior to the offering. Changes in shareowners' net
investment subsequent to the offering of AT&T Wireless Group tracking stock
represented AT&T Wireless Group tracking stock offering proceeds attributed to
AT&T Wireless Services from AT&T, proceeds from additional AT&T Wireless Group
tracking stock share issuances and the net income or loss for the period
subsequent to the offering. AT&T Wireless Services will begin accumulating its
retained earnings effective with the split-off.
Historically, AT&T has performed cash management functions on behalf of
AT&T Wireless Services. Substantially all of the AT&T Wireless Services' cash
balances were swept to AT&T on a daily basis, where they were managed and
invested by AT&T. Prior to the offering of the AT&T Wireless Group tracking
stock, transfers of cash to and from AT&T were reflected as a component of
shareowners' net investment, with no interest income or expense reflected.
Subsequent to the offering, transfers have been reflected as changes in the note
receivable from or short-term debt payable to AT&T. Cash balances maintained and
reported by AT&T Wireless Services primarily represented cash balances for which
no right of offset existed with AT&T. Subsequent to the split-off, AT&T Wireless
Services will be responsible for its own cash management functions.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Wireless Services as it was
not deemed practicable to specifically identify such common costs to AT&T
Wireless Services. These allocations were based on the ratio of AT&T Wireless
Services' external costs and expenses to AT&T's consolidated external costs and
expenses, adjusted for any functions that AT&T Wireless Services performs on its
own. However, the costs of these services charged to AT&T Wireless Services are
not necessarily indicative of the costs that would have been incurred if AT&T
Wireless Services had performed these functions entirely as a stand-alone
entity, nor are they indicative of costs that will be charged or incurred in the
future. Subsequent to the split-off, AT&T Wireless Services will perform these
functions using its own resources or purchased services. AT&T Wireless Services
will be responsible for all costs and expenses associated with the operations
and management of a separate company.
Consolidated income tax provision or benefit, related tax payments or
refunds, and deferred tax balances of AT&T have been allocated to AT&T Wireless
Services based principally on the taxable income and tax credits directly
attributable to AT&T Wireless Services. These allocations reflect AT&T Wireless
Services' contribution to AT&T's consolidated taxable income and the
consolidated tax liability and tax credit position. Subsequent to the offering
of AT&T Wireless Group tracking stock, the AT&T Common Stock Group and AT&T
Wireless Group entered into a tax sharing agreement that provided for
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
tax sharing payments based on the taxes or tax benefits of a hypothetical
affiliated group consisting of AT&T Common Stock Group and AT&T Wireless Group.
Based on this agreement, the consolidated tax liability before credits was
allocated between the groups, based on each group's contribution to consolidated
taxable income of the hypothetical group. For purposes of the tax sharing
agreement, the 9% cumulative preferred stock held by AT&T was treated as if it
were an intercompany debt instrument and, accordingly, tax sharing payments were
calculated by treating coupon payments on the preferred stock as interest
expense to AT&T Wireless Services and interest income to AT&T Common Stock
Group. Consolidated tax credits of the hypothetical group have been allocated
between groups based on each group's contribution to each tax credit. See Note
12 for discussion of amendments to the tax sharing agreement as a result of the
split-off. Subsequent to the split-off, AT&T Wireless Services will be a
separate taxable entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include all majority-owned and
controlled subsidiaries. Investments in majority-owned subsidiaries where
control does not exist and investments in which we exercise significant
influence but do not control are accounted for under the equity method.
Investments in which we have no significant influence are accounted for under
the cost method. All significant intercompany accounts and transactions have
been eliminated.
CASH EQUIVALENTS
All highly liquid investments with original maturities of generally three
months or less are considered to be cash equivalents.
CASH FLOWS
For purposes of the consolidated statements of cash flows, all transactions
between AT&T Wireless Services and AT&T, except for purchase business
combinations and initial investments in joint ventures and partnerships which
were funded by AT&T and contributed by AT&T to AT&T Wireless Services prior to
the offering of AT&T Wireless Group tracking stock, have been accounted for as
having been settled in cash at the time the transaction was recorded by AT&T
Wireless Services.
INVENTORIES
Inventories, which consist principally of handsets and accessories, are
recorded at the lower of cost or market. Cost is principally determined by the
first-in, first-out (FIFO) method. Market is determined using replacement cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, unless impaired, and
depreciation is determined based upon the assets' estimated useful lives.
Depreciation is calculated on a straight-line basis according to the following
useful lives:
Wireless communications systems and other equipment......... 3-15 years
Building and improvements................................... 5-20 years
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
When AT&T Wireless Services sells, disposes or retires assets, the related
gains or losses are included in operating results.
During 1998, AT&T Wireless Services completed a review of the estimated
service lives of certain wireless communications equipment. As a result,
effective January 1, 1998, the estimated service lives of such equipment were
changed from 12 years to varying periods ranging primarily from seven to ten
years, with certain assets being changed to 15 years, depending on the nature of
the equipment. The net impact of these changes to 1998 results was an annual
increase in depreciation expense of approximately $42 and an annual reduction in
net income of approximately $26. See Note 18 for further discussion associated
with an additional change in depreciable lives.
SOFTWARE CAPITALIZATION
AT&T Wireless Services capitalizes certain direct development costs
associated with internal-use software, including external direct costs of
materials and services, and payroll costs for employees devoting time to the
software projects. These costs are included within "Other assets" and are
amortized over a period not to exceed five years beginning when the asset is
substantially ready for use. Costs incurred during the preliminary project
stage, as well as maintenance and training costs, are expensed as incurred. AT&T
Wireless Services also capitalizes initial operating-system software costs and
amortizes them over the life of the associated hardware.
AT&T Wireless Services also capitalizes costs associated with the
development of application software incurred from the time technological
feasibility is established until the software is ready to provide service to
customers. These capitalized costs are included in property, plant and equipment
and are amortized over a useful life not to exceed five years.
LICENSING COSTS
Licensing costs are primarily incurred to acquire cellular (850 megahertz)
and PCS (1900 megahertz) licenses. In addition, licensing costs include costs
incurred to acquire 2.3 gigahertz licenses. Amortization begins with the
commencement of service to customers and is computed using the straight-line
method over periods of 35 or 40 years.
CAPITALIZED INTEREST
AT&T Wireless Services capitalizes interest which is applicable to the
construction of additions to property, plant, and equipment and the acquisitions
of licenses until the assets are placed into service. These costs are amortized
over the related assets' estimated useful lives.
INVESTMENTS
Investments in which AT&T Wireless Services exercises significant influence
but which AT&T Wireless Services does not control are accounted for under the
equity method. Under the equity method, investments are stated at initial cost
and are adjusted for AT&T Wireless Services' subsequent contributions and its
share of earnings or losses, and distributions. The excess of the carrying value
of the investment over the underlying book value of the investee's net assets is
being amortized over periods ranging from 20 to 40 years. Investments in which
AT&T Wireless Services has no significant influence over the investee are
accounted for under the cost method.
Investments in marketable securities which are covered under the scope of
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
Securities," are classified as "available-for-sale" and are carried at fair
value. Unrealized gains or losses, net of tax, are included within other
comprehensive income (loss).
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as a purchase. Goodwill
is amortized on a straight-line basis over periods not exceeding 40 years.
OTHER ACQUISITION RELATED INTANGIBLE ASSETS
Other acquisition related intangible assets, primarily the value assigned
to the customers acquired, are included in "Other assets" and are amortized on a
straight-line basis over periods not exceeding five years.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets such as property, plant and equipment, licensing costs,
goodwill, investments and capitalized software are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. It is reasonably possible that these assets could become
impaired as a result of technological or other industry changes. For assets AT&T
Wireless Services intends to hold for use, if the total of the expected future
undiscounted cash flows is less than the carrying amount of the asset, a loss is
recognized for the difference between the fair value and carrying value of the
asset. For assets AT&T Wireless Services intends to dispose of, a loss is
recognized for the amount that the estimated fair value, less costs to sell, is
less than the carrying value of the assets. In addition, in accordance with
Accounting Principles Board Opinion (APB) No. 17, "Intangible Assets", AT&T
Wireless Services continues to evaluate the amortization periods to determine
whether events or circumstances warrant revised amortization periods.
Additionally, AT&T Wireless Services periodically evaluates the useful lives of
its wireless communications systems and other equipment based on changes in
technological and industry conditions.
REVENUE RECOGNITION
Wireless services revenue is recognized based upon minutes of traffic
processed and contracted fees. Customer activation fees, along with the related
costs up to but not exceeding the revenues, are deferred and amortized over the
customer relationship period. The revenue and related expenses associated with
the sale of wireless handsets and accessories are recognized when the products
are delivered and accepted by the customer, as this is considered to be a
separate earnings process from the sale of wireless services. During 2000, AT&T
Wireless Services adopted Securities and Exchange Commission Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". The adoption
did not have a material impact on AT&T Wireless Services' results of operations
or financial condition.
ADVERTISING AND PROMOTIONAL COSTS
Costs of advertising and promotions are expensed as incurred. Advertising
and promotional expenses were $344, $386, and $618, in 1998, 1999 and 2000,
respectively.
INCOME TAXES
AT&T Wireless Services has not been a separate taxable entity for federal
and state income tax purposes prior to the split-off and its results of
operations have been included in the consolidated federal and state income tax
returns of AT&T and its affiliates. AT&T Wireless Services' provision or benefit
for
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
income taxes is based upon its contribution to the overall income tax liability
of AT&T and its affiliates as described in Note 1.
STOCK-BASED COMPENSATION EXPENSE
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
AT&T Wireless Services measures compensation expense for its stock-based
employee compensation plans using the intrinsic value method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees". AT&T Wireless
Services has adopted the disclosure-only provisions of SFAS No. 123 (see Note
10).
ISSUANCE OF COMMON STOCK BY AFFILIATES
Changes in our proportionate share of the underlying equity of a subsidiary
or equity method investee, which result from the issuance of additional equity
securities by such entity, are recognized as increases or decreases in
additional paid-in capital within the consolidated statements of shareowners'
equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and revenue and expenses during the period
reported. Actual results could differ from those estimates. Estimates are used
when accounting for certain items such as the allowance for doubtful accounts,
depreciation and amortization, taxes, valuation of investments and asset
impairment and restructuring charges.
CONCENTRATIONS
AT&T Wireless Services purchases a substantial portion of its wireless
infrastructure equipment from three major suppliers. Additionally, four primary
vendors provide AT&T Wireless Services' multi-network handsets. Further, AT&T
Wireless Services relies on one vendor to provide substantially all of its
billing services. Loss of any of these suppliers could adversely impact
operations temporarily until a comparable substitute could be found. AT&T
Wireless Services does not have a concentration of available sources of labor or
services, nor does AT&T Wireless Services have any significant concentration of
business transacted with a particular customer, that could, if suddenly
eliminated, severely impact operations.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
with current year presentations.
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
3. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1998 1999 2000
---- ---- ----
OTHER INCOME
Interest income............................................. $ 15 $ 4 $146
Minority interests in consolidated subsidiaries............. 35 17 28
Net gains on sale/exchange of businesses and investments.... 600 99 362
Miscellaneous, net.......................................... -- 2 (2)
---- ---- ----
Total Other Income.......................................... $650 $122 $534
==== ==== ====
SUPPLEMENTARY BALANCE SHEET INFORMATION
AT DECEMBER 31,
------------------
1999 2000
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET
Wireless communications systems and other equipment......... $10,127 $14,319
Land, buildings and improvements............................ 255 316
------- -------
Total property, plant and equipment......................... 10,382 14,635
Accumulated depreciation.................................... (4,033) (4,743)
------- -------
Property, plant and equipment, net.......................... $ 6,349 $ 9,892
======= =======
SUPPLEMENTARY CASH FLOW INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1998 1999 2000
---- ------ ------
Interest payments, net of amounts capitalized............... $120 $ 136 $ 85
Income tax payments (refunds)............................... 177 (41) (202)
Noncash additions to property, plant and equipment.......... 210 414 689
Noncash additions from AT&T for acquisitions and initial
investments in ventures and partnerships.................. 982 2,553 539
Recapitalization of Long-term debt due to AT&T into
Preferred stock held by AT&T.............................. -- -- 2,000
4. EARNINGS PER SHARE (UNAUDITED)
AT&T Wireless Services has not been a separate legal entity with public
shares outstanding subsequent to being acquired by AT&T Corp. in September 1994
and prior to the split-off. Therefore, historical earnings per share has not
been presented in the consolidated financial statements. Unaudited pro forma
earnings per share has been presented to reflect the capital structure
associated with the anticipated split-off of AT&T Wireless Services from AT&T.
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
Unaudited pro forma basic earnings per share (EPS) for AT&T Wireless
Services for the years ended December 31, 1998, 1999 and 2000 have been computed
by dividing net income (loss) available to common shareowners by the estimated
2,530 million common shares assumed to be outstanding effective with the
split-off. The estimated 2,530 million shares outstanding is based on the number
of shares of AT&T Wireless Group tracking stock outstanding at June 19, 2001,
the number of shares represented by AT&T's retained interest at June 19, 2001,
including the 228 million new share equivalents issued to DoCoMo in January 2001
(see Note 18), and reflects a reduction of 12 million shares from AT&T's
retained interest which shares will be held in treasury by AT&T Wireless
Services for future employee benefit plan obligations (see Note 10).
Unaudited pro forma diluted EPS for AT&T Wireless Services has been
computed by dividing net income (loss) available to common shareowners, by the
estimated 2,530 million of common shares assumed to be effective with the
split-off plus the estimated effect of dilutive stock options as of the split-
off, which total approximately 3 million shares, except for the year ended
December 31, 1999 as to which the impact of the stock options was considered to
be anti-dilutive. The estimated effect of dilutive stock options was determined
under the treasury stock method. Assumptions used to determine the dilutive
effect included (1) an assumed 34% conversion rate for the approximately 249
million of AT&T common stock options which will be converted at the split-off
date into AT&T common stock and AT&T Wireless Services stock options, (2)
relative converted option prices of 1.1:1.0 which was based upon the market
values of AT&T common stock and AT&T Wireless Group tracking stock at March 31,
2001, of $21.30 and $19.18, respectively, and (3) the weighted average market
value of AT&T Wireless Group tracking stock for the three months ended March 31,
2001 of $21.86. The estimated number of AT&T Wireless Group tracking stock
options outstanding (see Note 10), as well as an estimated 84 million of AT&T
Wireless Services common stock options assumed to be converted and outstanding
effective with the split-off, and the DoCoMo warrants issued in January 2001
(see Note 18) were assumed to be anti-dilutive as of the split-off date and
therefore were not included in the determination of the unaudited pro forma
diluted EPS for all periods.
5. ACQUISITIONS AND DISPOSITIONS
During 1998, 1999 and 2000, AT&T Wireless Services completed certain
transactions as part of its overall strategy to expand its wireless footprint
and divest itself of non-core interests. Net pretax gains recognized in
connection with these transactions were $600, $99 and $362 in 1998, 1999 and
2000, respectively and are included in "Other income" in the accompanying
consolidated statements of operations.
ACQUISITIONS:
The following tables present information about significant acquisitions by
AT&T Wireless Services. All of the following acquisitions were accounted for as
purchases. The excess of aggregate purchase price over the fair value of net
tangible assets (liabilities) acquired is being amortized over periods of five
to 40 years. As a result of AT&T Wireless Services' evaluation of recent changes
in its industry and the views of regulatory authorities, AT&T Wireless Services
expects that the amortization period for all licensing costs and goodwill
associated with newly acquired wireless operations will not exceed 25 years.
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
For the year ended December 31, 2000:
OTHER NET
IDENTIFIABLE TANGIBLE
PURCHASE LICENSING INTANGIBLE ASSETS
PRICE(1) COSTS ASSETS (LIABILITIES) GOODWILL
-------- --------- ------------ ------------- --------
Los Angeles(2)................. $3,555 $2,170 $186 $381 $818
Houston(3)..................... 984 560 15 (27) 436
CMT Partners(4)................ 1,805 910 100 210 585
Wireless One(5)................ 859 550 19 67 223
Others(6)...................... 1,462 851 32 224 355
---------------
(1) Purchase price includes cash, as well as the fair value of assets exchanged,
as applicable.
(2) In November 1998, AT&T Wireless Services and BellSouth combined their
jointly owned cellular properties in Los Angeles, Houston and Galveston,
Texas, plus cash, to form AB Cellular Holding, LLC (AB Cellular), which
owned, controlled and supervised all three properties. AT&T Wireless
Services held a 55.62% equity interest in AB Cellular, however, held a 50%
voting interest, therefore, this investment was accounted for under the
equity method. Pursuant to the AB Cellular Limited Liability Company
Agreement, there were redemption provisions that allowed BellSouth,
commencing in December 2000, to alter the ownership structure of AB Cellular
pursuant to one of three options. On December 4, 2000, BellSouth announced
its election to have AB Cellular exercise its option to redeem AT&T Wireless
Services' 55.62% equity interest. On December 29, 2000, AB Cellular
completed the redemption of AT&T Wireless Services' 55.62% equity interest
in AB Cellular, and in exchange, AT&T Wireless Services received 100% of the
net assets of the Los Angeles cellular property. As a result of the
redemption, AB Cellular recognized a significant gain on the transaction
based on the estimated fair value of the net assets of the Los Angeles
cellular property on the date of redemption. AT&T Wireless Services' net
equity earnings for the year ended December 31, 2000 included $372, after
tax, reflecting its proportionate share of the gain. The net assets of the
Los Angeles cellular property were recorded at fair value by AT&T Wireless
Services and resulted in a pretax loss of $184. AT&T Wireless Services may
make refinements to the allocation of the fair value of assets acquired in
future periods as the related fair value appraisals of certain assets and
liabilities are finalized. As a result of this transaction, AT&T Wireless
Services' results include a noncash reduction to investments of $3,756,
associated with the redemption of its equity interest in AB Cellular.
(3) On December 29, 2000, AT&T Wireless Services completed the acquisition of a
wireless system in Houston for cash. We may make refinements to the
allocation of the purchase price in future periods as the related fair value
appraisals of certain assets and liabilities are finalized.
(4) On June 29, 2000, AT&T Wireless Services completed the acquisition of
Vodafone Airtouch plc's 50% partnership interest in CMT Partners (the Bay
Area Properties) for cash, which holds a controlling interest in five Bay
Area markets including San Francisco and San Jose, thereby giving AT&T
Wireless Services a 100% ownership interest in this partnership. Prior to
consummation of this transaction, AT&T Wireless Services' 50% ownership
interest in CMT Partners was accounted for as an equity investment. As a
result of the transaction, $190 was reclassified from investments to
goodwill on the accompanying consolidated balance sheets. AT&T Wireless
Services may make refinements to the allocation of the purchase price in
future periods as the related fair value appraisals of certain assets and
liabilities are finalized.
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(5) On June 1, 2000, AT&T Wireless Services completed its acquisition of the
assets of Wireless One Network, L.P. for cash, acquiring wireless systems in
Northwest and Southwest Florida.
(6) Other 2000 acquisitions include wireless systems acquired in San Diego,
Indianapolis, and several New England markets. See Note 6 for further
discussion of the transaction related to the purchase of the wireless
systems in the New England markets.
For the year ended December 31, 1999:
DEFERRED
TAX
OTHER LIABILITIES
IDENTIFIABLE NET RELATED TO
PURCHASE LICENSING INTANGIBLE TANGIBLE INTANGIBLE
PRICE(1) COSTS ASSETS ASSETS ASSETS GOODWILL
-------- --------- ------------ -------- ----------- --------
Vanguard
Cellular(2)......... $1,528 $530 $100 $333 $(241) $806
Others(3)............. 601 385 -- 61 -- 155
---------------
(1) Purchase price includes cash, fair value of AT&T common stock issued,
assumption of debt, and fair value of assets exchanged, as applicable.
(2) On May 3, 1999, AT&T acquired Vanguard Cellular Systems, Inc. and has
contributed its interest in Vanguard to AT&T Wireless Services as of the
date of acquisition. Under the agreement, each Vanguard shareholder was
entitled to elect to receive either cash or AT&T stock in exchange for their
Vanguard shares subject to the limitation that the overall consideration
would consist of 50% AT&T stock and 50% cash. Consummation of the merger
resulted in the issuance of approximately 12.6 million AT&T shares and
payment of $485 in cash. In addition, Vanguard had approximately $550 in
debt, which was repaid by AT&T.
(3) Other 1999 acquisitions include Honolulu Cellular Telephone Company,
Bakersfield Cellular Telephone Company as well as wireless systems in Utah,
Oregon, California, Idaho, Ohio and Louisiana.
The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1998, 1999 and 2000, assume the Vanguard
acquisition had been completed on January 1, 1998, and the Los Angeles, Houston,
Bay Area Properties, Wireless One, San Diego and Indianapolis acquisitions had
been completed on January 1, 1999:
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1998 1999 2000
------ ------ -------
Revenue................................................. $5,868 $9,845 $12,239
Net income (loss)....................................... 254 (398) 410
Unaudited pro forma data may not be indicative of the results that would
have been obtained had these events actually occurred at the beginning of the
periods presented, nor does it intend to be a projection of future results.
DISPOSITIONS OF BUSINESSES AND INVESTMENTS:
In June 2000, AT&T Wireless Services sold its interest in two equity
investments for cash resulting in pretax gains of approximately $141.
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
In June 1999, AT&T Wireless Services sold its interest in WOOD-TV for cash
resulting in a pretax gain of $88.
In May 1999, AT&T Wireless Services sold its net assets in the geographic
area of San Juan, Puerto Rico, including a portion of the PCS license, to
TeleCorp PCS, Inc. for cash and preferred stock of TeleCorp resulting in a
pretax gain of $11.
In the fourth quarter of 1998, AT&T Wireless Services sold its net assets
in the geographic area of Norfolk, Virginia, including a portion of the PCS
license, to Triton PCS Holdings, Inc. for cash and preferred stock of Triton
resulting in a pretax gain of $29.
Also in the fourth quarter of 1998, AT&T Wireless Services sold a portion
of its net assets in the geographic areas of Cincinnati and Dayton, Ohio,
including portions of the PCS licenses, to Cincinnati Bell Wireless, LLC for
cash and an ownership interest. A pretax gain of $24 was recognized on this
transaction.
On October 2, 1998, AT&T Wireless Services sold its one-way messaging
services business and a narrowband PCS license to Metrocall, Inc. in exchange
for cash and preferred stock of Metrocall. A pretax loss of $5 was recognized on
this transaction. AT&T Wireless Services subsequently distributed its investment
in the preferred stock of Metrocall to AT&T.
In the second quarter of 1998, AT&T Wireless Services sold for cash its
interest in two equity investments and recognized pretax gains totaling $195.
In the first quarter of 1998, AT&T Wireless Services sold for cash its
equity interest in LIN Television Corp. and recognized a pretax gain of $342.
6. INVESTMENTS
AT&T Wireless Services holds investments in ventures and partnerships that
provide AT&T Wireless Services access to additional domestic and international
wireless markets. Substantially all of these investments are accounted for under
the equity method.
At December 31, 1999 and 2000, AT&T Wireless Services had equity method
investments of $4,409 and $3,080, respectively. Amortization of excess carrying
value of $52, $19 and $25 in 1998, 1999 and 2000, respectively, is reflected as
a component of net equity earnings in the accompanying consolidated statements
of operations. At December 31, 1999 and 2000, the carrying value of investments
accounted for under the equity method exceeded our share of the underlying
reported net assets by approximately $551 and $446, respectively. AT&T Wireless
Services received cash distributions based on its equity interest in these
investments of $233, $232 and $201 for the years ended December 31, 1998, 1999
and 2000, respectively.
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
Ownership of significant equity investments is as follows:
AT DECEMBER 31,
---------------------
1999 2000
------ ------
AB Cellular................................................. 55.62%(1) N/A(1)
CMT Partners................................................ 50.00%(2) N/A(2)
ACC Acquisitions, LLC....................................... N/A(3) 50.00%(3)
Triton PCS Holdings, Inc. .................................. 16.80%(4) 16.71%(4)
TeleCorp PCS, Inc. ......................................... 15.67%(5) 22.99%(5)
Tritel, Inc. ............................................... 21.64%(6) N/A(6)
Cincinnati Bell Wireless, LLC............................... 19.90%(7) 19.90%(7)
Alaska Native Wireless, LLC................................. N/A(8) 39.90%(8)
Far EasTone Telecommunications, Ltd. ....................... 13.87%(9) 22.70%(9)
Birla AT&T Communications Ltd. ............................. 49.00%(10) 49.00%(10)
Rogers Wireless Communications, Inc. ....................... 16.65%(11) 16.65%(11)
Japan Telecom............................................... N/A(12) 5.00%(12)
EuroTel Praha, spol. s.r.o. ................................ N/A(13) 24.50%(13)
EuroTel Bratislava a.s. .................................... N/A(13) 24.50%(13)
PT AriaWest International................................... N/A(13) 35.00%(13)
---------------
(1) See Note 5 for further discussion related to the redemption of AT&T
Wireless Services' equity interest in AB Cellular in December 2000.
(2) See Note 5 related to AT&T Wireless Services' acquisition of the remaining
50% interest in CMT Partners in June 2000.
(3) On February 28, 2000, AT&T and Dobson Communications Corporation (Dobson)
acquired American Cellular Corporation, through a joint venture, ACC
Acquisitions, LLC, for approximately $2.4 billion. AT&T contributed cash
equal to its interest in the joint venture to AT&T Wireless Services as of
the date of the acquisition. The acquisition was funded with non-recourse
bank debt by the joint venture and cash equity contributions of
approximately $400 from each of the two partners. Dobson is responsible for
day-to-day management of the joint venture, which is equally owned and
jointly controlled by Dobson and AT&T Wireless Services. Accordingly, this
investment is accounted for as an equity method investment in the
accompanying consolidated financial statements.
(4) During 1998, AT&T Wireless Services entered into a venture with Triton PCS
Holdings, Inc. to build and operate digital wireless networks in the
Southeast and MidAtlantic areas of the United States. AT&T Wireless
Services contributed licenses to the venture in exchange for preferred
stock. The effect of the above transaction resulted in a non-cash
reclassification of license balances of approximately $101 to investments.
Additionally during the fourth quarter of 1998, AT&T Wireless Services sold
its net assets in the geographic area of Norfolk, Virginia, including a
portion of the PCS license, to Triton for cash and preferred stock.
Ownership percentages reflect AT&T Wireless Services' ownership of common
stock, assuming conversion of all currently convertible preferred shares to
common stock. In addition, AT&T Wireless Services holds redeemable
preferred shares in this investment, which are not currently convertible to
common stock. These preferred shares have certain liquidation preference
rights. This investment is accounted for under the equity method because of
our ability to provide significant influence.
F-39
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(5) During 1998, AT&T Wireless Services entered into a venture with TeleCorp
PCS, Inc. to build and operate digital wireless networks in portions of New
England and the Midwestern and Southeastern United States. AT&T Wireless
Services contributed licenses to the venture in exchange for preferred
stock. The effect of the above transaction resulted in a non-cash
reclassification of license balances of approximately $40 to investments.
Additionally in May 1999, AT&T Wireless Services sold its net assets in the
geographic area of San Juan, Puerto Rico, including a portion of the PCS
license, to TeleCorp for cash and preferred stock. On November 13, 2000,
TeleCorp PCS, Inc. completed its merger agreement with Tritel, Inc., as
part of a stock transaction. Pursuant to the terms of the agreement, each
company merged with a separate newly formed subsidiary of a new holding
company named TeleCorp PCS, Inc., upon consummation of the transaction. In
connection with the merger, AT&T Wireless Services contributed to TeleCorp
PCS, Inc., rights to acquire wireless licenses in Wisconsin and Iowa, paid
approximately $20 in cash and extended the term of its brand license
agreement through July 2005, in exchange for approximately 9.3 million
additional common shares in the newly combined company. In a separate
transaction with TeleCorp, AT&T Wireless Services completed an exchange of
certain wireless licenses and rights to acquire additional licenses in the
Wisconsin and Iowa markets, as well as made a cash payment of approximately
$80. In return, AT&T Wireless Services received TeleCorp's PCS licenses and
wireless systems in several New England markets. AT&T Wireless Services
recognized a pretax gain of $379 associated with these transactions.
Ownership percentages reflect AT&T Wireless Services' ownership of common
stock, assuming conversion of all currently convertible preferred shares to
common stock. In addition, AT&T Wireless Services holds redeemable
preferred shares in this investment, which are not currently convertible to
common stock. These preferred shares have certain liquidation preference
rights.
(6) In January 1999, AT&T Wireless Services entered into a venture with Tritel,
Inc. to build and operate a digital wireless network across parts of the
Southwestern United States. AT&T Wireless Services contributed licenses to
the venture in exchange for preferred stock. The effect of the above
transaction resulted in a non-cash reclassification of license balances of
approximately $94 to investments. In November 2000, Telecorp completed a
merger with Tritel. See (5) above regarding the discussion of the merger.
The December 31, 1999 ownership percentage reflected AT&T Wireless
Services' ownership of common stock, assuming conversion of all convertible
preferred shares, as of December 31, 1999, to common stock. In addition, as
of December 31, 1999, AT&T Wireless Services held redeemable preferred
shares in this investment which were not convertible to common stock. These
preferred shares had certain liquidation preference rights.
(7) During the fourth quarter of 1998, AT&T Wireless Services sold a portion of
its net assets in the geographic areas of Cincinnati and Dayton, Ohio,
including portions of the PCS licenses, to Cincinnati Bell Wireless, LLC
for cash and an ownership interest. The effect of this transaction resulted
in a non-cash reclassification of license balances of approximately $20 to
investments in 1998.
(8) During November 2000, AT&T Wireless Services joined with others in the
formation of a venture, Alaska Native Wireless, LLC, which participated in
the Federal Communication Commissions' recent auction of license spectrum
in the 1900 megahertz band, which is used to provide wireless services.
AT&T Wireless Services provided funding to the joint venture through a
combination of a non-controlling equity interest and debt securities of
Alaska Native Wireless totaling approximately $229 as of December 31, 2000.
AT&T Wireless Services has made certain commitments related to this joint
venture. See Note 13 for further discussion of outstanding commitments.
F-40
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(9) On December 8, 2000, AT&T Wireless Services exercised its options to
purchase additional shares of stock in its equity investment in Far EasTone
Telecommunications, Ltd. AT&T Wireless Services paid approximately $205 for
the additional shares and increased its ownership percentage to 22.7%.
(10) During the fourth quarter of 2000, Birla AT&T Communications Ltd. executed
definitive documents for two transactions that will expand its coverage
area in India. First, Birla AT&T Communications Ltd. entered into an
agreement to merge with the wireless operations of Tata Cellular, Ltd. Tata
Cellular, Ltd. owns and operates a cellular business in the Indian state of
Andhra Pradesh. The completion of the transaction is awaiting governmental
approval, which Birla AT&T Communications Ltd. expects to receive in the
first half of 2001. When completed, AT&T Wireless Services will own an
approximate 33% interest in the newly merged entity. During the first
quarter of 2001, AT&T Wireless Services, Birla AT&T Communications Ltd. and
Tata Cellular, Ltd. completed a cash acquisition of cellular operations in
the Indian state of Madhya Pradesh. Each acquiror will contribute their
interest to the newly merged Birla AT&T/Tata Cellular, Ltd. entity
concurrent with the completion of the merger.
(11) In August 1999, AT&T and British Telecommunications plc through a newly
created joint venture acquired a 33.3% ownership interest in Rogers
Wireless Communications, Inc., formerly Rogers Cantel Mobile
Communications, Inc., for approximately $934 in cash. AT&T contributed its
interest in the joint venture to AT&T Wireless Services as of the date of
acquisition. The investment is owned equally by AT&T Wireless Services and
British Telecommunications. This investment is accounted for under the
equity method because of our ability to elect certain members of the board
of directors of this entity, which we believe provides us with significant
influence. See Note 18 for subsequent events related to Rogers Wireless.
(12) In the first quarter of 2000, AT&T Wireless Services was allocated one-half
of AT&T's interest in Japan Telecom, which is held through a joint venture
with British Telecommunications. This investment is accounted for under the
equity method because of our ability to elect certain members of the board
of directors of this entity, which we believe provides us with significant
influence. See Note 18 for discussion of subsequent events associated with
Japan Telecom.
(13) These investments were acquired on October 2, 2000, and represented the
significant interests acquired by AT&T Wireless Services when it completed
its acquisition of several interests in international ventures acquired by
AT&T as a result of its acquisition of MediaOne in June 2000. AT&T Wireless
Services acquired these interests from AT&T for approximately $1 billion in
cash, which was determined based upon a third party valuation.
Additionally, AT&T Wireless Services assumed deferred tax liabilities
totaling approximately $200 which were transferred from AT&T.
The unaudited consolidated results of operations and the financial position
of the significant equity method investments are summarized below.
CONDENSED INCOME STATEMENT INFORMATION (UNAUDITED)
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1998 1999 2000
------ ------ -------
Revenue................................................. $2,087 $3,494 $15,331
Operating income (loss)................................. 379 (149) 303
Net income (loss)....................................... 347 (226) 945
Condensed income statement information includes the results of AB Cellular
and CMT Partners prior to their consolidation by AT&T Wireless Services. The net
income in 2000 includes the gain recognized by AB Cellular associated with the
redemption of AT&T Wireless Services' equity interest in December 2000 (See Note
5).
F-41
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
CONDENSED BALANCE SHEET INFORMATION (UNAUDITED)
AS OF DECEMBER 31,
-------------------
1999 2000
------- --------
Current assets.............................................. $2,911 $ 4,209
Noncurrent assets........................................... 9,102 22,415
Current liabilities......................................... 1,336 2,654
Noncurrent liabilities...................................... 3,272 10,623
Redeemable preferred stock.................................. 457 543
Current assets are comprised primarily of cash, accounts receivable and
other current assets. Noncurrent assets are comprised primarily of net goodwill
and other assets, net property, plant and equipment and net licenses. Current
liabilities are comprised primarily of operating accruals, accounts payable and
short-term debt. Noncurrent liabilities are comprised primarily of long-term
debt and deferred income taxes.
AT&T Wireless Services also has investments accounted for under the cost
method. Under this method, investments are stated at cost, and earnings are
recognized to the extent distributions are received up to accumulated earnings
of the investee. Distributions received in excess of accumulated earnings are
recognized as a reduction of the investment balance.
7. ASSET IMPAIRMENT AND RESTRUCTURING CHARGES
During the fourth quarter of 1999, AT&T Wireless Services recorded a $531
asset impairment charge primarily associated with the planned disposal of
certain wireless communications equipment resulting from a program to increase
capacity and operating efficiency of its wireless network. As part of a
multi-vendor program, contracts have been executed with certain vendors to
replace significant portions of the wireless infrastructure equipment in the
Western United States and the metropolitan New York markets. The program is
intended to provide AT&T Wireless Services with the newest technology available
and allow it to evolve to new next-generation digital technology, which will
provide high-speed data capabilities.
The planned disposal of the existing wireless infrastructure equipment
required an evaluation of asset impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," to write-down these assets to their fair value, which was
estimated by discounting the expected future cash flows to be generated by these
assets from their use and eventual disposition through the date of disposal.
Since the assets will remain in service from the date of the decision to dispose
of these assets to the disposal date, the impairment has been recorded as
accumulated depreciation and the remaining net book value of the assets will be
depreciated over this shortened period. As of December 31, 2000, approximately
$320 of the asset impairment reserve has been utilized for assets that have been
disposed of and written off. The remaining net book value of these assets was
approximately $23 at December 31, 2000, which will be depreciated over an
estimated remaining useful life of 3 months.
During 1998, AT&T Wireless Services recorded a pretax asset impairment
charge of $120, which represented the write-down of unrecoverable assets
associated with nonstrategic businesses.
8. INCOME TAXES
AT&T Wireless Services has not been a separate taxable entity for federal
and state income tax purposes prior to the split-off and its results of
operations have been included in the consolidated federal and state income tax
returns of AT&T and its affiliates, as described in Note 1. The following table
shows
F-42
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
the principal reasons for the difference between the effective income tax rate
and the United States federal statutory income tax rate:
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1998 1999 2000
----- ----- -----
U.S. federal statutory income tax rate..................... 35.0% 35.0% 35.0%
===== ===== =====
Federal income tax at statutory rate....................... $ 65 $(238) $ 144
State and local income taxes, net of federal income tax
effect................................................... 5 (20) --
Dividends received deduction............................... (2) -- --
Amortization of intangibles................................ 12 17 19
Sale of foreign investment................................. -- -- (31)
Change in valuation allowance and other estimates.......... (17) (50) --
Other differences, net..................................... (4) (3) 9
----- ----- -----
Provision (benefit) for income taxes....................... $ 59 $(294) $ 141
===== ===== =====
Effective income tax rate.................................. 31.6% 43.2% 34.1%
===== ===== =====
PROVISION (BENEFIT) FOR INCOME TAXES
CURRENT
Federal.................................................. $ 83 $(207) $(370)
State and local.......................................... 15 (2) (74)
----- ----- -----
$ 98 $(209) $(444)
----- ----- -----
DEFERRED
Federal.................................................. $ (38) $ (41) $ 499
State and local.......................................... (1) (44) 86
----- ----- -----
$ (39) $ (85) $ 585
----- ----- -----
Provision (benefit) for income taxes....................... $ 59 $(294) $ 141
===== ===== =====
Deferred income tax liabilities are taxes AT&T Wireless Services expects to
pay in future periods. Similarly, deferred income tax assets are recorded for
expected reductions in taxes payable in future periods. Deferred income taxes
arise because of differences in the book and tax bases of certain assets and
liabilities.
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
Deferred income tax liabilities and assets consist of the following:
AT DECEMBER 31,
------------------
1999 2000
------- -------
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment and licenses................ $(3,246) $(3,618)
Investments............................................... (508) (989)
Other..................................................... (49) (74)
------- -------
Total long-term deferred income tax liabilities............. $(3,803) $(4,681)
------- -------
LONG-TERM DEFERRED INCOME TAX ASSETS
Net operating loss/credit carryforwards................... $ 65 $ 37
Valuation allowance....................................... (12) (15)
------- -------
Total net long-term deferred income tax assets.............. $ 53 $ 22
------- -------
Net long-term deferred income tax liabilities............... $(3,750) $(4,659)
======= =======
CURRENT DEFERRED INCOME TAX LIABILITIES
Total current deferred income tax liabilities............... $ -- $ --
CURRENT DEFERRED INCOME TAX ASSETS
Employee benefits......................................... $ 11 $ 11
Reserves and allowances................................... 101 65
Other..................................................... 15 17
------- -------
Total current deferred income tax assets.................... $ 127 $ 93
------- -------
Current deferred income tax assets.......................... $ 127 $ 93
======= =======
At December 31, 2000, AT&T Wireless Services had net operating loss
carryforwards for federal and state income tax purposes of $21 and $619,
respectively, expiring through 2019. AT&T Wireless Services also has federal tax
credit carryforwards of $29 which are not subject to expiration. AT&T Wireless
Services recorded a valuation allowance to reflect the estimated amount of
deferred tax assets which, more likely than not, will not be realized by AT&T
Wireless Services.
The realization of AT&T Wireless Services' deferred tax assets is not
dependent upon the consolidated tax group of AT&T. On a stand alone, separate
company basis, AT&T Wireless Services has sufficient reversing taxable temporary
differences to warrant recognition of its deferred tax assets without the need
for any additional valuation allowance. AT&T Wireless Services received payments
under its tax sharing arrangement with AT&T for the net domestic tax losses and
credits it had generated. These payments were recorded as a reduction to the
related deferred tax assets.
AT&T previously announced that it intends to split-off AT&T Wireless
Services (see Note 1). If it were determined that the split-off failed to
qualify as a tax-free transaction, a tax liability would be created which would
have a material effect on AT&T Wireless Services. In addition, there may be tax
costs associated with the split-off that result from AT&T Wireless Services
ceasing to be a member of the AT&T consolidated tax return group, as well as
from pre-split transactions. If incurred, these costs could be material to AT&T
Wireless Services' results.
F-44
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
9. EMPLOYEE BENEFIT PLAN
AT&T Wireless Services sponsors a savings plan for the majority of its
employees. The plan allows employees to contribute a portion of their pretax
income in accordance with specified guidelines. The plan matches a percentage of
employee contributions up to certain limits. In addition, AT&T Wireless Services
may make discretionary or profit sharing contributions. Contributions amounted
to $31, $37 and $60 in 1998, 1999 and 2000, respectively. See Note 12 for
further discussion related to employee benefit agreements subsequent to the
split-off.
10. STOCK-BASED COMPENSATION PLANS
STOCK-BASED COMPENSATION PLANS:
Employees of AT&T Wireless Services have historically participated in the
stock-based compensation plans of AT&T. Prior to the date of the offering of
AT&T Wireless Group tracking shares, AT&T granted approximately 10,503 thousand,
9,438 thousand and 1,082 thousand AT&T common stock options to AT&T Wireless
Services employees during 1998, 1999 and 2000, respectively. The
weighted-average exercise price at the grant date for AT&T options granted to
AT&T Wireless Services employees during 1998, 1999 and 2000 were $41.86, $59.35
and $48.05, respectively.
At December 31, 1998, 1999 and 2000, there were approximately 24,675
thousand, 30,068 thousand and 27,506 thousand options outstanding, respectively,
held by AT&T Wireless Services employees at weighted average exercise prices of
$32.62, $41.14 and $41.58, respectively. At December 31, 1998, 1999 and 2000,
there were approximately 8,857 thousand, 15,546 thousand and 17,492 thousand
options exercisable, respectively, at weighted average exercise prices of
$25.43, $30.15 and $35.37, respectively.
Under the AT&T 1996 Employee Stock Purchase Plan (Plan), employees may have
up to 10% of their earnings withheld to purchase AT&T's common stock. The
purchase price of the stock on the date of exercise is 85% of the average high
and low sale prices of shares on the New York Stock Exchange for that day. AT&T
sold approximately 535 thousand shares to AT&T Wireless Services employees in
1998, approximately 424 thousand shares in 1999 and approximately 1,127 thousand
shares in 2000, under the Plan.
On completion of the offering of AT&T Wireless Group tracking stock, a
total of 5% of the outstanding AT&T Wireless Group tracking shares became
available for grant under the stock based compensation plans of AT&T with a
maximum of 1.25% of the outstanding shares that may be used for awards other
than options. Beginning with January 1, 2001 the remaining AT&T Wireless Group
tracking shares available for grant at December 31 of the prior year plus 2.0%
of outstanding AT&T Wireless Group tracking shares on January 1 of each year
become available for grant. The exercise price of any stock option is equal to
the stock price when the option is granted. Generally, the options vest over two
to three and one half years and are exercisable up to 10 years from the date of
grant. In 2000 there were no grants of awards other than stock options. On April
27, 2000, AT&T granted AT&T Wireless Group tracking stock options to
substantially all AT&T and AT&T Wireless Services employees.
F-45
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
A summary of AT&T Wireless Group tracking stock option transactions for the
year ended December 31, 2000, including options issued to both AT&T Wireless
Services and AT&T employees, is shown below. The table below does not include
additional AT&T Wireless Services options to be created as a result of the
split-off.
WEIGHTED-
AVERAGE
EXERCISE
SHARES IN THOUSANDS 2000 PRICE
------------------- ------ ---------
Outstanding at January 1.................................... -- $ --
Options granted............................................. 76,983 $29.29
Options exercised........................................... -- $ --
Options canceled or forfeited............................... (3,357) $29.43
At December 31:
Options outstanding....................................... 73,626 $29.29
Options exercisable....................................... 12,391 $29.48
Shares available for grant................................ 41,874
The following table summarizes information about AT&T Wireless Group
tracking stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ----------------------------------
WEIGHTED-
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF AT DEC. 31, 2000 CONTRACTUAL AVERAGE AT DEC. 31, 2000 AVERAGE
EXERCISE PRICES (IN THOUSANDS) LIFE EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE
--------------- ---------------- ----------- -------------- ---------------- --------------
$17.06 - $21.00 305 9.9 $17.91 -- $ --
$24.47 1,741 9.8 $24.47 -- $ --
$26.00 - $28.53 1,865 9.5 $27.62 122 $27.21
$29.50 69,715 9.3 $29.50 12,269 $29.50
73,626 9.3 $29.29 12,391 $29.48
Of the total 73,626 thousand AT&T Wireless Group tracking stock options
outstanding at December 31, 2000, approximately 20,318 thousand AT&T Wireless
Group tracking stock options were held by AT&T employees.
FAIR VALUE DISCLOSURES:
If AT&T Wireless Services had elected to recognize compensation costs based
on the fair value at the date of grant for AT&T awards granted to AT&T Wireless
Services employees in 1998, 1999 and 2000, and for AT&T Wireless Group tracking
stock awards granted to AT&T Wireless Services' employees in 2000, consistent
with the provisions of SFAS No. 123, AT&T Wireless Services net income (loss)
would have been adjusted to reflect additional compensation expense resulting in
the following pro forma amounts:
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1998 1999 2000
---- ----- ----
Net income (loss)........................................... $127 $(464) $481
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
The pro forma effect on net income for 1998 may not be representative of
the pro forma effect on net income (loss) of future years because the SFAS No.
123 method of accounting for pro forma compensation expense has not been applied
to options granted prior to January 1, 1995 as all such options were fully
vested by the end of 1998.
The weighted-average exercise price at the date of grant of AT&T Wireless
Group tracking stock options granted to AT&T Wireless Services employees was
$29.23. The weighted-average fair value at date of grant was $14.43 and was
estimated using the Black-Scholes option-pricing model. The following
weighted-average assumptions were applied: (i) expected volatility rate of
55.0%, (ii) expected life of 4 years and (iii) risk-free interest rate of 6.52%.
The weighted-average fair values at date of grant for AT&T options granted
to AT&T Wireless Services employees during 1998, 1999 and 2000 were $9.80,
$15.36 and $14.26, respectively, and were estimated using the Black-Scholes
option-pricing model. The following weighted-average assumptions were applied
for 1998, 1999 and 2000, respectively: (i) expected dividend yields of 2.1%,
1.7% and 1.7% (ii) expected volatility rates of 23.8%, 27.2% and 31.2%, and
(iii) risk-free interest rates of 5.27%, 4.71% and 6.69% and (iv) expected lives
of 4.5 years, 4.9 years and 3.9 years.
STOCK-BASED COMPENSATION SPLIT-OFF IMPLICATIONS:
AT&T Wireless Services has adopted an AT&T Wireless Services Long Term
Incentive Plan which has terms and conditions that are substantially similar to
the AT&T Long Term Incentive Plan. This Plan was approved by AT&T as AT&T
Wireless Services' sole shareholder.
Additionally, AT&T and AT&T Wireless Services entered into an employee
benefits agreement. This agreement covers the treatment of AT&T common stock
options and AT&T Wireless Group tracking stock options held by both AT&T and
AT&T Wireless Services employees. Per the agreement, each AT&T option granted to
AT&T and AT&T Wireless Group employees prior to January 1, 2001, that is
outstanding under the AT&T Long Term Incentive Plan as of the split-off date,
shall be adjusted. This adjustment shall result in each individual who is the
holder of an AT&T option receiving, immediately after the split-off date, an
adjusted AT&T option and an AT&T Wireless Services option. The combined
intrinsic value of the adjusted AT&T option and the AT&T Wireless Services
option immediately after the split-off will equal the intrinsic value of the
AT&T option immediately before the split-off. Each AT&T Wireless Group tracking
stock option held by an AT&T or AT&T Wireless Group employee outstanding under
the AT&T Long Term Incentive Plan as of the split-off date shall be converted as
of the split-off date into an AT&T Wireless Services option. The number of
options and the exercise price per share of each AT&T Wireless Services option
will be adjusted, if necessary, to maintain the intrinsic value of the AT&T
Wireless Services option immediately after the split-off.
Each AT&T option held by an AT&T Wireless Services employee subsequent to
the split-off, shall be fully vested and shall continue to be exercisable for
the remaining scheduled term of such AT&T option. Each AT&T Wireless Services
option held by an AT&T employee subsequent to the split-off, shall be fully
vested and shall continue to be exercisable for the remaining scheduled term of
the original AT&T Wireless Group tracking stock option. Each AT&T Wireless
Services option converted from an AT&T Wireless Group tracking stock option held
by an AT&T Wireless Services employee shall be subject to the same terms and
conditions regarding term, vesting, and other provisions regarding exercise as
set forth in the original AT&T Wireless Group tracking stock option from which
the option was converted.
Upon the split-off, AT&T Wireless Services will assume liabilities and
obligations relating to employee benefits, including the obligation to assume a
portion of AT&T's outstanding employee stock
F-47
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
options. In connection with this assumption, AT&T will, effective immediately
before the split-off, reduce the AT&T Common Stock Group's retained portion of
the value of the AT&T Wireless Group by the equivalent of 12,577 thousand shares
of AT&T Wireless Group tracking stock. This will have the effect of reducing the
total number of shares of AT&T Wireless Services common stock distributed to
holders of AT&T common stock in the split-off.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, short-term debt due to AT&T and other current liabilities are
a reasonable estimate of their fair value due to the short-term nature of these
instruments. The fair value of the long-term debt due to AT&T approximates its
carrying value.
12. RELATIONSHIP WITH AT&T
The financial statements of AT&T Wireless Services reflect an assumed
capital structure allocated from AT&T, as well as allocated costs associated
with AT&T's common support divisions as discussed in Note 1. Additionally, AT&T
Wireless Services purchases various network and selling, general and
administrative services from AT&T, primarily at market-based prices.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1998 1999 2000
---- ---- ----
COSTS OF SERVICES:
Long-distance and other network related services............ $ 65 $170 $241
Provision for uncollectibles related to bundled customers... 14 29 38
---- ---- ----
Total costs of services..................................... $ 79 $199 $279
---- ---- ----
SELLING, GENERAL AND ADMINISTRATIVE:
General corporate overhead allocations...................... 42 40 56
Sales employee, commissions and marketing support related
costs(1).................................................. 65 223 67
Administrative telephone services........................... 50 69 104
Remittance processing services.............................. 12 22 23
Billing and collection services related to bundled
customers................................................. 22 36 38
---- ---- ----
Total selling, general and administrative................... 191 390 288
---- ---- ----
INTEREST INCOME ON NOTE RECEIVABLE FROM AT&T(2)............. -- -- 143
INTEREST EXPENSE............................................ 190 214 196
PREFERRED STOCK DIVIDENDS(3)................................ 56 56 130
---- ---- ----
$516 $859 $750
==== ==== ====
CAPITALIZED INTEREST DEDUCTED FROM INTEREST EXPENSE......... $ 75 $ 88 $123
==== ==== ====
---------------
(1) Effective April 1, 2000, the direct sales employees previously employed by
AT&T became employees of AT&T Wireless Services.
(2) Included within "Other income" on the consolidated statements of operations.
(3) Recorded net of tax, in accordance with the tax sharing agreement discussed
in Note 1.
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
RELATIONSHIP WITH AT&T AFTER THE SPLIT-OFF (UNAUDITED):
For purposes of governing certain of the ongoing relationships between AT&T
Wireless Services and AT&T at and after the separation and to provide for an
orderly transition, AT&T Wireless Services and AT&T entered into various
agreements. A brief description of each of the agreements follows.
Separation and Distribution Agreement
The separation and distribution agreement sets forth the agreements among
AT&T and AT&T Wireless Services with respect to the principal corporate
transactions required to effect the split-off, and a number of other agreements
governing the relationship between AT&T Wireless Services and AT&T following the
split-off. The asset transfer agreement with AT&T, which is incorporated into,
and superseded by, the separation and distribution agreement, relates to the
assets to be transferred in connection with the separation. AT&T Wireless
Services expects to finalize the transfers called for under the asset transfer
agreement immediately prior to the split-off.
Brand License Agreement
The brand license agreement gives AT&T Wireless Services rights to continue
to use specified AT&T brands, including the AT&T globe design and the AT&T trade
dress. The rights are granted royalty free, although AT&T Wireless Services will
be required to pay a maintenance fee.
AT&T Wireless Services has these rights for five years following the
completion of the split-off. After the initial five-year period, AT&T Wireless
Services may renew its right to these AT&T brands for an additional five-year
period. During the initial or renewal period, AT&T Wireless Services may
terminate the brand license agreement on 12 months prior notice. In addition,
AT&T Wireless Services may continue to use these AT&T brands during a transition
period after the brand license agreement is terminated.
In order for AT&T Wireless Services to maintain its rights, it must comply
with specified quality, customer care, graphics and marketing standards in
connection with its use of these AT&T brands. AT&T may terminate the brand
license agreement in the event of a significant breach or change in control of
AT&T Wireless Services.
Master Carrier Agreement
The master carrier agreement requires AT&T to provide voice and data
telecommunications services to AT&T Wireless Services for five years. AT&T will
provide both wholesale services, which AT&T Wireless Services will use as a
component of wireless services it provides to its customers, and administrative
services, for example corporate usage which AT&T Wireless Services will use
itself.
AT&T Wireless Services is required to purchase in each year an amount of
wholesale domestic voice services equal to AT&T Wireless Services actual usage
in 2001. The pricing at which AT&T provides these services will be subject to
internal and external benchmarking. AT&T Wireless Services is not required to
purchase from AT&T, wholesale domestic voice services in excess of this
commitment, although AT&T has a right to match any third party offers until 2003
for 80% of any excess. From 2003 until the agreement ends, AT&T Wireless
Services may purchase such service in excess of the commitment from any carrier.
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(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
AT&T Wireless Services is also required to purchase all international voice
services from AT&T. AT&T will provide these services at the price AT&T receives
from Concert, its joint venture with British Telecommunications.
AT&T Wireless Services is required each year to purchase domestic
administrative services, data and voice, at a level equal to 80% of its
purchases in 2000. AT&T Wireless Services will purchase its local connectivity
business needs from AT&T if AT&T meets committed levels of performance and
offers price and performance terms at least as favorable as those offered by
other providers.
Agency and Referral Agreement
The agency and referral agreement covers AT&T's acting as an agent on
behalf of AT&T Wireless Services to assist in obtaining business with AT&T's
business customers. Upon either party being acquired by a significant competitor
of the other, the party not being acquired will have the right to terminate this
agreement.
Employee Benefits Agreement
The employee benefits agreement covers a wide range of compensation and
benefit issues. In general, AT&T Wireless Services is responsible for all
obligations and liabilities relating to employees and former employees of AT&T
Wireless Services and their dependents and beneficiaries after the split-off
date, and AT&T is responsible for the obligations and liabilities before the
split-off date. See Note 10 for further discussion of treatment of employee
stock options related to the split-off.
Intellectual Property Agreement
The intellectual property agreement specifies the ownership and license
rights in patents, software, copyrights, and trade secrets, but not the AT&T
brands. Under the terms of the agreement, AT&T and AT&T Wireless Services will
grant each other a non-exclusive, fully paid, worldwide, perpetual and
irrevocable license under its patents to make, have made, use and sell any and
all products and services in the conduct of its present and future business. The
parties also grant special rights under certain of each other's patents for
defensive protection, special affiliate licensing, and supplier licensing. In
addition, AT&T will refrain from licensing some of its patents to AT&T Wireless
Services' ten largest domestic mobile service competitors for a period of five
years and will grant us a nonexclusive right to direct the licensing of certain
AT&T patents to certain third parties and receive half of the net royalties.
Tax Sharing Agreement
AT&T and AT&T Wireless Services amended their existing tax sharing
agreement. The amended tax sharing agreement provides that:
- AT&T will be responsible for any tax item resulting from asset transfers
from AT&T Wireless Services to AT&T Common Stock Group before the
split-off;
- The accounts between AT&T and AT&T Wireless Services will be adjusted for
unpaid amounts under the tax sharing agreement as of the time of the
split-off; and
- No tax sharing payments will be made with respect to taxable periods (or
portions thereof) beginning after the split-off date.
The tax sharing agreement also contains provisions that govern tax contests
and other related matters with respect to tax periods before the split-off date.
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(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
Services Agreement
The services agreement governs the following corporate support services:
common support services, inter-unit services, and systems replication and
systems services. The agreement will generally run for 18 months and the
individual services are generally terminable on 90 days' notice.
Common support services include services historically provided at a
corporate headquarters level, such as financial management, tax, media
relations, human resources administration, procurement, real estate management
and other administrative functions. Charges for these services will allow the
provider to recover the costs of such service, plus all out-of-pocket costs and
expenses, but without any profit.
Inter-unit services include services historically provided by one business
unit to another such as billing, remittance processing, systems development and
customer care. Charges for these services will allow the provider to recover the
costs of such service, plus all out-of-pocket costs and expenses. In some
instances the company providing the service will recover a profit.
AT&T will also supply to AT&T Wireless Services technology, systems and
support services. The formula for these charges is intended to allow AT&T to
recover its fully-allocated cost plus a profit.
13. COMMITMENTS
AT&T Wireless Services has entered into various purchase commitments for
network equipment as well as handsets, related to the development of its
next-generation strategy. Those commitments totaled $432 as of December 31, 2000
and expire between 2001 and 2004.
During January 2001, AT&T closed its previously announced agreement with
DoCoMo. Pursuant to this agreement, DoCoMo may require the repurchase of its
investment at DoCoMo's original purchase price, plus interest, if AT&T does not
complete the split-off by specified dates beginning January 1, 2002, or if,
under certain circumstances, AT&T Wireless Services fails to meet specified
technological milestones. See Note 18 for further discussion related to the
DoCoMo investment.
During November 2000, AT&T Wireless Services joined with others in the
formation of a venture, Alaska Native Wireless, which participated in the
Federal Communication Commission's recent auction of license spectrum in the
1900 megahertz band, which is used to provide wireless services. In January
2001, the auction was completed, and Alaska Native Wireless was the high bidder
on approximately $2.9 billion in licenses. AT&T Wireless Services has committed
to fund $2.6 billion to Alaska Native Wireless to fund Alaska Native Wireless'
purchase of licenses. As of December 31, 2000, AT&T Wireless Services funded
approximately $229 of the commitment through a combination of a non-controlling
equity interest and debt securities of Alaska Native Wireless. Additionally, in
February 2001, AT&T Wireless Services funded an additional $80. The remaining
approximate $2.3 billion of additional funding will be made when such licenses
are granted, and will take the form of non-convertible notes of Alaska Native
Wireless. At the fifth anniversary of the first date on which licenses won in
the auction are granted to Alaska Native Wireless, and in addition to other
means by which they may transfer their interests, the other owners of Alaska
Native Wireless have the right to require AT&T Wireless Services to purchase
their equity interests. If this right were exercised five years after license
grant, the purchase price could be as much as approximately $950 and would be
payable, at AT&T Wireless Services' option, in cash or marketable securities.
The right to require AT&T Wireless Services to purchase these interests may be
exercised before the five-year anniversary of the license grant if the
conditions of certain FCC regulations restricting the free transferability of
certain licenses offered in this auction are met earlier. If the right were
exercised earlier, the purchase price would be calculated in generally the same
way as if exercised at five years, except that a discount would be applied. In
certain circumstances, if a winning bid of Alaska Native
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(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
Wireless is rejected or if any license granted to it is revoked, AT&T Wireless
Services would be obligated to compensate other owners for making capital
available to the venture. In certain circumstances, if the grant of the licenses
is challenged, AT&T Wireless Services may be obligated to purchase the interests
of other owners. Depending on when such revocation or challenge takes place, the
amount may be material but would be less than the $950 purchase price described
above.
AT&T Wireless Services leases land, buildings and equipment through
contracts that expire in various years through 2037. Rental expense under
operating leases was $181 in 1998, $205 in 1999, and $271 in 2000. The following
table shows the future minimum rental payments due under noncancelable operating
leases at December 31, 2000.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001........................................................ $328
2002........................................................ 291
2003........................................................ 243
2004........................................................ 200
2005........................................................ 133
Later Years................................................. 214
During 1999 and 2000, AT&T Wireless Services expensed $82 and $28,
respectively, for losses associated with commitments related to certain equity
investments. Included in the 1999 loss of $82 was AT&T Wireless Services'
commitment of $63 to fund the long-term debt obligations of one of its equity
investments, which fully satisfied AT&T Wireless Services' commitment for this
equity investment.
AT&T Wireless Services also has various other purchase commitments for
materials, supplies and other items incidental to the ordinary course of
business which are not significant individually, nor in the aggregate.
14. CONTINGENCIES
Several lawsuits have been filed asserting claims that AT&T Wireless
Services collected charges for local government taxes from customers that were
not properly subject to those charges. AT&T Wireless Services has entered into a
settlement of one of these cases, although the settlement has been challenged on
appeal. AT&T Wireless Services has asserted in those cases that any recovery
should come from the municipalities to which the taxes were paid.
Several class action lawsuits have been filed in which claims have been
asserted that AT&T Wireless Services did not have sufficient network capacity to
support the influx of new subscribers who signed up for AT&T Digital One Rate
service beginning in May 1998 and therefore has failed to provide service of a
quality allegedly promised to subscribers. The plaintiffs in these cases have
not asserted specific claims for damages, with the exception of one case filed
in Texas in which the named plaintiffs have asserted claims for compensatory and
punitive damages totaling $100.
Several other class action or representative lawsuits have been filed
against AT&T Wireless Services that allege, depending on the case, breach of
contract, misrepresentation or unfair practice claims relating to AT&T Wireless
Services billing practices (including rounding up of partial minutes of use to
full minute increments and billing send to end), coverage, dropped calls, price
fixing and/or mistaken bills. Although the plaintiffs in these cases have not
specified alleged damages, the damages in two of the cases are alleged to exceed
$100. One of these two cases was dismissed and the dismissal was affirmed in
part on appeal. Settlement negotiations are ongoing in both cases.
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(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
AT&T Wireless Services is involved in litigation in which the Cellular One
Group claims that use of the name "AT&T Digital One Rate" infringes a
trademarked name, "DIGITALONE" for which the Cellular One Group has obtained
trademark registration. The Cellular One Group has not specified amounts of
claimed damages.
AT&T Wireless Services is involved in a patent infringement action against
GTE in the U.S. District Court in Seattle, Washington. GTE claims that the Nokia
phones manufactured for AT&T Wireless Services infringe a GTE patent for
over-the-air activation and over-the-air programming. AT&T Wireless Services is
seeking a declaratory judgment that its use of over-the-air activation does not
infringe GTE's patent. GTE has not specified amounts of claimed damages.
AT&T Wireless Services is involved in an international arbitration
proceeding concerning interests in a Malaysian telecommunications joint venture,
Maxis Communications Bhd, a former MediaOne business acquired by AT&T and sold
to AT&T Wireless Services in the fourth quarter of 2000. In the arbitration, a
group of Malaysian shareholders claim that MediaOne breached fiduciary duties
and contractual obligations owed to the joint venture. The arbitration claim
asserts damages of $400. AT&T Wireless Services will assume a portion of the
liabilities, if any, relating to this action, subject to certain adjustments. In
March 2001, AT&T Wireless Services entered into an agreement with other
shareholders of Maxis Communications Bhd who are the claimants in this
arbitration, for the sale of AT&T Wireless Services' entire interest in that
entity and the resolution of the claims asserted in the arbitration proceeding.
The parties agreed to suspend the arbitration proceeding pending closing of this
transaction, and expect to terminate the arbitration proceeding when the sale
has been completed.
Stockholders of a former competitor of AT&T Wireless Services air-to-ground
business are plaintiffs in a lawsuit filed in 1993, alleging that AT&T Wireless
Services breached a confidentiality agreement, used trade secrets to unfairly
compete, and tortiously interfered with the business and potential business of
the competitor. Plaintiffs sought damages in an unspecified amount in excess of
$3.5 billion. AT&T Wireless Services obtained partial summary judgment and then
prevailed on the remainder of the claims at a trial on the validity of a release
of plaintiffs' claims. Final judgment was entered against plaintiffs on their
claims, and plaintiffs appealed. On appeal, the Appellate Court of Illinois,
Second District, reversed and remanded the case for trial indicating that
certain issues decided by the judge needed to be resolved by a jury.
Several lawsuits have been filed against AT&T, certain executives of AT&T
and AT&T Wireless Services and a group of investment banking firms, seeking
class certification and asserting claims under federal securities laws. The
complaints assert claims that AT&T made material misstatements concerning the
company's earnings and financial condition, while omitting other material
information, allegedly to maximize proceeds from the public offering of AT&T
Wireless Group tracking stock in April 2000 and/or to avoid paying a cash
guarantee in connection with the MediaOne acquisition. The complaints do not
specify amounts of damages claimed, although the plaintiffs are seeking to
recover for declines in stock prices of AT&T securities, including the AT&T
Wireless Group tracking stock. In connection with the split-off, AT&T Wireless
Services will be allocated a portion of the liabilities, if any, arising out of
these actions to the extent relating to AT&T Wireless Group tracking stock.
While these matters could affect the operating results of any one quarter
when resolved in future periods, AT&T Wireless Services is unable to ascertain
the ultimate aggregate amount of monetary liability or financial impact with
respect to these matters.
AT&T Wireless Services also is a defendant in other legal actions involving
claims incidental to the normal conduct of the running of its business. Such
matters are subject to many uncertainties and
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
outcomes are not predictable with assurance. Additionally, AT&T Wireless
Services also makes routine filings with the Federal Communications Commission
and state regulatory authorities. However, AT&T Wireless Services believes that
the amounts that may be paid in these actions will not be material to its
financial position, or its results of operations or cash flow.
15. SEGMENT REPORTING
AT&T Wireless Services' results are segmented according to the way AT&T
Wireless Services manages its business: Mobility, Fixed Wireless and Corporate
and other. The Mobility segment is comprised of AT&T Wireless Services' domestic
wireless voice and data services and products in the 850 megahertz (cellular)
and 1900 megahertz (PCS) markets, the aviation division, and the earnings and
losses associated with equity investments in domestic wireless communications
ventures and partnerships. Additionally, the results of the messaging business
are included through October 2, 1998, the date of its sale. The Fixed Wireless
segment includes the results associated with AT&T Wireless Services' offering of
wireless local telephone and internet services to residential customers. The
Corporate and other segment includes primarily the results of AT&T Wireless
Services' international equity investments. Capital additions for each segment
include capital expenditures for property, plant and equipment, acquisitions of
licenses, additions to non-consolidated investments and additions to
internal-use software.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 2). There are no
material intercompany transactions between the segments. AT&T Wireless Services'
primary measure of evaluating operating performance is based upon operating
income, plus depreciation and amortization, referred to as EBITDA.
Geographic information is not presented due to the immateriality of
international revenues. Additionally, AT&T Wireless Services is not dependent
upon a single customer.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
Segment information is as follows:
AT AND FOR THE
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
------- ------- -------
Revenue:
Mobility -- Services........................................ $ 4,779 $ 6,823 $ 9,374
Mobility -- Equipment....................................... 627 804 1,072
------- ------- -------
Total Mobility.............................................. 5,406 7,627 10,446
Fixed Wireless.............................................. -- -- 2
Corporate and other......................................... -- -- --
------- ------- -------
Total revenue............................................... $ 5,406 $ 7,627 $10,448
======= ======= =======
Depreciation and Amortization:
Mobility.................................................... $ 1,064 $ 1,231 $ 1,639
Fixed Wireless.............................................. 15 22 47
Corporate and other......................................... -- -- --
------- ------- -------
Total depreciation and amortization......................... $ 1,079 $ 1,253 $ 1,686
======= ======= =======
Net equity earnings from investments:
Mobility.................................................... $ 127 $ 81 $ 408
Fixed Wireless.............................................. -- -- --
Corporate and other......................................... (91) (100) (20)
------- ------- -------
Total net equity earnings from investments.................. $ 36 $ (19) $ 388
======= ======= =======
Reconciliation of operating income plus depreciation and
amortization (EBITDA) to income (loss) before income taxes
and net equity earnings (loss) from investments:
Mobility.................................................... $ 794 $ 670 $ 1,884
Fixed Wireless.............................................. (49) (75) (228)
Corporate and other......................................... (9) (8) (8)
------- ------- -------
Total EBITDA................................................ 736 587 1,648
Depreciation and amortization............................... 1,079 1,253 1,686
Other income................................................ 650 122 534
Interest expense............................................ 120 136 85
------- ------- -------
Total income (loss) before income taxes..................... $ 187 $ (680) $ 411
======= ======= =======
Total Assets:
Mobility.................................................... $19,135 $22,608 $32,428
Fixed Wireless.............................................. 267 401 937
Corporate and other......................................... 58 503 1,937
------- ------- -------
Total Assets................................................ $19,460 $23,512 $35,302
======= ======= =======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
AT AND FOR THE
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
------- ------- -------
Equity Investments:
Mobility.................................................... $ 3,726 $ 3,911 $ 1,400
Fixed Wireless.............................................. -- -- --
Corporate and other......................................... 40 498 1,680
------- ------- -------
Total equity investments.................................... $ 3,766 $ 4,409 $ 3,080
======= ======= =======
Capital Additions:
Mobility.................................................... $ 1,298 $ 2,607 $ 4,336
Fixed Wireless.............................................. 51 137 598
Corporate and other......................................... 30 83 1,246
------- ------- -------
Total capital additions..................................... $ 1,379 $ 2,827 $ 6,180
======= ======= =======
Reflecting the dynamics of AT&T Wireless Services' business, AT&T Wireless
Services continually reviews its management model and structure, which may
result in adjustments to our operating segments in the future.
16. QUARTERLY INFORMATION (UNAUDITED)
2000 FIRST SECOND THIRD FOURTH
---- ------ ------ ------ ------
Revenue................................................. $2,198 $2,477 $2,799 $2,974
Operating income (loss)................................. $ 26 $ 107 $ 27 $ (198)
Net income (loss) available to common shareowners....... $ 13 $ 167 $ (21) $ 369
Dividends paid on preferred stock held by AT&T.......... $ 13 $ 33 $ 42 $ 42
1999 FIRST SECOND THIRD FOURTH
---- ------ ------ ------ ------
Revenue................................................. $1,563 $1,878 $2,049 $2,137
Operating (loss) income................................. $ (87) $ 16 $ 68 $ (663)
Net income (loss) available to common shareowners....... $ (63) $ 62 $ 4 $ (464)
Dividends paid on preferred stock held by AT&T.......... $ 14 $ 13 $ 14 $ 15
17. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board (FASB) issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- A Replacement of FASB No. 125". This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Under these standards,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. This statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001. AT&T Wireless Services does not expect that the adoption of SFAS No. 140
will have a material impact on its results of operations, financial position or
cash flows.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The effective date of this standard was delayed
via the issuance of SFAS No. 137. The effective date for SFAS No. 133 is now for
fiscal years beginning after June 15, 2000, though earlier adoption is
encouraged and retroactive application is prohibited. For AT&T Wireless
Services, this means that the standard must be adopted no later than January 1,
2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" as an amendment to SFAS
No. 133. This statement provides clarification with regard to certain
implementation issues under SFAS No. 133 on specific types of hedges. The
adoption of SFAS No. 133 in January 2001, did not have a material impact to AT&T
Wireless Services' results of operations, financial position or cash flows.
18. SUBSEQUENT EVENTS
In January 2001, NTT DoCoMo, a leading Japanese wireless communications
company, invested $9.8 billion in a security of AT&T that, like AT&T Wireless
Group tracking stock, is intended to reflect a portion of the financial
performance and economic value of AT&T Wireless Group. AT&T Wireless Services
was allocated $6.2 billion of the proceeds from DoCoMo's $9.8 billion investment
in AT&T. AT&T retained the remaining $3.6 billion of the DoCoMo investment
proceeds as consideration for the reduction in AT&T's retained portion of AT&T
Wireless Services' value. Following the split-off, this investment will be
converted into approximately 16% of AT&T Wireless Services' common shares.
DoCoMo also received warrants at an exercise price of $35 per AT&T Wireless
Group tracking share equivalent that would represent an approximate additional
1.6% of AT&T Wireless Services' common shares after the split-off. As part of
this investment, AT&T Wireless Services has entered into a strategic alliance
with DoCoMo to develop mobile multimedia services on a global-standard,
high-speed wireless network. DoCoMo may require the repurchase of its investment
at DoCoMo's original purchase price, plus interest, if AT&T does not complete
the split-off by specified dates beginning January 1, 2002, or if, under certain
circumstances, AT&T Wireless Services fails to meet specified technological
milestones.
In January 2001, AT&T Wireless Services executed agreements with certain
network equipment vendors, related to the development of its next-generation
network strategy. These agreements require AT&T Wireless Services to buy
equipment from these vendors totaling approximately $1.8 billion through 2004.
Effective January 1, 2001, AT&T Wireless Services implemented the results
of a review of the estimated service lives of certain wireless communications
equipment, primarily electronics. Lives were shortened to fully depreciate all
such equipment within seven years. Similar equipment acquired after January 1,
2001, will have useful lives no longer than seven years.
On November 17, 2000, AT&T Wireless Services announced that AT&T's board of
directors had approved an agreement under which AT&T Wireless Services would
purchase $200 in Series AA preferred stock from Dobson Communications
Corporation. AT&T Wireless Services completed this transaction on February 8,
2001. The Series AA preferred stock acquired has a liquidation preference of
$1,000 per share and is exchangeable into Series A convertible preferred stock.
If the Series AA preferred stock is exchanged into Series A convertible
preferred stock, AT&T Wireless Services will increase its ownership
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
interest in Dobson, on an as converted to common stock basis, from its current
ownership of 4.6% to approximately 11.6%.
On March 6, 2001, AT&T Wireless Services completed a private placement of
$6.5 billion in unsecured and unsubordinated Senior Notes with maturity dates
from 2006 to 2031. The notes pay interest at rates ranging from 7.350% to 8.750%
per annum, and include customary covenants. The notes include registration
rights, such that AT&T Wireless Services is required to exchange the notes for a
new issue of notes registered under the Securities Act of 1933 and are to be
declared effective no later than 240 days after the issue date.
On March 23, 2001, AT&T Wireless Services entered into Competitive Advance
and Revolving Credit Facilities (the "Facilities") in the aggregate amount of
$2.5 billion consisting of an up to $1.25 billion 364-day Competitive Advance
and Revolving Credit Facility and an up to $1.25 billion Five-Year Competitive
Advance and Revolving Credit Facility. The Facilities are subject to a facility
fee and utilization fee and bear interest at variable rates based upon, in
various cases, LIBOR, the prime rate or the rates on overnight Federal funds
transactions. The Facilities are to be used for general corporate purposes and
are subject to customary covenants, representations and warranties and events of
default. In addition, the Facilities contain financial covenants requiring AT&T
Wireless Services to maintain certain financial ratios. The Facilities also
specify limitations on AT&T's and AT&T Wireless Services' ability to consummate
the split-off including a provision that it will constitute an event of default
if the split-off is consummated without obtaining a favorable tax ruling from
the IRS or an unqualified tax opinion that the split-off will qualify as a
tax-free transaction. In addition, the existence of an obligation by AT&T
Wireless Services to repurchase equity interests from DoCoMo may under certain
circumstances constitute an event of default.
SUBSEQUENT EVENTS (UNAUDITED)
On February 26, 2001, AT&T agreed to sell its entire interest in Japan
Telecom. On April 27, 2001, AT&T completed the sale of its entire interest in
Japan Telecom for approximately $1.35 billion in cash. AT&T attributed $0.5
billion of the net after-tax proceeds from the sale to AT&T Wireless Services.
AT&T Wireless Services recognized an after-tax gain of $298 associated with the
transaction, which was recorded in net equity earnings from investments in the
second quarter of 2001.
During the first quarter of 2001, AT&T Wireless Services made unsecured
term loans to Rogers Wireless to pay for spectrum it successfully bid upon in
recently completed Canadian spectrum auctions. In April 2001, Rogers Wireless
effected a rights offering of its equity securities in which AT&T Wireless
Services' joint venture with British Telecommunications, JVII, participated. The
participation increased JVII's ownership interest in Rogers Wireless to 34.36%.
AT&T Wireless Services funded the purchase on behalf of JVII by offsetting it
against the unsecured, interest bearing note made by AT&T Wireless Services.
This transaction resulted in AT&T Wireless Services obtaining a controlling
interest of JVII, as well as increasing the indirect ownership percentage in
Rogers Wireless. As a result of the consolidation of JVII, which holds the
equity interest in Rogers Wireless, AT&T Wireless Services' investments in
unconsolidated subsidiaries, as well as minority interest liability, increased
approximately $420 in April 2001. This transaction did not result in a transfer
of control of Rogers Wireless to JVII. On July 3, 2001, AT&T Wireless Services
acquired British Telecommunications' interest in JVII for approximately $380 in
cash. As a result of this acquisition, AT&T Wireless Services now owns 100% of
JVII, and, through JVII, holds a 34.36% ownership interest in Rogers Wireless
Communications, Inc.
F-58
188
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
Several class action lawsuits have been filed against AT&T, several other
wireless service operators and several wireless phone manufacturers, asserting
products liability, breach of warranty and other claims relating to radio
frequency transmissions to and from wireless phones. The complaints seek damages
for the costs of headsets for wireless phone users as well as injunctive relief.
In connection with the split-off, AT&T Wireless Services will be allocated all
of the liability, if any, arising from such lawsuits. AT&T Wireless Services
believes these actions will not have a material impact on its financial
position, results of operations or cash flows.
AT&T Wireless Services has commitments to fund spectrum acquisitions and
operational funding requirements of an equity method investment which totaled
approximately $400 as of May 31, 2001.
During June 2001, AT&T Wireless Services finalized agreements with a group
of commercial paper dealers to issue up to $2.5 billion of private placement
commercial paper notes. The notes will be unsecured, ranking pari passu with
AT&T Wireless Services' other unsubordinated and unsecured indebtedness.
Maturity of the notes will be up to 365 days from date of issue. As of June 19,
2001, AT&T Wireless Services had not issued any notes under this program.
In accordance with the Separation and Distribution Agreement between AT&T
Wireless Services and AT&T, in June 2001, AT&T Wireless Services repaid to AT&T
the $1.8 billion of long-term debt and related accrued interest, and redeemed
the $3.0 billion of preferred equity and related unpaid dividends held by AT&T.
In June 2001, AT&T announced that the split-off of AT&T Wireless Services
from AT&T will occur on July 9, 2001. The S-1 registration statement filed with
the Securities and Exchange Commission, which will enable the split-off, became
effective June 21, 2001.
On June 27, 2001, AT&T Wireless Services entered into a preliminary
agreement to consolidate the soon to be merged Birla AT&T/Tata Cellular, Ltd.
entity with BPL Mobile Communications Ltd. and some portions of BPL Cellular
Ltd. The preliminary agreement is subject to a number of conditions, including
obtaining approvals of the boards of all of the participants to the
consolidation. If all conditions are satisfied and a consolidation occurs as
contemplated in the preliminary agreement, AT&T Wireless Services estimates that
its ownership will be approximately 25% of the consolidated entity.
F-59
189
AB CELLULAR HOLDING, LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED -- IN THOUSANDS)
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
---------- --------
Revenues
Cellular service revenue.................................. $1,005,023 $868,652
Equipment revenue......................................... 105,370 93,819
Other revenue............................................. 6,083 11,904
---------- --------
Total revenue..................................... 1,116,476 974,375
---------- --------
Costs and expenses
Cost of cellular service.................................. 224,479 172,576
Cost of equipment......................................... 171,109 133,716
Operating, administrative and selling..................... 350,686 352,332
Depreciation and amortization............................. 239,552 192,293
---------- --------
Total costs and expenses.......................... 985,826 850,917
---------- --------
Operating income.................................. 130,650 123,458
Interest income........................................... 61,555 47,998
Loss on sale of assets.................................... (2) (7,436)
Minority interest expenses................................ (357) (355)
---------- --------
Net income before taxes..................................... 191,846 163,665
Income tax provision........................................ 1,784 1,602
---------- --------
Net income........................................ $ 190,062 $162,063
========== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-60
190
AB CELLULAR HOLDING, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED -- IN THOUSANDS)
AT AT
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
ASSETS
Current assets
Cash and cash equivalents................................. $1,210,815 $1,239,293
Due from affiliates....................................... 56,424 53,397
Accounts receivable, less allowance of doubtful accounts
of $15,363 and $15,826, respectively................... 214,216 161,575
Inventories............................................... 15,793 25,631
Prepaid expenses and other current assets................. 3,453 7,477
---------- ----------
Total current assets.............................. $1,500,701 $1,487,373
---------- ----------
Property and equipment, less accumulated depreciation of
$866,762 and $710,743, respectively....................... 934,199 812,371
Other assets................................................ 10,897 3,112
Intangibles, less accumulated amortization of $171,897 and
$104,972, respectively.................................... 2,415,596 2,482,762
---------- ----------
Total assets...................................... $4,861,393 $4,785,618
========== ==========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Accounts payable.......................................... $ 112,744 $ 123,455
Due to affiliates......................................... 164,978 41,789
Other current liabilities................................. 56,038 101,673
---------- ----------
Total current liabilities......................... 333,760 266,917
---------- ----------
Other liabilities........................................... 1,976 1,534
Minority interest........................................... 3,148 3,068
---------- ----------
Total other liabilities........................... 5,124 4,602
---------- ----------
Contingencies (Note 3)
Members' capital
AT&T Wireless Services.................................... 2,515,192 2,510,515
BellSouth Cellular Corp................................... 2,007,317 2,003,584
---------- ----------
Total members' capital............................ 4,522,509 4,514,099
---------- ----------
Total liabilities and members' capital............ $4,861,393 $4,785,618
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-61
191
AB CELLULAR HOLDING, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
(UNAUDITED -- IN THOUSANDS)
BELLSOUTH AT&T
CELLULAR WIRELESS
TOTAL CORP. SERVICES
---------- ---------- ----------
Balance at December 31, 1998........................... $4,443,680 $1,972,328 $2,471,352
Net income........................................... 162,063 71,932 90,131
Members' distributions............................... (90,149) (40,013) (50,136)
Members' contributions............................... 30,438 755 29,683
Current period contributions receivable.............. (28,737) -- (28,737)
---------- ---------- ----------
Balance at September 30, 1999.......................... $4,517,295 $2,005,002 $2,512,293
========== ========== ==========
Balance at December 31, 1999........................... $4,514,099 $2,003,584 $2,510,515
Net income........................................... 190,062 84,359 105,703
Members' distributions............................... (184,941) (83,915) (101,026)
Members' contributions............................... 42,051 -- 42,051
Current period distribution payable.................. 3,289 3,289 --
Current period contributions receivable.............. (42,051) -- (42,051)
---------- ---------- ----------
Balance at September 30, 2000.......................... $4,522,509 $2,007,317 $2,515,192
========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-62
192
AB CELLULAR HOLDING, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED -- IN THOUSANDS)
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
CASH PROVIDED BY OPERATIONS
Net income.................................................. $ 190,062 $ 162,063
Adjustments to reconcile net income to net cash provided by
operating activities
Loss on sale of assets.................................... 2 7,436
Depreciation and amortization............................. 239,552 192,293
Inventory obsolescence.................................... 466 3,147
Minority interest......................................... 357 355
Provision for doubtful accounts........................... 27,482 26,929
Changes in operating assets and liabilities
Accounts receivable.................................... (80,123) (35,862)
Due from affiliates.................................... (3,027) (43,842)
Inventories............................................ 9,372 11,120
Prepaid expenses and other current assets.............. (3,769) 8,513
Accounts payable....................................... 18,017 40,874
Other current liabilities.............................. (47,607) (37,121)
Due to affiliates...................................... 123,165 26,286
---------- ----------
Total cash provided by operations................. 473,949 362,191
---------- ----------
CASH USED BY INVESTING ACTIVITIES
Capital expenditures and leasehold improvements............. (320,818) (178,740)
Proceeds from sale of property and equipment................ 296 213
---------- ----------
Total cash used by investing activities........... (320,522) (178,527)
---------- ----------
CASH USED BY FINANCING ACTIVITIES
Members' contributions...................................... -- 1,701
Members' distributions...................................... (181,652) (90,149)
Minority partner distribution............................... (253) (253)
---------- ----------
Total cash used by financing activities........... (181,905) (88,701)
---------- ----------
Net (decrease)/increase in cash and cash equivalents........ (28,478) 94,963
Cash and cash equivalents at beginning of period............ 1,239,293 1,178,937
---------- ----------
Cash and cash equivalents at end of period.................. $1,210,815 $1,273,900
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-63
193
AB CELLULAR HOLDING, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
AB Cellular Holding, LLC, a Delaware limited liability company (the
"Company"), was formed on November 13, 1998 as a joint venture of BellSouth
Cellular Corp. ("BLS") and AT&T Wireless Services, Inc. ("AWS"). Effective
November 13, 1998, AWS and BLS contributed their respective equity interests in
Los Angeles Cellular Telephone Company ("LACTC") and Houston Cellular Telephone
Company, LP ("HCTC") into the Company. In addition, AWS contributed cash of
approximately $1.1 billion to form the Company. This was not a merger, sale, or
assignment. Control over the Company resides with a Member Committee which
consists of four members, two of which are representatives of BLS and two of
which are representatives of AWS. The interest in the limited liability company
is effectively 44.385% for BLS and 55.615% for AWS.
The Company was formed by the conversion of LACTC into a limited liability
company under Delaware law, at which time the operation of LACTC became a
division (the "L.A. Division") of the Company. Under Delaware law, the form of
any entity may change (from a general partnership to a limited liability
company) but the entity remains the same and all rights of creditors and others
against LACTC continue to exist against the Company. New creditors will be
affected by the limitation of liability. Prior to November 13, 1998, BLS equity
ownership interest was effectively 60.1% and AWS equity ownership interest was
effectively 39.9%.
The L.A. Division is engaged principally in the construction and operation
of Domestic Public Cellular Radio Telecommunications Service in the Los Angeles,
California area. Cellular services provided by the L.A. Division are regulated
by the California Public Utilities Commission.
The Company has a wholly owned consolidated subsidiary, L.A. Cellular Long
Distance LLC, a limited liability company organized under the laws of Nevada. In
addition, the Company has newly formed wholly owned subsidiaries of Houston
Cellular Telephone Company, LP, Houston Cellular Holding Co., LLC and Wireless
Telecommunications Investment Co., LLC.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim consolidated financial information. In the
Company's opinion, these condensed consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, which the Company
considers necessary to fairly state the Company's financial position and the
results of its operations and its cash flows. The balance sheet at December 31,
1999 has been derived from the audited consolidated financial statements at that
date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
accompanying condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's financial statements for the year ended December 31, 1999 and the
period November 13, 1998 (inception) through December 31, 1998. The results of
the Company's operations for any interim period are not necessarily indicative
of the results of the Company's operations for any other interim period or for a
full fiscal year.
F-64
194
AB CELLULAR HOLDING, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
2. FORMATION OF SUBSIDIARIES
FORMATION OF HOUSTON CELLULAR TELEPHONE CO., LP
The Company's wholly owned subsidiary, HCTC, was organized as a limited
partnership under the laws of the State of Texas on October 5, 1998 for the
purpose of building and operating the Domestic Public Cellular Radio
Telecommunications Service in Houston, Texas. The assets and liabilities of HCTC
at the date of formation were comprised of the assets and liabilities of Houston
Cellular Telephone Company which was owned 43.75% by BLS and 56.25% by AWS. On
November 13, 1998, Galveston Mobile Partnership merged into HCTC, and HCTC
became the 87.3462% owner of Galveston Cellular Partnership ("GCP").
On November 13, 1998, the ownership interest in HCTC was revised, resulting
in HCTC being 99% owned by the Company and 1% owned by Houston Cellular Holding
Company, LLC ("HCHC").
FORMATION OF HOUSTON CELLULAR HOLDING CO., LLC
The Company's wholly owned subsidiary, HCHC was organized as a limited
liability company under the laws of the State of Texas on October 2, 1998. On
November 13, 1998, the Company contributed a 1% ownership interest in HCTC.
FORMATION OF WIRELESS TELECOMMUNICATIONS INVESTMENT CO., LLC
The Company's wholly owned subsidiary, Wireless Telecommunications
Investment Co., LLC ("WTIC"), was organized as a limited liability company under
the laws of the State of Delaware on October 2, 1998.
3. CONTINGENCIES
The Company is currently named as a defendant in the class actions of
Garabedian, et al. vs. LASMSA Limited Partnership, et al., Richard W. Thomas v.
Los Angeles Cellular Telephone Company, et al. and Eurus Cady v. Los Angeles
Cellular Corp., all which seek damages for alleged conspiracy to fix prices of
retail and wholesale service. The Orange County Superior Court approved a
settlement and entered a final judgment on May 20, 1998. The L.A. Division has
recorded a liability of $8,300 as of September 30, 2000 based upon the final
judgment referenced above. Three objectors to the settlement have appealed the
judgment.
The Company and its subsidiaries are a part to various legal proceedings of
a nature considered normal to its business. The Company believes it has adequate
legal defenses with respect to each of the suits and intends to vigorously
defend against the actions. However, it is reasonably possible that these cases
could result in outcomes unfavorable to the Company. The Company currently
believes that the amount of the ultimate probable loss would not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
4. RELATED PARTY TRANSACTIONS
The Company purchases equipment and services from organizations that are
affiliated with the Company. Such equipment purchases amounted to $122,152 and
$75,453, and the purchases of such services amounted to $139,162 and $59,010,
during the nine months ended September 30, 2000 and 1999, respectively. Accounts
payable to these related parties were $164,978 and $41,789 at September 30, 2000
and December 31, 1999, respectively.
F-65
195
AB CELLULAR HOLDING, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
In addition, the Company provides cellular service to these related
parties. Revenues from these services amounted to $86,492 and $83,405 for the
nine months ended September 30, 2000 and 1999, respectively. Accounts receivable
from these related parties were $56,424 and $53,397 at September 30, 2000 and
December 31, 1999, respectively.
The Company has also entered into an agreement with its members whereby the
member responsible for the management of a division of the Company is committed
to make contributions to or receive distributions from the Company for the
deficiency or excess of certain quarterly financial targets. Total contributions
from the members related to these agreements were $42,051 and $30,438 for the
nine months ended September 30, 2000 and 1999, respectively, of which $87,666
and $28,737 were receivable at September 30, 2000 and 1999, respectively. Total
distributions recorded to members related to these agreements were $3,289 and $0
for the nine months ended September 30, 2000 and 1999, respectively, which were
payable at September 30, 2000 and 1999, respectively.
5. SUBSEQUENT EVENTS
During 1999, the Los Angeles operating division was audited by the City of
Los Angeles, relating to claims that the Los Angeles operating division failed
to collect utility user taxes from residents in various Los Angeles communities
between September 1995 and the present. On April 24, 2000, an official
assessment, including interest and penalties, was made in the amount of $7,450.
In February 2001, the city administrative panel of the City of Los Angeles
affirmed the city auditor's assessment relating to the alleged underpayment of
taxes by the Los Angeles operating division. As a result, the Company must pay
$8,141 to the City of Los Angeles. The Company has paid the entire assessment in
March 2001, and it will seek a hearing for reversal or a refund of a portion of
the assessment.
In December 2000, BLS exercised its option to redeem AWS's 55.615% interest
in the Company as part of the joint venture agreement described in Note 1, by
distributing to AWS the L.A. Division cellular business. As of December 31,
2000, BLS held the remaining assets of the Company.
In early 2001, BLS contributed its interest in the Company to Cingular
Wireless LLC, a joint venture of BellSouth and SBC Communications.
F-66
196
AB CELLULAR HOLDING, LLC
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED -- IN THOUSANDS)
FOR THE
PERIOD FROM
NOVEMBER 13,
FOR THE 1998 (INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ----------------
Revenues
Cellular service revenue.................................. $1,279,438 $127,821
Equipment revenue......................................... 138,721 12,311
Other revenue............................................. 16,675 7,628
---------- --------
Total revenue..................................... 1,434,834 147,760
---------- --------
Costs and expenses
Cost of cellular service.................................. 311,127 10,601
Cost of equipment......................................... 203,648 17,161
Operating, administrative and selling..................... 504,843 78,383
Depreciation and amortization............................. 266,666 20,000
---------- --------
Total costs and expenses.......................... 1,286,284 126,145
---------- --------
Operating income.................................. 148,550 21,615
Interest income........................................... 66,493 8,021
Loss on sale of assets.................................... (14,560) (3,930)
Minority interest expenses................................ (438) (68)
---------- --------
Net income before taxes..................................... 200,045 25,638
---------- --------
Income tax provision........................................ 2,016 137
---------- --------
Net income........................................ $ 198,029 $ 25,501
========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-67
197
AB CELLULAR HOLDING, LLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED -- IN THOUSANDS)
AT DECEMBER 31,
------------------------
1999 1998
---------- ----------
ASSETS
Current assets
Cash and cash equivalents................................. $1,239,293 $1,178,937
Restricted cash........................................... -- 38,819
Due from affiliates....................................... 53,397 8,203
Accounts receivable, less allowance of doubtful accounts
of $15,826 and $8,055, respectively.................... 161,575 133,303
Inventories............................................... 25,631 28,226
Prepaid expenses and other current assets................. 7,477 10,123
---------- ----------
Total current assets.............................. 1,487,373 1,397,611
Property and equipment, net................................. 812,371 724,658
Other assets................................................ 3,112 2,598
Intangibles, net............................................ 2,482,762 2,573,827
---------- ----------
Total assets...................................... $4,785,618 $4,698,694
========== ==========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Accounts payable.......................................... $ 123,455 $ 145,532
Due to affiliates......................................... 41,789 3,941
Other current liabilities................................. 101,673 101,279
---------- ----------
Total current liabilities......................... 266,917 250,752
---------- ----------
Other liabilities........................................... 1,534 1,379
Minority interest........................................... 3,068 2,883
---------- ----------
Total other liabilities........................... 4,602 4,262
---------- ----------
Commitments and contingencies (Note 7)
Members' capital
AT&T Wireless Services.................................... 2,510,515 2,471,352
BellSouth Cellular Corp................................... 2,003,584 1,972,328
---------- ----------
Total members' capital............................ 4,514,099 4,443,680
---------- ----------
Total liabilities and members' capital............ $4,785,618 $4,698,694
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-68
198
AB CELLULAR HOLDING, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
(UNAUDITED -- IN THOUSANDS)
BELLSOUTH AT&T
CELLULAR WIRELESS
TOTAL CORP. SERVICES
---------- ---------- ----------
Balance at November 13, 1998 (inception)............... $4,418,179 $1,961,009 $2,457,170
Net income........................................... 25,501 11,319 14,182
---------- ---------- ----------
Balance at December 31, 1998........................... 4,443,680 1,972,328 2,471,352
Net income........................................... 198,029 87,895 110,134
Members' distributions............................... (133,253) (59,946) (73,307)
Members' contributions............................... 49,816 4,545 45,271
Current period distribution payable.................. 1,442 1,442 --
Current period contribution receivable............... (45,615) (2,680) (42,935)
---------- ---------- ----------
Balance at December 31, 1999........................... $4,514,099 $2,003,584 $2,510,515
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-69
199
AB CELLULAR HOLDING, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED -- IN THOUSANDS)
FOR THE
PERIOD FROM
NOVEMBER 13,
FOR THE 1998 (INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ----------------
CASH PROVIDED BY OPERATIONS
Net income.................................................. $ 198,029 $ 25,501
Adjustments to reconcile net income to net cash provided by
operating activities
Loss on sale of assets.................................... 14,560 3,930
Depreciation and amortization............................. 266,666 20,000
Inventory obsolescence.................................... 3,743 (12)
Minority interest......................................... 438 68
Provision for doubtful accounts........................... 35,551 211
Changes in operating assets and liabilities
Restricted cash........................................ 38,819 (38,819)
Accounts receivable.................................... (65,358) 3,478
Due from affiliates.................................... (49,860) (957)
Inventories............................................ (1,148) (4,500)
Prepaid expenses and other current assets.............. 6,211 6,793
Accounts payable and other current liabilities......... (40,083) 34,613
Due to affiliates...................................... 40,850 554
---------- ----------
Total cash provided by operations................. 448,418 50,860
---------- ----------
CASH USED BY INVESTING ACTIVITIES
Capital expenditures and leasehold improvements........... (260,846) (48,372)
Proceeds from sale of property and equipment.............. 394 540
---------- ----------
Total cash used by investing activities........... (260,452) (47,832)
---------- ----------
CASH USED BY FINANCING ACTIVITIES
Members' contributions...................................... 4,201 --
Members' distributions...................................... (131,811) --
---------- ----------
Total cash used by financing activities........... (127,610) --
---------- ----------
Net increase in cash and cash equivalents................... 60,356 3,028
Cash and cash equivalents at beginning of period............ 1,178,937 1,175,909
---------- ----------
Cash and cash equivalents at end of period.................. $1,239,293 $1,178,937
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-70
200
AB CELLULAR HOLDING, LLC
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
AB Cellular Holding, LLC, a Delaware limited liability company (the
"Company"), was formed on November 13, 1998 as a joint venture of BellSouth
Cellular Corp. ("BLS") and AT&T Wireless Services ("AWS"). Effective November
13, 1998, AWS and BLS contributed their respective equity interests in Los
Angeles Cellular Telephone Company ("LACTC") and Houston Cellular Telephone
Company, LP ("HCTC") into the Company. In addition, AWS contributed cash of
approximately $1.1 billion to form the Company. This was not a merger, sale, or
assignment. Control over the Company resides with a Member Committee which
consists of four members, two of which are representatives of BLS and two of
which are representatives of AWS. The interest in the limited liability company
is effectively 44.385% for BLS and 55.615% for AWS.
The Company was formed by the conversion of LACTC into a limited liability
company under Delaware law, at which time the operation of LACTC became a
division (the "L.A. Division") of the Company. Under Delaware law, the form of
any entity may change (from a general partnership to a limited liability
company) but the entity remains the same and all rights of creditors and others
against LACTC continue to exist against the Company. New creditors will be
affected by the limitation of liability. Prior to November 13, 1998, BLS equity
ownership interest was effectively 60.1% and AWS equity ownership interest was
effectively 39.9%.
The L.A. Division is engaged principally in the construction and operation
of Domestic Public Cellular Radio Telecommunications Service in the Los Angeles,
California area. Cellular services provided by the L.A. Division are regulated
by the California Public Utilities Commission.
The Company has a wholly owned consolidated subsidiary, L.A. Cellular Long
Distance LLC, a limited liability company organized under the laws of Nevada. In
addition, the Company has newly formed wholly owned subsidiaries of Houston
Cellular Telephone Company, LP, Houston Cellular Holding Co., LLC and Wireless
Telecommunications Investment Co., LLC.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and present the operating results and financial position of the Company
and its subsidiaries. Significant intercompany balances and transactions have
been eliminated.
2. FORMATION OF SUBSIDIARIES
FORMATION OF HOUSTON CELLULAR TELEPHONE CO., LP
The Company's wholly owned subsidiary, HCTC, was organized as a limited
partnership under the laws of the State of Texas on October 5, 1998 for the
purpose of building and operating the Domestic Public Cellular Radio
Telecommunications Service in Houston, Texas. The assets and liabilities of HCTC
at the date of formation were comprised of the assets and liabilities of Houston
Cellular Telephone Company which was owned 43.75% by BLS and 56.25% by AWS. On
November 13, 1998, Galveston Mobile Partnership merged into HCTC, and HCTC
became the 87.3462% owner of Galveston Cellular Partnership ("GCP").
On November 13, 1998, the ownership interest in HCTC was revised, resulting
in HCTC being 99% owned by the Company and 1% owned by Houston Cellular Holding
Company, LLC ("HCHC").
F-71
201
AB CELLULAR HOLDING, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
FORMATION OF HOUSTON CELLULAR HOLDING CO., LLC
The Company's wholly owned subsidiary, HCHC, was organized as a limited
liability company under the laws of the State of Texas on October 2, 1998. On
November 13, 1998, the Company contributed a 1% ownership interest in HCTC.
FORMATION OF WIRELESS TELECOMMUNICATIONS INVESTMENT CO., LLC
The Company's wholly owned subsidiary, Wireless Telecommunications
Investment Co., LLC ("WTIC"), was organized as a limited liability company under
the laws of the State of Delaware on October 2, 1998.
3. SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of liquid investments with a maturity of
three months or less when purchased. Cash and cash equivalents are stated at
cost, which approximates market value.
RESTRICTED CASH
The California Public Utilities Commission ("CPUC") created California High
Cost Fund A & B ("CHCF"), a tax to subsidize the cost of phone services in
higher cost areas, and California Teleconnect Fund ("TCF"), a tax to provide
discounts in schools, libraries and hospitals on telecommunications usage. These
surcharge taxes are collected from wireless subscribers and were held, including
interest, by the Company until such time as the CPUC established a fund from
which these assessments could be transferred. In November 1999, the CPUC
established a fund and an assessment of $60,544, which was transferred,
including interest accrued at the seven-day compound yield on taxable money
market funds from February 1997.
INVENTORY
Inventory consists primarily of cellular phones and accessories held for
resale stated at the lower of cost (first-in, first-out) or market. Losses on
sales of cellular phones are recognized in the period in which sales are made as
a cost of acquiring subscribers.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the cost basis. Renewals and
betterments that materially extend the life of an asset are capitalized, while
maintenance and repair costs are charged to operations when incurred. Upon sale
or disposal of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any gains or losses are included
in the results of operations. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets.
F-72
202
AB CELLULAR HOLDING, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
Computer software costs are capitalized or expensed in accordance with
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use."
INTANGIBLE ASSETS
Intangible assets include customer lists, FCC licenses, and goodwill.
Customer lists are amortized using the sum-of-the-years digit method. FCC
licenses and goodwill are amortized using the straight-line method. The carrying
value of intangible assets is periodically reviewed to determine whether such
intangibles are fully recoverable from projected net cash flows of the related
business units. The amortization periods being used for the intangibles
represent the remaining years of their original estimated 40-year life at the
formation of the Company.
VALUATION OF LONG-LIVED ASSETS
The Company reviews long-lived assets and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The impairment loss is measured as the amount
by which the carrying amount exceeds the fair value of the asset as determined
by quoted market prices when available, or the present value of the expected
future cash flows.
REVENUE RECOGNITION
Revenues are recognized when earned. Access service and bundled service
packages are billed monthly in advance and are recognized the following month
when services are provided. Revenues for airtime usage are recognized monthly as
services are provided.
The revenue and related expenses associated with the sales of wireless
handsets and accessories are recognized when the products are delivered and
accepted by the customer.
ADVERTISING
Advertising costs are expensed as incurred. The advertising expense for the
periods ended December 31, 1999 and 1998 was $44,592 and $8,502, respectively.
INCOME TAXES
The Company itself does not provide for federal income tax, as the Company
is a limited liability company. The income and expenses are accordingly passed
on to its members. Due to the consolidation of its subsidiaries which are
required to file and pay federal and state income taxes, the financial
statements reflect the application of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" for the applicable
subsidiaries. In accordance with SFAS No. 109, the consolidated balance sheet
reflects deferred tax balances associated with the anticipated tax impact of
future income or deductions implicit in the consolidated balance sheet in the
form of temporary differences. Temporary differences primarily result from the
use of accelerated methods and shorter lives in computing depreciation for tax
purposes.
RISKS AND UNCERTAINTIES
The Company participates in a volatile industry with a concentration of
customers in two geographic areas that are characterized by industry-wide
competition for market share resulting in aggressive pricing practices,
continually changing customer demand patterns, growing competition and rapid
technological
F-73
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AB CELLULAR HOLDING, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
development. The Company's operating results could be adversely affected should
the Company be unable to anticipate customer demand accurately, to maintain
short design cycles while meeting evolving industry performance standards, to
manage its product transitions and inventory levels, to distribute its products
quickly in response to customer demand, to differentiate its products from those
of its competitors, or to compete successfully in the market for its new
products. Significant numbers of components are purchased from single sources
due to technology, availability, price, quality, or other considerations.
The Company provides cellular service and sells cellular telephones to a
diversified group of customers within concentrated geographical areas. Credit
evaluations of customers are performed by the Company, and collateral is
generally not required. Credit related losses are provided for as estimated by
the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101, which requires adoption by the end of fiscal year 2000,
provides guidance on the recognition, presentation, and disclosure of revenue in
the financial statements. The Company does not believe that the adoption of SAB
101 will have a significant effect on its financial condition or results of
operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company does not believe that adoption of SFAS No. 133,
which requires adoption for fiscal years beginning after June 15, 2000, will
have a significant effect on its financial condition or results in operations.
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at December 31:
ESTIMATED
DEPRECIABLE
LIVES
(IN YEARS) 1999 1998
----------- ---------- ----------
Land and improvements........................... 3-10 $ 41,762 $ 42,861
Cellular equipment.............................. 7-10 1,217,738 1,105,795
Noncellular equipment........................... 3-5 121,411 138,894
Other property, plant and equipment............. 3-5 70,542 24,013
Construction in progress........................ 71,661 49,432
---------- ----------
1,523,114 1,360,995
Less: Accumulated depreciation.................. (710,743) (636,337)
---------- ----------
Property and equipment, net..................... $ 812,371 $ 724,658
========== ==========
F-74
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AB CELLULAR HOLDING, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
5. INTANGIBLE ASSETS
Intangible assets are summarized as follows at December 31:
ESTIMATED
AMORTIZABLE
LIVES
(IN YEARS) 1999 1998
----------- ---------- ----------
Goodwill....................................... 25-30 $ 316,534 $ 316,534
Licenses....................................... 30-35 2,245,094 2,245,094
Customer lists................................. 5 26,106 26,106
---------- ----------
2,587,734 2,587,734
Less: Accumulated amortization................. (104,972) (13,907)
---------- ----------
Intangibles, net............................... $2,482,762 $2,573,827
========== ==========
6. OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows at December 31:
1999 1998
-------- --------
Accrued benefits............................................ $ 48,678 $ 30,030
Accrued taxes............................................... 5,470 3,712
Commissions payable......................................... 5,110 11,263
Deferred income............................................. 12,081 24,778
Other....................................................... 30,334 31,496
-------- --------
$101,673 $101,279
======== ========
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
During the periods ended December 31, 1999 and 1998, the Company leased
office space, retail store locations, cell sites, and certain equipment. Several
of these leases contained fixed escalation clauses. Rent expense for these
leases has been calculated on a straight-line basis over the term of the leases.
Total rent expense under these leases was $32,960 and $4,550 during the periods
ended December 31, 1999 and 1998, respectively.
Future minimum rental payments required under operating leases for
primarily real estate having initial or remaining noncancelable lease terms in
excess of one year as of December 31, 1999 are as follows:
2000........................................................ $ 30,950
2001........................................................ 23,644
2002........................................................ 17,973
2003........................................................ 13,146
2004........................................................ 10,206
Thereafter.................................................. 56,136
--------
$152,055
========
F-75
205
AB CELLULAR HOLDING, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
The real estate leases permit renewals at various intervals with provisions
for increased rentals of each renewal.
CONTINGENCIES
The Company is currently named as a defendant in the class actions of
Garabedian, et al. vs. LASMSA Limited Partnership, et al., Richard W. Thomas v.
Los Angeles Cellular Telephone Company, et al. and Eurus Cady v. Los Angeles
Cellular Corp., all which seek damages for alleged conspiracy to fix prices of
retail and wholesale service. The Orange County Superior Court approved a
settlement and entered a final judgment on May 20, 1998. The L.A. Division has
recorded a liability of $8,300 as of December 31, 1999 based upon the final
judgment referenced above. Three objectors to the settlement have appealed the
judgment.
The Company and its subsidiaries are a party to various legal proceedings
of a nature considered normal to its business. The Company believes it has
adequate legal defenses with respect to each of the suits and intends to
vigorously defend against the actions. However, it is reasonably possible that
these cases could result in outcomes unfavorable to the Company. The Company
currently believes that the amount of the ultimate probable loss would not have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
- Accounts receivable and accounts payable -- The carrying amount is a
reasonable estimate of fair value because of the short maturity of these
instruments.
9. BENEFITS PLANS
The Company sponsors defined contribution 401(k) and profit sharing plans
in which substantially all employees are eligible to participate upon completion
of six months of service. The 401(k) plan permits eligible employees to
contribute a portion of their basic compensation to the plan on a before tax
basis. The Company makes matching contributions equal to 100% of employee
before-tax contributions up to 2% of their basic compensation, and 50% of
employee before-tax contributions up to 6%. The Company's matching contributions
charged to expense amounted to $3,685 and $460 for the periods ended December
31, 1999 and 1998, respectively.
The profit-sharing plan allows the Company to make an annual discretionary
profit-sharing contribution based on the Company's overall performance and
profitability. Qualified employees receive a percentage of their eligible annual
earnings paid in one single contribution after the fiscal year end. The Company
elected to make a discretionary profit sharing contribution of $4,371 and $591
for the periods ended December 31, 1999 and 1998, respectively.
In January 1997, HCTC provided a phantom stock option plan (the "Plan") for
officers, directors and certain employees. The Plan required that 50% of the
value of the option award be provided in AT&T Corporation ("AT&T") stock units
and 50% of the value be issued in BellSouth Corporation ("BLS") stock units. In
January 1997, the Plan, which vests over a period of three years, provided
29,000 and 58,000 of AT&T and BLS stock units, respectively.
F-76
206
AB CELLULAR HOLDING, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
In January 1998, the Plan provided 42,750 and 85,500 of AT&T and BLS stock
units, respectively, which also vest over a period of three years. The shares
have been adjusted for stock splits.
In 1998, LACTC issued a total of 485 AT&T and BLS phantom stock ("PS")
options of which 259 were effective January 1, 1998 and 226 were effective
January 1, 1997 (as adjusted for stock splits). In 1999, no PS options were
issued. The PS options vest over a period of three years. Employees may exercise
their options upon vesting for up to five years after the date of grant. Upon
exercise, participants are paid based on the excess of the New York Stock
Exchange's previous day closing price over the grant option price.
Total employee benefit costs related to the HCTC and L.A. Division's
phantom stock options were $4,205 and $351, all of which were incurred and
expensed during the periods ended December 31, 1999 and 1998, respectively.
HCTC established an employee bonus plan based on the Company achieving its
objectives for business drivers such as revenues, net income, customer
satisfaction, and churn, as well as employees achieving at least a 2.00 rating
on their individual annual performance review. Each employee's bonus opportunity
is equal to a fixed percentage of his/her annual base salary, for which the
percentage is determined, based on the employee's position grade. The plan is
available to all regular full-time employees and those part-time employees
regularly scheduled to work at least 20 hours per week. Payment of bonuses are
made after the fiscal year end and after the performance review process, with
the exception of directors and officers for which payments are made on a
quarterly basis. The Company's bonus expenses were approximately $2,819 and $243
for the periods ended December 31, 1999 and 1998, respectively.
HCTC has a deferred compensation plan which provides certain eligible
employees a deferred cash payment which is earned after a specified period of
continuous service since the award date. The deferred compensation is accrued
but unfunded, and amounted to approximately $752 and $41 as of December 31, 1999
and 1998, respectively.
10. RELATED PARTY TRANSACTIONS
The Company purchases equipment and services from organizations that are
affiliated with the Company. Such equipment purchases amounted to $130,294 and
$0, and the purchases of such services amounted to $81,683 and $4,944, during
the periods ended December 31, 1999 and 1998, respectively. Accounts payable to
these related parties were $41,789 and $3,941 at December 31, 1999 and 1998,
respectively.
In addition, the Company provides cellular service to these related
parties. Revenues from these services amounted to $107,677 and $7,959 for the
periods ended December 31, 1999 and 1998, respectively. Accounts receivable from
these related parties were $53,397 and $8,203 at December 31, 1999 and 1998,
respectively.
The Company has also entered into an agreement with its members whereby the
member responsible for the management of a division of the Company is committed
to make contributions to or receive distributions from the Company for the
deficiency or excess of certain quarterly financial targets. Total contributions
from the members related to these agreements for the year ended December 31,
1999 were $47,315, of which $45,615 was unpaid at December 31, 1999. Total
distributions recorded to members related to these agreements for the year ended
December 31, 1999 were $1,442, which were payable at December 31, 1999.
F-77
207
AB CELLULAR HOLDING, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
11. DEFERRED INCOME TAXES
Significant components of the deferred tax assets and liabilities as of
December 31, 1999 and 1998 are as follows:
1999 1998
------- -------
Deferred tax liability
Property, plant and equipment............................. $(1,532) $(1,379)
------- -------
Total deferred tax liability...................... (1,532) (1,379)
------- -------
Deferred tax assets
Allowance for doubtful accounts........................... 40 33
------- -------
Total deferred tax assets......................... 40 33
------- -------
Net deferred tax liability........................ $(1,492) $(1,346)
======= =======
For the periods ended 1999 and 1998, $1,750 and $600, respectively, in
federal income tax were paid for GCP.
12. SUBSEQUENT EVENTS
During 1999, the Los Angeles operating division was audited by the City of
Los Angeles, relating to claims that the Los Angeles operating division failed
to collect utility user taxes from residents in various Los Angeles communities
between September 1995 and the present. On April 24, 2000, an official
assessment, including interest and penalties, was made in the amount of $7,450.
In February 2001, the city administrative panel of the City of Los Angeles
affirmed the city auditor's assessment relating to the alleged underpayment of
taxes by the Los Angeles operating division. As a result, the Company must pay
$8,141 to the City of Los Angeles. The Company has paid the entire assessment in
March 2001, and it will seek a hearing for reversal or a refund of a portion of
the assessment.
In December 2000, BLS exercised its option to redeem AWS's 55.615% interest
in the Company as part of the joint venture agreement described in Note 1, by
distributing to AWS the L.A. Division. As of December 31, 2000, BLS held the
remaining assets of the Company.
In early 2001, BLS contributed its interest in the Company to Cingular
Wireless LLC, a joint venture of BellSouth and SBC Communications.
F-78
208
CMT PARTNERS
CONSOLIDATED INCOME STATEMENTS AND CHANGES IN PARTNERS' EQUITY
(UNAUDITED -- IN THOUSANDS)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
------------- ----------
REVENUE
Services.................................................. $173,615 $173,802
Equipment................................................. 10,378 10,699
-------- --------
183,993 184,501
EXPENSES
Cost of services.......................................... 17,185 22,172
Cost of equipment......................................... 12,683 12,714
Selling, general and administrative....................... 49,180 59,656
Depreciation and amortization............................. 18,958 20,428
-------- --------
98,006 114,970
-------- --------
OPERATING INCOME............................................ 85,987 69,531
Equity in earnings of unconsolidated investment............. -- 10,429
Minority interest........................................... (5,344) (3,757)
-------- --------
NET INCOME.................................................. 80,643 76,203
Partners' equity, beginning of period....................... 336,556 568,005
Distributions to partners................................... (28,200) (38,182)
-------- --------
Partners' equity, end of period............................. $388,999 $606,026
======== ========
The accompanying notes are an integral part of these financial statements.
F-79
209
CMT PARTNERS
CONSOLIDATED BALANCE SHEETS
(UNAUDITED -- IN THOUSANDS)
AT MARCH 31, AT DECEMBER 31,
2000 1999
------------ ---------------
ASSETS
Current assets
Cash and cash equivalents................................. $ 24,524 $ 3,076
Accounts receivable:
Trade accounts receivable, net of allowance for
doubtful accounts of $4,413 and $4,007 in 2000 and
1999, respectively................................... 73,735 72,326
Equipment accounts receivable, net of allowance for
doubtful accounts of $1,565 and $1,293 in 2000 and
1999, respectively................................... 3,016 5,439
Other.................................................. 4,103 3,538
Inventory................................................. 14,201 14,158
Other current assets...................................... 4,681 4,282
-------- --------
Total current assets.............................. 124,260 102,819
Property and equipment, net of accumulated depreciation of
$243,824 and $225,440 in 2000 and 1999, respectively...... 331,744 306,756
Intangible assets, net of accumulated amortization of
$42,900 and $42,329 in 2000 and 1999, respectively........ 57,721 58,291
-------- --------
Total assets...................................... $513,725 $467,866
======== ========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 19,213 $ 10,636
Accrued expenses.......................................... 39,281 48,321
Other current liabilities................................. 53,399 61,071
-------- --------
Total current liabilities......................... 111,893 120,028
Other noncurrent liabilities................................ 2,890 3,189
-------- --------
Total liabilities................................. 114,783 123,217
Commitments and contingencies
Minority interest........................................... 9,943 8,093
Partners' equity............................................ 388,999 336,556
-------- --------
Total liabilities and partners' equity............ $513,725 $467,866
======== ========
The accompanying notes are an integral part of these financial statements.
F-80
210
CMT PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED -- IN THOUSANDS)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 80,643 $ 76,203
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 18,958 20,428
Minority interest...................................... 5,344 3,757
Earnings of unconsolidated investment.................. -- (10,429)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net...... 450 (4,574)
Increase in inventory................................ (401) (2,663)
Increase in other current assets..................... (46) (343)
Increase (decrease) in accounts payable.............. 8,577 (5,461)
Decrease in accrued expenses......................... (9,040) (9,628)
(Increase) decrease in other current liabilities..... (7,672) 868
-------- --------
16,170 (8,045)
-------- --------
Net cash provided by operating activities......... 96,813 68,158
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (43,373) (27,467)
Proceeds from sale of property and equipment.............. 3 31
Distributions from unconsolidated investment.............. -- 3,399
Decrease in intangibles, net.............................. (3) 118
-------- --------
Net cash used for investing activities............ (43,373) (23,919)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to partners of CMT.......................... (28,200) (38,182)
Distributions to minority interest holders................ (3,493) (2,200)
Decrease in long-term liability........................... (299) (271)
-------- --------
Net cash used for financing activities............ (31,992) (40,653)
-------- --------
Net increase in cash and cash equivalents......... 21,448 3,586
Cash and cash equivalents, beginning of period.............. 3,076 41,482
-------- --------
Cash and cash equivalents, end of period.................... $ 24,524 $ 45,068
======== ========
The accompanying notes are an integral part of these financial statements.
F-81
211
CMT PARTNERS
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS
CMT Partners (the Partnership) was formed on September 1, 1993 (inception)
pursuant to the Amended and Restated Partnership Agreement dated as of September
1, 1993 between subsidiaries of AirTouch Communications, Inc. (ATI), formerly
PacTel Corporation, and subsidiaries of AT&T Wireless Services, Inc. (AT&TWS),
formerly McCaw Cellular Communications, Inc. (MCCI). The Partnership is a
Delaware general partnership equally owned by ATI and AT&TWS through the
following contributions:
RELATIVE
CONTRIBUTIONS
TO CMT
PARTNERS
UPON
FORMATION
-------------
GENERAL PARTNERS
AIR TOUCH COMMUNICATIONS, INC.:
Bay Area Cellular Telephone Company (BACTC)................. 61.099%
Interest in A Block licensee in Dallas-Fort Worth, TX
(DFW)*.................................................... 33.915%
AT&T WIRELESS SERVICES, INC.:
Cagal Cellular Communications Corporation (Cagal)........... 80.370%
Salinas Cellular Telephone Company (Salinas)................ 85.930%
Napa Cellular Telephone Company (Napa)...................... 99.999%
Net operating assets of A Block licensee in Kansas City, MO
(Kansas City)*............................................ 100.000%
St. Joseph CellTelCo (St. Joseph)*.......................... 87.000%
Net operating assets of A Block licensee in Lawrence, KS
(Lawrence)*............................................... 100.000%
BACTC....................................................... 32.900%
The initial contributions were accounted for at the net book value of the assets
and liabilities of the entities. Each of the entities holds a license or
licenses from the Federal Communication Commission (FCC) and state authorities
to operate cellular telephone systems in Metropolitan Statistical Areas (MSAs)
as listed below:
Bay Area Cellular Telephone Company...................... San Francisco/San Jose, CA
Metroplex Telephone Company*............................. Dallas-Fort Worth, TX
Cagal Cellular Communications Corporation................ Santa Rosa, CA
Salinas Cellular Telephone Company....................... Salinas, CA
Napa Cellular Telephone Company.......................... Napa/Vallejo, CA
Net operating assets of A Block licensee*................ Kansas City, MO
St. Joseph CellTelCo*.................................... St. Joseph, MO
Net operating assets of A Block licensee*................ Lawrence, KS
These licenses are recorded as intangible assets.
---------------
* On October 1, 1999 all Kansas City and St. Joseph assets were distributed to
ATI and all interest in DFW was distributed to AT&TWS pursuant to a
Distribution Agreement dated September 1999.
F-82
212
CMT PARTNERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying interim consolidated financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results for such
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in CMT Partners Annual Financial Statements for the year
ended December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101, which requires adoption by the end of the fiscal year
2000, provides guidance on the recognition, presentation, and disclosure of
revenue in the financial statements. The Partnership does not believe that the
adoption of SAB 101 will have a significant effect on the financial condition or
results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Partnership does not believe that adoption of SFAS No.
133, which requires adoption for fiscal years beginning after June 15, 2000,
will have a significant effect on its financial condition or results of
operations.
3. LINE OF CREDIT
The Partnership has a revolving line of credit with a bank that allows for
borrowings of up to $3.0 million. There were no borrowings against this line or
interest expense incurred in either 1999 and 1998. Interest on all advances on
the line of credit accrue at the lesser of a variable rate equal to .50% below
the Prime rate or the LIBOR rate plus .90%. The line of credit agreement expires
on September 15, 2000.
4. RELATED PARTY TRANSACTIONS
The Partnership provides network support and associated services to AT&TWS
and ATI. During the first quarter of 2000 and 1999, revenue related to cellular
airtime and access charges from AT&TWS amounted to $32,138 and $24,248,
respectively. As a component of trade accounts receivable at March 31, 2000 and
1999, amounts due from AT&TWS totaled $14,093 and $8,185, respectively. During
the first quarter of 2000 and 1999, network support and associated services from
AT&TWS amounted to $7,577 and $5,467, respectively. As a component of accrued
expenses at March 31, 1999 and 1998, amounts due to AT&TWS totaled $2,360 and
$1,663, respectively.
F-83
213
CMT PARTNERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
During the first quarter of 2000 and 1999, revenue related to cellular
airtime and access charges from ATI amounted to $7 and $625, respectively. As a
component of trade accounts receivable at March 31, 2000 and 1999, amounts due
from ATI totaled $248 and $335, respectively. During the first quarter of 2000
and 1999, network support and associated services from ATI amounted to $218 and
$277, respectively. As a component of accrued expenses at March 31, 2000 and
1999, amounts due to ATI totaled $700 and $731, respectively.
5. SUBSEQUENT EVENT
On June 29, 2000, AT&T Wireless Group, through AT&TWS, completed the
acquisition of ATI's 50% interest in CMT Partners, thereby giving AT&T Wireless
Group a 100% ownership interest in the Partnership.
F-84
214
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of CMT Partners:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated income statement and changes in partners' equity, and of cash flows
present fairly, in all material respects, the consolidated financial position of
CMT Partners (the Partnership) at December 31, 1998, and the consolidated
results of its operations and its cash flows for the year ended December 31,
1998, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
March 31, 1999
F-85
215
CMT PARTNERS
CONSOLIDATED INCOME STATEMENTS AND CHANGES IN PARTNERS' EQUITY
(IN THOUSANDS)
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1999 1998
----------- ---------
(UNAUDITED)
REVENUE
Services.................................................. $ 721,174 $ 648,807
Equipment................................................. 44,507 42,356
--------- ---------
765,681 691,163
EXPENSES
Cost of services.......................................... 88,345 89,111
Cost of equipment......................................... 58,114 54,436
Selling, general and administrative....................... 274,777 229,542
Depreciation and amortization............................. 89,107 76,792
--------- ---------
510,343 449,881
--------- ---------
OPERATING INCOME............................................ 255,338 241,282
Equity in earnings of unconsolidated investment............. 37,233 35,442
Minority interest........................................... (11,252) (14,159)
--------- ---------
NET INCOME.................................................. 281,319 262,565
Partners' equity, beginning of period....................... 568,005 536,871
Distributions to partners................................... (512,768) (231,431)
--------- ---------
Partners' equity, end of period............................. $ 336,556 $ 568,005
========= =========
The accompanying notes are an integral part of these financial statements.
F-86
216
CMT PARTNERS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AT DECEMBER 31,
-----------------------
1999 1998
----------- --------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents................................. $ 3,076 $ 41,482
Accounts receivable
Trade accounts receivable, net of allowance for
doubtful accounts of $4,007 and $7,002 in 1999 and
1998, respectively.................................... 72,326 74,648
Equipment accounts receivable, net of allowance for
doubtful accounts of $1,293 and $539 in 1999 and 1998,
respectively.......................................... 5,439 10,117
Other.................................................. 3,538 3,271
Inventory................................................. 14,158 11,870
Other current assets...................................... 4,282 5,496
-------- --------
Total current assets.............................. 102,819 146,884
Property and equipment, net of accumulated depreciation of
$225,440 and $235,789 in 1999 and 1998, respectively...... 306,756 363,238
Unconsolidated investment, net of accumulated amortization
of $9,533................................................. -- 140,791
Intangible assets, net of accumulated amortization of
$42,329 and $41,809 in 1999 and 1998, respectively........ 58,291 66,253
-------- --------
Total assets...................................... $467,866 $717,166
======== ========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities
Account payable........................................... $ 10,636 $ 9,953
Accrued expenses.......................................... 48,321 64,051
Other current liabilities................................. 61,071 59,923
-------- --------
Total current liabilities......................... 120,028 133,927
Other noncurrent liabilities................................ 3,189 4,408
-------- --------
Total liabilities................................. 123,217 138,335
Commitments and contingencies (Note 10)
Minority interest........................................... 8,093 10,826
Partners' equity............................................ 336,556 568,005
-------- --------
Total liabilities and partners' equity............ $467,866 $717,166
======== ========
The accompanying notes are an integral part of these financial statements.
F-87
217
CMT PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1999 1998
----------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $281,319 $262,565
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 89,107 76,792
Minority interest......................................... 16,136 12,290
Earnings of unconsolidated investment..................... (37,233) (35,442)
(Loss) gain on disposition of property and equipment...... (3,562) 671
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net........ (13,214) 4,170
(Increase) decrease in inventory....................... (147) 119
Decrease (increase) in other current assets............ 119 (1,799)
Increase in accounts payable........................... 7,228 8,181
Decrease in accrued expenses........................... (17,217) (11,230)
Increase in other current liabilities.................. 8,756 24,546
(Decrease) increase in other noncurrent liabilities.... (1,084) 4,408
-------- --------
48,889 82,706
-------- --------
Net cash provided by operating activities............ 330,208 345,271
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (123,958) (86,358)
Proceeds from sale of property and equipment.............. 163 134
Distributions from unconsolidated investment.............. 26,690 26,513
Decrease in intangibles, net.............................. 223 679
-------- --------
Net cash used for investing activities............... (96,882) (59,032)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to partners of CMT.......................... (253,232) (231,431)
Distributions to minority interest holders................ (18,500) (15,023)
-------- --------
Net cash used for financing activities............... (271,732) (246,454)
-------- --------
Net (decrease) increase in cash and cash
equivalents......................................... (38,406) 39,785
Cash and cash equivalents, beginning of year................ 41,482 1,697
-------- --------
Cash and cash equivalents, end of year...................... $ 3,076 $ 41,482
======== ========
The accompanying notes are an integral part of these financial statements.
F-88
218
CMT PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
1. ORGANIZATION AND NATURE OF OPERATIONS
CMT Partners (the Partnership) was formed on September 1, 1993 (inception)
pursuant to the Amended and Restated Partnership Agreement dated as of September
1, 1993 between subsidiaries of AirTouch Communications, Inc. (ATI), formerly
PacTel Corporation, and subsidiaries of AT&T Wireless Services, Inc. (AT&TWS),
formerly McCaw Cellular Communications, Inc. (MCCI). The Partnership is a
Delaware general partnership equally owned by ATI and AT&TWS through the
following contributions:
RELATIVE
CONTRIBUTIONS
TO CMT
PARTNERS
UPON
FORMATION
-------------
GENERAL PARTNERS
AIR TOUCH COMMUNICATIONS, INC.:
Bay Area Cellular Telephone Company (BACTC)................. 61.099%
Interest in A Block licensee in Dallas-Fort Worth, TX
(DFW)*.................................................... 33.915%
AT&T WIRELESS SERVICES, INC.:
Cagal Cellular Communications Corporation (Cagal)........... 80.370%
Salinas Cellular Telephone Company (Salinas)................ 85.930%
Napa Cellular Telephone Company (Napa)...................... 99.999%
Net operating assets of A Block licensee in Kansas City, MO
(Kansas City)*............................................ 100.000%
St. Joseph CellTelCo (St. Joseph)*.......................... 87.000%
Net operating assets of A Block licensee in Lawrence, KS
(Lawrence)*............................................... 100.000%
BACTC....................................................... 32.900%
The initial contributions were accounted for at the net book value of the
assets and liabilities of the entities. Each of the entities holds a license or
licenses from the Federal Communication Commission (FCC) and state authorities
to operate cellular telephone systems in Metropolitan Statistical Areas (MSAs)
as listed below:
Bay Area Cellular Telephone Company...................... San Francisco/San Jose, CA
Metroplex Telephone Company*............................. Dallas-Fort Worth, TX
Cagal Cellular Communications Corporation................ Santa Rosa, CA
Salinas Cellular Telephone Company....................... Salinas, CA
Napa Cellular Telephone Company.......................... Napa/Vallejo, CA
Net operating assets of A Block licensee*................ Kansas City, MO
St. Joseph CellTelCo*.................................... St. Joseph, MO
Net operating assets of A Block licensee*................ Lawrence, KS
These licenses are recorded as intangible assets.
---------------
* On October 1, 1999 all Kansas City and St. Joseph assets were distributed to
ATI and all interest in DFW was distributed to AT&TWS pursuant to a
Distribution Agreement dated September 1999.
F-89
219
CMT PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CMT Partners
and the entities in which it owns a majority interest: BACTC, Cagal, Salinas,
Napa, Kansas City, St. Joseph, and Lawrence. Kansas City, St. Joseph and
Lawrence are only consolidated through September 30, 1999.
All significant inter-company balances and transactions have been
eliminated.
Prior to the distribution of DFW to AT&TWS on October 1, 1999, DFW, in
which CMT Partners exercised significant influence but which CMT Partners did
not control, was accounted for under the equity method of accounting. Under the
equity method, investments are stated at initial cost and are adjusted for CMT
Partners subsequent contributions and its share of earnings or losses, and
distributions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUES
Cellular airtime and access charges are recorded as revenue when earned.
Sales of equipment and related services are recorded when the goods and services
are delivered.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of investments with original maturities
of less than three months. The carrying amount approximates fair value because
of the short maturity of those instruments.
ALLOCATION OF PROFITS AND LOSSES
In general, profits and losses incurred by the Partnership are allocated to
the partners pro rata in accordance with their partnership ownership
percentages.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets.
DEPRECIABLE LIFE
----------------
Cellular equipment.......................................... 3 to 7 years
Cellular towers/shelters.................................... 5 to 15 years
Other....................................................... 3 to 7 years
Leasehold improvements are amortized using the straight-line method over
the shorter of the lease term or the estimated useful life of the asset.
When property and equipment are retired or sold, the cost and accumulated
depreciation of dispositions are removed from the accounts, and any gain or loss
is reflected in income.
F-90
220
CMT PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
Repairs and maintenance costs are charged to expense when incurred.
Renewals and betterments are capitalized and depreciated over the remaining
useful lives of the assets.
INVENTORY
Inventory consists of cellular phones and related equipment. Inventory is
stated at the lower of cost or market. Inventory cost is determined based upon
actual cost for inventory held at the warehouse and the average cost method for
inventory held at the retail stores.
INTANGIBLES
Intangible assets represent the contributed licenses from AT&TWS and ATI,
which are carried at the historic basis of the partners. The contributed
licenses are being amortized over forty years using the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121 (SFAS No. 121),
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, requires that long-lived assets and certain intangible assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If undiscounted expected future
cash flows are less than the carrying value of the assets, an impairment loss is
to be recognized based on the fair value of the assets. The Partnership
considers the requirements of SFAS No. 121 on an ongoing basis. No impairment
losses have been recognized to date.
INCOME TAXES
The income or loss of CMT Partners and its consolidated subsidiaries are
included in the tax returns of the individual partners. Accordingly, no
provision has been made for income taxes for these entities in the financial
statements.
MINORITY INTEREST
Minority interest represent these equity interest held by entities other
than CMT Partners in the St. Joseph, BACTC and Salinas markets and the
corporation serving the Cagal market.
ADVERTISING COSTS
The Partnership recognizes advertising and promotional expenses as
incurred. Total advertising expense for the years ended 1999 (unaudited) and
1998 was approximately $11,804 and $11,041 respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101, which requires adoption by the end of fiscal year 2000,
provides guidance on the recognition, presentation, and disclosure of revenue in
the financial statements. The Partnership does not believe that the adoption of
SAB 101 will have a significant effect on its financial condition or results of
operations.
F-91
221
CMT PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Partnership does not believe that adoption of SFAS No.
133, which requires adoption for fiscal years beginning after June 15, 2000,
will have a significant effect on its financial condition or results of
operations.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 consists of the
following:
1999 1998
----------- ---------
(UNAUDITED)
Land........................................................ $ 1,724 $ 1,752
Cellular property and equipment............................. 436,001 497,928
Administrative assets....................................... 56,974 62,443
--------- ---------
494,699 562,123
Less accumulated depreciation and amortization.............. (225,440) (235,789)
--------- ---------
269,259 326,334
Cellular property under construction........................ 37,497 36,904
--------- ---------
$ 306,756 $ 363,238
========= =========
Administrative assets primarily consist of office furniture and fixtures,
including leasehold improvements and computer equipment. Included in cellular
system under construction are engineering salaries, system design costs,
equipment and other costs directly associated with the construction of the
system. Fully depreciated assets in use at December 31, 1999 (unaudited) and
1998 amounted to $37,854 and $41,931, respectively.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
1999 1998
----------- -------
(UNAUDITED)
Accrued commissions......................................... $11,088 $ 8,120
Accrued network and inventory purchases..................... 9,577 23,935
Accrued operating expenses.................................. 24,216 17,157
Other accrued expenses...................................... 3,440 14,839
------- -------
Total accrued expenses...................................... $48,321 $64,051
======= =======
F-92
222
CMT PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
5. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
1999 1998
----------- -------
(UNAUDITED)
Taxes....................................................... $10,099 $32,441
Unearned revenue............................................ 14,342 2,045
Accrued wages and benefits.................................. 7,626 6,691
Employee bonuses............................................ 22,282 12,087
All other current liabilities............................... 6,722 6,659
------- -------
Total other current liabilities............................. $61,071 $59,923
======= =======
Certain tax payments have been withheld by the Partnership until an
appropriate trustee has been appointed. All collections relating to these taxes
have been placed in an interest bearing account subject to notification of
payment with the related liability in other current liabilities.
6. LINE OF CREDIT
The Partnership has a revolving line of credit with a bank that allows for
borrowings up to $3.0 million. There were no borrowings against the line of
credit or interest expense incurred in either 1999 (unaudited) and 1998.
Interest on all advances on the line of credit accrue at the lesser of a
variable rate equal to .50% below the prime rate or the LIBOR rate plus .90%.
The line of credit agreement expires September 15, 2000.
7. UNCONSOLIDATED INVESTMENT
The unconsolidated investment represents an investment in DFW. The purchase
price in excess of the DFW's share of net assets was $61.8 million and was being
amortized over approximately 35 years. On September 30, 1999, the Partnership
distributed the investment in DFW to AT&TWS pursuant to the Distribution
Agreement dated September 1999. The financial information of Metroplex Telephone
Company at September 30, 1999, December 31, 1998 and for the nine months ended
September 30, 1999 and for the year ended December 31, 1998 are shown below:
AT AND AT AND
FOR THE NINE FOR THE
MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
Current assets............................................. $ 49,617 $ 67,440
Noncurrent assets.......................................... 252,051 205,722
-------- --------
Total assets............................................... $301,668 $273,162
======== ========
Current liabilities........................................ $ 11,806 $ 9,902
Partners' equity........................................... 289,862 263,260
-------- --------
Total liabilities and partners' equity..................... $301,668 $273,162
======== ========
Revenue.................................................... $359,870 $353,665
Expenses................................................... 254,747 248,348
-------- --------
Net income................................................. $105,123 $105,317
======== ========
F-93
223
CMT PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
8. RELATED PARTY TRANSACTIONS
The Partnership provides network support and associated services to AT&TWS
and ATI. During 1999 (unaudited) and 1998, revenue related to cellular airtime
and access charges from AT&TWS amounted to $112,167 and $54,213, respectively.
As a component of trade accounts receivable at December 31, 1999 (unaudited) and
1998, amounts due from AT&TWS totaled $12,232 and $7,053, respectively. During
1999 (unaudited) and 1998, network support and associated services from AT&TWS
amounted to $29,022 and $18,004, respectively. As a component of accrued
expenses at December 31, 1999 (unaudited) and 1998, amounts due to AT&TWS
totaled $2,294 and $1,136, respectively.
During 1999 (unaudited) and 1998, revenue related to cellular airtime and
access charges from ATI amounted to $6,157 and $1,628, respectively. As a
component of trade accounts receivable at December 31, 1999 (unaudited) and
1998, amounts due from ATI totaled $290 and $329, respectively. During 1999
(unaudited) and 1998, network support and associated services from ATI amounted
to $1,138 and $999, respectively. As a component of accrued expenses at December
31, 1999 (unaudited) and 1998, amounts due to ATI totaled $801 and $827,
respectively.
9. EMPLOYEE CONTRIBUTION AND PROFIT SHARING PLAN
Employees of CMT Partners and its subsidiaries participate in a
contributory profit-sharing plan referred to as the Cellular One Section 401(k)
and Profit Sharing Plan (the Plan), formerly known as the Bay Area Cellular
Telephone Company 401(k) and Profit Sharing Plan, which qualifies as a cash or
deferred arrangement under Section 401(k) of the Internal Revenue Code. Upon
formation of CMT Partners, employees of the markets contributed by AT&TWS may
elect to participate in the Plan at any time. Otherwise, these employees may
maintain their contributions in AT&TWS's 401(k) plan.
The Plan allows participating employees to elect to contribute up to 15% of
their monthly salaries, to a maximum as prescribed by the Internal Revenue
Service. The Plan sponsor, CMT Partners, contributes to the Plan, on behalf of
each participating employee, an amount equal to 50% of the employee's
contribution, not to exceed 5% of the participant's salary. Contributions are
invested in eleven different funds. Under the 401(k) Plan, participants are at
all times fully vested. Under the profit sharing plan, CMT Partners contributes
a discretionary percentage of each eligible employee's salary. Employees vest in
the profit sharing plan over five years. CMT Partners contributed $6,062, and
$5,112, to the 401(k) and profit sharing plan for 1999 (unaudited) and 1998.
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Future minimum payments required under operating leases and agreements that
have an initial or remaining noncancelable lease term in excess of one year at
December 31, 1999 are summarized below:
YEAR ENDING DECEMBER 31,
------------------------ (UNAUDITED)
2000........................................................ $35,438
2001........................................................ 9,209
2002........................................................ 6,814
2003........................................................ 4,186
2004........................................................ 2,022
Thereafter.................................................. 4,003
-------
$61,672
=======
F-94
224
CMT PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
Rental expense for operating leases was $18,296 and $15,802, for the years
ended December 31, 1999 (unaudited) and 1998, respectively.
LITIGATION
On July 18, 1997, the federal District Court approved a stipulation of
settlement (the Settlement Agreement), resolving several class actions brought
against the Partnership, certain of its affiliates, and AT&TWS, among others in
1997 and 1996, alleging, among other things, that its affiliates and AT&TWS
inappropriately allocated expenses to the Partnership or removed Partnership
revenues for its own benefit. The plaintiff class includes all persons who owned
minority equity interests in the Partnership during the period defined in the
Settlement Agreement. The Settlement Agreement, which became effective on March
18, 1999, retroactively caps, reduces, and/or eliminates, from January 1, 1996,
until the year 2004, certain fees and charges the Partnership pays to its
affiliates and AT&TWS. In addition, the Settlement Agreement provides for a
common fund to be distributed to all class members and from which the fees of
class counsel will be paid. The impact of the Settlement Agreement has been
reflected in the accompanying financial statements.
In late 1998, the San Francisco County Superior Court preliminarily
approved a settlement resolving two class action suits alleging price fixing
between the Partnership and GTE Wireless in the Bay Area. In the aggregate, the
effects of this settlement are reflected in the Partnership's financial position
and results of operations.
The Partnership is a party to certain litigation in the ordinary course of
business and is also a party to routine filings with the FCC, state regulatory
authorities and other proceedings which management believes are immaterial to
the Partnership.
11. SUBSEQUENT EVENT (UNAUDITED)
On June 29, 2000, AT&T Wireless Group, through AT&TWS, completed the
acquisition of ATI's 50% interest in CMT Partners, thereby giving AT&T Wireless
Group a 100% ownership interest in the Partnership.
F-95
225
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1999 1998
-------- ---------
Revenues:
Service revenue........................................... $91,924 $ 89,980
Cellular telephone equipment revenue...................... 5,604 7,641
Other..................................................... 178 338
------- --------
97,706 97,959
------- --------
Costs and Expenses:
Cost of service........................................... 7,185 7,413
Cost of cellular telephone equipment...................... 13,877 10,664
General and administrative................................ 23,127 27,386
Marketing and selling..................................... 16,777 18,656
Depreciation and amortization............................. 16,335 22,098
Merger and other costs.................................... 3,056 --
------- --------
80,357 86,217
------- --------
Income From Operations...................................... 17,349 11,742
Interest Expense............................................ (8,686) (15,683)
Other, net.................................................. 903 288
------- --------
Net Income (Loss) Before Income Taxes, Losses on
Unconsolidated Investments and Extraordinary Item......... 9,566 (3,653)
Income Tax Expense.......................................... (3,195) 1,461
------- --------
Net Income (Loss) Before Losses on Unconsolidated
Investments and Extraordinary Item........................ 6,371 (2,192)
Losses on Unconsolidated Investments........................ (2,232) (14,566)
------- --------
Net Income (Loss) before Extraordinary Item................. 4,139 (16,758)
Extraordinary Loss on Extinguishment of Debt, net of income
tax benefit of $2,645..................................... -- (3,971)
------- --------
Net Income (Loss)........................................... $ 4,139 $(20,729)
======= ========
Net Income (Loss) Per Common Share:
Basic.....................................................
Net income (loss) before extraordinary item............ $ 0.10 $ (0.44)
Extraordinary item..................................... -- (0.11)
------- --------
Net income (loss)...................................... $ 0.10 $ (0.55)
======= ========
Diluted...................................................
Net income (loss) before extraordinary item............ $ 0.10 $ (0.44)
Extraordinary item..................................... -- (0.11)
------- --------
Net income (loss)...................................... $ 0.10 $ (0.55)
======= ========
Common Shares Used in Computing Per Share Amounts:
Basic..................................................... 39,665 37,844
Diluted................................................... 40,991 37,844
======= ========
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-96
226
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
AT AT
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including $16,625 held in
escrow................................................. $ 31,888 $ 34,038
Accounts receivable, net of allowances for doubtful
accounts of $8,649 and $9,798.......................... 49,569 54,917
Cellular telephone inventories............................ 11,282 13,696
Deferred income taxes, current............................ 10,886 10,374
Prepaid expenses.......................................... 3,373 2,554
--------- ---------
Total current assets.............................. 106,998 115,579
Investments................................................. 275,705 278,438
Property and Equipment, net of accumulated depreciation of
$189,710 and $175,686..................................... 336,110 345,108
Notes Receivable from Employees and Directors............... 8,672 8,270
Other Assets, net of accumulated amortization of $9,316 and
$8,957.................................................... 5,984 6,331
--------- ---------
Total assets...................................... $ 733,469 $ 753,726
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Deferred Income Tax Liability....................... $ 338 $ --
Accounts payable and accrued expenses....................... 56,815 80,876
--------- ---------
Total current liabilities................................... 57,153 80,876
--------- ---------
Noncurrent Deferred Income Tax Liability.................... 2,223 3,817
Long-Term Debt.............................................. 548,276 568,276
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock -- $.01 par value, 1,000 shares
authorized,
no shares issued....................................... -- --
Common stock, Class A -- $.01 par value, 250,000 shares
authorized, and 40,191 and 39,138 shares outstanding... 402 391
Common stock, Class B -- $.01 par value, 30,000 shares
authorized, no shares issued........................... -- --
Additional capital in excess of par value................. 306,528 285,618
Notes receivable from employees and directors............. (19,218) (19,218)
Accumulated deficit....................................... (161,895) (166,034)
--------- ---------
Total shareholders' equity........................ 125,817 100,757
--------- ---------
Total liabilities and shareholders' equity........ $ 733,469 $ 753,726
========= =========
The accompanying notes to condensed consolidated financial statements are an
integral part of these balance sheets.
F-97
227
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1999 1998
-------- ---------
Cash flows from operating activities:
Net income (loss)......................................... $ 4,139 $ (20,729)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 16,335 22,098
Amortization of deferred debt issuance costs........... 200 334
Net losses from unconsolidated investments............. 2,232 14,566
Net loss on dispositions............................... 69 7
Deferred income tax provision (benefit)................ 3,195 (4,106)
Extraordinary loss on extinguishment of debt........... -- 6,616
Changes in current items:
Accounts receivable, net............................. 5,348 1,798
Cellular telephone inventories....................... 2,414 2,228
Accounts payable and accrued expenses................ (12,142) (7,315)
Other, net........................................... (1,356) (60)
-------- ---------
Net cash provided by operating activities......... 20,434 15,437
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (16,839) (29,046)
Proceeds from dispositions of property and equipment...... 201 501
Payments for acquisition of investments................... (354) (16,232)
Capital contributions to unconsolidated entities.......... (1,146) (2,312)
-------- ---------
Net cash used in investing activities............. (18,138) (47,089)
-------- ---------
Cash flows from financing activities:
Principal payments of long-term debt...................... (20,000) (594,130)
Repurchase of common stock................................ -- (18,565)
Net proceeds from issuance of common stock................ 15,955 42
Proceeds of long-term debt................................ -- 653,000
Debt issuance cost........................................ -- (4,106)
Loans to shareholders and directors....................... (401) --
Decrease in other assets.................................. -- 3
-------- ---------
Net cash (used in) provided by financing
activities...................................... (4,446) 36,244
-------- ---------
Net (decrease) increase in cash............................. (2,150) 4,592
Cash, beginning of period................................... 34,038 2,487
-------- ---------
Cash, end of period......................................... $ 31,888 $ 7,079
======== =========
Supplemental disclosure of interest paid.................... $ 11,420 $ 11,515
Supplemental disclosure of income taxes paid................ -- --
-------- ---------
The accompanying notes to condensed consolidated financial statements are an
integral part of those statements.
F-98
228
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Vanguard
Cellular Systems, Inc. and Subsidiaries (the Company) have been prepared without
audit pursuant to Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission ("SEC"). Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's 1998 annual
report on Form 10-K.
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries and entities in which the Company holds a majority
ownership interest. Investments in entities in which the Company exercises
significant influence but does not exercise control through majority ownership
have been accounted for using the equity method of accounting. Ownership
interests in entities in which the Company does not exercise significant
influence and does not control through majority ownership and for which there is
no readily determinable fair value have been accounted for using the cost method
of accounting. Ownership interests in entities in which the Company does not
control through majority ownership and does not exercise significant influence
and for which there is a readily determinable fair value have been accounted for
as available for sale pursuant to the requirements of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." All significant intercompany accounts and transactions have
been eliminated.
NOTE 2 -- AT&T MERGER
On October 2, 1998, the Company entered into a definitive merger agreement
with AT&T Corp. (AT&T), the "Merger Agreement." Under the terms of the
agreement, the Company will be merged into a wholly owned subsidiary of AT&T and
each of the Company's outstanding shares of Class A Common Stock, par value $.01
per share (other than dissenting shares), will, at each shareholder's option, be
converted into the right to receive 0.59805 (as adjusted to reflect a
three-for-two stock split declared by AT&T on March 17, 1999) of a share of AT&T
common stock or $23.00 in cash and the Company will be merged into a wholly
owned subsidiary of AT&T. Such share exchange options are subject to the overall
limitation that the overall consideration for the Company's shares will consist
of 50% cash and 50% AT&T common stock. This proposed transaction has been
approved by the Company's board of directors and the board of directors of AT&T.
Ultimate consummation is subject to the approval of the Company's shareholders
who are expected to vote on the transaction in April 1999 and certain other
conditions.
In connection with the Merger Agreement with AT&T, certain officers and
affiliated entities of the Company entered into voting agreements with AT&T.
Under the voting agreements, each shareholder has agreed (i) to vote such
shareholder's shares in favor of approval of the merger proposal and against any
acquisition proposal from any other person other than AT&T, and (ii) if so
requested, to deliver to AT&T an irrevocable proxy with respect to such shares.
Vanguard has agreed to indemnify the shareholders from and against all expenses
(including reasonable attorneys' fees) incurred in connection with the defense
of any action (actual or threatened) arising out of the voting agreements up to
an aggregate of $1 million. Vanguard is not liable for any settlement, judgment
or award resulting from any such proceeding. Also under the voting agreements,
each shareholder has agreed not to dispose of such shareholder's shares, except
in certain limited cases for specified purposes. Generally, in the event of any
permitted disposal, AT&T has a right of first refusal to purchase any Vanguard
shares to be sold.
F-99
229
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Under pre-existing employment agreements with the Company, certain members
of management are eligible to receive lump sum payments upon a post-merger
termination of employment (as defined in the employment agreements). Such
payments will be computed as 2.99 times each employee's average annual total
cash compensation for the immediately preceding five years. Should each of the
eligible employees be terminated following the merger, the total payments to the
employees would be approximately $10.0 million.
In October 1998, the board of directors of the Company revised an existing
long term incentive plan that provides for the payment, upon consummation of the
AT&T merger, of approximately $1.6 million to certain members of management and
the board of directors. Further, the board of directors approved a resolution to
accelerate the vesting of all outstanding stock options upon consummation of the
AT&T merger.
In accordance with agreements entered into in July 1998 (which agreements
replaced prior agreements that were scheduled to expire in September 1998),
certain members of management and the board of directors are entitled to
receive, upon the consummation of the AT&T merger, payment equal to the amount
of income tax paid in 1991 and 1992 related to certain restricted stock awards.
Such payments, if made, are expected to total approximately $17.0 million.
Under the AT&T merger agreement, certain members of management and the
board of directors are eligible to receive loans from the Company in amounts
necessary to exercise vested stock options and to satisfy the tax withholding
associated therewith. Such loans would be part recourse and part nonrecourse and
would be secured by the shares of stock issued upon the exercise of such options
and amounts due to the individuals under certain employment arrangements with
the Company. Such loans would become due and payable upon the consummation of
the merger, to the extent of cash received by the individual in the merger and
90 days following the merger for any remaining balance. Should the merger fail
to occur, such loans will be due within five years from the date of the loan. As
of March 31, 1999, loans were outstanding to certain members of management and
the board of directors totaling $27.9 million.
The Company has incurred approximately $3.1 million of merger related costs
consisting primarily of investment advisor and other professional fees for the
three months ended March 31, 1999 and approximately $3.2 million for the year
ended December 31, 1998. These costs are included in merger and other costs on
the accompanying statement of operations.
F-100
230
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 3 -- INVESTMENTS
Investments consist of the following (in thousands):
AT AT
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
INVESTMENTS IN DOMESTIC CELLULAR ENTITIES:
Consolidated entities:
License cost........................................... $305,367 $305,360
Accumulated amortization............................... (48,454) (46,454)
-------- --------
256,913 258,906
Entities carried on the cost method......................... 4,146 4,179
-------- --------
261,059 263,085
-------- --------
INVESTMENTS IN OTHER ENTITIES:
Entities carried on the equity method:
Investment in equity securities........................ 70,401 68,875
Debentures, net of discount of $5,901 and $4,119....... 14,539 13,881
Loans.................................................. 31,692 31,297
Accumulated share of losses............................ (70,694) (67,408)
Valuation allowances on investments in SDL............. (31,292) (31,292)
-------- --------
14,646 15,353
-------- --------
$275,705 $278,438
======== ========
INVESTMENTS IN DOMESTIC CELLULAR ENTITIES
The Company's significant activity relating to its investments in domestic
wireless entities is discussed below:
Consolidated Entities and Entities on the Equity Method:
In September 1998, the Company sold for approximately $177 million in cash
its Pensacola, FL MSA and its Fort Walton Beach, FL RSA markets (the "Florida
Markets") as well as various minority interests in regional cellular licenses.
The purchaser required the Company to place $8.6 million of the purchase price
into an escrow fund for one year. These escrowed funds were to be held for
certain purchase price adjustments. The funds were distributed in October 1999.
In August 1998, the Company sold its 50% investment in a joint venture
known as Eastern North Carolina Cellular Joint Venture ("ENCCJV"), for $30
million in cash. The underlying net assets of the joint venture consisted
principally of its investment in the FCC licenses in the Wilmington, NC and
Jacksonville, NC MSA cellular markets. The Company recognized a third quarter
pretax gain of $147.9 million on the above two transactions.
In June 1998, the Company sold for approximately $162 million in cash its
Myrtle Beach, SC RSA market and related operations, and recognized a $117
million pretax gain on this sale in the second quarter of 1998. The purchaser
required the Company to place $8.0 million of the purchase price into an escrow
fund for one year. These escrowed funds are to be held for certain purchase
price adjustments. The funds were distributed in June 1999.
F-101
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In July 1998, the Company purchased NationPage, a leading regional paging
provider in Pennsylvania and New York, for approximately $28.5 million in cash.
In the first quarter of 1998, the Company participated in the Federal
Communications Commission's ("FCC") Local Multipoint Distribution Service
("LMDS") auction, which concluded on March 25, 1998. The Company was the high
bidder for 22 LMDS Basic Trading Area ("BTA") licenses, with an aggregate bid of
$8.9 million. The majority of these licenses are in the same markets as the
Company's existing cellular operations. In June 1998, the licenses were issued
and full payment was made to the FCC. LMDS frequencies may be used for a variety
of technologies, including traditional wireless telephony, competitive local
exchange service, and broadband data transmissions including Internet, video and
others.
NONCELLULAR INVESTMENTS
International Wireless Communications Holdings, Inc. and Foreign Investments
At March 31, 1999, the Company owned approximately 29% of the outstanding
stock of International Wireless Communications Holdings, Inc. ("IWC") and has
invested an aggregate of $25.1 million. IWC is a development stage company
specializing in securing, building and operating wireless businesses, primarily
in Asia and Latin America. International Wireless Communications Holdings, Inc.,
International Wireless Communications, Inc. Radio Movil Digital Americas, Inc.,
International Wireless Communications Latin America Holdings, Ltd. and Pakistan
Wireless Holdings Limited (collectively, "IWC") filed separate petitions for
relief under Chapter 11 of the United States Bankruptcy Code on September 3,
1998. Pursuant to Bankruptcy Court approval on October 28, 1998, the Company
provided IWC with post-petition debtor in possession financing in the amount of
$4.6 million on a senior secured and administrative priority basis (the
"Financing"). The Financing will mature upon the earlier of (i) October 20,
1999, (ii) the date of declaration of events of default by the Company (as
described in the Financing documents) and (iii) the effective date of an order
of the Bankruptcy Court confirming a plan or reorganization for any of the
above-referenced debtors. At IWC's option, the Financing, along with interest
and fees earned under the Financing, may be converted into equity of the
reorganized debtors under a plan of reorganization. The Financing was fully
funded by the Company in November 1998. The Company has also entered into an
Interim Operating Agreement with IWC ("Interim Operating Agreement") which
provides, among other things, that IWC is granted authority to exercise
day-to-day control over the Company's investment in Pakistan Mobile
Communications (Pvt) Ltd. ("PMCL") during the course of the Chapter 11 cases and
the Company is granted authority to exercise day-to-day control over IWC's
interest in Star Digitel Limited ("SDL") during the course of the Chapter 11
cases. The Bankruptcy Court approved the Interim Operating Agreement at a
hearing on October 28, 1998. By order entered on March 26, 1999, the Bankruptcy
Court approved the IWC reorganization plan.
During the first quarter of 1997, the Company entered into a stock purchase
agreement to purchase from an unrelated third party 7% of the outstanding shares
of Star Digitel Limited ("SDL"), a Hong Kong company whose principal business
activities relate to the provision and development of cellular
telecommunications services in the People's Republic of China. SDL is a
development stage company, and as such, is expected to incur operating losses
for the foreseeable future. The Company accounts for its investment using the
equity method of accounting. Through March 31, 1999, the Company has invested
$13.8 million in SDL and has provided $5.0 million in shareholder loans. In
addition, the Company has guaranteed obligations of SDL totaling $16.9 million,
which were called during the first quarter of 1999 and paid on April 13, 1999.
During 1997, the Company acquired a 12% equity interest in International
Wireless Communications Pakistan LTD ("IWCPL") for $7.0 million. IWCPL owns
approximately 59% of the equity in Pakistan Mobile Communications (Pvt) Ltd.
("PMCL"), a Pakistan company that owns and operates the cellular
F-102
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
license in Pakistan. Through March 31, 1999, the Company has invested $10.2
million in IWCPL, and has provided $3.6 million in debt financing. The Company
records its proportionate share of the losses of IWCPL under the equity method
of accounting. Through March 31, 1999, the Company has recognized losses
totaling $.9 million.
In connection with the IWC bankruptcy filing, the Company reevaluated the
net realizable value of the investment in Pakistan and in April 1999, the
Company recognized an additional loss of $13.3 million.
Inter-Act Systems, Incorporated.
As of March 31, 1999, the Company had invested $10.2 million in Inter-Act
Systems, Inc. ("Inter-Act") common stock and $8.0 million in Inter-Act preferred
stock for an ownership interest of approximately 24%. Inter-Act is a development
stage company that provides consumer product manufacturers and retailers
(currently supermarkets) the ability to offer targeted promotions to retail
customers at the point of entry of a retail outlet through an interactive
multi-media system utilizing ATM-like terminals.
During 1996, Inter-Act completed the sale of 142,000 units ("Units") of 14%
Senior Discount Notes due 2003, which have been exchanged for identical notes
registered with the SEC and warrants to purchase shares of common stock at $.01
per share. The Company purchased for $12.0 million a total of 18,000 Units
consisting of $18.0 million principal amount at maturity of these 14% Senior
Discount Notes and warrants to purchase 132,012 shares of common stock. At
issuance, the Company allocated, based upon the estimated fair values, $8.9
million and $3.1 million to the debentures and warrants purchased by the
Company, respectively. Effective September 30, 1997 and in accordance with the
warrant agreement, the shares of common stock eligible to be purchased with the
warrants held by the Company increased from 132,012 to 169,722. The shares
issuable upon the exercise of these warrants currently represent approximately
2% of Inter-Act's outstanding common stock. In addition, an existing warrant
held by the Company was restructured whereby the Company has the right to
acquire at any time prior to May 5, 2005 an aggregate of 900,113 shares of
common stock for $23.50 per share, which shares presently represent
approximately 10% of the outstanding common stock of Inter-Act.
Inter-Act has incurred net losses since its inception. Inter-Act received
approximately $91 million in net proceeds from the above financing which are
being used to accelerate the roll-out of its systems in retail supermarkets and,
as a result, the net losses incurred by Inter-Act are expected to grow
significantly in future years. The Company records its proportionate share of
these losses under the equity method of accounting. The Company's equity and
warrant investment was reduced to zero through the recognition of equity method
losses during 1997. In the third quarter of 1998, the Company invested an
additional $8.0 million in Inter-Act preferred stock and resumed recognition of
equity method losses at that time. As of March 31, 1999, the Company's remaining
investment in Inter-Act was again reduced to zero. However, the Company will
continue to recognize equity method losses related to its investment in bonds
until such investment is reduced to zero.
In addition to the current ownership held by the Company, certain officers,
directors and entities affiliated with certain directors of the Company maintain
an additional 27% ownership interest in Inter-Act.
Geotek Communications, Inc.
In 1994, the Company purchased from Geotek Communications, Inc. ("Geotek")
2.5 million shares of Geotek common stock for $30 million. In September 1995,
the Company purchased, for $5.0 million in cash, 531,463 shares of convertible
preferred stock of Geotek with a stated value of $9.408 per share.
F-103
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Geotek is a telecommunications company that is developing a wireless
communications network using its FHMA(R) digital technology. Under a management
agreement, the Company earned and recorded as revenue approximately 201,370
shares with an aggregate value of $2.1 million in 1996, and approximately
300,000 shares with an aggregate value of $2.4 million in 1995. The Company
currently owns less than 5% of Geotek's outstanding common stock.
During 1997, the Geotek common stock price, as quoted on the NASDAQ
National Market System, declined from $7.13 per share at December 31, 1996 to
$1.53 per share at December 31, 1997. Based on Geotek's historical performance,
including the significant decline in the market value of Geotek's common stock,
the Company's management made the determination that the decline in Geotek's
common stock price during 1997 was other than temporary and, accordingly,
recognized an impairment loss of $32.7 million in the fourth quarter of 1997 to
adjust the Company's investment in Geotek common stock to its market value at
December 31, 1997. On June 29, 1998, Geotek announced the filing of voluntary
petitions seeking protection under Chapter 11 of the Bankruptcy Code.
Accordingly, the Company recognized an impairment of approximately $10.0 million
in the second quarter to reduce its entire investment in Geotek to zero.
Geotek's common stock price as of June 30, 1998 was $0.16 per share, and Geotek
was delisted from NASDAQ with the close of business on that date.
NOTE 4 -- LONG-TERM FINANCING ARRANGEMENTS
At March 31, 1999, the Company's long-term financing arrangements consists
primarily of a $1.0 billion Credit Facility (as permanently reduced in 1998
through loan repayments) with various lenders and $3.3 million of Senior
Debentures due 2006. The Credit facility is senior to the Senior Debentures
through the use of structured subordination whereby Vanguard Cellular Systems,
Inc. ("Vanguard") is the borrower on the Senior Debentures and Vanguard Cellular
Financial Corp. ("VCFC"), Vanguard's only direct subsidiary, is the primary
obligor on the credit facility. As discussed below, the Company's Credit
Facility was refinanced in February 1998 and the majority of the Debentures were
tendered and retired in December 1998.
Long-term debt consists of the following as of March 31, 1999 and December
31, 1998 (in thousands):
AT AT
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
Debt of VCFC:
Borrowings under the 1998 Loan Agreement:
Facility A Loan........................................ $295,000 $565,000
Facility B Loan........................................ 250,000 --
-------- --------
$545,000 $565,000
Debt of Vanguard:
Senior Debentures due 2006................................ 3,276 3,276
-------- --------
$548,276 $568,276
======== ========
These borrowings were repaid by AT&T, subsequent to the AT&T merger.
F-104
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
CREDIT FACILITY OF VCFC
The Facility A and Facility B Loans are available to provide the Company
with additional financial and operating flexibility and enable it to pursue
business opportunities that may arise in the future. The Facility A Loan
consists of a $750 million senior secured reducing revolving credit facility
which allows for the issuance of up to $25 million of standby letters of credit.
The Facility B Loan consists of a $250 million 364-day revolving credit facility
which may be extended for an additional 364-day period upon the approval of the
lenders or converted to a term loan according to the terms and subject to
certain conditions of the Facility B Loan Agreement. On June 30, 1998, the
Company permanently reduced funds available for borrowing under its Facility A
Loan by paying down debt with $150 million of the proceeds from the sale of its
Myrtle Beach, SC RSA market. The Company further reduced debt, although not
permanently, with $165 million of the proceeds from the sale of its Florida
Markets. During the first quarter of 1999, the Company borrowed $250 million
against the Facility B, which was converted to a term loan, according to the
terms of the agreement. The proceeds were used to pay down a portion of the
Facility A loan.
Borrowings under the 1998 Loan Agreements bear interest at a rate equal to
the Company's choice of the Prime Rate or Eurodollar Rate plus an applicable
margin based upon a leverage ratio for the most recent fiscal quarter. The
ranges for this applicable margin are 0.0% to 0.25% for the Prime Rate and 0.5%
to 1.5% for the Eurodollar Rate. Based on the leverage ratio, computed as the
ratio of Total Debt (as defined) to Adjusted Cash Flow (as defined), as of March
31, 1999, the Company's applicable margins on borrowings under the 1998 Loan
Agreements are 0.00% and 0.75% per annum for the first quarter of 1999 for the
Prime Rate and Eurodollar Rate, respectively. Upon the occurrence of an event of
default as defined in the 1998 Loan Agreements, the applicable margin added to
both the Eurodollar Rate and the Prime Rate becomes 2.0%.
Upon the closing of the 1998 Loan Agreements, the Company paid fees of
approximately $4 million to the lenders. These fees and other costs incurred in
the refinancing have been recorded as a long-term asset in the first quarter of
1998 and will be amortized over the life of the agreements. Remaining
unamortized deferred financing costs of $6.6 million related to the 1994 Credit
Facility were expensed in the first quarter of 1998 and are reported on the
income statement as an extraordinary item. The extraordinary item recorded in
the first quarter of 1998, net of a related income tax benefit of $2.6 million,
totaled $4.0 million or $0.11 per share on a basic and diluted basis.
SENIOR DEBENTURES
In November 1998, the Company commenced a cash tender offer and consent
solicitation (the "Offer") relating to its $200 million outstanding principal
amount of 9 3/8% Senior Debentures (the "Debentures") due April 15, 2006. The
Company offered to purchase for cash any and all of the outstanding Debentures
and solicited consents (the "Solicitation") from registered holders of the
Debentures to proposed amendments which eliminated substantially all of the
covenants in the Debenture other than the covenants to pay principal and
interest on the Debentures. The Company offered a price of $1,107.54 per $1,000
principal amount of Debentures plus accrued and unpaid interest of $12.76 and a
consent payment of $30 per $1,000 of Debentures. As of the expiration date of
the offer, $196.7 million in principal amount of the total $200 million had been
tendered (and not withdrawn) and the requisite consents to the proposed
amendments were received. The remaining Debentures ($3.3 million in principal)
mature in 2006 with interest payable semi-annually and are redeemable at the
Company's option, in whole or in part, at any time on or after April 15, 2001.
The amendments eliminated virtually all of the
F-105
235
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
covenants of the Debentures. Amounts paid to retire the Debentures were paid
with borrowings under the 1998 Loan Agreements.
INTEREST RATE PROTECTION AGREEMENTS
The Company maintains interest rate swaps and interest rate caps which
provide protection against interest rate risk. At March 31, 1999, the Company
had interest rate cap agreements in place covering a notional amount of $300
million. The interest rate cap agreements provide protection to the extent that
LIBOR exceeds the strike level through the expiration date as follows (in
thousands):
STRIKE LEVEL NOTIONAL AMOUNT EXPIRATION DATE
------------ --------------- ---------------
7.5% $ 50,000 February, 1999
7.5 50,000 February, 1999
8.0 25,000 August, 1999
8.5 100,000 November, 2002
7.5 75,000 November, 2002
--------
$300,000
========
The total cost of the interest rate cap agreements in place at March 31,
1999 of $1.2 million has been recorded in other assets in the accompanying
consolidated balance sheet and is being amortized over the lives of the
agreements as a component of interest expense.
Additionally, at March 31, 1999, the Company maintains interest rate swap
agreements that fix the LIBOR interest rate at 6.10% on a notional amount of $50
million through October 2002 and at 5.62% on a notional amount of $100 million
through January 2003. Under these swap agreements, the Company benefits if LIBOR
interest rates increase above the fixed rates and incurs additional interest
expense if rates remain below the fixed rates. Any amounts received or paid
under these agreements are reflected as interest expense over the period
covered.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The new statement establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value and requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Application of this statement
is required for fiscal years beginning after June 15, 1999, and may be
implemented as early as fiscal quarters beginning June 16, 1998, but cannot be
applied retroactively. The Company has not applied this statement in the
financial statements contained herein.
NOTE 5 -- CAPITAL STOCK AND COMPREHENSIVE INCOME
Through February 1998, the Company's board of directors authorized the
repurchase of up to 7,500,000 shares of its Class A Common Stock from time to
time in open market or other transactions. As of March 31, 1999, the Company had
repurchased 4,677,100 shares of its Class A Common Stock at an average price of
approximately $15 per share.
During the second quarter of 1998, the Company entered into a total return
equity swap (the "Equity Swap") with a financial institution counterparty (the
"Counterparty"). Pursuant to the swap, the Company has the right to purchase
from the Counterparty on or prior to June 30, 2000, shares of Vanguard Cellular
Systems, Inc.'s Class A common stock ("Equity Swap Shares") at a price based
upon the Counterparty purchase price for said shares at initiation of the Equity
Swap. At each quarter end
F-106
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
during the term of the Equity Swap, the Company is required to settle any
decrease in the market value of the Equity Swap Shares below the Counterparty's
cost with shares of Vanguard Cellular Systems, Inc.'s Class A stock, or with
cash or a letter of credit in the amount of the decrease. In addition, the
Company is required to pay the Counterparty a quarterly fee equal to a
LIBOR-based rate on the Counterparty's adjusted cost to acquire the Equity Swap
Shares. Due to the Company's ability to issue shares to settle periodic price
fluctuations under the Equity Swap, the Company records all amounts received
(paid) under this arrangement as increases (decreases) to equity.
The purpose of the total return equity swap is to allow the Company to lock
in the current price of Vanguard stock in anticipation of, or in lieu of, a
future buyback, without the necessity of a present cash outlay. As of March 31,
1999, the Counterparty had acquired 112,800 shares of Vanguard Class A Common
Stock at an approximate cost of $2.1 million. Based on the closing stock price
of $27.31 at March 31, 1999, the market value of the Equity Swap Shares was
greater than the Counterparty's cost of such shares by $935,074.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company adopted SFAS No. 130 on
January 1, 1998. For the three months ended March 31, 1999 and 1998, total
comprehensive income (loss) of the Company was $4.1 million and ($22.3) million,
respectively.
NOTE 6 -- SUBSEQUENT EVENTS
CONSUMMATION OF AT&T MERGER
In April 1999, the shareholders of the Company approved the terms of the
Merger Agreement (Note 2). In May 1999, following the satisfaction of all other
conditions of closing, the AT&T Merger was consummated and the Company was
merged into Winston, Inc. ("Winston"), a Delaware corporation and a wholly owned
subsidiary of AT&T. At that time, the separate corporate existence of the
Company ceased and Winston continued as the surviving corporation.
INVESTMENT ACTIVITY AND LEGAL PROCEEDINGS
Inter-Act: During the first quarter of 1999, the Company recorded equity
method losses related to Inter-Act which equaled the remaining investment in
Inter-Act as of December 31, 1998. As a result, the Company suspended during the
first quarter of 1999, the recognition of further losses attributable to
Inter-Act. Inter-Act has continued to incur operating losses since the
consummation of the Company's merger with AT&T.
SDL: IWCH's initial plan for reorganization contemplated the exchange of
the Company's interests in IWCPL for IWCH's interests in SDL. The confirmation
of this plan occurred on March 26, 1999. As a result, the Company's remaining
investment in IWCPL, $13.1 million as of December 31, 1998, was transferred to
its investment in SDL. In March 1999, the Company assessed the realizability of
its investment in SDL through consideration of SDL's ability to continue as a
going concern. Because of SDL's financial difficulties, the Company concluded
that its investment in SDL was impaired and wrote off its remaining net carrying
value of $13.1 million investment in SDL. In addition, on April 13, 1999, the
Company paid $16.9 million in settlement of the outstanding loan guarantees for
SDL borrowings. SDL filed for bankruptcy in Hong Kong in 2000.
SDL filed a lawsuit against the Company on March 23, 1999 in California.
Such lawsuit was never served upon the Company or Winston and management
considers this matter to be closed.
F-107
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
IWCH Bankruptcy: On December 29, 1999, the Bankruptcy Court confirmed the
Third Amended Joint Chapter 11 Plan of Reorganization of IWCH (the Revised
Plan). The Revised Plan resulted in the public bondholders of IWCH and Toronto
Dominion (a commercial lender to IWCH) becoming the sole equity holders of the
post-bankruptcy reorganized IWCH ("New IWCH"). All previous equity holders of
IWCH, including Winston, were to receive, on a pro rata basis, New IWCH Series A
warrants with the potential to acquire up to 10% of the equity value of New IWCH
above a defined baseline valuation of $225 million.
In connection with the bankruptcy settlement, a Settlement Agreement,
Release and Covenant Not To Sue (Settlement Agreement) was entered into between
and among Winston, IWCH and its subsidiaries (the Debtors), the creditors'
committee appointed in the IWCH bankruptcy proceedings, certain present and
former officers and directors of IWCH, and certain other parties, including the
parties to two lawsuits filed against the Company and certain of its management
and board of directors ((Warburg Dillon Read, ET AL. v. Vanguard Cellular
Systems, Inc. ET AL) and (Loeb Partners Corporation, ET AL v. Griffin, ET AL.).
In the Settlement Agreement, all parties agreed to cease prosecuting any and all
existing IWCH claims, including the above litigation against Winston assumed in
its acquisition of the Company, in return for a settlement payment of $32.4
million. Winston's portion of the settlement payment totaled $23.3 million and
was deposited into an escrow account in December 1999. The escrow amount was
released in February 2000. The parties also agreed that no further claims would
be initiated relating to IWCH.
In addition to the above settlement, the Revised Plan included the
following settlement provisions:
- In full satisfaction and to fully discharge all amounts due Winston under
the post-petition debtor-in possession financing, previously made by the
Company to IWCH in the amount of $4.6 million (Note 3), IWCH distributed
377,946 shares of IWCH common stock to Winston.
- Winston forever waived its rights to any further distributions related to
its equity or debt holdings in IWCH and irrevocably agreed to be bound by
all provisions of the Revised Plan.
- Winston transferred all of its interests in IWCPL to a PWH, a subsidiary
of IWCH. In addition, Winston waived certain distributions to which it
would have been entitled arising out of certain indebtedness owed by the
Pakistan related entities.
- Winston received IWCH Series B Warrants and Pakistan Series A Warrants.
- Winston assigned and transferred all of its direct and indirect equity
interests (including options or other rights to purchase interests) in
SDL to a new subsidiary, New Vanguard China Inc. (NVC). Pursuant to the
Revised Plan, Winston became obligated to provide no less than $3.2
million in cash for capital calls to SDL, as needed. Additionally, NVC
assumed all obligations of IWCH and its affiliates related to SDL and
agreed to indemnify IWCH and its affiliates from any claims related to
its interests in SDL.
- IWCH transferred to NVC its entire direct and indirect equity interests
in SDL, together with all equity or profit participation interests in
SDL.
- NVC issued and distributed warrants (NVC Warrants) to IWCH. These
warrants gave reorganized IWCH the right to purchase up to 17.5% of the
issued and outstanding common stock of the New Vanguard China Inc. on a
fully diluted basis at a nominal exercise price of one cent per share.
- Winston provided letters of credit of approximately $10.0 million to
guarantee certain credit facilities maintained by IWCH and/or certain of
its subsidiaries.
F-108
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Pakistan Post-Effective Date Events: Subsequent to the Effective Date of
the Revised Plan, in March 2000, a Settlement and Release Agreement was entered
into by and among IWCH, PWH and Winston, as successor to Vanguard, as PWH sought
to sell its shares of IWCPL to an unrelated third party. In connection with the
IWCPL sale, the IWCH entities delivered to Winston the NVC Warrants and were
deemed to have transferred, released, waived and extinguished any entitlement
thereto. In addition, the purchaser of the IWCPL interests issued replacement
letters of credit for $10.0 million of letters of credit that Winston had
provided under the terms of the Revised Plan and secured releases of Winston
from each of the Banks upon which the original letters of credit were drawn.
Further, Winston was released from its $3.2 million SDL capital call obligation
and all existing or potential obligations related to SDL. In return, Winston
paid to IWCH $663 in cash and delivered to IWCH, all IWCH Common Stock and the
IWCH Series B Warrants that Winston received under the Revised Plan. Following
this transaction, Winston had disposed of all interests in IWCH and its
subsidiaries with the exception of the Pakistan Series A Warrants as part of
this IWCH settlement.
SDL Post Effective Date Events: During 2000, SDL filed for bankruptcy under
Hong Kong bankruptcy regulations. In July 2000, the Hong Kong bankruptcy court
appointed joint and several liquidators to wind up the operations of SDL.
Management does not believe it will recover any amounts of its past investments
during this liquidation process, nor does it believe it will be obligated for
further liabilities related to SDL.
F-109
239
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vanguard Cellular Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Vanguard
Cellular Systems, Inc. (a North Carolina corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, comprehensive income (loss), changes in shareholders' equity and
cash flows for each of the two years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vanguard Cellular Systems,
Inc. and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Greensboro, North Carolina,
March 22, 1999, except with respect to the
matters discussed in Note 12, as to which the
date is April 17, 2001.
F-110
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1998 1997
--------- --------
REVENUE:
Service revenue........................................... $ 385,826 $349,638
Cellular telephone equipment revenue...................... 34,984 23,328
Other..................................................... 896 1,552
--------- --------
421,706 374,518
--------- --------
COSTS AND EXPENSES:
Cost of service........................................... 30,187 34,443
Cost of cellular telephone equipment...................... 56,889 40,223
General and administrative................................ 106,892 100,913
Marketing and selling..................................... 76,244 75,794
Depreciation and amortization............................. 82,960 73,881
Merger and other costs.................................... 4,684 --
--------- --------
357,856 325,254
--------- --------
Income from operations...................................... 63,850 49,264
Interest expense............................................ (55,876) (57,257)
Net gains on dispositions of businesses..................... 251,024 --
Net gains (losses) on securities............................ 7,356 (32,440)
Other, net.................................................. 956 1,073
--------- --------
Income (loss) before income taxes, losses on unconsolidated
investments and extraordinary item........................ 267,310 (39,360)
Income tax (expense) benefit................................ (112,642) 38,022
--------- --------
Net income (loss) before losses on unconsolidated
investments and extraordinary item........................ 154,668 (1,338)
Losses on unconsolidated investments, net of income tax
benefit of $0 and $4,678.................................. (60,416) (8,689)
--------- --------
Income (loss) before extraordinary item..................... 94,252 (10,027)
Extraordinary loss on extinguishment of debt, net of income
tax benefit of $13,337.................................... (20,005) --
--------- --------
Net income (loss)........................................... $ 74,247 $(10,027)
========= ========
Earnings (loss) per common share -- basic:
Net income (loss) before extraordinary loss................. $ 2.54 $ (0.25)
Extraordinary loss, net of income tax benefit............... (0.54) --
--------- --------
Net income (loss)........................................... $ 2.00 $ (0.25)
========= ========
Weighted average number of common shares outstanding........ 37,156 40,224
========= ========
Earnings (loss) per common share -- assuming dilution:
Net income (loss) before extraordinary loss................. $ 2.43 $ (0.25)
Extraordinary loss, net of income tax benefit............... (0.52) --
--------- --------
Net income (loss)........................................... $ 1.91 $ (0.25)
========= ========
Weighted average number of diluted common shares
outstanding............................................... 38,791 40,224
========= ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-111
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
1998 1997
------- --------
Net income (loss)........................................... $74,247 $(10,027)
Other comprehensive income, net of income tax provision:
Unrealized holding gain (loss) on securities
Unrealized holding gain (loss) arising during period... (1,524) (18,187)
Less: Reclassification adjustment for losses included
in net income (loss).................................. 1,524 32,757
------- --------
Other comprehensive income, before income taxes........... -- 14,570
Income tax provision related to items of other
comprehensive income................................... -- (5,100)
------- --------
Other comprehensive income, net of income taxes........... -- 9,470
------- --------
Comprehensive income (loss)................................. $74,247 $ (557)
======= ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-112
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
AT DECEMBER 31,
---------------------
1998 1997
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including $16,625 held in
escrow.................................................. $ 34,038 $ 2,487
Accounts receivable, net of allowances for doubtful
accounts of $9,798 and $8,184........................... 54,917 54,340
Cellular telephone inventories............................ 13,696 18,826
Deferred income tax asset................................. 10,374 43,139
Prepaid expenses.......................................... 2,554 3,620
--------- ---------
Total current assets............................... 115,579 122,412
--------- ---------
INVESTMENTS................................................. 278,438 307,718
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Land...................................................... 1,331 2,432
Buildings................................................. 0 557
Cellular telephones held for rental....................... 23,189 33,505
Cellular telephone and paging systems..................... 377,058 382,012
Office furniture and equipment............................ 75,233 81,160
--------- ---------
476,811 499,666
Less -- Accumulated depreciation.......................... (175,686) (166,230)
--------- ---------
301,125 333,436
Construction in progress.................................. 43,983 37,907
--------- ---------
345,108 371,343
--------- ---------
NONCURRENT DEFERRED INCOME TAX ASSET........................ -- 9,447
--------- ---------
NOTES RECEIVABLE FROM EMPLOYEES AND DIRECTORS............... 8,270 --
--------- ---------
OTHER ASSETS, net of accumulated amortization of $8,957 and
$10,701................................................... 6,331 17,041
--------- ---------
Total assets....................................... $ 753,726 $ 827,961
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES -- Accounts payable and accrued
expenses.................................................. $ 80,876 $ 58,084
--------- ---------
NONCURRENT DEFERRED INCOME TAX LIABILITY.................... 3,817 --
--------- ---------
LONG-TERM DEBT.............................................. 568,276 768,967
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDERS' EQUITY:
Preferred stock -- $.01 par value, 1,000,000 shares
authorized, no shares issued............................ -- --
Common stock, Class A -- $.01 par value, 250,000,000
shares authorized, and 39,138,394 and 38,307,623 shares
issued and outstanding.................................. 391 383
Common stock, Class B -- $.01 par value, 30,000,000 shares
authorized, no shares issued............................ -- --
Additional capital in excess of par value................. 285,618 221,624
Notes receivable from employees and directors............. (19,218) --
Accumulated deficit....................................... (166,034) (221,097)
--------- ---------
Total shareholders' equity......................... 100,757 910
--------- ---------
Total liabilities and shareholders' equity......... $ 753,726 $ 827,961
========= =========
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
F-113
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
--------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
CLASS A CAPITAL IN NET UNREALIZED NOTES RECEIVABLE TOTAL
------------------- EXCESS OF HOLDING FROM EMPLOYEES ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT PAR VALUE GAIN/LOSS AND DIRECTORS DEFICIT EQUITY
---------- ------ ---------- -------------- ---------------- ----------- -------------
BALANCE, January 1, 1997..... 41,084,522 411 237,640 (14,570) -- (190,030) 33,451
Shares issued upon exercise
of stock options........... 17,550 -- 58 -- -- -- 58
Shares issued for cash....... 15,551 -- 178 -- -- -- 178
Shares repurchased and
retired.................... (2,810,000) (28) (16,252) -- (21,040) (37,320)
Net unrealized holding losses
recognized through
operations................. -- -- -- 14,570 -- -- 14,570
Net loss..................... -- -- -- -- -- (10,027) (10,027)
---------- ---- -------- -------- -------- --------- --------
BALANCE, December 31, 1997... 38,307,623 383 221,624 -- -- (221,097) 910
Shares issued upon exercise
of stock options........... 2,396,614 24 30,272 -- -- -- 30,296
Shares issued for cash....... 46,157 -- 727 -- -- -- 727
Equity swap fees............. -- -- (76) -- -- -- (76)
Shares repurchased and
retired.................... (1,612,000) (16) (9,326) -- -- (19,184) (28,526)
Recognition of deferred
income tax asset........... -- -- 42,397 -- -- -- 42,397
Loans to employees and
directors for sale of
stock...................... -- -- -- -- (19,218) -- (19,218)
Net income................... -- -- -- -- -- 74,247 74,247
---------- ---- -------- -------- -------- --------- --------
BALANCE, December 31, 1998... 39,138,394 $391 $285,618 $ -- $(19,218) $(166,034) $100,757
========== ==== ======== ======== ======== ========= ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-114
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1998 1997
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 74,247 $ (10,027)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 82,960 73,881
Amortization of deferred financing costs................ 1,563 1,983
Net losses from unconsolidated investments.............. 60,416 13,367
Net (gains) losses on dispositions of businesses and
securities............................................. (258,380) 32,440
Deferred income tax provision (benefit)................. 88,664 (42,700)
Extraordinary loss...................................... 33,342 --
Changes in current items:
Accounts receivable, net.............................. (7,720) (24,433)
Cellular telephone inventories........................ 4,808 (2,905)
Accounts payable and accrued expenses................. (10,211) 6,071
Other, net............................................ 957 (1,563)
----------- ---------
Net cash provided by operating activities.......... 70,646 46,114
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (86,568) (136,825)
Payments for acquisitions of investments.................. (67,856) (17,773)
Proceeds from dispositions of businesses and other........ 376,022 448
Capital contributions to unconsolidated affiliates........ (8,646) (706)
----------- ---------
Net cash provided by (used in) investing
activities....................................... 212,952 (154,856)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt...................... (1,184,417) --
Proceeds of long-term debt................................ 956,000 138,993
Debt issuance costs....................................... (4,106) --
Proceeds from termination of interest rate protection
agreements.............................................. 5,385 --
Repurchases of common stock............................... (28,602) (37,320)
Net proceeds from issuance of common stock................ 11,805 236
Loans to shareholders and directors....................... (8,270) --
Increase (decrease) in other assets....................... 158 (1,860)
----------- ---------
Net cash provided by (used in) financing
activities....................................... (252,047) 100,049
----------- ---------
NET INCREASE (DECREASE) IN CASH............................. 31,551 (8,693)
CASH, beginning of year..................................... 2,487 11,180
----------- ---------
CASH, end of year........................................... $ 34,038 $ 2,487
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE YEAR FOR:
INTEREST, net of amounts capitalized...................... $ 59,350 $ 52,812
INCOME TAXES.............................................. 10,300 --
=========== =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-115
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Vanguard Cellular Systems, Inc. ("Vanguard") (a North Carolina corporation)
through its only direct subsidiary, Vanguard Cellular Financial Corp. ("VCFC"),
is a provider of cellular telephone and paging services to various markets in
the eastern United States. The majority of Vanguard's operations are conducted
in the Mid-Atlantic SuperSystem covering areas of Pennsylvania, New York and New
Jersey. The primary activities of Vanguard, VCFC, its wholly owned subsidiaries
and its majority owned cellular entities (collectively referred to as the
"Company") include acquiring interests in entities that have been granted
nonwireline Federal Communications Commission ("FCC") permits to construct or
authorizations to operate cellular telephone and paging systems, and
constructing and operating cellular and paging systems.
All of the Company's cellular entities operate under the trade name of
CellularONE(R), which is the trade name many nonwireline carriers have adopted
to provide uniformity throughout the industry. The trade name is owned by a
partnership in which the Company holds a minority ownership interest.
Vanguard is a holding company which is the 100% shareholder of VCFC. This
organization was created to structurally subordinate Vanguard's $200 million in
Senior Debentures to VCFC's Credit Facility. (See Note 5 -- Long-Term Financing
Arrangements.)
NOTE 2 -- AT&T MERGER
On October 2, 1998, the Company entered into a definitive merger agreement
with AT&T Corp. (AT&T), the "Merger Agreement". Under the terms of the Merger
Agreement, each of the Company's outstanding shares of Class A Common Stock
(other than dissenting shares) will, at each shareholder's option, be converted
into the right to receive 0.59805 (as adjusted to reflect a three-for-two stock
split declared by AT&T on March 17, 1999) of a share of AT&T common stock or
$23.00 in cash and the Company will be merged into a wholly owned subsidiary of
AT&T. Such share exchange options are subject to the overall limitation that the
overall consideration for the Company's shares will consist of 50% cash and 50%
AT&T common stock. This proposed transaction has been approved by the Company's
board of directors and the board of directors of AT&T. Ultimate consummation is
subject to the approval of the Company's shareholders who are expected to vote
on the transaction in April 1999 and certain other conditions.
In connection with the Merger Agreement with AT&T, certain officers and
affiliated entities of the Company entered into voting Agreements with AT&T.
Under the voting agreements, each shareholder has agreed (i) to vote such
shareholder's shares in favor of approval of the merger proposal and against any
acquisition proposal from any other person other than AT&T, and (ii) if so
requested, to deliver to AT&T an irrevocable proxy with respect to such shares.
Vanguard has agreed to indemnify the shareholders from and against all expenses
(including reasonable attorneys' fees) incurred in connection with the defense
of any action (actual or threatened) arising out of the voting agreements up to
an aggregate of $1 million. Vanguard is not liable for any settlement, judgement
or award resulting from any such proceeding. Also under the voting agreements,
each shareholder has agreed not to dispose of such shareholder's shares, except
in certain limited cases for specified purposes. Generally, in the event of any
permitted disposal, AT&T has a right of first refusal to purchase any Vanguard
shares to be sold.
Under pre-existing employment agreements with the Company, certain members
of management are eligible to receive lump sum payments upon a post-merger
termination of employment (as defined in the employment agreements). Such
payments will be computed as 2.99 times each employee's average annual total
cash compensation for the immediately preceding five years. Should each of the
eligible employees be terminated following the merger, the total payments to the
employees would be approximately $10.0 million.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1998, the board of directors of the Company revised an existing
long term incentive plan that provides for the payment, upon consummation of the
AT&T merger, of approximately $1.6 million to certain members of management and
the board of directors. Further, the board of directors approved a resolution to
accelerate the vesting of all outstanding stock options upon consummation of the
AT&T merger.
In accordance with agreements entered into in July 1998 (which agreements
replaced prior agreements that were scheduled to expire in September 1998),
certain members of management and the board of directors are entitled to
receive, upon the consummation of the AT&T merger, payment equal to the amount
of income tax paid in 1991 and 1992 related to certain restricted stock awards.
Such payments, if made, are expected to total approximately $17.0 million.
Under the AT&T merger agreement, certain members of management and the
board of directors are eligible to receive loans from the Company in amounts
necessary to exercise vested stock options and to satisfy the tax withholding
associated therewith. Such loans would be part recourse and part nonrecourse and
would be secured by the shares of stock issued upon the exercise of such options
and amounts due to the individuals under certain employment arrangements with
the Company. Such loans would become due and payable upon the consummation of
the merger, to the extent of cash received by the individual in the merger and
90 days following the merger for any remaining balance. Should the merger fail
to occur, such loans will be due within five years from the date of the loan. As
of December 31, 1998, loans were outstanding to certain members of management
and the board of directors totaling $27.5 million.
Through December 31, 1998, the Company has incurred approximately $3.2
million of merger related costs consisting primarily of investment advisor and
other professional fees. These costs are included in merger and other costs on
the accompanying 1998 statement of operations.
NOTE 3 -- SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vanguard,
VCFC, its wholly owned subsidiaries and the entities in which it has a majority
ownership interest. Investments in which the Company exercises significant
influence but does not exercise control through majority ownership have been
accounted for using the equity method of accounting. Investments in which the
Company does not exercise significant influence or control through majority
ownership have been accounted for using the cost method of accounting. All
significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of these consolidated financial statements and footnote
disclosures required the use of certain estimates by management in determining
the Company's financial position and results of operations. Actual results could
differ from those estimates.
CELLULAR TELEPHONE INVENTORIES
Inventories, consisting primarily of cellular telephones held for resale,
are valued at the lower of first-in, first-out (FIFO) cost or market.
INVESTMENTS
Investments in Domestic Wireless Entities -- Investments in domestic
cellular entities consist of the costs incurred to acquire FCC licenses or
interests in entities that have been awarded FCC licenses to provide cellular
service, net of the Company's share of the fair value of the net assets
acquired, payments
F-117
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of other acquisition related expenses and capital contributions to
unconsolidated cellular entities. The Company's investments in consolidated
wireless entities are being amortized over forty years. Exchanges of minority
ownership interests in cellular entities are recorded based on the fair value of
the ownership interests acquired.
Investments in Other Entities -- Investments in other entities consist of
the Company's investments in International Wireless Communications Holdings,
Inc. ("IWC"), Star Digitel Limited ("SDL"), International Wireless
Communications Pakistan Ltd. ("IWCPL"), Inter-Act Systems, Incorporated
("Inter-Act"), Eastern North Carolina Cellular Joint Venture ("ENCCJV") and
Geotek Communications, Inc. ("Geotek"). The investments in IWC, SDL, IWCPL,
Inter-Act and ENCCJV are recorded using the equity method. The investment in
Geotek common stock is considered to be "available for sale" under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
The Company recognizes its pro rata share of the net income or losses
generated by the entities carried on the equity method of accounting in its
consolidated statements of operations (see Note 4).
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated on
a straight-line basis for financial reporting purposes over the following
estimated useful lives:
Buildings................................................... 20 years
Cellular telephones held for rental......................... 1.5 years
Cellular telephone systems.................................. 7-20 years
Office furniture and equipment.............................. 3-10 years
During 1998, the Company changed the depreciable lives of the rental phone
assets from 3 years to 1.5 years, which better reflects the useful life of this
equipment. This change increased depreciation expense by approximately $8.7
million or $0.23 per basic common share for the year ended December 31, 1998.
At December 31, 1998 and 1997, construction in progress was composed
primarily of the cost of uncompleted additions to the Company's cellular
telephone systems. The Company capitalized interest costs of $824,000 in 1998
and $1.3 million in 1997, as part of the cost of cellular telephone systems.
Maintenance, repairs and minor renewals are charged to operations as
incurred. Gains or losses at the time of disposition of property and equipment
are reflected in the statements of operations currently and were insignificant
in both years.
Cellular telephones are rented to certain customers generally with a
contract for a minimum stipulated length of service. Such customers have the
option to purchase the cellular telephone at any time during the term of the
agreement.
LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
reviews for the impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Under SFAS No. 121, an
impairment loss would be recognized when estimated future cash flows expected to
result from the use of the asset and its eventual disposition is less than its
carrying amount. Impairment losses are calculated as the difference between the
asset's carrying value and its estimated fair market value. Impairment losses
have been recorded by the Company related to its investments in Geotek and SDL
as discussed in Note 4.
F-118
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS
Other assets consist of the following at December 31, 1998 and 1997 (in
thousands):
1998 1997
------- --------
Deferred financing costs.................................... $ 4,217 $ 16,016
Acquired customer bases..................................... 8,190 8,190
Interest rate cap agreements................................ 1,209 1,569
Other....................................................... 1,672 1,967
------- --------
15,288 27,742
Accumulated amortization.................................... (8,957) (10,701)
------- --------
$ 6,331 $ 17,041
======= ========
Deferred financing costs are being amortized over the periods of the
related agreements. Amortization of $1.2 million and $2.0 million, has been
included in interest expense in each of the accompanying 1998 and 1997
consolidated statements of operations, respectively. Upon the closing of the
1998 Loan Agreements (Note 5), the Company paid fees of approximately $4.0
million to the lenders. These fees and other costs incurred in the refinancing
were recorded as a long-term asset in the first quarter of 1998 and will be
amortized over the lives of the agreements. Remaining unamortized deferred
financing costs of $6.6 million related to the 1994 Credit Facility were
expensed in the first quarter of 1998 and are included in the statement of
operations as an extraordinary item. Additionally, in connection with the Bond
Tender Offer (Note 5), remaining unamortized deferred financing costs of $4.4
million and the remaining unamortized bond discount of $145,000 related to the
Debentures were expensed in the fourth quarter of 1998 and are included in the
1998 statement of operations as an extraordinary item.
The acquired customer bases relate to the acquisitions of the Logan, WV
(WV-6) RSA in August 1996, the Union, PA (PA-8) RSA in January 1995, and the
Binghamton, NY and Elmira, NY MSAs in December 1994. The customer bases are
being amortized over a four-year period and, accordingly, amortization of $2.1
million has been included in the accompanying 1998 and 1997 consolidated
statements of operations.
The Company maintains interest rate cap agreements with certain major
financial institutions. These costs are being amortized over the lives of the
agreements, and accordingly, amortization of $633,000 and $243,000, has been
included in interest expense in the accompanying 1998 and 1997 consolidated
statements of operations, respectively.
REVENUE RECOGNITION
Service revenue is recognized at the time cellular and paging services are
provided and service fees related to prebilled services are not recognized until
earned. Cellular telephone equipment revenues consist primarily of sales of
cellular telephones to subscribers and are recognized at the time equipment is
delivered to the subscriber. During 1998, the Company began selling equipment
under a "twelve-month same as cash" program where the purchase price is billed
to the customer over the twelve month period. The revenue from the sale is
recognized when the equipment is delivered to the customer. Accordingly, there
are approximately $8.2 million of installment receivables included in the
December 31, 1998 accounts receivable balance.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the use of the "asset and
liability method" of accounting for income taxes.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accordingly, deferred income tax assets and liabilities are determined based on
the difference between the financial statement and income tax bases of assets
and liabilities, using enacted income tax rates in effect for the year in which
the differences are expected to reverse (see Note 7).
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments in the form of interest rate cap and swap
agreements are used by the Company in the management of its interest rate
exposures. Interest rate swap agreements modify the interest characteristics of
a portion of the Company's debt. Amounts paid or received under interest rate
swap agreements are accrued as interest rates change and are recognized over the
life of the swap agreements as an adjustment to interest expense. The related
receivable from, or amounts payable to, the counter-parties are included in
accounts receivable or accounts payable and accrued expenses. Interest rate caps
are used to lock in a maximum rate if rates rise, but enable the Company to
otherwise pay lower market rates. The costs of interest rate cap agreements are
included in interest expense ratably over the lives of the agreements. Payments
to be received as a result of the cap agreements are accrued as a reduction of
interest expense. The unamortized costs of the cap agreements are included in
other assets (see Note 5). The Company does not hold or issue financial
instruments for trading purposes.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed based upon the weighted
average number of common shares outstanding during the year. Diluted earnings
per common share for 1998 reflect the potential dilution that could occur if the
Company's outstanding options to issue common stock were exercised and converted
into common shares that then shared in the earnings of the Company. Diluted
earnings (loss) per common share is computed in accordance with the guidance
provided by SFAS No. 128, "Earnings Per Share."
All outstanding options at December 31, 1998 were included in the 1998
calculation. Options to purchase 4,870,802 shares at a weighted average exercise
price of $13.31 were outstanding as of December 31, 1997, but were not included
in the computation of diluted loss per common share because the effect would be
antidilutive.
STATEMENTS OF CASH FLOWS
Additional required disclosures of noncash investing and financing
activities for the years ended December 31, 1998 and 1997 are as follows:
The Company acquired property and equipment for cash and noncash
consideration, as follows (in thousands):
1998 1997
------- --------
Cash.................................................... $86,568 $136,825
Increase (decrease) in accounts payable................. 12,564 (15,163)
------- --------
$99,132 $121,662
======= ========
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- INVESTMENTS
Investments consist of the following as of December 31, 1998 and 1997 (in
thousands):
1998 1997
-------- --------
INVESTMENTS IN DOMESTIC WIRELESS ENTITIES:
Consolidated entities:
License cost...................................... $305,360 $297,142
Accumulated amortization.......................... (46,454) (43,696)
-------- --------
258,906 253,446
-------- --------
Entities carried on the equity method:
Cost.............................................. -- 10,193
Accumulated share of earnings..................... -- 1,960
-------- --------
-- 12,153
-------- --------
Entities carried on the cost method.................. 4,179 9,592
-------- --------
263,085 275,191
-------- --------
INVESTMENTS IN OTHER ENTITIES:
Entities carried on the equity method:
Investment in equity securities................... 68,875 40,794
Debentures, net of discount of $4,119 and
$6,449.......................................... 13,881 11,551
Loans............................................. 31,297 4,045
Accumulated share of losses....................... (67,408) (33,842)
Valuation allowances on investments in SDL........ (31,292) --
-------- --------
15,353 22,548
-------- --------
Investments carried as "available for sale":
Cost.............................................. -- 37,736
Net unrealized holding losses..................... -- (32,757)
-------- --------
-- 4,979
-------- --------
Other investments, at cost........................... -- 5,000
-------- --------
15,353 32,527
-------- --------
$278,438 $307,718
======== ========
INVESTMENTS IN DOMESTIC WIRELESS ENTITIES
The Company's significant activity relating to its investments in domestic
wireless entities is discussed below.
CONSOLIDATED ENTITIES AND ENTITIES ON THE EQUITY METHOD
In June 1998, the Company sold for approximately $162.0 million in cash its
Myrtle Beach, SC RSA market and related operations. The purchaser required the
Company to place $8.0 million of the purchase price into an escrow fund for one
year. These escrowed funds are to be held for certain purchase price
adjustments, if any, that may be identified by the purchaser and agreed to by
the Company. The date for post closing adjustments has passed, and management
does not anticipate such further adjustments to the purchase price.
F-121
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1998, the Company sold its 50% investment in a joint venture
known as Eastern North Carolina Cellular Joint Venture ("ENCCJV"), for $30
million in cash. The underlying net assets of the joint venture consisted
principally of its investment in the FCC licenses in the Wilmington, NC and
Jacksonville, NC MSA cellular markets.
In September 1998, the Company sold for approximately $177.0 million in
cash its Pensacola, FL MSA and its Fort Walton Beach, FL RSA markets as well as
various minority interests in cellular licenses (the "Florida Markets"). The
purchaser required the Company to place $8.6 million of the purchase price into
an escrow fund for one year. These escrowed funds are to be held for certain
purchase price adjustments, if any, that may be identified by the purchaser and
agreed to by the Company. Currently, management does not anticipate any material
adjustments to the purchase price.
As a result of the three dispositions, the Company recognized pre-tax gains
of $267.3 million during 1998.
In July 1998, the Company purchased NationPage, a leading regional paging
provider in Pennsylvania and New York, for approximately $28.5 million in cash.
Pro forma results of operations, as if the acquisition of NationPage had
occurred January 1, 1997 are as follows (in thousands, except per share data):
YEAR ENDED
DECEMBER 31,
--------------------
1998 1997
-------- --------
Revenue................................................ $426,870 $383,719
Net income (loss) before extraordinary item............ 92,742 (10,823)
Net income (loss)...................................... 72,737 (10,823)
Net income (loss) per share:
Basic................................................ $ 1.96 $ (0.27)
Diluted.............................................. 1.88 (0.27)
In the first quarter of 1998, the Company participated in the Federal
Communications Commission's ("FCC") Local Multipoint Distribution Service
("LMDS") auction, which concluded on March 25, 1998. The Company was the high
bidder for 22 LMDS Basic Trading Area ("BTA") licenses, with an aggregate bid of
$8.9 million. The majority of these licenses are in the same markets as the
Company's existing cellular operations. LMDS frequencies may be used for a
variety of technologies, including traditional wireless telephony, competitive
local exchange service, and broadband data transmissions including Internet,
video and others. The investment in LMDS licenses is being amortized over a
forty year period.
CELLULAR ENTITIES ON THE COST METHOD
The investment balance of approximately $4.2 million at December 31, 1998
represents the Company's investment in approximately 17 cellular markets with
ownership interests ranging from 0.27% to 12.44%. The Company holds these
ownership interests for investment purposes. As discussed above, the Company
sold various minority interests with a total cost of $4.8 million in conjunction
with the sale of its Florida Markets.
NONCELLULAR INVESTMENTS
International Wireless Communications Holdings, Inc. and Foreign Investments
At December 31, 1998, the Company owned approximately 29% of the
outstanding stock of IWC and has invested an aggregate of $24.8 million and had
provided loans of $5.7 million. IWC is a development stage company specializing
in securing, building and operating wireless businesses, primarily in Asia and
F-122
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Latin America. International Wireless Communications Holdings, Inc.,
International Wireless Communications, Inc., Radio Movil Digital Americas, Inc.,
International Wireless Communications Latin America Holdings, Ltd. and Pakistan
Wireless Holdings Limited filed separate petitions for relief under Chapter 11
of the United States Bankruptcy Code on September 3, 1998. Pursuant to
Bankruptcy Court approval on October 28, 1998, the Company has provided IWC with
post-petition debtor-in-possession financing in the amount of $4.6 million on a
senior secured and administrative priority basis (the "Financing"). The
Financing will mature upon the earlier of (i) October 20, 1999, (ii) the date of
declaration of events of default by the Company (as described in the Financing
documents) and (iii) the effective date of an order of the Bankruptcy Court
confirming a plan or reorganization for any of the above-referenced debtors
(which pursuant to the order of confirmation entered on March 26, 1999, could
occur any time on or after April 9, 1999). At IWC's option, the Financing, along
with interest and fees earned under the Financing, may be converted into equity
of the reorganized debtors under a plan of reorganization. The Financing was
fully funded by the Company in November 1998. The Company has also entered into
an Interim Operating Agreement with IWC ("Interim Operating Agreement") which
provides, among other things, that IWC is granted authority to exercise
day-to-day control over the Company's investment in Pakistan Mobile
Communications (Pvt) Ltd. ("PMCL") during the course of the Chapter 11 cases and
the Company is granted authority to exercise day-to-day control over IWC's
interests in SDL during the course of the Chapter 11 cases. The Bankruptcy Court
approved the Interim Operating Agreement at a hearing on October 28, 1998. By
order entered on March 26, 1999, the Bankruptcy Court approved the IWC
reorganization plan.
The Company accounts for its investment in IWC under the equity method of
accounting and, for the years ended December 31, 1998 and 1997, recognized
losses on this investment totaling $15.3 million and $1.5 million, respectively.
As of December 31, 1998 and 1997, the Company had recognized an amount of losses
on the equity method from IWC that was equal to the Company's equity investment
in IWC. As a result, the Company has suspended the recognition of losses
attributable to IWC until such time that the Company makes further investments
in IWC.
During the first quarter of 1997, the Company entered into a stock purchase
agreement to purchase from an unrelated third party 7% of the outstanding shares
of SDL, a Hong Kong company whose principal business activities relate to the
provision and development of cellular telecommunications services in the
People's Republic of China. SDL is a development stage company, and as such, is
expected to incur operating losses for the foreseeable future. The Company
accounts for its investment using the equity method of accounting. Through
December 31, 1998, the Company had invested $12.6 million in SDL and has
provided $5.0 million in shareholder loans. In addition, the Company had
guaranteed obligations of SDL totaling $16.9 million, of which $16.6 million
have been called during 1999; however, the funding has not yet occurred. SDL
requires capital to construct, operate and expand its cellular systems. During
1998, SDL sought additional third party debt or equity financing to continue its
operations. As of March 1999, SDL had been unsuccessful in obtaining additional
outside financing and its shareholders have not agreed to contribute sufficient
capital to maintain operations and pay its existing obligations. With the
uncertainty of SDL's ability to continue as a going concern in 1999, the Company
decided to write off its total investment in SDL resulting in a $14.4 million
charge to net losses from unconsolidated investments. In addition, the Company
accrued a liability totaling $16.9 million at December 31, 1998, representing
the expected funding of the Company's loan guarantees of SDL. For the years
ended December 31, 1998 and 1997, the Company recorded losses on its investment
in SDL of $33.7 million and $805,000, respectively.
During 1997, the Company acquired a 12% equity interest in IWCPL for $7.0
million. IWCPL owns approximately 59% of the equity in Pakistan Mobile
Communications (Pvt) Ltd. ("PLCL"), a Pakistan company that owns and operates
the cellular license in Pakistan. Through December 31, 1998, the Company had
invested $10.2 million in IWCPL, and has provided $3.6 million in debt
financing. The Company records its proportionate share of the losses of IWCPL
under the equity method of accounting.
F-123
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the years ended December 31, 1998 and 1997, the Company recognized losses on
this investment totaling $364,000 and $425,000, respectively.
In connection with IWC's bankruptcy filing, a Plan of Reorganization was
filed and upon the effective date of an order of the Bankruptcy Court confirming
a Plan of Reorganization, which could occur any time on or after April 9, 1999,
the Company will exchange its interest in IWCPL for IWC's interest in SDL. At
that point the Company will evaluate its $13.1 million net investment in
Pakistan with respect to its net realizable value as a part of SDL due to the
uncertainty of SDL's ability to continue as a going concern.
Inter-Act Systems, Incorporated
Inter-Act is a development stage company that provides consumer product
manufacturers and retailers (currently supermarkets) the ability to offer
targeted promotions to retail customers at the point of entry of a retail outlet
through an interactive multi-media system utilizing ATM-like terminals.
Inter-Act has incurred significant net losses since its inception. Such net
losses are expected to continue in future years as Inter-Act accelerates the
rollout of its systems in retail supermarkets.
As of December 31, 1998, the Company had invested $10.2 million in
Inter-Act common stock and $8.0 million in Inter-Act preferred stock for an
ownership interest of approximately 24%. Further, the Company has invested $12.0
million for 18,000 units of 14% Senior Discount Notes issued by Inter-Act
consisting of $18.0 million principal amount at maturity of the Notes and
warrants to purchase up to 169,722 shares of Inter-Act common stock. The Company
also holds additional warrants to purchase up to 900,113 shares of Inter-Act
common stock. Inter-Act shares issuable under warrants held by Vanguard
represent approximately 10% of the outstanding common stock of Inter-Act. In
addition to the current ownership held by the Company, certain officers,
directors and entities affiliated with certain directors of the Company maintain
an additional 27% ownership interest in Inter-Act.
The Company accounts for its investments in Inter-Act under the equity
method of accounting. As of June 30, 1998, the Company's total investment in
Inter-Act was reduced to zero through the recognition of equity method losses
and further loss recognition was suspended. In the third quarter of 1998, the
Company invested an additional $8.0 million in Inter-Act preferred stock and
resumed recognition of equity method losses at that time. As of December 31,
1998, the Company's remaining investment in Inter-Act, subject to future equity
method losses was $2.3 million. Total equity method losses related to Inter-Act
were $15.5 million and $11.0 million during 1998 and 1997, respectively.
Geotek Communications, Inc.
Geotek Communications, Inc. (Geotek) is a telecommunications company which
was formed to develop a wireless communications network using FHMA digital
technology. In 1994, the Company purchased from Geotek 2.5 million shares of
Geotek common stock for $30 million. In September 1995, the Company purchased,
for $5.0 million in cash, 531,463 shares of convertible preferred stock of
Geotek. Under a management agreement, the Company earned and recorded revenue on
approximately 500,000 shares of Geotek common stock with an aggregate value of
$7.7 million during 1994 through 1996.
During the fourth quarter of 1997, as a result of declines in the common
stock price of Geotek, the Company's management made the determination that its
investment in Geotek was impaired and recorded a loss of $32.7 million to adjust
the Company's investment in Geotek common stock to its market value at December
31, 1997. In June 1998, Geotek filed petitions seeking protection under Chapter
11 of the United States Bankruptcy Code. Geotek common stock was delisted from
NASDAQ on June 30, 1998. Geotek subsequently revised its filing to a Chapter 7
liquidation filing. Based on these actions, the
F-124
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's management made the determination that its remaining investment in
Geotek was permanently impaired and recognized a loss of approximately $10.0
million to reduce the investment to zero.
NOTE 5 -- LONG-TERM FINANCING ARRANGEMENTS
At December 31, 1998 the Company's long-term financing arrangements consist
primarily of a $1.0 billion Credit Facility (as permanently reduced in 1998
through loan repayments) with various lenders and $3.3 million of Senior
Debentures due 2006. The Credit Facility is senior to the Senior Debentures
through the use of structured subordination whereby Vanguard is the borrower on
the Senior Debentures and VCFC, Vanguard's only direct subsidiary, is the
primary obligor on the Credit Facility. As discussed below, the Company's Credit
Facility was refinanced in February 1998 and the majority of the Debentures were
tendered and retired in December 1998.
Long-term debt consists of the following as of December 31, 1998 and 1997
(in thousands):
1998 1997
-------- --------
Debt of VCFC:
Borrowings under the 1998 Loan Agreements:
Facility A Loan................................... $565,000 $ --
Facility B Loan................................... -- --
Borrowings under the 1994 Credit Facility:
Term Loan......................................... -- 325,000
Revolving Loan.................................... -- 244,000
Other Long-Term Debt................................. -- 130
-------- --------
$565,000 $569,130
Debt of Vanguard:
9 3/8% Senior Debentures due 2006, net of unamortized
discount of $0 and $163........................... 3,276 199,837
-------- --------
$568,276 $768,967
======== ========
CREDIT FACILITY OF VCFC
In February 1998, the Company completed the closing of an amendment to the
1994 Credit Facility, increasing the facility to $1.0 billion pursuant to the
Third Amended and Restated Facility A Loan Agreement (Facility A Loan) and the
Facility B Loan Agreement (Facility B Loan), (collectively, the 1998 Loan
Agreements), with various lenders.
The Facility A and Facility B Loans are available to provide the Company
with additional financial and operating flexibility and enable it to pursue
business opportunities that may arise in the future. The Facility A Loan
consisted of a $750 million senior secured reducing revolving credit facility
which allows for the issuance of up to $25 million of standby letters of credit.
On June 30, 1998, the Company permanently reduced funds available for borrowing
under its Facility A loan by paying down debt with $150 million of the proceeds
from the sale of its Myrtle Beach SC, RSA market. The Facility B Loan consisted
of a $250 million 364-day revolving credit facility which may be extended for an
additional 364-day period upon the approval of the lenders or converted to a
term loan according to the terms and subject to certain conditions of the
Facility B Loan Agreement. Subsequent to December 31, 1998, the Company borrowed
$250 million against the Facility B which was converted to a term loan according
to the terms of the agreement. The proceeds were used to pay down part of the
outstanding balance on the Facility A Loan.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Borrowings under the Facility A and Facility B Loans bear interest at a
rate equal to the Company's choice of the Prime Rate or Eurodollar Rate plus an
applicable margin based upon a leverage ratio for the most recent fiscal
quarter. The ranges for this applicable margin are 0.0% to 0.25% for the Prime
Rate and 0.5% to 1.5% for the Eurodollar Rate. Based on the leverage ratio,
computed as the ratio of Total Debt (as defined) to Adjusted Cash Flow (as
defined), as of December 31, 1998, the Company's applicable margins on
borrowings under the Facility A and Facility B Loans are 0.00% and .625% per
annum for the first quarter of 1999 for the Prime Rate and Eurodollar Rate,
respectively. Upon the occurrence of an event of default as defined in the
Facility A and Facility B Loan agreements, the applicable margin added to both
the Eurodollar Rate and the Prime Rate becomes 2.0%.
The outstanding amounts of the Facility A and Facility B Loans as of
September 30, 2000 are to be repaid in increasing quarterly installments
commencing on September 30, 2000 and terminating at the maturity date of
December 31, 2005. The quarterly installment payments begin at 2.5% of the
outstanding principal amount at September 30, 2000 and gradually increase to
6.875% of the outstanding principal amount. As discussed above, the Company
borrowed funds under the Facility B Loan subsequent to December 31, 1998 and has
converted the borrowings to a term loan maturing on December 31, 2005. In the
event of a merger with AT&T, the facilities are to be repaid in full and
terminated within sixty days after the closing date of the merger.
The outstanding commitment under the Facility A Loan is reduced and the
outstanding borrowings under the Facility B term loan are due quarterly as
follows:
PERCENTAGE OF
OUTSTANDING LOANS
-----------------
1999........................................................ --
2000........................................................ 5.0
2001........................................................ 15.0
2002........................................................ 15.0
2003........................................................ 17.5
2004........................................................ 20.0
2005........................................................ 27.5
-----
100.0%
=====
Upon closing of the 1998 Loan Agreements, the Company paid fees of
approximately $4.0 million to the lenders. These fees and other costs incurred
in the refinancing were recorded as a long-term asset in 1998 and are being
amortized over the lives of the agreements. Remaining unamortized deferred
financing costs of $6.6 million related to the 1994 Credit Facility were
expensed in 1998 and are included on the Statement of Operations as an
extraordinary item. The Company must pay to the lenders a commitment fee equal
to either 0.375% or 0.25% of the aggregate unborrowed balance of the available
Facility A commitment and 0.2% or 0.15% of the aggregate unborrowed balance of
the Facility B commitment during the terms of the loans based upon the Leverage
Ratio for the most recent fiscal quarter.
Borrowings under the 1998 Loan Agreements are secured by the stock of VCFC
and Vanguard Cellular Operating Corp., direct or indirect wholly owned
subsidiaries of the Company. Among other restrictions, the 1998 Loan Agreements
limit the payment of cash dividends, limit the use of borrowings, limit the
creation of additional long-term indebtedness and require the maintenance of
certain financial ratios. The requirements of the 1998 Loan Agreements were
established in relation to projected capital needs and projected results of
operations and cash flow. These requirements generally were designed to require
continued improvement in operating performance such that the Company's cash flow
would be
F-126
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sufficient to continue servicing the debt as repayments are required. As of
December 31, 1998, VCFC is in compliance with all loan covenants.
SENIOR DEBENTURES OF VANGUARD
On April 10, 1996, Vanguard issued $200 million aggregate principal amount
of 9 3/8% Senior Debentures due 2006 (the "Debentures") through an underwritten
public offering. The Debentures were issued at a price to the public of 99.901
for a yield of 9.384%. The net proceeds from the sale of the Debentures of
approximately $194.8 million were used to reduce borrowings under the Revolving
Loan portion of the Credit Facility and pay approximately $844,000 of expenses
in connection with an amendment to the Credit Facility. The Credit Facility was
amended to permit issuance of the Debentures and to require the structural
subordination of the Debentures by making VCFC the primary obligor of the Credit
Facility and all liabilities of the Company (other than the Debentures) and the
owner of all stock and partnership interests of the Company's operating
subsidiaries.
During November 1998, the Company commenced a cash tender offer and consent
solicitation (the "Offer") of the Debentures. The Company offered to purchase
for cash any and all of the outstanding Debentures and solicited consents (the
"Solicitation") from registered holders of the Debentures to proposed amendments
which eliminated substantially all of the covenants in the Debenture other than
the covenants to pay principal and interest on the Debentures. The Company
offered a price of $1,107.54 per $1,000 principal amount of Debentures plus
accrued and unpaid interest of $12.76 and a consent payment of $30 per $1,000 of
Debentures. As of the expiration date of the offer, $196.7 million in principal
amount of the total $200.0 million had been tendered (and not withdrawn) and the
requisite consents to the proposed amendments were received. The remaining
Debentures ($3.3 million in principal) mature in 2006 with interest payable
semi-annually and are redeemable at the Company's option, in whole or in part,
at any time on or after April 15, 2001. The amendments eliminated virtually all
of the covenants of the Debentures. Amounts paid to retire the Debentures were
paid with borrowings under the 1998 Loan Agreements.
In connection with the Offer and the closing of the 1998 Loan Agreements,
an extraordinary loss was recorded consisting of the following components (in
thousands):
Costs in excess of principal (Debentures)................... $ 27,057
Manager fee and other costs (Debentures).................... 505
Unamortized bond issuance costs and discount (Debentures)... 4,549
Unamortized debt issuance costs (1994 Credit Facility)...... 6,616
Proceeds from termination of reverse interest swap
transactions.............................................. (5,385)
--------
33,342
Income tax benefit of the above transactions................ (13,337)
--------
$ 20,005
========
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future maturities of the principal amount outstanding of all long-term
financing arrangements at December 31, 1998 were as follows (in thousands):
1999........................................................ $ 0
2000........................................................ 28,250
2001........................................................ 84,750
2002........................................................ 84,750
2003........................................................ 98,875
Thereafter.................................................. 271,651
--------
$568,276
========
INTEREST RATE PROTECTION AGREEMENTS
The Company maintains interest rate swaps and interest rate caps which
provide protection against interest rate risk. At December 31, 1998 and 1997 the
Company had interest rate cap agreements in place covering a notional amount of
$300 million and $500 million, respectively. The interest rate cap agreements
provide protection to the extent that LIBOR exceeds the strike level through the
expiration date as follows (in thousands):
1998
------------------------------------------------
STRIKE LEVEL NOTIONAL AMOUNT EXPIRATION DATE
------------ --------------- ---------------
7.5% $ 50,000 February 1999
7.5 50,000 February 1999
8.0 25,000 August 1999
8.5 100,000 November 2002
7.5 75,000 November 2002
--------
$300,000
========
1997
------------------------------------------------
STRIKE LEVEL NOTIONAL AMOUNT EXPIRATION DATE
------------ --------------- ---------------
7.5% $ 50,000 February 1999
7.5 50,000 February 1999
8.0 25,000 August 1999
9.5 100,000 October 2002
9.5 100,000 October 2002
8.5 100,000 November 2002
7.5 75,000 November 2002
--------
$500,000
========
The total cost of the interest rate cap agreements in place at December 31,
1998 of $1.2 million has been recorded in other assets in the accompanying 1998
consolidated balance sheet and is being amortized over the lives of the
agreements as a component of interest expense. During 1998, the Company
terminated two of the cap agreements and included approximately $294,000 of
unamortized costs in interest expense.
Additionally, at December 31, 1998 the Company maintains interest rate swap
agreements that fix the LIBOR interest rate at 6.10% on a notional amount of $50
million through October 2002 and at 5.62% on a notional amount of $100 million
through January 2003. Under these swap agreements, the Company benefits if LIBOR
interest rates increase above the fixed rates and incurs additional interest
expense if rates remain below the fixed rates. Any amounts received or paid
under these agreements are reflected as interest expense over the period
covered.
During December 1998, in connection with the Offer described above, the
Company received $5.4 million for the termination of certain reverse interest
rate swap agreements with Toronto Dominion and NationsBank. The proceeds were
recorded on the Statement of Operations as a reduction of the extraordinary loss
on the extinguishment of debt.
The effect of interest rate protection agreements on the operating results
of the Company was to decrease interest expense by $171,000 in 1998 and increase
interest expense by $16,000 in 1997.
F-128
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The new statement establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value and requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Application of this statement
is required for fiscal years beginning after June 15, 1999, and may be
implemented as early as fiscal quarters beginning June 16, 1998, but cannot be
applied retroactively.
The Company has not applied this statement in the financial statements
contained herein. The estimated fair value of interest rate cap and swap
agreements presented below is based on quoted market prices as if the agreements
were entered into on the measurement date (in thousands):
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
$831 $(4,035) $1,464 $(868)
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
As of December 31, 1998, Vanguard owned approximately 29% of the
outstanding common stock of International Wireless Communications Holdings, Inc.
("IWCH"). Vanguard's investment in IWCH has a carrying value of zero. IWCH is a
development stage company specializing in securing, building and operating
wireless businesses, primarily in Asia and Latin America. IWCH and its
affiliates, International Wireless Communications, Inc., Radio Movil Digital
Americas, Inc., International Wireless Communications Latin America Holdings,
Ltd. and Pakistan Wireless Holdings Limited filed separate petitions for relief
under Chapter 11 of the United States Bankruptcy Code on September 3, 1998. A
Plan of Reorganization (the "Plan") was submitted by IWCH.
On January 22, 1999, a group of IWCH shareholders filed a complaint in the
Supreme Court of the State of New York (Warburg Dillon Read, ET AL. v. Vanguard
Cellular Systems, Inc. ET AL) against Vanguard and certain of Vanguard's and
IWCH's directors and officers, alleging fraud and misrepresentation in
connection with the merger of Radio Movil Digital Americas into a subsidiary of
IWCH. The complaint seeks $81 million in compensatory damages and $325 million
in punitive damages. The plaintiffs are former Radio Movil shareholders who
received IWCH Series I Preferred Stock as consideration in the merger.
In addition, on December 16, 1998, another group of IWCH shareholders, who
formerly were Radio Movil Shareholders, filed a complaint in the U.S. District
Court for the District of Delaware (Loeb Partners Corporation, ET AL v. Griffin,
ET AL.) against present and former officers and directors of IWCH (including
certain present and former officers and directors of Vanguard) seeking damages
in excess of $3.5 million with respect to the Radio Movil transaction. In
addition, in the course of the IWCH bankruptcy proceeding, certain other
shareholders of IWCH have asserted in the filings with the court that they have
claims against Vanguard or individual current or former officers and directors
of Vanguard in connection with IWCH.
On March 26, 1999, the bankruptcy court confirmed the IWCH plan of
reorganization as submitted with one modification. Upon the effective date,
which could occur any time on or after April 9, 1999, Vanguard and Vanguard
officers and directors are released from claims by IWCH and IWCH bondholders
under the release provisions of the Plan. Direct (i.e., non-derivative) claims
against Vanguard or its officers and directors by shareholders of IWCH,
including those stated in the above referenced suits, are not released under the
Plan, as modified. The Company believes that the allegations of the shareholder
suits are without merit and intends to vigorously defend such suits.
F-129
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 16, 1999, the Company received a letter from a California attorney
purporting to represent SDL, in which he threatened that SDL would sue Vanguard,
a Vanguard affiliate, and a director of Vanguard, on the grounds that Vanguard,
the Vanguard affiliate and the Vanguard director failed to fulfill certain
alleged promises to raise funds for SDL, to assist SDL in finding a strategic
investment partner, and to assist SDL in resolving disputes with a commercial
equipment supplier. The letter asserts that the damages could exceed $500
million. SDL filed suit containing causes of action for breach of contract,
fraud and misrepresentation, consistent with the above description, in Federal
District Court in Los Angeles on March 23, 1999. The Company believes that the
allegations of the suit are without any merit and intends to vigorously defend
such litigation.
Other legal proceedings pending against the Company or any of its
subsidiaries are routine filings with the FCC and state regulatory authorities
and customary regulatory proceedings pending in connection with acquisitions and
interconnection rates and practices, proceedings concerning the
telecommunications industry generally and other proceedings arising in the
ordinary course of business.
Management believes, even if resolved unfavorably to the Company, the above
legal proceedings would not have a materially adverse effect on the Company's
business.
OPERATING LEASES
The Company leases office space, furniture, equipment, vehicles and land
under noncancelable operating leases expiring through 2019. As of December 31,
1998, the future minimum rental payments under these lease agreements having an
initial or remaining term in excess of one year were as follows (in thousands):
1999........................................................ $ 13,800
2000........................................................ 13,092
2001........................................................ 12,330
2002........................................................ 11,451
2003........................................................ 10,922
Thereafter.................................................. 99,644
--------
$161,239
========
Rent expense under operating leases was $13.8 million and $12.9 million,
for the years ended December 31, 1998 and 1997, respectively.
CONSTRUCTION AND CAPITAL COMMITMENTS
Capital expenditures for 1999 are estimated to be approximately $70.0
million to $80.0 million, and are expected to be funded primarily with
internally generated funds.
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES
Deferred income taxes are provided for the temporary differences between
the financial reporting and tax basis of the Company's assets and liabilities.
The components of net deferred income taxes as of December 31, 1998 and 1997
were as follows (in thousands):
1998 1997
-------- --------
Deferred income tax assets:
Net operating loss carryforwards..................... $ 52,564 $122,926
Property and equipment............................... 228 --
Alternative minimum tax credits...................... 6,191 891
Accumulated losses of unconsolidated investments..... 23,814 --
Other liabilities and reserves....................... 6,545 6,280
Less: Valuation allowance......................... (23,814) (31,439)
-------- --------
Total deferred income tax assets............. 65,528 98,658
-------- --------
Deferred income tax liabilities:
Investments and other intangibles.................... (58,971) (45,630)
Property and equipment............................... -- (442)
-------- --------
Total deferred income tax liabilities........ (58,971) (46,072)
-------- --------
Net deferred income taxes............................ $ 6,557 $ 52,586
======== ========
As of December 31, 1998, the Company has cumulative net deferred income tax
assets (before valuation allowance) totaling approximately $30.3 million. The
net deferred income tax asset is composed of $89.3 million of gross deferred
income tax assets and $59.0 million of gross deferred income tax liabilities.
The gross deferred income tax assets consist primarily of the income tax effect
of Federal net operating loss carryforwards ("NOL's") of approximately $104
million. These losses may be used to reduce future taxable income and expire
periodically through 2017. Included in the NOL carryforward are additional
income tax deductions arising from restricted stock bonuses, stock options and
stock purchase warrants ("Equity NOL's"). The recognition of this component
results in a direct increase to shareholders' equity. Gross deferred income tax
assets also include timing differences related to reserves and accruals, basis
differences in property and equipment, cumulative losses on unconsolidated
investments and alternative minimum tax credit carryforwards. Deferred income
tax liabilities consist primarily of basis differences in cellular licenses.
Prior to 1996, the Company incurred significant financial reporting and tax
losses primarily as a result of substantial depreciation, amortization and
interest expenses associated with acquiring and developing its cellular markets
and substantial marketing and other operating costs associated with building its
subscriber base. Although substantial net deferred income tax assets were
generated during these periods, a valuation allowance was established because in
management's assessment the historical operating results made it uncertain
whether the net deferred income tax assets would be realized.
In evaluating the realizability of its net deferred income tax assets
(before valuation allowance) at December 31, 1997, the Company considered the
expected effects of certain planned market and asset disposition transactions.
These transactions were expected to generate substantial taxable income to
utilize a significant portion of the accumulated NOL's. As a result, the Company
had recognized, as of December 31, 1997, a net deferred income tax asset of
$52.6 million. A valuation allowance of $31.4 million was retained on certain
assets due to uncertainties as to their realizability. These assets consisted of
the Equity NOL's. The disposition transactions discussed previously were
consummated during 1998 and generated taxable income to the Company of
approximately $285.0 million. As a result, the Company
F-131
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
utilized the NOL's to offset the Federal and partially offset the state income
taxes that would have been due on these gains.
For the years ended December 31, 1998 and 1997, the Company's benefit
(provision) for income taxes (including the income tax effects of losses on
unconsolidated investments and extraordinary items) consisted of the following
(in thousands):
1998 1997
-------- -------
Deferred................................................ $(88,664) $42,700
Current Federal......................................... (5,300) --
State................................................... (5,341) --
-------- -------
$(99,305) $42,700
======== =======
In addition to the provision recorded, the Company recognized deferred
income tax assets during the fourth quarter of 1998 totaling approximately $11.0
million related to Equity NOL's generated with the exercise of certain stock
options. This recognition was recorded as a direct increase to shareholders'
equity.
A reconciliation between income taxes computed at the statutory Federal
rate of 35% and the reported income tax (provision) benefit (including the
income tax effects of losses on unconsolidated investments and extraordinary
items) is as follows (in thousands):
DECEMBER 31,
-------------------
1998 1997
-------- -------
Amount at statutory Federal rate........................ $(66,658) $18,454
State income taxes net of Federal benefit............... (3,472) --
Change in valuation allowance........................... (23,814) 32,805
Other................................................... (5,361) (8,559)
-------- -------
Income tax benefit...................................... $(99,305) $42,700
======== =======
The remaining valuation allowance at December 31, 1997 of $31.4 million
related to the Equity NOL's was reversed during the third quarter of 1998 with a
direct increase to shareholders' equity as it was determined by management that
it was more likely than not that the Equity NOL's were realizable. During 1998,
management recorded a valuation allowance on capital losses incurred during the
year on certain unconsolidated investments due to uncertainties as to when and
whether these assets will be realized in the future. As of December 31, 1998, a
valuation allowance of $23.8 million remains related to losses accumulated
during 1998 on these investments.
The primary differences between the accumulated deficit for financial
reporting purposes and the income tax loss carryforwards relate to the
differences in the treatment of certain deferred cellular license acquisition
costs, certain gains on dispositions of cellular interests, partnership losses,
depreciation methods, estimated useful lives and compensation earned under the
stock compensation plan. These carryforwards may be subject to annual limitation
in the future in accordance with the Tax Reform Act of 1986 and the ability to
use these carryforwards could be significantly impacted by a future "change of
control" of the Company. The limitations, if any, arising from the AT&T Merger
are not expected to be significant.
NOTE 8 -- CAPITAL STOCK AND COMPREHENSIVE INCOME
ACQUISITION OF CELLULAR INTERESTS
The Company has registered 4,500,000 shares of its Class A common stock and
3,000,000 shares of its Class B common stock. The shares may be offered in
connection with the acquisition of entities which
F-132
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have received or may receive an authorization or license from the FCC to provide
cellular service. Through December 31, 1998, 2,707,957 of these registered
shares of Class A common stock have been issued in conjunction with the
acquisition of cellular markets.
STOCK COMPENSATION PLANS
During 1994, the board adopted the 1994 Long-Term Incentive Plan (the "1994
Plan"). Under the provisions of the 1994 Plan, the Company may grant up to
6,000,000 shares of the Company's Class A common stock to officers, directors
and key employees in the form of nonqualified stock options, incentive stock
options, stock appreciation rights, unrestricted stock, restricted stock and
performance shares. During 1996, the board adopted the 1996 Stock Option Plan
for Non-Employee Directors (the "1996 Plan"). Under the provisions of the 1996
Plan, the Company may grant up to 100,000 shares of the Company's Class A common
stock to non-employee directors of the Company in the form of nonqualified stock
options. All stock options must require exercise prices of not less than the
fair market value of the Company's Class A common stock on the date of the
grant, except that certain incentive stock options must require exercise prices
of not less than 110% of fair market value of the Company's Class A common stock
on the date of the grant. Options granted under the 1994 and 1996 Plans may not
have a term greater than ten years from the date of grant and are not
transferable except upon death. As of December 31, 1998, 2,203,800 shares were
available for future grants under the 1994 Plan and 70,000 shares were available
for future grants under the 1996 Plan.
Upon adoption of the 1994 Plan, the Company's previously adopted stock
option and stock compensation plans were terminated. Options granted and
outstanding under these previous plans are still exercisable, but no further
grants may be made under these plans.
STOCK OPTIONS
Under the terms of the Company's previous and current stock compensation
plans, the board has granted incentive stock options and nonqualified stock
options requiring exercise prices approximating the fair market value of the
Company's Class A common stock on the date of the grant.
Stock option activity under the plans was as follows:
NUMBER OF SHARES WEIGHTED AVERAGE
UNDER OPTION EXERCISE PRICE
---------------- ----------------
Balance, January 1, 1997..................... 5,201,387 18.82
----------
Granted.................................... 2,012,075 10.02
Exercised.................................. (17,470) 3.32
Forfeited.................................. (24,940) 14.91
Cancelled.................................. (2,300,250) 22.95
----------
Balance, December 31, 1997................... 4,870,802 13.31
----------
Granted.................................... 1,185,000 16.11
Exercised.................................. (2,396,614) 12.64
Forfeited.................................. (47,085) 15.30
----------
Balance, December 31, 1998................... 3,612,103 14.65
==========
F-133
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During December, 1998, certain executive officers and directors exercised
stock options totaling 1,626,186 shares at a weighted average exercise price of
$11.82. Subsequent to December 31, 1998, approximately 1,020,760 additional
options had been exercised at a weighted average exercise price of $15.31.
In January 1997, the board of directors authorized the cancellation of
certain options with higher exercise prices and the issuance of fewer options at
a lower exercise price. Options for 2,299,750 shares with exercise prices
ranging from $21.50 to $25.125 were canceled and new options for 1,980,575
shares with an exercise price of $15.69 were issued. The exercise price for all
of these new options reflected the fair market value at the time of issuance. In
April 1997, the board of directors authorized the amendment of certain options,
nearly all of which were these newly issued options approved in January 1997, to
lower the exercise price to $10.00, the fair market value at that time.
Of the total options outstanding at December 31, 1998, 2,791,030 have an
exercise price in the range of $10.00 and $15.75 with a weighted-average
exercise price of $13.45 and a weighted-average remaining contractual life of
7.1 years. Of the 2,791,030 options, 1,907,876 are exercisable at December 31,
1998. Of the total outstanding options at December 31, 1998, 811,073 have an
exercise price in the range of $17.17 and $19.25 with a weighted-average
exercise price of $18.69 and a weighted-average contractual life of 6.4 years,
and 799,498 of those options are exercisable at December 31, 1998. The remaining
10,000 options have an exercise price of $22.38 and a remaining contractual life
of 7.4 years.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS No. 123 is effective for fiscal years beginning after December
15, 1995. SFAS No. 123 encourages companies to adopt the fair value method for
compensation expense recognition related to employee stock options. Existing
accounting requirements of Accounting Principles Board Opinion No. 25 ("APB No.
25") use the intrinsic value method in determining compensation expense which
represents the excess of the market price of the stock over the exercise price
on the measurement date. The Company elected to remain under the APB No. 25
rules for stock options, and is required to provide pro forma disclosures of
what net income and earnings per share would have been had the Company adopted
the new fair value method for recognition purposes. The following information is
presented as if the Company had adopted SFAS No. 123 and restated its results
(in thousands, except per share data):
1998 1997
------- --------
Net income (loss):
As reported........................................... $74,247 $(10,027)
Pro forma............................................. $60,105 $(19,309)
Net income (loss) per share:
Basic:
As reported........................................... $ 2.00 $ (0.25)
Pro forma............................................. $ 1.82 $ (0.48)
Net income (loss) per share:
Diluted:
As reported........................................... $ 1.91 $ (0.25)
Pro forma............................................. $ 1.74 $ (0.48)
F-134
264
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the above information, the fair value of each option grant was
estimated on the dates of grant using the Black-Scholes option pricing model
with the following assumptions used for grants in fiscal 1998 and 1997: risk
free rates of 5.5% to 5.6%, and 6.5% to 6.8%, expected volatility of 50% and
45%, and expected lives of 7 years in each year. The weighted-average grant date
fair value of options granted during 1998 and 1997 was $7.33 and $7.27,
respectively.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the above pro forma amounts may not be
representative of the compensation costs to be expected in future years.
SHARES RESERVED FOR ISSUANCE
At December 31, 1998, 5,885,903 shares of the Company's Class A common
stock are reserved for exercise and grant under the Company's stock compensation
plans. In addition, 1,792,043 shares of Class A common stock and 3,000,000
shares of Class B common stock are reserved for issuance in conjunction with the
acquisition of cellular interests discussed above.
SHARE REPURCHASE
The Company's board of directors has authorized the repurchase of up to
7,500,000 shares of its Class A Common Stock from time to time in open market or
other transactions. During 1998 and 1997, the Company repurchased 1,612,100 and
2,810,000 shares, respectively, of its Class A Common Stock at an average price
of approximately $17.70 in 1998 and $13.00 in 1997.
During the second quarter of 1998, the Company entered into a total return
equity swap (the "Equity Swap") with a financial institution counterparty (the
"Counterparty"). Pursuant to the swap, the Company has the right to purchase
from the Counterparty on or prior to June 30, 2000, shares of Vanguard Cellular
Systems, Inc.'s Class A common stock ("Equity Swap Shares") at a price based
upon the Counterparty purchase price for said shares at initiation of the Equity
Swap. At each quarter end during the term of the Equity Swap, the Company is
required to settle any decrease in the market value of the Equity Swap Shares
below the Counterparty's cost with shares of Vanguard Cellular Systems, Inc.'s
Class A stock, or with cash or a letter of credit in the amount of the decrease.
In addition, the Company is required to pay the Counterparty a quarterly fee
equal to a LIBOR-based rate on the Counterparty's adjusted cost to acquire the
Equity Swap Shares. Due to the Company's ability to issue shares to settle
periodic price fluctuations under the Equity Swap, the Company records all
amounts received (paid) under this arrangement as increases (decreases) to
equity.
The purpose of the total return equity swap is to allow the Company to lock
in the current price of Vanguard stock in anticipation of, or in lieu of, a
future buyback, without the necessity of a present cash outlay. As of December
31, 1998, the Counterparty had acquired 112,800 shares of Vanguard Class A
Common Stock at an approximate cost of $2.1 million. Based on the closing stock
price of $25.81 at December 31, 1998, the market value of the Equity Swap Shares
was greater than the Counterparty's cost of such shares by $765,874.
F-135
265
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses were composed of the following at
December 31, 1998 and 1997 (in thousands):
1998 1997
------- -------
Accounts payable......................................... $33,315 $26,594
Accrued expenses:
Interest............................................... 4,615 8,763
Payroll and commissions................................ 14,508 13,578
Accrued obligations of SDL............................. 16,900 --
Taxes.................................................. 5,221 3,543
Other.................................................. 6,317 5,606
------- -------
$80,876 $58,084
======= =======
NOTE 10 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each category of financial instruments for which it is practicable to
estimate that value:
Cellular Entities Carried on the Cost Method -- The fair value of these
instruments is estimated based upon recent transactions from this portfolio.
Inter-Act Debentures and Warrants -- The fair value of the combined
investment in Inter-Act debentures and warrants is based upon the quoted market
price.
Interest Rate Protection Agreements -- The fair value of interest rate cap
and swap agreements is based on quoted market prices as if the agreements were
entered into on the measurement date.
Borrowings Under Credit Facility -- The fair value of the borrowings under
the VCFC Credit Facility approximates the carrying value.
Vanguard Senior Debentures -- The fair value of the Vanguard Senior
Debentures is based upon quoted market price.
The estimated fair values of the Company's financial assets (liabilities)
are summarized as follows (in thousands):
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- --------- ----------
Cellular entities carried on the cost
method.................................... $ 4,179 $ 9,317 $ 9,592 $ 27,907
Inter-Act debentures and warrants........... 0 1,440 8,300 10,800
Interest rate protection agreements......... 831 (4,035) 1,464 (868)
Borrowings under Credit Facility............ (565,000) (565,000) (569,000) (569,000)
Senior Debentures of Vanguard............... (3,276) (3,669) (199,837) (208,000)
Notes receivable from employees and
directors................................. 27,488 27,488 -- --
F-136
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VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- QUARTERLY INFORMATION (UNAUDITED; IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
1998 QUARTERS FIRST SECOND THIRD FOURTH TOTAL
------------- -------- -------- -------- -------- --------
Revenue............................. $ 97,959 $112,193 $109,228 $102,326 $421,706
Income from operations.............. 11,742 20,317 18,818 12,973 63,850
Net income (loss) before
extraordinary item................ (16,758) 63,809 89,736 (42,535) 94,252
Net income (loss)................... (20,729) 63,809 89,736 (58,569) 74,247
Net income (loss) per share before
extraordinary item
Basic............................. (0.44) 1.72 2.44 (1.15) 2.54
Diluted........................... (0.44) 1.65 2.31 (1.15) 2.43
Net income (loss) per share
Basic............................. (0.55) 1.72 2.44 (1.59) 2.00
Diluted........................... (0.55) 1.65 2.31 (1.59) 1.91
1997 QUARTERS
------------------------------------
Revenue............................. $ 80,315 $ 94,148 $101,317 $ 98,738 $374,518
Income from operations.............. 10,882 13,047 18,780 6,555 49,264
Net income (loss)................... 228 74 1,068 (11,397) (10,027)
Net income (loss) per share
Basic............................. 0.01 0.00 0.03 (0.29) (0.25)
Diluted........................... 0.01 0.00 0.03 (0.29) (0.25)
Certain amounts in the quarterly financial information for the first,
second and third quarters of 1997 have been reclassified to conform to the
fourth quarter presentation.
NOTE 12 -- SUBSEQUENT EVENTS
CONSUMMATION OF AT&T MERGER
In April 1999, the shareholders of the Company approved the terms of the
Merger Agreement (Note 2). In May 1999, following the satisfaction of all other
conditions of closing, the AT&T Merger was consummated and the Company was
merged into Winston, Inc. (Winston), a Delaware corporation and a wholly owned
subsidiary of AT&T. At that time, the separate corporate existence of the
Company ceased and Winston continued as the surviving corporation.
INVESTMENT ACTIVITY AND LEGAL PROCEEDINGS
Inter-Act: During the first quarter of 1999, the Company recorded equity
method losses related to Inter-Act which equaled the remaining investment in
Inter-Act as of December 31, 1998. As a result, the Company suspended, during
the first quarter of 1999, the recognition of further losses attributable to
Inter-Act. Inter-Act has continued to incur operating losses since the
consummation of the Company's merger with AT&T.
SDL: As described in Note 4, IWCH's initial plan for reorganization
contemplated the exchange of the Company's interests in IWCPL for IWCH's
interests in SDL. The confirmation of this plan occurred on March 26, 1999. As a
result, the Company's remaining investment in IWCPL, $13.1 million as of
December 31, 1998, was transferred to its investment in SDL. In March 1999, the
Company assessed the realizability of its investment in SDL through
consideration of SDL's ability to continue as a going concern. Because of SDL's
financial difficulties, the Company concluded that its investment in SDL was
F-137
267
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impaired and wrote off its remaining net carrying value of $13.1 million
investment in SDL. In addition, on April 13, 1999, the Company paid $16.9
million in settlement of the outstanding loan guarantees for SDL borrowings.
Such amount was included in accounts payable and accrued expenses in the
accompanying December 31, 1998 consolidated balance sheet. SDL filed for
bankruptcy in Hong Kong in 2000.
As described in Note 6, SDL filed a lawsuit against the Company on March
23, 1999 in California. Such lawsuit was never served upon the Company or
Winston and management considers this matter to be closed.
IWCH Bankruptcy: On December 29, 1999, the Bankruptcy Court confirmed the
Third Amended Joint Chapter 11 Plan of Reorganization of IWCH (the Revised
Plan). The Revised Plan resulted in the public bondholders of IWCH and Toronto
Dominion (a commercial lender to IWCH) becoming the sole equity holders of the
post-bankruptcy reorganized IWCH ("New IWCH"). All previous equity holders of
IWCH, including Winston, were to receive, on a pro rata basis, New IWCH Series A
warrants with the potential to acquire up to 10% of the equity value of New IWC
above a defined baseline valuation of $225 million.
In connection with the bankruptcy settlement, a Settlement Agreement,
Release and Covenant Not To Sue (Settlement Agreement) was entered into,
between, and among Winston, IWCH and its subsidiaries (the Debtors), the
creditors' committee appointed in the IWCH bankruptcy proceedings, certain
present and former officers and directors of IWCH, and certain other parties,
including the parties to two lawsuits filed against the Company and certain of
its management and board of directors ((Warburg Dillon Read, ET AL. v. Vanguard
Cellular Systems, Inc. ET AL) and (Loeb Partners Corporation, ET AL v. Griffin,
ET AL.) Note 6). In the Settlement Agreement, all parties agreed to cease
prosecuting any and all existing IWCH claims, including the above litigation
against Winston assumed in its acquisition of the Company, in return for a
settlement payment of $32.4 million. Winston's portion of the settlement payment
totaled $23.3 million and was deposited into an escrow account in December 1999.
The escrow amount was released in February, 2000. The parties also agreed that
no further claims would be initiated relating to IWCH.
In addition to the above settlement, the Revised Plan included the
following settlement provisions:
- In full satisfaction and to fully discharge all amounts due Winston under
the post-petition debtor-in possession financing, previously made by the
Company to IWCH in the amount of $4.6 million (Note 4), IWCH distributed
377,946 shares of IWCH common stock to Winston.
- Winston forever waived its rights to any further distributions related to
its equity or debt holdings in IWCH and irrevocably agreed to be bound by
all provisions of the Revised Plan.
- Winston transferred all of its interests in IWCPL to PWH, a subsidiary of
IWCH. In addition, Winston waived certain distributions to which it would
have been entitled arising out of certain indebtedness owed by the
Pakistan related entities.
- Winston received IWCH Series B Warrants and Pakistan Series A Warrants.
- Winston assigned and transferred all of its direct and indirect equity
interests (including options or other rights to purchase interests) in
SDL to a new subsidiary, New Vanguard China Inc. (NVC). Pursuant to the
Revised Plan, Winston became obligated to provide no less than $3.2
million in cash for capital calls to SDL, as needed. Additionally, NVC
assumed all obligations of IWCH and its affiliates related to SDL and
agreed to indemnify IWCH and its affiliates from any claims related to
its interests in SDL.
F-138
268
VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- IWCH transferred to NVC its entire direct and indirect equity interests
in SDL, together with all equity or profit participation interests in
SDL.
- NVC issued and distributed warrants (NVC Warrants) to IWCH. These
warrants gave reorganized IWCH the right to purchase up to 17.5% of the
issued and outstanding common stock of the New Vanguard China Inc. on a
fully diluted basis at a nominal exercise price of one cent per share.
- Winston provided letters of credit of approximately $10.0 million to
guarantee certain credit facilities maintained by IWCH and/or certain of
its subsidiaries.
Pakistan Post-Effective Date Events: Subsequent to the Effective Date of
the Revised Plan, in March 2000, a Settlement and Release Agreement was entered
into by and among IWCH, PWH and Winston, as successor to Vanguard, as PWH sought
to sell its shares of IWCPL to an unrelated third party. In connection with the
IWCPL sale, the IWCH entities delivered to Winston the NVC Warrants and were
deemed to have transferred, released, waived and extinguished any entitlement
thereto. In addition, the purchaser of the IWCPL interests issued replacement
letters of credit for $10.0 million of letters of credit that Winston had
provided under the terms of the Revised Plan and secured releases of Winston
from each of the Banks upon which the original letters of credit were drawn.
Further, Winston was released from its $3.2 million SDL capital call obligation
and all existing or potential obligations related to SDL. In return, Winston
paid to IWCH $663 in cash and delivered to IWCH all IWCH Common Stock and the
IWCH Series B Warrants that Winston received under the Revised Plan. Following
this transaction, Winston had disposed of all interests in IWCH and its
subsidiaries with the exception of the Pakistan Series A Warrants as part of
this IWCH settlement.
SDL Post Effective Date Events: During 2000, SDL filed for bankruptcy under
Hong Kong bankruptcy regulations. In July 2000, the Hong Kong bankruptcy court
appointed joint and several liquidators to wind up the operations of SDL.
Management does not believe it will recover any amounts of its past investments
during this liquidation process, nor does it believe it will be obligated for
further liabilities related to SDL.
RECLASSIFICATIONS
Certain nonoperating amounts in the Consolidated Statements of Operations
for 1998 and 1997 have been reclassified from their original presentation. Such
reclassifications relate to modifications from the original presentation of net
losses on unconsolidated investments.
F-139
269
REPORT OF INDEPENDENT ACCOUNTANTS
To the Member Committee of
AB Cellular Holding, LLC
In our opinion, the accompanying combined balance sheet and the related
combined statement of income and of cash flows present fairly, in all material
respects, the financial position of L.A. Cellular Division of AB Cellular
Holding, LLC (formerly Los Angeles Cellular Telephone Company) at December 31,
1998, and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on theses
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
See Note 1 of notes to financial statements, which describes the
conversion, effective November 14, 1998 of Los Angeles Cellular Telephone
Company, a general partnership, to a division of AB Cellular Holding, LLC.
/s/ PricewaterhouseCoopers LLP
Newport Beach, California
January 18, 1999, except for Note 10,
The date of which is April 9, 1999
F-140
270
L.A. CELLULAR DIVISION OF AB CELLULAR HOLDING, LLC
(FORMERLY LOS ANGELES CELLULAR TELEPHONE COMPANY)
COMBINED INCOME STATEMENT
(IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31, 1998
------------------
REVENUE
Services.................................................. $798,376
Equipment sales........................................... 48,661
Other..................................................... 11,995
--------
859,032
--------
OPERATING EXPENSES
Network and other costs of services....................... 177,423
Cost of equipment sales................................... 89,343
Selling, general and administrative....................... 273,067
Depreciation and amortization............................. 106,767
Loss on sale and disposal of assets....................... 5,164
--------
651,764
--------
OPERATING INCOME............................................ 207,268
Interest income, net........................................ 1,776
--------
NET INCOME.................................................. $209,044
========
The accompanying notes are an integral part of these combined financial
statements.
F-141
271
L.A. CELLULAR DIVISION OF AB CELLULAR HOLDING, LLC
(FORMERLY LOS ANGELES CELLULAR TELEPHONE COMPANY)
COMBINED BALANCE SHEET
(IN THOUSANDS)
AT DECEMBER 31,
1998
---------------
ASSETS
Current assets
Cash and cash equivalents................................. $ 53,314
Restricted cash........................................... 38,819
Accounts receivable trade, net of allowance for doubtful
accounts and
fraud reserve of $5,641................................ 82,382
Accounts receivable affiliates............................ 2,877
Inventories............................................... 19,090
Prepaid expenses and other current assets................. 8,967
--------
Total current assets.............................. 205,449
Property and equipment, net................................. 485,473
Other assets................................................ 2,598
--------
Total assets...................................... $693,520
========
LIABILITIES AND DIVISION EQUITY
Current liabilities
Accounts payable -- trade................................. $108,405
Accrued expenses.......................................... 38,625
Commissions payable....................................... 9,085
Deferred income........................................... 18,731
Customer deposits......................................... 4,530
Legal settlement.......................................... 8,302
--------
Total current liabilities......................... 187,678
Commitments and contingencies
Division equity, net........................................ 505,842
--------
Total liabilities and division equity............. $693,520
========
The accompanying notes are an integral part of these combined financial
statements.
F-142
272
L.A. CELLULAR DIVISION OF AB CELLULAR HOLDING, LLC
(FORMERLY LOS ANGELES CELLULAR TELEPHONE COMPANY)
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31,
1998
------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income................................................ $ 209,044
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 106,767
Provision for doubtful accounts and cellular fraud..... 22,464
Provision for inventory obsolescence................... 1,180
Loss on sale and disposal of property and equipment.... 5,164
Changes in operating assets and liabilities:
Increase in accounts receivable...................... (5,557)
Decrease in accounts receivable affiliates........... 53
Increase in inventories.............................. (12,129)
Decrease in prepaid expenses and other assets........ 10,196
Increase in restricted cash.......................... (20,242)
Increase in accounts payable and accrued expenses.... 45,406
Decrease in accounts payable affiliates, net......... (614)
Increase in commissions payable...................... 2,496
Increase in deferred income.......................... 1,197
Decrease in customer deposits........................ (3,444)
Decrease in accrued legal settlement................. (15,335)
---------
Net cash provided by operating activities......... 346,646
---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment, net.................. (85,675)
---------
Net cash used in investing activities............. (85,675)
---------
CASH FLOWS USED IN FINANCING ACTIVITIES
Distributions paid to members............................. (225,000)
---------
Net cash used in financing activities............. (225,000)
---------
Net increase in cash and cash equivalents......... 35,971
Cash and cash equivalents at beginning of year.............. 17,343
---------
Cash and cash equivalents at end of year.................... $ 53,314
=========
SUPPLEMENTAL DISCLOSURE:
Interest paid during the year............................. $ 338
=========
NON-CASH INVESTING ACTIVITIES:
Non-cash additions to property and equipment during the
year................................................... $ 16,546
=========
The accompanying notes are an integral part of these combined financial
statements.
F-143
273
L.A. CELLULAR DIVISION OF AB CELLULAR HOLDING, LLC
(FORMERLY LOS ANGELES CELLULAR TELEPHONE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The combined financial statements include the combined results of Los
Angeles Cellular Telephone Company ("LACTC") and L.A. Cellular Long Distance,
LLC ("LACLD").
LACTC was a California general partnership (the "Partnership") through
November 12, 1998. Effective November 13, 1998, LACTC was converted into a
limited liability company under Delaware law and became a division (the "L.A.
Division") of AB Cellular Holding, LLC, a Delaware limited liability company
(the "Company"). This was not a merger, sale or assignment of any interest under
Delaware law. Under Delaware law, the form of any entity may change (from a
general partnership to a limited liability company) but the entity remains the
same and all rights of creditors and others against the Partnership continue to
exist against the Company. New creditors will be affected by the limitation of
liability. Control over the Company resides with a Member Committee. The Member
Committee consists of four members, two of which are representatives of
BellSouth ("BLS") and two of which are representatives of AT&T Wireless
Services, Inc. ("AWS"). Prior to November 13, 1998 BLS equity ownership interest
in the Partnership was effectively 60.0275% and AWS equity ownership interest
was effectively 39.9725%. Subsequent to November 13, 1998 interest in the L.A.
Division is effectively 44.385% BLS and 55.615% AWS.
The L.A. Division is engaged principally in the construction and operation
of Domestic Public Cellular Radio Telecommunications Service ("DPCRTS") in the
Los Angeles area. Cellular services provided by the L.A. Division are regulated
by the California Public Utilities Commission (the "CPUC").
LACLD is a limited liability company organized under the laws of Nevada.
LACLD holds a certificate granted by the CPUC to provide long-distance service
in the State of California. At December 31, 1998, approximately 65% of the L.A.
Division's subscribers had elected or been assigned LACLD as their long-distance
carrier.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in banks, money market funds and
petty cash. The L.A. Division considers highly liquid investments with a
maturity of three months or less at the time of purchase to be cash equivalents.
The carrying amount of these assets approximates fair value due to the
short-term maturity of these instruments.
RESTRICTED CASH
The CPUC created California High Cost Fund A & B ("CHCF"), a tax to
subsidize the cost of phone service in higher cost areas, and California
Teleconnect Fund ("CTF"), a tax to provide discounts to schools, libraries and
hospitals on telecommunications usage. These surcharge taxes are collected from
wireless subscribers and are to be forwarded to CHCF and CTF. However, as CHCF
and CTF had not established an account to which the taxes could be forwarded,
the funds collected were held by the L.A. Division. The funds collected for the
CHCF and CTF taxes totaled $38,819 as of December 31, 1998 and were included in
restricted cash.
ACCOUNTS RECEIVABLE
The L.A. Division performs ongoing credit evaluations of its customers and
in certain circumstances obtains refundable deposits. The L.A. Division
maintains reserves for potential credit and fraud losses.
F-144
274
L.A. CELLULAR DIVISION OF AB CELLULAR HOLDING, LLC
(FORMERLY LOS ANGELES CELLULAR TELEPHONE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
INVENTORIES
Inventories consist primarily of cellular phones and related accessories,
and are carried at the lower of average cost (which approximates actual cost) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, unless impaired. Renewals and
betterments that materially extend the life of an asset are capitalized while
maintenance and repair costs are charged to operations as incurred. When
property and equipment are sold or otherwise disposed of, the asset account and
related accumulated depreciation and amortization accounts are relieved, and any
gain or loss is included in operations.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets, or for leasehold improvements, over the term
of the lease, if less. For all new purchases starting January 1, 1998, the
estimated useful lives are three years for vehicles and computer equipment, five
years for furniture, and seven years for cellular equipment, except for switch
receiver hardware which has a useful life of ten years. For purchases prior to
January 1, 1998 the estimated useful lives are five years for vehicles, computer
equipment and furniture, and ten years for cellular equipment.
Computer software costs are capitalized or expensed in accordance with
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use."
VALUATION OF LONG-LIVED ASSETS
The L.A. Division reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may not
be recoverable. It is reasonably possible that these assets could become
impaired as a result of technological or other industry changes. For assets the
L.A. Division intends to hold for use, if the total of the expected future
undiscounted cash flows is less than the carrying amount of the asset, a loss is
recognized for the difference between the fair value and carrying value of the
asset. For assets the L.A. Division intends to dispose of, a loss is recognized
for the amount that the estimated fair value, less costs to sell, is less than
the carrying value of the assets.
DEFERRED INCOME
Deferred income at December 31, 1998 consisted principally of amounts
billed to customers for access fees, which were payable one month in advance.
REVENUE RECOGNITION
Cellular service revenues are based upon minutes of traffic processed and
contracted fees. Equipment sales and other revenues are recognized when the
products are delivered and accepted by customers or services are provided in
accordance with contract terms. No revenue is recognized unless collection of
the revenue is reasonably assured.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
F-145
275
L.A. CELLULAR DIVISION OF AB CELLULAR HOLDING, LLC
(FORMERLY LOS ANGELES CELLULAR TELEPHONE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
INCOME TAXES
There is no provision in the financial statements for income taxes as LACTC
was a partnership during the period from January 1, 1998 through November 12,
1998 and was converted to a limited liability company for the period of November
13, 1998 through December 31, 1998. The income and expenses are accordingly
passed on to its partners and members, respectively.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 1998:
Cellular equipment.......................................... $ 770,924
Computer hardware/software and other equipment.............. 97,206
Leasehold improvements...................................... 26,837
Furniture and fixtures...................................... 17,634
Vehicles.................................................... 5,437
---------
918,038
Less accumulated depreciation............................. (475,893)
---------
442,145
Construction in progress.................................... 43,328
---------
Property and equipment, net............................... $ 485,473
=========
As discussed in Note 1, L.A. Division changed the estimated useful lives
for certain property and equipment. In accordance with Accounting Principles
board Opinion No. 20, "Accounting Changes," this change has been accounted for
on a prospective basis. The additional expense incurred in 1998 due to such
change is approximately $2,125.
3. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the L.A. Division to a
concentration of credit risk, as defined by Statement of Financial Accounting
Standards No. 105, "Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Concentrations of Credit Risk," consist of cash and
cash equivalents. The L.A. Division maintains its cash balances at various
California and New York banking institutions. At times, cash balances may exceed
the FDIC insurance limit.
During 1998, greater than 85% of the L.A. Division's cellular phone and
accessory equipment was purchased from one major vendor and 63% of property and
equipment was purchased from one major vendor.
F-146
276
L.A. CELLULAR DIVISION OF AB CELLULAR HOLDING, LLC
(FORMERLY LOS ANGELES CELLULAR TELEPHONE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
4. L.A. DIVISION EQUITY
Contributions, distributions and net income of the L.A. Division for the
year ending December 31, 1998 were as follows:
Balance at January 1, 1998.................................. $ 521,798
Net income (January 1, 1998-November 12, 1998)............ 202,899
Net income (November 13, 1998-December 31, 1998).......... 6,145
Distributions (January 1, 1998-November 12, 1998)......... (225,000)
---------
Balance at December 31, 1998................................ $ 505,842
=========
Refer to Note 1 of these notes to combined financial statements regarding
changes in the L.A. Division's organization in 1998.
5. ADVERTISING AND PROMOTIONAL EXPENDITURES
The L.A. Division recognizes advertising and promotional expenses as
incurred. Total advertising expense for 1998 was approximately $34,332.
6. LEASES
The L.A. Division leases office space, retail store locations and land and
buildings for cell sites, all under noncancelable operating leases which expire
through 2014. Total rent expense for 1998 was $23,322. The L.A. Division has
certain operating leases which contain fixed escalation clauses. Rent expense
for these leases has been calculated on a straight-line basis over the term of
the leases. A deferred charge in the amount of $233 was incurred and included in
accrued expenses during 1998 for the difference between the amount charged to
expense and the amount paid. The total deferred charge was $906 at December 31,
1998.
In 1998, the L.A. Division entered into $197 of capital leases on vehicles.
Interest paid on capital leases in 1998 is $3. Amortization expense was $13 for
the year ended December 31, 1998.
Future minimum annual lease payments under noncancelable operating leases
with initial or remaining terms of one year or more amounted to:
Year ended December 31,
1999...................................................... $ 21,816
2000...................................................... 20,290
2001...................................................... 15,682
2002...................................................... 12,456
2003...................................................... 10,691
2004 and thereafter....................................... 75,789
--------
$156,724
========
7. BENEFIT PLANS
The L.A. Division sponsors a defined contribution 401(k) and a
profit-sharing plan in which substantially all employees are eligible to
participate upon completion of six months of service. The 401(k) plan permits
eligible employees to contribute up to 15% of their basic compensation. The L.A.
Division
F-147
277
L.A. CELLULAR DIVISION OF AB CELLULAR HOLDING, LLC
(FORMERLY LOS ANGELES CELLULAR TELEPHONE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
makes matching contributions equal to 100% of employee before-tax contributions
up to 2% of their basic compensation, and 50% of employee before-tax
contributions from 2% to 6%. The L.A. Division's matching contributions charged
to expense amounted to $2,631 in 1998.
The profit-sharing plan allows the L.A. Division to contribute to the
employees' 401(k) accounts. The L.A. Division elected to make discretionary
profit-sharing contributions of $3,242 in 1998.
The L.A. Division established a phantom stock appreciation plan (the
"Plan") for senior management employees. Two types of options were granted for
1996, base options and retention options, while only retention options were
granted for 1997. The base options vest over a period of three years, with no
vesting in the first year and one-half vesting in each of years two and three.
The retention options vest 100% in year three. Employees may exercise their
options upon vesting for up to five years after the date of grant. Upon
exercise, participants are paid based on the excess of the frozen per-share
value over the per-share value at the date of the grant. The frozen per-share
value was decided by the L.A. Division and replaced the annually determined
per-share value which was based on the plan valuation formula as described in
the Plan Agreement. Total employee benefit costs (benefits) under the Plan for
1998 amounted to ($113).
In 1998 the L.A. Division issued a total of 485 AT&T and BLS phantom stock
("PS") options of which 259 were effective January 1, 1998 and 226 were
effective January 1, 1997 (as adjusted for stock splits). The PS options vest
over a period of three years. Employees may exercise their options upon vesting
for up to five years after the date of grant. Upon exercise, participants are
paid based on the excess of the New York Stock Exchange previous day closing
price over the grant option price. Total 1998 employee benefit costs related to
the PS options was $5,194.
8. CONTINGENCIES
The L.A. Division is currently named as a defendant in the class actions of
Garabedian, et. al. v. LASMSA Limited Partnership, et al., Richard W. Thomas, et
al. v. Los Angeles Cellular Telephone Company, et al. and Eurus Cady v. Los
Angeles Cellular Corp., all which seek damages for alleged conspiracy to fix
prices of retail and wholesale service. The Orange County Superior Court
approved a settlement and entered a final judgment on May 20, 1998. As of
December 31, 1997, the L.A. Division had recorded a contingent liability of
$24.3 million that has been reduced to $8.3 million as of December 31, 1998
based upon the final judgment referenced above. Three objectors to the
settlements have appealed the judgment.
The L.A. Division is also named as defendant in Landin v. Los Angeles
Cellular Telephone Company. Landin filed an action against the L.A. Division
seeking injunctive relief and restitution against the L.A. Division on its
procedures for handling "dropped" calls. The Court denied the motion for class
certification. A trial date of July 14, 1999 has been set. The L.A. Division
intends to defend this case vigorously and does not reasonably expect the
ultimate results of these legal proceedings to have a material adverse effect on
the financial position, results of operations or cash flows of the L.A.
Division.
The L.A. Division is also named as defendant in Spielholz v. Los Angeles
Cellular Telephone Company regarding a personal injury claim from alleged false
representation of service availability. The plaintiff claims that the subscriber
was unable to contact 911 during an attempted carjacking in which the subscriber
was shot. The claim has been tendered to the L.A. Division's insurance carrier
and a trial date of September 20, 1999 has been set. Mediation proceedings are
set for April 22, 1999.
The L.A. Division is named as defendant in Spielholz, et al. v. Los Angeles
Cellular Telephone Company, et al. This class action suit contends that the L.A.
Division misrepresented the area in which coverage is provided and that the L.A.
Division failed to install sufficient cell sites to perform pursuant to
F-148
278
L.A. CELLULAR DIVISION OF AB CELLULAR HOLDING, LLC
(FORMERLY LOS ANGELES CELLULAR TELEPHONE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
the Cellular Service Agreements. Plaintiff seeks injunctive relief and
restitution. The class has not been certified and the L.A. Division will oppose
certification. The L.A. Division intends to vigorously defend this case.
The Ball, et al. v. GTE et al. suit seeks injunctive relief and restitution
for all amounts allegedly overpaid by subscribers of the L.A. Division and other
wireless service providers based on alleged practices which result in billing in
full minute increments. On December 14, 1998, the Sacramento Superior Court
dismissed the complaint with prejudice. Plaintiff's counsel have announced their
intention to appeal the trial court's ruling.
Additionally, the L.A. Division is subject to other pending claims and
litigation primarily related to contractual and employee issues. No estimates of
possible loss or range of loss, if any, can be made at this time. Management,
after review and consultation with the L.A. Division's counsel, considers that
the liability, if any, from the disposition of such claims and litigation should
not have a material adverse effect on the financial position, results of
operations or cash flows of the L.A. Division.
9. RELATED PARTY TRANSACTIONS
The L.A. Division pays certain management fees to one of the members (the
"Managing Member") for the performance of its responsibilities with respect to
the operations of the L.A. Division. The management fee was $88 for 1998. In
addition, the Managing Member is committed to make contributions to or receive
distributions from the L.A. Division for the deficiency or excess of certain
quarterly financial targets.
The L.A. Division purchases inventory and services and provides cellular
and administrative services to its affiliates, including the members. In
addition, the Managing Member may pay invoices or bill for services on behalf of
the L.A. Division. The Managing Member is reimbursed on a monthly basis for the
net amount of these invoices as well as the items detailed below. Total
affiliate revenues and affiliate purchases, net of expense reimbursements,
during 1998 amounted to:
1998
-------
REVENUES
Affiliate subscribers roaming in the L.A. Division
market................................................. $47,930
=======
EXPENDITURES
Cost of L.A. Division subscribers roaming in affiliate
markets................................................ $28,845
Other network services.................................... 5,950
Selling, general, and other expenses, net of payroll
expenses reimbursements................................ 2,537
-------
$37,332
=======
10. SUBSEQUENT EVENT
During April of 1999, Prime Matrix, one of the L.A. Division's resellers,
informed the L.A. Division that Prime Matrix has filed for bankruptcy. As of
December 31, 1998, the L.A. Division had a receivable balance of $2,548.
F-149
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AT&T WIRELESS SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements set forth
below for AT&T Wireless Services give effect to:
- the settlement of all intercompany obligations between AT&T and AT&T
Wireless Services in accordance with the separation and distribution
agreement between AT&T and AT&T Wireless Services as if such event had
been completed on January 1, 2000 for statement of operations purposes,
and at March 31, 2001 for balance sheet purposes;
- the $6.5 billion debt offering of Senior Notes of AT&T Wireless Services
which occurred on March 1, 2001 as if such event had been completed on
January 1, 2000 for statement of operations purposes; and
- the reclassification of the DoCoMo investment which occurred on January
22, 2001 to a mandatorily redeemable security effective with the
split-off of AT&T Wireless Services from AT&T as if such event had
occurred on March 31, 2001 for balance sheet purposes.
The pro forma adjustments included herein were based on available
information and certain assumptions that management believes are reasonable and
are described in the accompanying notes to the pro forma financial statements.
The unaudited pro forma condensed combined financial statements do not
necessarily represent what AT&T Wireless Services' financial position or results
of operations would have been had these items occurred on such dates or to
project AT&T Wireless Services' financial position or results of operations at
or for any future date or period. In the opinion of management, all adjustments
necessary to present fairly the unaudited pro forma financial information have
been made. The unaudited pro forma condensed combined financial statements
should be read in conjunction with the historical financial statements of AT&T
Wireless Services, as included in this document.
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AT&T WIRELESS SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AT MARCH 31, 2001
(IN MILLIONS)
AT&T PRO FORMA
WIRELESS PRO FORMA AT&T WIRELESS
SERVICES(1) ADJUSTMENTS SERVICES
----------- ----------- -------------
ASSETS:
Cash and cash equivalents............................. $ 34 $ 5,788(2) $ 5,822
Accounts receivable, net.............................. 1,811 1,811
Note receivable from AT&T............................. 10,588 (10,588)(2)
Other current assets.................................. 756 756
TOTAL CURRENT ASSETS.................................. 13,189 (4,800) 8,389
Property, plant and equipment, net.................... 10,725 10,725
Licensing costs, net.................................. 13,568 13,568
Investments in and advances to unconsolidated
subsidiaries........................................ 3,904 3,904
Goodwill, net......................................... 4,686 4,686
Other assets, net..................................... 967 967
TOTAL ASSETS.......................................... $47,039 $(4,800) $42,239
LIABILITIES:
Accounts payable...................................... $ 800 $ 800
Payroll and benefit-related liabilities............... 263 263
Due on demand notes payable........................... 103 103
Other current liabilities............................. 1,578 1,578
TOTAL CURRENT LIABILITIES............................. 2,744 2,744
Long-term debt due to AT&T............................ 1,800 (1,800)(2) --
Long-term debt to Others.............................. 6,487 6,487
Deferred income taxes................................. 4,739 4,739
Other long-term liabilities........................... 290 290
TOTAL LIABILITIES..................................... 16,060 (1,800) 14,260
MINORITY INTEREST..................................... 42 42
PREFERRED STOCK HELD BY AT&T.......................... 3,000 (3,000)(2) --
MANDATORILY REDEEMABLE COMMON STOCK................... -- 8,308(4) 8,308
SHAREOWNERS' EQUITY:
Shareowner's net investment........................... 28,015 (8,308)(4) 19,707
Accumulated other comprehensive loss.................. (78) (78)
TOTAL SHAREOWNERS' EQUITY............................. 27,937 (8,308) 19,629
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY............. $47,039 $(4,800) $42,239
See Notes To Unaudited Pro Forma AT&T Wireless Services Condensed Combined
Financial Statements
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AT&T WIRELESS SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AT&T PRO FORMA
WIRELESS PRO FORMA AT&T WIRELESS
SERVICES(1) ADJUSTMENTS SERVICES
----------- ----------- -------------
REVENUE............................................... $3,212 $ -- $3,212
OPERATING EXPENSES
Costs of services..................................... 921 -- 921
Costs of equipment sales.............................. 490 490
Selling, general and administrative................... 1,084 -- 1,084
Depreciation and amortization......................... 576 -- 576
------ ---- ------
Total operating expenses.............................. 3,071 -- 3,071
OPERATING INCOME...................................... 141 -- 141
Other income.......................................... 84 -- 84
Interest expense...................................... 47 (40)(2) 101
94(3)
Income (loss) before income taxes and net equity
losses from investments............................. 178 (54) 124
Provision (benefit) for income taxes.................. 79 (21)(5) 58
Net equity losses from investments.................... (99) -- (99)
NET LOSS.............................................. -- (33) (33)
Dividend requirements on preferred stock held by AT&T,
net................................................. 42 (42)(2) --
------ ---- ------
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREOWNERS..... $ (42) $ 9 $ (33)
====== ==== ======
Unaudited pro forma net loss per share:
Basic............................................... $(0.02) $(0.01)
Diluted............................................. $(0.02) $(0.01)
Weighted average shares used to compute unaudited pro
forma net loss per share:
Basic............................................... 2,530 2,530
Diluted............................................. 2,530 2,530
See Notes To Unaudited Pro Forma AT&T Wireless Services Condensed Combined
Financial Statements
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AT&T WIRELESS SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
AT&T AT&T
WIRELESS PRO FORMA WIRELESS
SERVICES(1) ADJUSTMENTS SERVICES
----------- ----------- -------------
REVENUE............................................... $10,448 $ -- $10,448
OPERATING EXPENSES
Costs of services..................................... 3,169 -- 3,169
Costs of equipment sales.............................. 2,041 -- 2,041
Selling, general and administrative................... 3,590 -- 3,590
Depreciation and amortization......................... 1,686 -- 1,686
------- ----- -------
Total operating expenses.............................. 10,486 -- 10,486
OPERATING LOSS........................................ (38) -- (38)
Other income.......................................... 534 -- 534
Interest expense...................................... 85 (196)(2) 419
530(3)
Income (loss) before income taxes and net equity
earnings from investments........................... 411 (334) 77
Provision (benefit) for income taxes.................. 141 (128)(5) 13
Net equity earnings from investments.................. 388 -- 388
NET INCOME (LOSS)..................................... 658 (206) 452
Dividend requirements on preferred stock held by AT&T,
net................................................. 130 (130)(2) --
------- ----- -------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREOWNERS..... $ 528 $ (76) $ 452
======= ===== =======
Unaudited pro forma net income per share:
Basic............................................... $ .21 $ .18
Diluted............................................. $ .21 $ .18
Weighted average shares used to compute unaudited pro
forma net income per share:
Basic............................................... 2,530 2,530
Diluted............................................. 2,533 2,533
See Notes to Unaudited Pro Forma AT&T Wireless Services Condensed Combined
Financial Statements
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AT&T WIRELESS SERVICES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. This column reflects the historical consolidated results of operations
and financial position of AT&T Wireless Services.
2. Gives effect to the settlement of intercompany balances with AT&T,
including the note receivable, long-term debt and preferred stock owed
to AT&T as of March 31, 2001, for balance sheet purposes. For statement
of operations purposes, the amounts of interest expense related to the
intercompany short-term and long-term debt and dividends on preferred
stock were eliminated as if the intercompany short-term and long-term
debt and preferred stock had been repaid as of January 1, 2000.
3. Gives effect to the March 1, 2001 private placement of $6.5 billion in
Senior Notes as if such private placement occurred on January 1, 2000
for statement of operations purposes. The notes included $1.0 billion
paying interest at 7.350% due in 2006, $3.0 billion paying interest at
7.875% due in 2011, and $2.5 billion paying interest at 8.750% due in
2031.
4. Gives effect to the reclassification of the DoCoMo investment to a
mandatorily redeemable security which will occur in conjunction with the
split-off. The DoCoMo investment has been classified as a mandatorily
redeemable security due to certain contractual provisions that could
require AT&T Wireless Services to repay the proceeds of the investment
plus interest if certain technology commitments are not met subsequent
to the split-off. The value assigned to the mandatorily redeemable
common stock was based upon the fair value of the stock as of April 27,
2001, for which the closing price of AT&T Wireless Group tracking stock
was $20.45. The actual allocation will be based upon the stock price as
of the split-off date.
5. Reflects the federal statutory and blended state tax effect on the pro
forma adjustments.
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284
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareowners
of AT&T Wireless Services, Inc.
Our audits of the consolidated financial statements referred to in our report
dated March 30, 2001, except as to Note 1 which is as of June 21, 2001,
appearing in the Registration Statement on Form S-1 also included an audit of
the financial statement schedule listed on page F-2 of the "Index to Financial
Statements." In our opinion, this financial statement schedule presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
March 30, 2001
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285
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
COL. A COL. B COL. C COL. D COL. E
---------------------------------------------- ---------- ---------- ------------- ---------
BALANCE CHARGED BALANCE
AT TO AT
BEGINNING COSTS END
OF AND OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS(a) PERIOD
----------- ---------- ---------- ------------- ---------
Year 2000
Allowances for doubtful accounts.............. $130 $314 $(251) $193
Year 1999
Allowances for doubtful accounts.............. $ 74 $200 $(144) $130
Year 1998
Allowances for doubtful accounts.............. $ 74 $ 99 $ (99) $ 74
---------------
(a) Amounts written off as uncollectible, net of recoveries.
F-156
286
[ ] SHARES
AT&T WIRELESS SERVICES, INC.
COMMON STOCK, PAR VALUE $.01
------------------------
PROSPECTUS
------------------------
------------------------
CREDIT SUISSE FIRST BOSTON GOLDMAN SACHS & CO.
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO INCORPORATED
, 2001
287
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, to be paid in connection with the
securities being registered. All amounts are estimates except the registration
fee. All of these expenses will be paid by AT&T.
Registration fee............................................ $ 375,000
NASD-related expenses....................................... $ 10,000
Transfer agent and registrar fees........................... $ 15,000
Printing and engraving expenses............................. $ 100,000
Legal fees and expenses..................................... $ 500,000
Accounting fees and expenses................................ $ 250,000
Miscellaneous............................................... $ 100,000
Total....................................................... $1,350,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses including attorneys' fees, judgments, fines and
amounts paid in settlement in connection with various actions, suits or
proceedings, whether civil, criminal, administrative or investigative other than
an action by or in the right of the corporation, a derivative action, if they
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, if they had no reasonable cause to believe their
conduct was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses including
attorneys' fees incurred in connection with the defense or settlement of such
actions, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's by-laws, disinterested
director vote, stockholder vote, agreement or otherwise.
Our certificate of incorporation provides that each person who was or is
made a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person, or a person of whom such
person is the legal representative, is or was a director or officer of us or, is
or was serving at our request as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is the alleged action of such person in an official
capacity as a director, officer, employee or agent or in any other capacity
while serving as a director, officer, employee or agent, will be indemnified and
held harmless by us to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended, against all
expense, liability and loss reasonably incurred or suffered by such person in
connection therewith; provided, however, that, except when such person is
bringing action against us to recover an unpaid claim of indemnification, we
shall indemnify any such person seeking indemnification in connection with a
proceeding, or part thereof, initiated by such person only if such proceeding,
or part thereof, was authorized by our board of directors. Our certificate of
incorporation also provides that we shall pay the expenses incurred in defending
any such proceeding in advance of its final disposition, subject to the
provisions of the Delaware General Corporation Law. Such rights are not
exclusive of any other right which any person may have or thereafter acquire
under any statute, provision of the certificate, by-law, agreement, vote of
stockholders or disinterested directors or otherwise. No repeal
II-1
288
or modification of such provision will in any way diminish or adversely affect
the rights of any director, officer, employee or agent of us thereunder in
respect of any occurrence or matter arising before any such repeal or
modification. Our certificate of incorporation also specifically authorizes us
to maintain insurance and to grant similar indemnification rights to our
employees or agents.
The Delaware General Corporation Law permits a corporation to provide in
its certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for:
- any breach of the director's duty of loyalty to the corporation or its
stockholders,
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- payments of unlawful dividends or unlawful stock repurchases or
redemptions, or
- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation provides that none of our directors will
be personally liable to us or our stockholders for monetary damages for breach
of fiduciary duty as a director, except, if required by the Delaware General
Corporation Law as amended from time to time, for liability
- for any breach of the director's duty of loyalty to us or our
stockholders,
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- under Section 174 of the Delaware General Corporation Law, which concerns
unlawful payments of dividends, stock purchases or redemptions, or
- for any transaction from which the director derived an improper personal
benefit.
Neither the amendment nor repeal of such provision will eliminate or reduce
the effect of such provision in respect of any matter occurring, or any cause of
action, suit or claim that, but for such provision, would accrue or arise before
such amendment or repeal.
The Separation and Distribution Agreement by and among us and AT&T dated as
of , 2001, provides for indemnification by us of AT&T and its
directors, officers and employees for some liabilities, including liabilities
under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On March 1, 2001, the registrant sold Senior Notes having an aggregate
principal amount of $6.5 billion, with maturity dates from 2006 to 2031. The
notes pay interest at rates ranging from 7.350% to 8.750% per annum, and include
customary covenants. The proceeds of the offering to the registrant, net of
underwriting discounts commissions and related expenses, was $6.447 billion. The
sale was made pursuant to Rule 144A under the Securities Act. Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Salomon Smith Barney Inc. were the joint
book-running managers of the offering. The notes include registration rights
such that the registrant is required to exchange the notes for a new issue of
notes registered under the Securities Act of 1933 and are to be declared
effective no later than 240 days after the issue date.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
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289
EXHIBIT DESCRIPTION
------- -----------
1.1 Form of Underwriting Agreement (filed as Exhibit 1.1 to
Registration Statement on Form S-1/A (Commission file No.
333-60472), filed July 5, 2001, and incorporated herein by
reference).
3.1 Restated Certificate of Incorporation of the Registrant, as
amended to date (filed as Exhibit 3.1 to Registration
Statement on Form S-1/A (Commission file No. 333-59174),
filed June 11, 2001, and incorporated herein by reference).
3.2 Form of Certificate of Incorporation of the Registrant, to
be in effect upon completion of the split-off (filed as
Exhibit 3.2 to Registration Statement on Form S-1/A
(Commission file No. 333-60472), filed July 5, 2001, and
incorporated herein by reference).
3.3 Restated By-Laws of the Registrant, as amended to date.
3.4 Form of By-Laws of the Registrant to be in effect upon
completion of the split-off (filed as Exhibit 3.4 to
Registration Statement on Form S-1/A (Commission file No.
333-60472), filed July 5, 2001, and incorporated herein by
reference).
4.1 Specimen certificate for shares of common stock, par value
$0.01 per share, of the Registrant (filed as Exhibit 4.1 to
Registration Statement on Form S-1/A (Commission file No.
333-59174), filed June 20, 2001, and incorporated herein by
reference).
4.2 Specimen certificate for warrants of the Registrant (filed
within Exhibit 10.10 to Registration Statement on Form S-1/A
(Commission File No. 333-59174), filed June 11, 2001, and
incorporated herein by reference).
4.3 Specimen certificate for 7.350% Senior Notes due March 1,
2006, 7.875% Senior Notes due March 1, 2011 and 8.750%
Senior Notes due March 1, 2031 (filed as Exhibit A within
Exhibit 4.5 to Registration Statement on Form S-1/A
(Commission File No. 333-59174), filed June 11, 2001, and
incorporated herein by reference).
4.4 Form of Preferred Stock Purchase Rights Agreement between
AT&T Wireless Services, Inc. and Equiserve Trust Company,
N.A., as rights agent (filed as Exhibit 4.4 to Registration
Statement on Form S-1/A (Commission file No. 333-59174),
filed June 20, 2001, and incorporated herein by reference).
4.5 Indenture, dated as of March 6, 2001, between AT&T Wireless
Services, Inc. and The Bank of New York, as trustee (filed
as Exhibit 4.5 to Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 11, 2001, and
incorporated herein by reference).
5.1 Opinion as to the legality of the securities being
registered (filed as Exhibit 5.1 to Registration Statement
on Form S-1/A (Commission file No. 333-60472), filed July 5,
2001, and incorporated herein by reference).
10.1 Separation and Distribution Agreement by and between AT&T
Corp. and AT&T Wireless Services, Inc., dated as of June 4,
2001 (filed as Exhibit 10.1 to Registration Statement on
Form S-1/A (Commission file No. 333-59174), filed June 21,
2001, and incorporated herein by reference).
10.2 Amended and Restated Tax Sharing Agreement by and between
AT&T Corp. and AT&T Wireless Services, Inc., dated as of
June 4, 2001 (filed as Exhibit 10.2 to Registration
Statement on Form S-1/A (Commission file No. 333-59174),
filed June 21, 2001, and incorporated herein by reference).
10.3 Employee Benefits Agreement by and between AT&T Corp. and
AT&T Wireless Services, Inc., dated as of June 7, 2001
(filed as Exhibit 10.3 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
10.4 Brand License Agreement by and between AT&T Corp. and AT&T
Wireless Services, Inc., dated as of June 4, 2001 (filed as
Exhibit 10.4 to Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 11, 2001, and
incorporated herein by reference).
10.5 Agency and Referral Agreement by and among AT&T Corp. and
AT&T Wireless Services, Inc., dated as of June 5, 2001
(filed as Exhibit 10.5 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 11, 2001,
and incorporated herein by reference).
10.6 Intellectual Property Agreement by and between AT&T Corp.
and AT&T Wireless Services, Inc., effective as of July 9,
2001 (filed as Exhibit 10.6 to Registration Statement on
Form S-1/A (Commission file No. 333-59174), filed June 11,
2001, and incorporated herein by reference).
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290
EXHIBIT DESCRIPTION
------- -----------
10.7 AT&T Master Carrier Agreement by and between AT&T Corp. and
AT&T Wireless Services, Inc. (filed as Exhibit 10.7 to
Registration Statement on Form S-1/A (Commission file No.
333-59174), filed June 11, 2001, and incorporated herein by
reference).
10.8 Registration Rights Agreement, by and among AT&T Corp. and
AT&T Wireless Services, Inc., dated as of June 4, 2001
(filed as Exhibit 10.8 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
10.9 Investor Agreement by and among AT&T Corp., AT&T Wireless
Services, Inc. and NTT DoCoMo, Inc., dated December 20, 2000
(filed as Exhibit 10.2 to the Current Report on Form 8-K for
AT&T Corp. filed December 22, 2000 and incorporated herein
by reference).
10.10 Warrant Agreement by and among AT&T Wireless Services, Inc.,
NTT DoCoMo, Inc. and AT&T Corp. dated December 20, 2000
(filed as Exhibit 10.3 to the Current Report on Form 8-K for
AT&T Corp. filed December 22, 2000 and incorporated herein
by reference).
10.11 Registration Rights Agreement between AT&T Wireless
Services, Inc., AT&T Corp. and the Initial Purchasers, dated
March 1, 2001 (filed as Exhibit 10.11 to Registration
Statement on Form S-1/A (Commission file No. 333-59174),
filed June 11, 2001, and incorporated herein by reference).
10.12 Amended and Restated Limited Liability Company Agreement of
Alaska Native Wireless, L.L.C. among AT&T Wireless PCS
Interests, LLC, AT&T Wireless Services, Inc., Council Tree
Alaska Native Wireless L.L.C. and certain other parties,
dated as of February 8, 2001 (filed as Exhibit 10.12 to
Registration Statement on Form S-1/A (Commission file No.
333-59174), filed June 20, 2001, and incorporated herein by
reference).
10.13 AT&T Wireless Services, Inc. 2001 Long Term Incentive Plan
(filed as Exhibit 99.1 to Registration Statement on Form S-8
(Commission file No. 333-64484), filed July 3, 2001, and
incorporated herein by reference).
10.14 AT&T Wireless Services, Inc. Employee Stock Purchase Plan
(filed as Exhibit 99.2 to Registration Statement on Form S-8
(Commission file No. 333-64484), filed July 3, 2001, and
incorporated herein by reference).
10.15 AT&T Wireless Services, Inc. Adjustment Plan (filed as
Exhibit 99.3 to Registration Statement on Form S-8
(Commission file No. 333-64484), filed July 3, 2001, and
incorporated herein by reference).
10.16 Employment Agreement between AT&T Wireless Services, Inc.
and Mohan S. Gyani, dated June 20, 2001 (filed as Exhibit
10.16 to Registration Statement on Form S-1/A (Commission
file No. 333-59174), filed June 21, 2001, and incorporated
herein by reference).
10.17 Special Retention Agreement between AT&T Wireless Services,
Inc. and Michael G. Keith, dated January 3, 2000 (filed as
Exhibit 10.17 to Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 11, 2001, and
incorporated herein by reference).
10.18 Special Retention Agreement between AT&T Wireless Services
and Robert H. Johnson, dated June 29, 2000 (filed as Exhibit
10.18 to Registration Statement on Form S-1/A (Commission
file No. 333-59174), filed June 11, 2001, and incorporated
herein by reference).
10.19 Form of Commercial Paper Dealer Agreements, each dated as of
June 13, 2001, between AT&T Wireless Services, Inc. and each
of five dealers (filed as Exhibit 10.19 to Registration
Statement on Form S-1/A (Commission File No. 333-59174),
filed June 20, 2001, and incorporated herein by reference).
10.20 Master Commercial Paper Note of the Registrant, dated June
13, 2001 (filed as Exhibit 10.20 to Registration Statement
on Form S-1/A (Commission File No. 333-59174), filed June
20, 2001, and incorporated herein by reference).
21.1 Subsidiaries of the Registrant (filed as Exhibit 21.1 to
Registration Statement on Form S-1/A (Commission file No.
333-60472), filed July 5, 2001, and incorporated herein by
reference).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Arthur Andersen LLP.
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EXHIBIT DESCRIPTION
------- -----------
23.3 Consent of counsel (included in opinion of counsel filed as
Exhibit 5.1) (included within Exhibit 5.1 to Registration
Statement on Form S-1/A (Commission file No. 333-60472),
filed July 5, 2001, and incorporated herein by reference).
24.1 Powers of attorney executed by the officers and directors of
the Registrant who signed this Registration Statement
(included on page II-4 of the Registration Statement on Form
S-1 (Commission file No. 333-60472), filed May 8, 2001).
99.1 Form of Exchange Agreements between AT&T Corp. and each of
Credit Suisse First Boston Corporation and Goldman, Sachs &
Co., and, in each case, solely with respect to certain
sections, AT&T Wireless Services, Inc. (filed as Exhibit
99.1 to Registration Statement on Form S-1/A (Commission
file No. 333-60472), filed July 5, 2001, and incorporated
herein by reference).
99.2 Consent of Walter Y. Elisha to be named as a director
nominee (filed as Exhibit 99.6 to Registration Statement on
Form S-1/A (Commission file No. 333-59174), filed June 21,
2001, and incorporated herein by reference).
99.3 Consent of Donald V. Fites to be named as a director nominee
(filed as Exhibit 99.7 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
99.4 Consent of Ralph S. Larsen to be named as a director nominee
(filed as Exhibit 99.8 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
99.5 Consent of John W. Madigan to be named as a director nominee
(filed as Exhibit 99.9 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
99.6 Consent of Nobubaru Ono to be named as a director nominee
(filed as Exhibit 99.10 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
99.7 Consent of A. Barry Rand to be named as a director nominee
(filed as Exhibit 99.11 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
99.8 Consent of Carolyn M. Ticknor to be named as a director
nominee (filed as Exhibit 99.12 to Registration Statement on
Form S-1/A (Commission file No. 333-59174), filed June 21,
2001, and incorporated herein by reference).
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purpose of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A
II-5
292
and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
293
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 4 to registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of Basking
Ridge, State of New Jersey, on July 6, 2001.
AT&T WIRELESS SERVICES, INC.
By: /s/ JOHN D. ZEGLIS
------------------------------------
Name: John D. Zeglis
Title: Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement has been signed by the following
persons in the capacities indicated on July 6, 2001.
SIGNATURE TITLE
--------- -----
/s/ JOHN D. ZEGLIS Chairman of the Board and Chief Executive Officer
--------------------------------------------------- and President (Principal Executive Officer)
John D. Zeglis
* Executive Vice President and Chief Financial
--------------------------------------------------- Officer
Joseph McCabe Jr. (Principal Financial and Accounting Officer)
By: /s/ JOHN D. ZEGLIS
---------------------------------------------------
John D. Zeglis
(Attorney-in-fact)
II-7
294
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
1.1 Form of Underwriting Agreement (filed as Exhibit 1.1 to
Registration Statement on Form S-1/A (Commission file No.
333-60472), filed July 5, 2001, and incorporated herein by
reference).
3.1 Restated Certificate of Incorporation of the Registrant, as
amended to date (filed as Exhibit 3.1 to Registration
Statement on Form S-1/A (Commission file No. 333-59174),
filed June 11, 2001, and incorporated herein by reference).
3.2 Form of Certificate of Incorporation of the Registrant, to
be in effect upon completion of the split-off (filed as
Exhibit 3.2 to Registration Statement on Form S-1/A
(Commission file No. 333-60472), filed July 5, 2001, and
incorporated herein by reference).
3.3 Restated By-Laws of the Registrant, as amended to date.
3.4 Form of By-Laws of the Registrant to be in effect upon
completion of the split-off (filed as Exhibit 3.4 to
Registration Statement on Form S-1/A (Commission file No.
333-60472), filed July 5, 2001, and incorporated herein by
reference).
4.1 Specimen certificate for shares of common stock, par value
$0.01 per share, of the Registrant (filed as Exhibit 4.1 to
Registration Statement on Form S-1/A (Commission file No.
333-59174), filed June 20, 2001, and incorporated herein by
reference).
4.2 Specimen certificate for warrants of the Registrant (filed
within Exhibit 10.10 to Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 11, 2001, and
incorporated herein by reference).
4.3 Specimen certificate for 7.350% Senior Notes due March 1,
2006, 7.875% Senior Notes due March 1, 2011 and 8.750%
Senior Notes due March 1, 2031 (filed as Exhibit A within
Exhibit 4.5 to Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 11, 2001, and
incorporated herein by reference).
4.4 Form of Preferred Stock Purchase Rights Agreement between
AT&T Wireless Services, Inc. and Equiserve Trust Company,
N.A., as rights agent (filed as Exhibit 4.4 to Registration
Statement on Form S-1/A (Commission file No. 333-59174),
filed June 20, 2001, and incorporated herein by reference).
4.5 Indenture, dated as of March 6, 2001, between AT&T Wireless
Services, Inc. and The Bank of New York, as trustee (filed
as Exhibit 4.5 to Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 11, 2001, and
incorporated herein by reference).
5.1 Opinion as to the legality of the securities being
registered (filed as Exhibit 5.1 to Registration Statement
on Form S-1/A (Commission file No. 333-60472), filed July 5,
2001, and incorporated herein by reference).
10.1 Separation and Distribution Agreement by and between AT&T
Corp. and AT&T Wireless Services, Inc., dated as of June 4,
2001 (filed as Exhibit 10.1 to Registration Statement on
Form S-1/A (Commission file No. 333-59174), filed June 21,
2001, and incorporated herein by reference).
10.2 Amended and Restated Tax Sharing Agreement by and between
AT&T Corp. and AT&T Wireless Services, Inc., dated as of
June 4, 2001 (filed as Exhibit 10.2 to Registration
Statement on Form S-1/A (Commission file No. 333-59174),
filed June 21, 2001, and incorporated herein by reference).
10.3 Employee Benefits Agreement by and between AT&T Corp. and
AT&T Wireless Services, Inc., dated as of June 7, 2001
(filed as Exhibit 10.3 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
10.4 Brand License Agreement by and between AT&T Corp. and AT&T
Wireless Services, Inc., dated as of June 4, 2001 (filed as
Exhibit 10.4 to Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 11, 2001, and
incorporated herein by reference).
295
10.5 Agency and Referral Agreement by and among AT&T Corp. and
AT&T Wireless Services, Inc., dated as of June 5, 2001
(filed as Exhibit 10.5 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 11, 2001,
and incorporated herein by reference).
10.6 Intellectual Property Agreement by and between AT&T Corp.
and AT&T Wireless Services, Inc., effective as of July 9,
2001 (filed as Exhibit 10.6 to Registration Statement on
Form S-1/A (Commission file No. 333-59174), filed June 11,
2001, and incorporated herein by reference).
10.7 AT&T Master Carrier Agreement by and between AT&T Corp. and
AT&T Wireless Services, Inc. (filed as Exhibit 10.7 to
Registration Statement on Form S-1/A (Commission file No.
333-59174), filed June 11, 2001, and incorporated herein by
reference).
10.8 Registration Rights Agreement by and among AT&T Corp. and
AT&T Wireless Services, Inc., dated as of June 4, 2001
(filed as Exhibit 10.8 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
10.9 Investor Agreement by and among AT&T Corp., AT&T Wireless
Services, Inc. and NTT DoCoMo, Inc., dated December 20, 2000
(filed as Exhibit 10.2 to the Current Report on Form 8-K for
AT&T Corp. filed December 22, 2000 and incorporated herein
by reference).
10.10 Warrant Agreement by and among AT&T Wireless Services, Inc.,
NTT DoCoMo, Inc. and AT&T Corp. dated December 20, 2000
(filed as Exhibit 10.3 to the Current Report on Form 8-K for
AT&T Corp. filed December 22, 2000 and incorporated herein
by reference).
10.11 Registration Rights Agreement between AT&T Wireless
Services, Inc., AT&T Corp. and the Initial Purchasers, dated
March 1, 2001 (filed as Exhibit 10.11 to Registration
Statement on Form S-1/A (Commission file No. 333-59174),
filed June 11, 2001, and incorporated herein by reference).
10.12 Amended and Restated Limited Liability Company Agreement of
Alaska Native Wireless, L.L.C. among AT&T Wireless PCS
Interests, LLC, AT&T Wireless Services, Inc., Council Tree
Alaska Native Wireless L.L.C. and certain other parties,
dated as of February 8, 2001 (filed as Exhibit 10.12 to
Registration Statement on Form S-1/A (Commission file No.
333-59174), filed June 20, 2001, and incorporated herein by
reference).
10.13 AT&T Wireless Services, Inc. 2001 Long Term Incentive Plan
(filed as Exhibit 99.1 to Registration Statement on Form S-8
(Commission file No. 333-64484), filed July 3, 2001, and
incorporated herein by reference).
10.14 AT&T Wireless Services, Inc. Employee Stock Purchase Plan
(filed as Exhibit 99.2 to Registration Statement on Form S-8
(Commission file No. 333-64484), filed July, 2001, and
incorporated herein by reference).
10.15 AT&T Wireless Services, Inc. Adjustment Plan (filed as
Exhibit 99.3 to Registration Statement on Form S-8
(Commission file No. 333-64484), filed July 3, 2001, and
incorporated herein by reference).
10.16 Employment Agreement between AT&T Wireless Services, Inc.
and Mohan S. Gyani, dated June 20, 2001 (filed as Exhibit
10.16 to Registration Statement on Form S-1/A (Commission
file No. 333-59174), filed June 21, 2001, and incorporated
herein by reference).
10.17 Special Retention Agreement between AT&T Wireless Services,
Inc. and Michael G. Keith, dated January 3, 2000 (filed as
Exhibit 10.17 to Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 11, 2001, and
incorporated herein by reference).
10.18 Special Retention Agreement between AT&T Wireless Services
and Robert H. Johnson, dated June 29, 2000 (filed as Exhibit
10.18 to Registration Statement on Form S-1/A (Commission
file No. 333-59174), filed June 11, 2001, and incorporated
herein by reference).
296
10.19 Form of Commercial Paper Dealer Agreements, each dated as of
June 13, 2001, between AT&T Wireless Services, Inc. and each
of five dealers (filed as Exhibit 10.19 to Registration
Statement on Form S-1/A (Commission File No. 333-59174),
filed June 20, 2001, and incorporated herein by reference).
10.20 Master Commercial Paper Note of the Registrant, dated June
13, 2001 (filed as Exhibit 10.20 to Registration Statement
on Form S-1/A (Commission File No. 333-59174), filed June
20, 2001, and incorporated herein by reference).
21.1 Subsidiaries of the Registrant (filed as Exhibit 21.1 to
Registration Statement on Form S-1/A (Commission file No.
333-60472), filed July 5, 2001, and incorporated herein by
reference).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of counsel (included in opinion of counsel filed as
Exhibit 5.1) (included within Exhibit 5.1 to Registration
Statement on Form S-1/A (Commission file No. 333-60472),
filed July 5, 2001, and incorporated herein by reference).
24.1 Powers of attorney executed by the officers and directors of
the Registrant who signed this Registration Statement
(included on page II-4 of the Registration Statement on Form
S-1 (Commission file No. 333-60472), filed May 8, 2001).
99.1 Form of Exchange Agreements between AT&T Corp. and each of
Credit Suisse First Boston Corporation and Goldman, Sachs &
Co., and, in each case, solely with respect to certain
sections, AT&T Wireless Services, Inc. (filed as Exhibit
99.1 to Registration Statement on Form S-1/A (Commission
file No. 333-60472), filed July 5, 2001, and incorporated
herein by reference).
99.2 Consent of Walter Y. Elisha to be named as a director
nominee (filed as Exhibit 99.6 to Registration Statement on
Form S-1/A (Commission file No. 333-59174), filed June 21,
2001, and incorporated herein by reference).
99.3 Consent of Donald V. Fites to be named as a director nominee
(filed as Exhibit 99.7 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
99.4 Consent of Ralph S. Larsen to be named as a director nominee
(filed as Exhibit 99.8 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
99.5 Consent of John W. Madigan to be named as a director nominee
(filed as Exhibit 99.9 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
99.6 Consent of Nobubaru Ono to be named as director nominee
(filed as Exhibit 99.10 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
99.7 Consent of A. Barry Rand to be named as a director nominee
(filed as Exhibit 99.11 to Registration Statement on Form
S-1/A (Commission file No. 333-59174), filed June 21, 2001,
and incorporated herein by reference).
99.8 Consent of Carolyn M. Ticknor to be named as a director
nominee (filed as Exhibit 99.12 to Registration Statement on
Form S-1/A (Commission file No. 333-59174), filed June 21,
2001, and incorporated herein by reference).