-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fxur6uFPTDDDsAitb1mgGpb+jV6zGTYBr6NzqQPt7JWDO6tLsGebo7WoBlJ1r+w/ Ch79nj4NVpZLIfujZA7GPA== 0001047469-98-028046.txt : 19980723 0001047469-98-028046.hdr.sgml : 19980723 ACCESSION NUMBER: 0001047469-98-028046 CONFORMED SUBMISSION TYPE: 424B2 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980722 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDIA ONE GROUP INC CENTRAL INDEX KEY: 0000732718 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 840926774 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B2 SEC ACT: SEC FILE NUMBER: 333-57187 FILM NUMBER: 98669858 BUSINESS ADDRESS: STREET 1: 188 INVERNESS DR WEST CITY: ENGLEWOOD STATE: CO ZIP: 80112 MAIL ADDRESS: STREET 1: 188 INVERNESS DRIVE WEST CITY: ENGLEWOOD STATE: CO ZIP: 80112 FORMER COMPANY: FORMER CONFORMED NAME: US WEST INC DATE OF NAME CHANGE: 19920703 424B2 1 424B2 SUBJECT TO COMPLETION, DATED JULY 22, 1998 This preliminary prospectus supplement and the information contained herein are subject to completion or amendment and prospective purchasers are referred to the related final prospectus supplement for definitive information on any matter contained herein. Neither this prospectus supplement nor the accompanying prospectus shall constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. Filed Pursuant to Rule 424(b)(2) Registration No. 333-57187 PRELIMINARY PROSPECTUS SUPPLEMENT (To Prospectus Dated July 22, 1998) [LOGO] PREMIUM INCOME EXCHANGEABLE SECURITIES(SM) (PIES(SM)) (AGGREGATE PRINCIPAL AMOUNT $1,500,000,000) OF MEDIAONE GROUP, INC. % EXCHANGEABLE NOTES DUE AUGUST , 2001 SUBJECT TO EXCHANGE INTO SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF AIRTOUCH COMMUNICATIONS, INC. [LOGO] -------------------------- The principal amount of each of the % Exchangeable Notes (each, a "PIES") of MediaOne Group, Inc. ("MediaOne Group") being offered hereby will be $ (the last sale price of the common stock, par value $.01 per share (the "AirTouch Common Stock"), of AirTouch Communications, Inc. ("AirTouch") on , 1998 as reported on the New York Stock Exchange Composite Tape) (the "Initial Price"). The PIES will mature on August , 2001 (such date and any permitted extensions thereof, "Stated Maturity") except as otherwise provided herein. Interest on the PIES will accrue at a rate of % of the principal amount per annum until Maturity (as defined below) and is payable quarterly in arrears on each February , May , August and November , beginning November , 1998 and at Maturity. (COVER CONTINUED ON NEXT PAGE) -------------------------- SEE "RISK FACTORS" BEGINNING ON PAGE S-5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCCEDS TO PRICE TO DISCOUNT AND MEDIAONE PUBLIC(1) COMMISSIONS(2) GROUP(1)(3) Per PIES........................................... $ $ $ Total(4)........................................... $ $ $
(1) Plus accrued interest, if any, from the issue date. (2) MediaOne Group and AirTouch have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Plan of Distribution." (3) Before deducting estimated expenses of $ payable by MediaOne Group. (4) MediaOne Group has granted to the Underwriters a 30-day option to purchase an additional number of PIES having an aggregate principal amount of up to $225,000,000 on the same terms and conditions as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Commissions, and Proceeds to MediaOne Group will be $ , $ , and $ , respectively. See "Plan of Distribution." -------------------------- The PIES offered by this Prospectus Supplement are offered by the Underwriters subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the Underwriters and to certain further conditions. It is expected that delivery of the PIES will be made through The Depository Trust Company, New York, New York, on or about , 1998. -------------------------- LEHMAN BROTHERS MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO. , 1998 "Premium Income Exchangeable Securities(SM)" and "PIES(SM)" are service marks owned by Lehman Brothers Inc. (COVER CONTINUED FROM PREVIOUS PAGE) At Maturity the principal amount of each PIES will be mandatorily exchanged by MediaOne Group into a number of shares of AirTouch Common Stock (or, at MediaOne Group's option under the circumstances described herein, the cash equivalent for all or part thereof and/or such other consideration as permitted or required by the terms of the PIES) at the Exchange Rate (as defined herein). MediaOne Group, at its option, may extend the Stated Maturity of the PIES for up to six months, and, if such extension exceeds three months, will pay additional interest, all as further described herein. Attached to this Prospectus Supplement for convenience of reference is a separate prospectus of AirTouch relating to the shares of AirTouch Common Stock that may be received by holders of PIES at Maturity. AIRTOUCH IS NOT AN AFFILIATE OF MEDIAONE GROUP. AIRTOUCH WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE PIES AND WILL HAVE NO OBLIGATIONS WITH RESPECT TO THE PIES. AirTouch Common Stock is listed for trading on the New York Stock Exchange ("NYSE") under the symbol "ATI." Application will be made to list the PIES on the NYSE. Prior to the offering made hereby, there has not been a public market for the PIES. -------------------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PIES AND THE AIRTOUCH COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF AIRTOUCH COMMON STOCK PRIOR TO THE PRICING OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE PIES AND THE AIRTOUCH COMMON STOCK, THE PURCHASE OF PIES FOLLOWING THE PRICING OF THE OFFERING TO COVER A SHORT POSITION IN THE PIES AND THE PURCHASE OF AIRTOUCH COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE PIES AND THE AIRTOUCH COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION." S-2 "[Map of AirTouch Communications, Inc. Worldwide Markets]" SUMMARY OF THE OFFERING Securities Offered................ PIES % Exchangeable Notes of MediaOne Group having an aggregate principal amount of $1,500,000,000. Offering Price.................... $ per PIES (the last sale price of the AirTouch Common Stock on , 1998). Interest.......................... % per annum, payable quarterly in arrears on each February , May , August and November , beginning November , 1998 and at Maturity. Stated Maturity................... The PIES will mature on August , 2001, subject to extension as described herein. Mandatory Exchange................ At Maturity the principal amount of each PIES will be mandatorily exchanged by MediaOne Group into a number of shares of AirTouch Common Stock (or, at MediaOne Group's option under the circumstances described herein, the cash equivalent for all or part thereof and/or such other consideration as permitted or required by the terms of the PIES) at the Exchange Rate. The "Exchange Rate" is equal to, subject to certain adjustments: (a) if the Maturity Price is greater than or equal to $ per share of AirTouch Common Stock (the "Threshold Appreciation Price"), shares of AirTouch Common Stock per PIES; (b) if the Maturity Price is less than the Threshold Appreciation Price but is greater than the Initial Price, a fraction of one share of AirTouch Common Stock per PIES equal to the quotient of (i) the Initial Price divided by (ii) the Maturity Price; and (c) if the Maturity Price is less than or equal to the Initial Price, one share of AirTouch Common Stock per PIES. See "Description of the PIES--Dilution Adjustments; Adjustment Events." The value of the AirTouch Common Stock to be received by holders of the PIES (or the cash equivalent for all or part thereof and/or other consideration) at Maturity may be less than the principal amount thereof. Holders of PIES will realize no equity appreciation if the Maturity Price is less than the Threshold Appreciation Price, and will realize only % of the appreciation above the Threshold Appreciation Price. The "Maturity Price" (other than in the case of a post-extension termination of the PIES (as described under the caption "Description of the PIES-- Extensions and Post-Extension Termination")) means the average Closing Price (as defined herein) per share of AirTouch Common Stock on the 20 Trading Days (as defined herein) immediately prior to Maturity, as further described herein. "Maturity" means the date on which the principal of the PIES becomes due and payable as therein provided, whether at the Stated Maturity (whether as initially stated or as extended) or by declaration of acceleration, post-extension termination or otherwise.
S-3 Extension of Stated Maturity...... MediaOne Group, at its option, may extend the Stated Maturity of the PIES for up to two extension periods of three months each (subject to post-extension termination as described below), provided that if two such extension periods are utilized, additional interest at a rate of 0.5% per annum will accrue on the PIES during the second of such periods. MediaOne Group, at its option, may also cause all but not less than all of the PIES to be terminated and repaid at any time within an extension period under the circumstances described herein. See "Description of the PIES--Extensions and Post-Extension Termination." Defeasance........................ The PIES are subject to defeasance on the terms described herein. See "Description of the PIES--Defeasance." Listing........................... The AirTouch Common Stock is listed for trading on the "NYSE" under the symbol "ATI." Application will be made to list the PIES on the NYSE. Use of Proceeds................... The net proceeds to be received by MediaOne Group from sales of the PIES will be used by MediaOne Group and its affiliates to reduce short-term indebtedness and for general corporate purposes. See "Use of Proceeds."
S-4 RISK FACTORS Before investing in the PIES, prospective investors should consider carefully all the information set forth or incorporated by reference in this Prospectus Supplement including the considerations set forth below. RISK FACTORS RELATING TO PIES As described in more detail below, the trading price of the PIES may vary considerably prior to Maturity due to, among other things, fluctuations in the market price of AirTouch Common Stock and other events that are difficult to predict and beyond MediaOne Group's control. COMPARISON TO OTHER DEBT SECURITIES; RELATIONSHIP TO AIRTOUCH COMMON STOCK. The terms of the PIES differ from those of ordinary debt securities in that the value of the AirTouch Common Stock (or cash equivalent for all or part thereof and/or other consideration) that a holder of the PIES will receive upon mandatory exchange of the principal amount thereof at Maturity (the "Amount Receivable at Maturity") is not fixed, but is based on the market price of the AirTouch Common Stock (and of such other consideration) as specified in the Exchange Rate (as defined under "Description of the PIES"). There can be no assurance that the Amount Receivable at Maturity will be equal to or greater than the principal amount of the PIES. For example, if the Maturity Price of the AirTouch Common Stock is less than the Initial Price, the Amount Receivable at Maturity will generally be less than the principal amount paid for the PIES, in which case an investment in PIES would result in a loss. If AirTouch were to become insolvent or bankrupt, the PIES could result in a total loss. Holders of the PIES, therefore, bear the full risk of a decline in the value of the AirTouch Common Stock during the term of the PIES. Dividends are not currently paid on the AirTouch Common Stock. Accordingly, the yield on the PIES is higher than the current dividend yield on the AirTouch Common Stock. However, there is no assurance that the yield on the PIES will be higher than the dividend yield on the AirTouch Common Stock over the term of the PIES. In addition, the opportunity for equity appreciation afforded by an investment in the PIES is less than the opportunity for equity appreciation afforded by an investment in AirTouch Common Stock because the Amount Receivable at Maturity will only exceed the principal amount of such PIES if the Maturity Price exceeds the Threshold Appreciation Price (as defined under "Description of the PIES"), which represents an appreciation of % of the Initial Price. Moreover, holders of the PIES will only be entitled to receive upon exchange at Maturity % of any appreciation of the value of AirTouch Common Stock in excess of the Threshold Appreciation Price. See "Description of the PIES" for an illustration of the Amount Receivable at Maturity that a PIES holder will receive at various Maturity Prices. Because the market price of the AirTouch Common Stock is subject to market fluctuations, the Amount Receivable at Maturity may be more or less than the principal amount of the PIES. In addition, because the Maturity Price is generally determined based on a 20-Trading-Day average, the value of a share of AirTouch Common Stock distributed at Maturity may be less than the Maturity Price used to determine the Amount Receivable at Maturity. The market price of the PIES at any time will be affected primarily by changes in the price of AirTouch Common Stock. It is impossible to predict whether the price of AirTouch Common Stock will rise or fall. Trading prices of AirTouch Common Stock will be influenced by AirTouch's operational results and by complex and interrelated political, economic, financial and other factors that can affect the capital markets generally, the stock exchange on which AirTouch Common Stock is traded and the market segment of which AirTouch is a part. See the prospectus relating to AirTouch and to AirTouch Common Stock attached hereto. Trading prices of AirTouch Common Stock also may be influenced if AirTouch, MediaOne Group or a principal stockholder of AirTouch hereafter issues securities with terms similar to those of the PIES or otherwise transfers shares of AirTouch Common Stock. As of the date hereof, a wholly owned subsidiary of MediaOne Group held an aggregate of 59,313,621 shares of AirTouch S-5 Common Stock, shares of which ( shares if the Underwriters' over-allotment option is exercised in full) MediaOne Group may deliver to holders of the PIES at Maturity. IMPACT OF THE PIES ON THE MARKET FOR AIRTOUCH COMMON STOCK. Any market that develops for the PIES is likely to influence and be influenced by the market for AirTouch Common Stock. For example, the price of the AirTouch Common Stock could become more volatile and could be depressed by investors' anticipation of the potential distribution into the market of substantial additional amounts of AirTouch Common Stock at the maturity of the PIES, by possible sales of the AirTouch Common Stock by investors who view the PIES as a more attractive means of equity participation in AirTouch and by hedging or arbitrage trading activity that may develop involving the PIES and the AirTouch Common Stock. POTENTIAL FUTURE ISSUANCES OF AIRTOUCH COMMON STOCK. As of July 15, 1998, AirTouch had outstanding 17,252,923 shares of its 6.00% Class B Preferred Stock, Series 1996 (the "Class B Preferred Stock") that mature on August 16, 1999, or earlier upon the occurrence of specified mergers or asset dispositions by AirTouch. At maturity, the Class B Preferred Stock will be mandatorily exchangeable by AirTouch into up to 17,252,923 shares of AirTouch Common Stock. Based on the market price of the AirTouch Common Stock on July 15, 1998, 13,905,856 shares would be mandatorily exchanged. Prior to maturity, each share is convertible at the option of the holder at any time into 0.806 shares of AirTouch Common Stock. As of July 15, 1998, AirTouch had outstanding 11,080,082 shares of its 4.25% Class C Convertible Preferred Stock, Series 1996 (the "Class C Preferred Stock"). Each share of Class C Preferred Stock is convertible at the option of the holder at any time into 1.379 shares of AirTouch Common Stock, subject to certain adjustments. After August 16, 1999, the Class C Preferred Stock will be redeemable by AirTouch in exchange for shares of AirTouch Common Stock at any time if certain trading conditions exist, and after August 16, 2000, at any time regardless of then existing trading conditions. Based on the market price of the AirTouch Common Stock on July 15, 1998, 15,279,433 shares would be issuable upon redemption. The price of AirTouch Common Stock could become more volatile and could be depressed by investors' anticipation of the potential distribution into the market of substantial additional amounts of AirTouch Common Stock at maturity or conversion of the foregoing securities. POTENTIAL DILUTION OF AIRTOUCH COMMON STOCK; STOCKHOLDER RIGHTS. The Amount Receivable at Maturity is subject to adjustment for certain events arising from stock splits and combinations, stock dividends and certain other actions of AirTouch that modify its capital structure. See "Description of the PIES--Dilution Adjustments; Adjustment Events." Such Amount Receivable at Maturity may not be adjusted for other events, such as offerings of AirTouch Common Stock (or securities convertible into AirTouch Common Stock) for cash or in connection with acquisitions or distributions of AirTouch Common Stock upon the maturity or conversion of instruments described in "--Potential Future Issuances of AirTouch Common Stock" above, that may adversely affect the price of AirTouch Common Stock, and, because of the relationship of such Amount Receivable at Maturity to the price of AirTouch Common Stock, such other events may adversely affect the trading price of the PIES. There can be no assurance that AirTouch or MediaOne Group, a principal stockholder of AirTouch, will not make offerings of AirTouch Common Stock (or securities convertible into AirTouch Common Stock) or take such other action in the future or as to the amount of such offerings, if any. In addition, until such time, if any, as MediaOne Group shall deliver shares of AirTouch Common Stock to holders of the PIES at Maturity thereof, holders of the PIES will not be entitled to any rights with respect to AirTouch Common Stock (including, without limitation, voting rights, rights to respond to tender offers and the rights to receive any dividends or other distributions in respect thereof). Nevertheless, dividends paid in excess of a specified level will result in a cash payment in an amount calculated as described herein to holders of the PIES at Maturity. NO AFFILIATION BETWEEN MEDIAONE GROUP AND AIRTOUCH. A wholly owned subsidiary of MediaOne Group currently owns for its own account approximately 10.3% (59,313,621 shares) of the outstanding AirTouch Common Stock. Notwithstanding such ownership, except for certain contractual arrangements S-6 described herein, MediaOne Group is not affiliated with AirTouch and does not have the right to designate any members of the Board of Directors of AirTouch or to otherwise influence the management or operations of AirTouch. AirTouch has no obligations with respect to the PIES or the Amount Receivable at Maturity, including any obligation to take the needs of MediaOne Group or of holders of the PIES into consideration for any reason. AirTouch will not receive any of the proceeds of the offering of the PIES made hereby and is not responsible for, and has not participated in, the determination of the time of, prices for or quantities of PIES to be issued or the determination or calculation of the Amount Receivable at Maturity. AirTouch is not involved with the administration or trading of the PIES. POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET. It is not possible to predict how the PIES will trade in the secondary market or whether such market will be liquid or illiquid. There is currently no secondary market for the PIES. The Underwriters currently intend, but are not obligated, to make a market in the PIES, and any such market-making may be discontinued at any time in the sole discretion of the Underwriters without notice. There can be no assurance that a secondary market will develop or, if a secondary market does develop, that it will provide the holders of the PIES with liquidity or that it will continue for the life of the PIES. MediaOne Group will make application to list the PIES on the NYSE. Assuming the acceptance of such application, there can be no assurance that the PIES will not later be delisted or that trading in the PIES on the NYSE will not be suspended. In the event of a delisting or suspension of trading on such exchange, MediaOne Group will apply for listing of the PIES on another national securities exchange or for quotation on another trading market. If the PIES are not listed or traded on any securities exchange or trading market, or if trading of the PIES is suspended, pricing information for the PIES may be more difficult to obtain, and the price and liquidity of the PIES may be adversely affected. RISK FACTORS RELATING TO AIRTOUCH. Investors in the PIES should carefully consider the information in the prospectus of AirTouch attached hereto, including the information contained therein under "Risk Factors." UNCERTAINTY OF FEDERAL INCOME TAX CONSEQUENCES. No statutory, judicial or administrative authority directly addresses the characterization of the PIES or instruments similar to the PIES for U.S. federal income tax purposes. As a result, significant aspects of the U.S. federal income tax consequences of an investment in the PIES are not certain. No ruling is being requested from the Internal Revenue Service with respect to the PIES and no assurance can be given that the Internal Revenue Service will agree with the conclusions expressed under "United States Federal Income Tax Consequences." RANKING OF PIES. The PIES will be unsecured obligations of MediaOne Group ranking pari passu in right of payment with all other unsecured and unsubordinated obligations of MediaOne Group. Nevertheless, MediaOne Group is a holding company that conducts its operations through subsidiaries, and therefore, the obligations of MediaOne Group under the PIES will be structurally subordinated to all of the indebtedness of MediaOne Group's subsidiaries. As of March 31, 1998, MediaOne Group's consolidated subsidiaries had outstanding approximately $5.0 billion of indebtedness after giving effect to the use of the estimated proceeds from this offering as described in "Use of Proceeds," the discontinuance of the businesses of New U S WEST, the consummation of the AirTouch Transaction and the refinancing of the indebtedness of Old U S WEST, each as described in "Recent Developments" and "Capitalization." The indebtedness of these subsidiaries includes all of the indebtedness of MediaOne Group of Delaware, Inc. (formerly Continental Cablevision, Inc.), MediaOne Group's principal domestic operating subsidiary ("MediaOne Delaware"), which, as of March 31, 1998, had outstanding approximately $2.7 billion of indebtedness. S-7 RISK FACTORS RELATING TO MEDIAONE GROUP OPERATING LOSSES. For the year ended December 31, 1997 and the three months ended March 31, 1998, on a pro forma basis after giving effect to the discontinuance of the operations of the businesses of New U S WEST and the AirTouch Transaction (as defined herein), MediaOne Group would have had operating losses from continuing operations of $617 million and $175 million, respectively. See "Summary Financial Data." These losses result from the significant amount of amortization of intangible assets recognized in connection with the acquisition of Continental Cablevision, Inc. and from depreciation associated with capital expenditures required to upgrade MediaOne Group's networks. There can be no assurance that MediaOne Group will realize positive operating income from continuing operations in the foreseeable future. REGULATION. The businesses of MediaOne Group are subject to a high degree of regulation at the federal, state and local levels, as well as in various foreign countries in connection with certain overseas business activities. These regulations can in certain circumstances impose significant limitations on operations. In addition, these regulations are constantly evolving and may change significantly over time. There can be no assurance the future regulatory changes will not have a material adverse effect on MediaOne Group. COMPETITION. MediaOne Group's businesses operate in an increasingly competitive environment. MediaOne Group's cable television systems compete with other providers of video programming. The cable television services offered by MediaOne Group face competition from other communications and entertainment media, including broadcast television, video tape rentals and live sporting events. In addition, with the passage of the Telecommunications Act of 1996, additional competitors are entering into MediaOne Group's markets, including local exchange carriers with greater financial resources than MediaOne Group who offer video programming services similar to those offered by MediaOne Group. As MediaOne Group begins to offer additional services over its networks, including local exchange and data services, MediaOne Group will face additional competition from other providers of such services, including from local exchange carriers, interexchange carriers and internet service providers. MediaOne Group's international businesses also typically face significant competition in their markets. The broadband communications industry is continually subject to rapid and significant changes in technology. There can be no assurance that the introduction of any new technology will not result in the entry of additional competitors into MediaOne Group's markets, which could reduce MediaOne Group's market share. RISKS ASSOCIATED WITH INTERNATIONAL INVESTMENTS. MediaOne Group has made and intends to continue to consider making, investments in companies located outside of the United States. Such investments are subject to risks and uncertainties relating to international investments which may include taxation, nationalization, inflation, currency fluctuations, increased regulation and approval requirements and governmental regulation limiting returns to foreign investors. In recent months, investments in Asia have been subject to an unusually high level of risk, owing to uncertainty from economic and political conditions. FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE. Some of the information presented in or in connection with this Prospectus Supplement constitutes "forwarding-looking statements." Although MediaOne Group believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that could cause actual results to differ from expectations include: (i) greater than anticipated competition from new entrants into the cable and international wireless communications markets; (ii) changes in demand for MediaOne Group's products and services; (iii) regulatory changes affecting the cable and telecommunications industries; (iv) changes in economic conditions in the various markets served by MediaOne Group's operations that could adversely affect the level of demand for cable, international wireless or other services offered by MediaOne Group; (v) greater than anticipated competitive activity requiring new pricing for services; (vi) higher than anticipated start- S-8 up costs associated with new business opportunities; (vii) higher than anticipated employee levels, capital expenditures and operating expenses (such as costs associated with the year 2000 remediation); (viii) consumer acceptance of broadband services, including telephony and data services, and international wireless services; (ix) increases in fraudulent activity with respect to broadband and wireless services; and (x) delays in the development of anticipated technologies, or the failure of such technologies to perform according to expectations. MEDIAONE GROUP, INC. MediaOne Group is a diversified global media and broadband communications company. MediaOne Group has operations and investments in two principal areas: (i) domestic broadband communications and (ii) international broadband and wireless communications. MediaOne Group is the third largest cable television system operator in the United States with large clusters in Atlanta, Georgia, Eastern Massachusetts, Southern California, Southern Florida, Detroit, Michigan and Minneapolis/St. Paul, Minnesota. As of March 31, 1998, MediaOne Group's domestic cable television systems passed approximately 8.4 million homes and provided services to approximately 4.9 million basic cable subscribers. MediaOne Group also owns a 25.51% priority capital and residual equity interest in Time Warner Entertainment Company, L.P., a provider of cable programming, filmed entertainment and broadband communications services and the second largest cable television system operator in the United States. Outside of the United States, MediaOne Group owns interests in various providers of broadband and wireless communications services in markets in continental Europe, the United Kingdom and Asia, including a 26.8% interest in Telewest Communications plc, the second largest provider of combined cable and telecommunications services in the United Kingdom, and a 50% interest in One 2 One, a provider of personal communications services in the United Kingdom. RECENT DEVELOPMENTS THE SEPARATION Prior to June 12, 1998, MediaOne Group was known as "U S WEST, Inc." ("Old U S WEST"). On June 12, 1998, Old U S WEST consummated a transaction in which it separated its businesses into two independent companies (the "Separation"). Until the Separation, Old U S WEST conducted its businesses through two groups: the U S WEST Communications Group (the "Communications Group") and the U S WEST Media Group (the "Media Group"). In connection with the Separation, Old U S WEST contributed the businesses of the Communications Group and the domestic directories business of the Media Group, known as "Dex," to a wholly owned subsidiary of Old U S WEST (such subsidiary is referred to as "New U S WEST"), and distributed all of the common stock of New U S WEST to Old U S WEST's stockholders. Upon consummation of the Separation, New U S WEST was renamed "U S WEST, Inc." and Old U S WEST was renamed "MediaOne Group, Inc." and has continued to conduct the business of the Media Group other than Dex. THE AIRTOUCH TRANSACTION On April 6, 1998, MediaOne Group sold its domestic wireless business to AirTouch (the "AirTouch Transaction"). Pursuant to the AirTouch Transaction, MediaOne Group received from AirTouch (i) 59,446,902 shares of AirTouch Common Stock, 133,281 of which were subsequently delivered to AirTouch in settlement of certain post-closing adjustments, and (ii) 825,000 shares of 5.143% Class D Cumulative Preferred Stock, Series 1998, par value $.01 per share, and 825,000 shares of 5.143% Class E Cumulative Preferred Stock, Series 1998, par value $.01 per share, of AirTouch (collectively, the "AirTouch Preferred Stock") having an aggregate liquidation preference of $1.65 billion. In addition, AirTouch assumed $1.35 billion of indebtedness of MediaOne Group's domestic wireless business. Prior to the consummation of the AirTouch Transaction, MediaOne Group and AirTouch were parties to a multi-phased joint venture pursuant to which the parties had agreed to combine their domestic wireless businesses. The AirTouch Transaction was consummated in lieu of such joint venture. S-9 AIRTOUCH COMMUNICATIONS, INC. AirTouch is the largest wireless telecommunication services company in the world based on the 31.5 million total wireless customers served by the company and its ventures as of June 30, 1998. Based on its ownership shares of its global ventures, AirTouch had approximately 15.1 million proportionate customers as of June 30, 1998. Through its operations in the United States, Europe, Asia and North Africa, AirTouch provides a full range of wireless telecommunication services, including cellular, personal communications services and paging, and in the future will also provide global satellite communications. AirTouch's principal objective is to be the premier provider of wireless telecommunication services worldwide. To achieve its objective, AirTouch focuses on profitable growth of its existing operations; pursues new wireless licenses in selected countries and increases in ownership interests in existing markets; and pursues other value-creating opportunities around the world. RELATIONSHIP BETWEEN MEDIAONE GROUP AND AIRTOUCH A wholly owned subsidiary of MediaOne Group currently owns for its own account approximately 10.3% (59,313,621 shares) of the outstanding AirTouch Common Stock. In addition, a wholly owned subsidiary of MediaOne Group currently owns for its own account the AirTouch Preferred Stock. The AirTouch Preferred Stock is not convertible into AirTouch Common Stock. MediaOne Group acquired such shares of AirTouch Common Stock and AirTouch Preferred Stock in connection with the AirTouch Transaction. See "Recent Developments--The AirTouch Transaction." In connection with the AirTouch Transaction, MediaOne Group and AirTouch entered into the Amended and Restated Investment Agreement, dated as of April 6, 1998 (the "Investment Agreement"). Pursuant to the Investment Agreement, MediaOne Group has agreed that MediaOne Group and its affiliates will vote all of the shares of AirTouch Common Stock held by them in favor of the individuals nominated by AirTouch for election to the Board of Directors of AirTouch and on all other matters in the same proportion as all other holders of the AirTouch Common Stock. Notwithstanding the foregoing, if, in connection with a transfer by MediaOne Group of AirTouch Common Stock, counsel to MediaOne Group or to AirTouch informs MediaOne Group and AirTouch in writing that, as a result of the foregoing voting agreement, such counsel is unable to deliver an opinion that MediaOne Group is not an "affiliate" of AirTouch within the meaning of Rule 144 under the Securities Act, then MediaOne Group has agreed that MediaOne Group and its affiliates will vote all of the shares of AirTouch Common Stock held by them in respect of all matters in the same proportion as all other holders of the AirTouch Common Stock. In addition, pursuant to the Investment Agreement, AirTouch has granted to MediaOne Group certain registration rights and MediaOne Group has agreed not to purchase additional shares of AirTouch Common Stock and is subject to certain limited transfer restrictions with respect to the shares of AirTouch Common Stock it owns. Pursuant to the Investment Agreement, in connection with the offering of the PIES, AirTouch has agreed to indemnify MediaOne Group against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). Notwithstanding the ownership by MediaOne Group of approximately 10.3% of the AirTouch Common Stock, except for the contractual arrangements described above, MediaOne Group has no role in the management or operational decisions of AirTouch. MediaOne Group does not have the right to designate any members of the Board of Directors of AirTouch or to otherwise influence the management or operations of AirTouch, and assumes no responsibility for the accuracy or completeness of the information contained in the prospectus of AirTouch attached hereto. MediaOne Group does not believe that it is an "affiliate" of AirTouch within the meaning of the Securities Act. See "Risk Factors--Risk Factors Relating to PIES--No Affiliation Between MediaOne Group and AirTouch." S-10 CAPITALIZATION The following table sets forth, at March 31, 1998, (i) the unaudited historical consolidated capitalization of MediaOne Group, restated to give effect to the discontinuance of the businesses of New U S WEST, (ii) the unaudited pro forma condensed combined capitalization of MediaOne Group, which gives effect to the discontinuance of the businesses of New U S WEST, the distribution of New U S WEST to Old U S WEST's shareholders pursuant to the Separation, the refinancing by New U S WEST of $3.9 billion of indebtedness of Old U S WEST, transfers of certain assets and liabilities to New U S WEST and allocations of certain costs and expenses in connection with the Separation and the AirTouch Transaction, as if such transactions had been consummated as of March 31, 1998, (iii) adjustments to the unaudited pro forma condensed combined capitalization of MediaOne Group necessary to give effect to (x) the actual costs and results of the refinancing of indebtedness by MediaOne Group in connection with the Separation and (y) the sale of the PIES and the application of the net proceeds thereof as described under "Use of Proceeds," and (iv) the adjusted condensed combined capitalization of MediaOne Group, which represents the unaudited pro forma condensed combined capitalization of MediaOne Group, adjusted for the transactions described in the preceding clause (iii). The unaudited pro forma capitalization and the adjusted capitalization are presented for information purposes only and are not necessarily indicative of the future capitalization of MediaOne Group. The table should be read in conjunction with MediaOne Group's historical and pro forma financial statements and the notes thereto included in the documents incorporated by reference herein, including MediaOne Group's Current Report on Form 8-K, dated June 18, 1998. See "Incorporation of Certain Documents by Reference" in the accompanying Prospectus of MediaOne Group.
AT MARCH 31, 1998 (UNAUDITED) RESTATED HISTORICAL PRO FORMA ADJUSTMENTS AS ADJUSTED ----------- ----------- ------------- ----------- (DOLLARS IN MILLIONS) Short-term debt............................................... $ 958 $ 1,009 211(a) 239 519(b) (1,500)(c) Long-term debt Notes, debentures and other................................. 8,247 3,285 (16)(a) 3,269 PIES........................................................ 1,500(c) 1,500 ----------- ----------- ------------- ----------- Total long-term debt...................................... 8,247 3,285 1,484 4,769 ----------- ----------- ------------- ----------- Mandatorily redeemable preferred securities................... 100 100 100 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company-guaranteed debentures ("Preferred Securities")......................... 1,080 1,080 (1,017)(b) 561 498(b) Total equity.................................................. 11,352 12,713 7(a) 12,720 ----------- ----------- ------------- ----------- Total capitalization.......................................... $ 21,737 $ 18,187 $ 202 $ 18,389 ----------- ----------- ------------- ----------- ----------- ----------- ------------- -----------
- ------------------------ (a) Represents adjustments to reflect the actual allocation of debt between short-term debt and long-term debt upon refinancing of indebtedness in connection with the Separation (the "Refinancing"), and adjustments for actual debt refinancing costs. MediaOne Group retained excess funds related to the Refinancing of approximately $200 million as cash on hand. (b) Amounts reflect adjustments for the cash paid and securities issued in the tender and exchange offer amounts of Preferred Securities pursuant to the Refinancing. The cash tender of Preferred Securities was financed with commercial paper debt. (c) Adjustment reflects the issuance of PIES and the use of the debt proceeds to repay commercial paper debt. S-11 SUMMARY FINANCIAL DATA The summary historical financial information of MediaOne Group set forth below should be read in conjunction with the restated consolidated financial statements of MediaOne Group included in MediaOne Group's Current Report on Form 8-K, dated June 18, 1998. See "Incorporation of Certain Documents by Reference" in the accompanying Prospectus of MediaOne Group. The summary historical financial information at and for each of the five years ended December 31, 1997 have been derived from the restated consolidated financial statements of MediaOne Group which have been audited by Arthur Andersen LLP (for 1997 and 1996) and by Coopers & Lybrand L.L.P. (for all other years). The summary historical financial information of MediaOne Group for the three months ended March 31, 1997 and 1998 have been prepared on the same basis as MediaOne Group's audited restated consolidated financial statements and, in the opinion of management, contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for these periods. The summary pro forma financial information of MediaOne Group set forth below at and for the year ended December 31, 1997 and the three months ended March 31, 1998 gives effect to the discontinuance of the businesses of New U S WEST, the distribution of New U S WEST to Old U S WEST's shareholders pursuant to the Separation, the refinancing by New U S WEST of $3.9 billion of indebtedness of Old U S WEST, transfers of certain assets and liabilities to New U S WEST and allocations of certain costs and expenses in connection with the Separation and the AirTouch Transaction, as if such transactions had been consummated at the beginning of each of such periods. The summary pro forma financial information should be read in conjunction with MediaOne Group's pro forma financial statements included in Old U S WEST's Current Report on Form 8-K, dated May 15, 1998 and in Old U S WEST's Proxy Statement on Schedule 14A filed with the Commission on April 20, 1998. See "Incorporation of Certain Documents by Reference" in the accompanying Prospectus of MediaOne Group.
THREE MONTHS ENDED MARCH 31, (UNAUDITED) -------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------- PRO FORMA(2) THREE YEAR ENDED MONTHS DECEMBER ENDED 31, MARCH 31, ---------- ---------- (UNAUDITED) 1998 1997 1997 1996 1995 1994 1993 1998 1997 --------- --------- --------- --------- --------- --------- --------- ---------- ---------- DOLLARS IN MILLIONS Sales and other revenues(1)........... $972 $920 $3,847 $1,837 $1,330 $925 $612 $633 $2,419 Income (loss) from continuing operations(3)......... (222) (190) (827) (357) (102) 23 (139) (175) (617) Income from discontinued operations(3)......... 434 420 1,524 1,535 1,423 1,403 (2,667) 25,589 -- Net income (loss)(4).... 212 230 697 1,178 1,317 1,426 (2,806) 25,136 (617) Total assets............ 26,895 27,585 26,783 27,727 11,847 10,331 7,923 24,252 24,314 Total debt(5)........... 9,205 10,009 8,963 8,806 2,073 1,791 1,471 4,294 4,039 Mandatorily redeemable preferred stock and Preferred Securities(6)......... 1,180 1,131 1,180 1,131 651 51 -- 1,180 1,180 Shareowners' equity..... 11,352 11,485 11,324 11,549 7,948 7,382 5,861 12,713 12,770 Percentage of debt to total capital(5)...... 42.3% 44.2% 41.8% 41.0% 19.4% 19.4% 20.1% Capital expenditures(5)....... $345 $320 $1,502 $643 $370 $308 $185 Employees 16,359 17,943 16,351 17,809 6,495 6,259 4,631
- ------------------------------ (1) 1997 and 1996 sales and other revenues include other $2,070 and $252, respectively, related to the acquisition by MediaOne Group of Continental Cablevision Inc. (the "Continental Acquisition"), which was consummated on November 15, 1996. (2) MediaOne Group has accounted for the Separation as a discontinuance of the businesses comprising New U S WEST. See "Recent Developments--The Separation." The unaudited pro forma financial information gives effect to the Separation and the AirTouch Transaction as if the transactions occurred as of January 1, 1998 and 1997, respectively, for the summary statement of operations information and as of March 31, 1998 and December 31, 1997, respectively, for the summary balance sheet information. S-12 (3) Income from continuing operations for the three month period ended March 31, 1998 includes a net gain of $10 on the sale of a domestic investment. Income from continuing operations for the three month period ended March 31, 1997 includes a net gain of $31 on the sale of MediaOne Group's interest in a wireless venture in France. 1997 income from continuing operations includes net gains of $249 on the sales of domestic and international investments, and net losses of $356 related to the Continental Acquisition. 1996 income from continuing operations includes net losses of $71 related to the Continental Acquisition and a charge of $19 from the sale of MediaOne Group's cable television interests in Norway, Sweden and Hungary. 1995 income from continuing operations includes a gain of $95 from the merger of Telewest Communications plc with SBC CableComms (UK), and costs of $9 associated with Old U S WEST's implementation of a targeted stock capital structure. 1994 income from continuing operations includes a gain of $105 on the partial sale of MediaOne Group's joint venture interest in Telewest, and a gain of $41 on the sale of MediaOne Group's paging operations. 1993 income from continuing operations was reduced by a restructuring charge of $45. (4) 1995 net income was reduced by an extraordinary item of $4 for the early extinguishment of debt. 1993 net income includes a charge of $120 for MediaOne Group's decision to discontinue the operations of its capital assets segment. Discontinued operations of the capital assets segment also provided net income of $38 during 1993. (5) Debt at March 31, 1998, and December 31, 1997 and 1996 includes debt related to the Continental Acquisition. Capital expenditures, debt and the percentage of debt to total capital excludes the capital assets segment, which has been discontinued and is held for sale, and the discontinued operations of New U S WEST, which have been discontinued effective June 12, 1998. Percentage of debt to total capital includes the Preferred Securities and mandatorily redeemable preferred stock as a component of total capital. (6) Includes Preferred Securities of $1,080 at March 31, 1998 and 1997, and December 31, 1997 and 1996, and $600 at December 31, 1995, and preferred stock subject to mandatory redemption of $100 at March 31, 1998 and December 31, 1997, and $51 at March 31, 1997, and December 31, 1996, 1995 and 1994. S-13 PRICE RANGE AND DIVIDEND HISTORY OF AIRTOUCH COMMON STOCK AirTouch Common Stock has been traded on the NYSE under the symbol "ATI" since April 6, 1994. The following table sets forth the high and low sales prices for the AirTouch Common Stock for the calendar quarters indicated as reported on the NYSE consolidated transaction system.
SALES PRICES -------------------------- HIGH LOW ------------ ------------ 1996 First Quarter........................................................... $ 335/8 $ 255/8 Second Quarter.......................................................... 331/8 275/8 Third Quarter........................................................... 295/8 25 Fourth Quarter.......................................................... 283/8 247/8 1997 First Quarter........................................................... $ 291/2 $ 227/8 Second Quarter.......................................................... 291/4 22 Third Quarter........................................................... 381/8 2615/16 Fourth Quarter.......................................................... 42 33 1998 First Quarter........................................................... $ 507/8 $ 405/16 Second Quarter.......................................................... 5815/16 461/4 Third Quarter (through July 21, 1998)................................... 655/8 581/8
On July 21, 1998, the last reported sale price of the AirTouch Common Stock on the NYSE Composite Tape was $64 7/8 per share. As of June 30, 1998, there were 532,342 holders of record of AirTouch Common Stock and 573,537,166 shares of AirTouch Common Stock outstanding. AirTouch has never paid dividends on the AirTouch Common Stock. For a description of AirTouch's dividend policy, see "Price Range of Common Stock and Dividends" in the prospectus of AirTouch attached hereto. MediaOne Group makes no representation as to the amount of dividends, if any, that AirTouch will pay in the future. In general, holders of the PIES will not be entitled to receive dividends that may be payable on the AirTouch Common Stock until such time as MediaOne Group, if it so elects, delivers AirTouch Common Stock at Maturity of the PIES, and then only with respect to dividends having a record date on or after the date of delivery of such AirTouch Common Stock. Nevertheless, dividends paid in excess of a specified level will result in a cash payment in an amount calculated as described herein to holders of the PIES at Maturity. See "Description of the PIES." USE OF PROCEEDS Based on the last sale price for the AirTouch Common Stock on July 21, 1998, the estimated net proceeds of this offering after deducting estimated expenses will be approximately $1,458,081,500. The estimated net proceeds to be received by MediaOne Group from sales of the PIES will be used by MediaOne Group and its affiliates to reduce short-term indebtedness and for general corporate purposes. As of July 17, 1998, the short-term indebtedness being repaid with the net proceeds of the sale of the PIES had a weighted average interest rate of approximately 5.85% and had been outstanding for a weighted average of approximately 34 days. S-14 DESCRIPTION OF THE PIES The following description of the particular terms of the PIES supplements, and to the extent inconsistent therewith replaces, the description of the general terms and provisions of Debt Securities set forth in the Prospectus, to which description reference is hereby made. GENERAL The PIES are a series of Debt Securities (as defined in the Prospectus), to be issued under an indenture dated as of November 13, 1995, as supplemented by the Third Supplemental Indenture, dated as of August , 1998 (the indenture dated as of November 13, 1995, as supplemented from time to time, the "Indenture"), between MediaOne Group and The First National Bank of Chicago, as Trustee (the "Trustee"). The PIES will be unsecured and will rank on a parity with all other unsecured and unsubordinated indebtedness of MediaOne Group. However, since MediaOne Group is a holding company that conducts its operations through its subsidiaries, the obligations of MediaOne Group under the PIES will be structurally subordinated to all of the indebtedness of MediaOne Group's subsidiaries. See "Risk Factors--Risk Factors Relating to the PIES--Ranking of the PIES." The aggregate number of PIES to be issued will be , having an aggregate principal amount of $1,500,000,000, plus such additional number of PIES, having an aggregate principal amount of up to $225,000,000, as may be issued pursuant to the over-allotment option granted by MediaOne Group to the Underwriters (see "Plan of Distribution"). The PIES will mature on August , 2001, unless extended or, following an event of default described in the Prospectus, accelerated. In the future MediaOne Group may issue additional Debt Securities or other securities with terms similar to those of the PIES. Each PIES, which will be issued with a principal amount of $ , will bear interest at an annual rate of % of the principal amount per annum (or $ per annum) from August , 1998, or from the most recent Interest Payment Date (as defined below) to which interest has been paid or provided for until the principal amount thereof is exchanged or paid at Maturity pursuant to the terms of the PIES. Interest on the PIES will be payable quarterly in arrears on each February , May , August and November , commencing November , 1998 (each, an "Interest Payment Date") and at Maturity, to the persons in whose names the PIES are registered at the close of business on the last day of the calendar month immediately preceding such Interest Payment Date, provided that interest payable at Maturity shall be payable to the person to whom the principal is payable. Interest on the PIES will be computed on the basis of a 360-day year of twelve 30-day months. If an Interest Payment Date falls on a day that is not a Business Day (as defined below), the interest payment to be made on such Interest Payment Date will be made on the next succeeding Business Day with the same force and effect as if made on such Interest Payment Date, and no additional interest will accrue as a result of such delayed payment. MANDATORY EXCHANGE; CASH DELIVERY OPTION At Maturity the principal amount of each PIES will be mandatorily exchanged by MediaOne Group into a number of shares of AirTouch Common Stock at the Exchange Rate (as defined below) or, at MediaOne Group's option, with respect to all or a portion of such shares, the equivalent amount in cash as described below. The "Exchange Rate" is equal to, (a) if the Maturity Price (as defined below) per share of AirTouch Common Stock is greater than or equal to $ per share of AirTouch Common Stock (the "Threshold Appreciation Price"), shares of AirTouch Common Stock per PIES, (b) if the Maturity Price is less than the Threshold Appreciation Price but is greater than the Initial Price, a fraction of one share of AirTouch Common Stock per PIES equal to the quotient of (i) the Initial Price divided by (ii) the Maturity Price and (c) if the Maturity Price is less than or equal to the Initial Price, one share of AirTouch Common Stock per PIES. ACCORDINGLY THE VALUE OF THE AIRTOUCH COMMON STOCK TO BE RECEIVED BY HOLDERS OF THE PIES (OR, AS DISCUSSED BELOW, THE CASH S-15 EQUIVALENT FOR ALL OR PART THEREOF AND/OR OTHER CONSIDERATION TO BE RECEIVED IN LIEU OF SUCH SHARES) AT MATURITY MAY BE LESS THAN THE PRINCIPAL AMOUNT OF SUCH PIES. The numbers of shares of AirTouch Common Stock per PIES specified in clauses (a), (b) and (c) above of the Exchange Rate definition are hereinafter referred to as the "Share Components." Any shares of AirTouch Common Stock delivered by MediaOne Group to the holders of the PIES that are not affiliated with AirTouch shall be free of any transfer restrictions and the holders of the PIES will be responsible for the payment of any and all brokerage costs upon the subsequent sale of such shares. No fractional shares of AirTouch Common Stock will be issued at Maturity as provided under "--Fractional Shares" below. Although it is MediaOne Group's current intention to deliver shares of AirTouch Common Stock at Maturity, MediaOne Group may at its option deliver cash in lieu of delivering all or a portion (such portion to be selected by MediaOne Group in its discretion) of the shares of AirTouch Common Stock otherwise deliverable at Maturity (the "Cash Delivery Option"). The amount of cash deliverable in respect of each PIES shall be equal to the product of the number of shares of AirTouch Common Stock otherwise deliverable in respect of such PIES on the date of Maturity multiplied by the Maturity Price. An election to exercise the Cash Delivery Option with respect to less than all of the shares of AirTouch Common Stock otherwise deliverable at Maturity shall not in any way limit MediaOne Group's obligation to deliver the remaining shares of AirTouch Common Stock otherwise deliverable at Maturity. On or prior to the twenty-first Business Day prior to Stated Maturity, MediaOne Group will notify The Depository Trust Company and the Trustee and publish a notice in a daily newspaper of national circulation stating whether the principal amount of each PIES will be exchanged for shares of AirTouch Common Stock, cash or a combination thereof and, if a combination of cash and shares, the relative proportions thereof. Notwithstanding the foregoing, (i) in the case of certain dilution events, the Exchange Rate will be subject to adjustment and (ii) in the case of certain reorganization events, the consideration received by holders of PIES at Maturity will be cash or other property. See "--Dilution Adjustments; Adjustment Events" below. The "Maturity Price" (other than in the case of a post-extension termination of the PIES as described in "--Extensions and Post-Extension Termination" below) is defined as the average Closing Price per share of AirTouch Common Stock on the 20 Trading Days immediately prior to (but not including) the date of Maturity; provided, however, that if there are not 20 Trading Days for the AirTouch Common Stock following the 60th calendar day immediately prior to, but not including, the date of maturity, "Maturity Price" shall be defined as the market value per share of AirTouch Common Stock as of Maturity as determined by a nationally recognized investment banking firm retained for such purpose by MediaOne Group. The "Closing Price" of any security on any date of determination means the closing sale price (or, if no closing price is reported, the last reported sale price) of such security (regular way) on the NYSE on such date or, if such security is not listed for trading on the NYSE on any such date, as reported in the composite transactions for the principal United States securities exchange on which such security is so listed, or if such security is not so listed on a United States national or regional securities exchange, as reported by the NASDAQ National Market, or if such security is not so reported, the last quoted bid price for such security in the over-the-counter market as reported by the National Quotation Bureau or similar organization. For purposes of determining the Maturity Price, the Closing Price of any security on any day prior to any "ex-dividend" date occurring during the relevant 20 Trading Day period for any dividend paid or to be paid with respect to such security shall be reduced by the amount of such dividend. A "Trading Day" is defined as a day on which the security the Closing Price of which is being determined (A) is not suspended from trading on any national or regional securities exchange or association or over-the-counter market at the close of business and (B) has traded at least once on the national or regional securities exchange or association or over-the-counter market that is the primary market for the trading of such security. "Business Day" means any day that is not a Saturday, a Sunday or a day on which the NYSE, banking institutions or trust companies in The City of New York are authorized or obligated by law or executive order to close. S-16 For illustrative purposes only, the following chart shows the number of shares of AirTouch Common Stock or the amount of cash that a holder of PIES would receive for each PIES at various Maturity Prices. The table assumes that there will be no adjustments to the Exchange Rate described under "--Dilution Adjustments; Adjustment Events" below and that any exercise of the Cash Delivery Option will be with respect to all of the shares of AirTouch Common Stock otherwise deliverable. There can be no assurance that the Maturity Price will be within the range set forth below. Given the Initial Price of $ per PIES and the Threshold Appreciation Price of $ , a PIES holder would receive at Maturity the following number of shares of AirTouch Common Stock or amount of cash (if MediaOne Group exercises the all Cash Delivery Option in full) per PIES:
PRICE OF NUMBER OF SHARES OF AIRTOUCH AIRTOUCH COMMON STOCK COMMON STOCK AMOUNT OF AT MATURITY PER PIES CASH PER PIES - -------------- ------------------- -------------- $ $
Interest on the PIES will be payable, and delivery of AirTouch Common Stock (or with respect to all or a portion of such shares, its cash equivalent as described above and/or such other consideration as permitted or required herein) in exchange for the PIES at Maturity will be made upon surrender of such PIES, at the office or agency of MediaOne Group maintained for such purposes; provided, however, that payment of interest may be made at the option of MediaOne Group by check mailed to the persons in whose names the PIES are registered at the close of business on the last day of the calendar month immediately preceding the relevant Interest Payment Date. See "--Book-Entry System." Initially such office will be the principal corporate trust office of The First National Bank of Chicago, One First National Plaza, Suite 6126, Chicago, Illinois 60670. The PIES will be transferable at any time or from time to time at the aforementioned office. No service charge will be made to the holder for any such transfer except for any tax or governmental charge incidental thereto. The Indenture does not contain any restriction on the ability of MediaOne Group to sell, pledge or convey all or any portion of the AirTouch Common Stock held by it or its subsidiaries, and no such shares of AirTouch Common Stock will be pledged or otherwise held in escrow for use at Maturity of the PIES (other than as described under the caption "--Defeasance" below). Consequently, in the event of a bankruptcy, insolvency or liquidation of MediaOne Group or its subsidiaries, the AirTouch Common Stock, if any, owned by MediaOne Group or its subsidiaries will be subject to the claims of the creditors of MediaOne Group or its subsidiaries, respectively. In addition, as described herein, MediaOne Group will have the option, exercisable in its sole discretion, to satisfy its obligations pursuant to the mandatory exchange for the principal amount of each PIES at Maturity by delivering to holders of the PIES either the number of shares of AirTouch Common Stock specified above or cash in an amount equal to the product of such number of shares multiplied by the Maturity Price, or a combination thereof. In the event of such a sale, pledge or conveyance a holder of the PIES may be more likely to receive cash in lieu of AirTouch Common Stock. As a result, there can be no assurance that MediaOne Group will elect or will be permitted at Maturity to deliver AirTouch Common Stock or, if it so elects and is permitted, that it will use all or any portion of its current holdings of AirTouch Common Stock to make such delivery. Consequently, holders of the PIES will not be entitled to any rights with respect to AirTouch Common Stock (including, without limitation, voting rights and rights to receive any dividends or other distributions in respect thereof S-17 (other than, in certain cases described under "--Dilution Adjustments; Adjustment Events," for adjustments to the Exchange Rate)) until such time, if any, as MediaOne Group shall have delivered shares of AirTouch Common Stock to holders of the PIES at Maturity thereof. EXTENSIONS AND POST-EXTENSION TERMINATION The PIES will mature on August , 2001 (such date, as the same may be extended pursuant to this paragraph, the "Stated Maturity"), except that MediaOne Group at its option may elect to extend such maturity to November , 2001 and may further elect to extend the maturity of the PIES to February , 2002 (each, an "extension period"), subject, in either case, to post-extension termination as described in the following paragraph. MediaOne Group may exercise this election by giving notice not less than 21 nor more than 60 Business Days prior to the then-current Stated Maturity of such extension and of the new Stated Maturity date. Interest at the rate set forth on the cover page of this Prospectus Supplement will continue to accrue in arrears during any extension period until Maturity (including by post-extension termination) and, in the event that MediaOne exercises its option to extend the maturity of the PIES to February , 2002, additional interest will accrue in arrears, commencing November , 2001 until Maturity (including by post-extension termination), at a rate per annum equal to 0.5% of the principal amount of the PIES. Such additional interest shall be payable in the same manner, at the same time and to the same holders as other interest payments required to be made under the PIES. MediaOne Group may elect to cause all but not less than all of the PIES to be terminated and repaid at any time within an extension period upon completion of a Refinancing Offer ("post-extension termination"). MediaOne Group may exercise this election by (i) providing to the Trustee an officer's certificate to the effect that MediaOne Group is engaged in good faith efforts to launch and consummate a Refinancing Offer, (ii) giving notice to the holders of the PIES not less than 21 and not more than 30 Business Days prior to the anticipated settlement date of such Refinancing Offer (a) of MediaOne Group's intention to launch and consummate a Refinancing Offer and of such anticipated settlement date and (b) that, pursuant to the terms described herein, the PIES will be terminated and repurchased by MediaOne Group on the anticipated settlement date of the Refinancing Offer and (iii) simultaneously with such notice, giving notice to The Depository Trust Company and the Trustee and publishing a notice in a daily newspaper of national circulation stating whether the principal amount of each PIES will be exchanged for shares of AirTouch Common Stock, cash or a combination thereof and, if a combination of cash and shares, the relative proportions thereof. The termination and purchase date for the PIES shall be the anticipated settlement date indicated in the notice described in clause (b) above, except that if MediaOne Group postpones the settlement date for the Refinancing Offer and gives two Business Days' prior notice by press release to holders of such postponement, the termination and purchase date shall be such postponed date on which the Refinancing Offer actually settles. Notwithstanding the foregoing, if MediaOne Group terminates or abandons a Refinancing Offer and gives notice thereof by press release to holders, any election made to terminate the PIES will be deemed rescinded and thereafter the PIES will mature on the then existing date of Stated Maturity, subject to post-extension termination on the terms described herein. "Refinancing Offer" means a refinancing, reoffering or retirement of all or part of the PIES effected not earlier than August , 2001 by means of a completed public offer or offers (which may include one or more exchange offers) by or on behalf of MediaOne Group. In the case of a post-extension termination in connection with a Refinancing Offer, "Maturity Price" is defined as the Closing Price per share on the Trading Day immediately preceding the date that such Refinancing Offer is priced (the "Pricing Date") or, if such Refinancing Offer is priced after 4:00 p.m., New York time, on the Pricing Date, the Closing Price per share on the Pricing Date. DILUTION ADJUSTMENTS; ADJUSTMENT EVENTS The Exchange Rate is subject to adjustment if AirTouch shall: S-18 (i) pay a stock dividend or make a distribution, in either case, with respect to AirTouch Common Stock in shares of such stock; (ii) subdivide or split its outstanding shares of AirTouch Common Stock; (iii) combine its outstanding shares of AirTouch Common Stock into a smaller number of shares; (iv) issue by reclassification (other than a reclassification pursuant to clause (ii), (iii), (iv) or (v) of the definition of Adjustment Event below) of its shares of AirTouch Common Stock any other shares of common stock of AirTouch (other than shares of a class of common stock of AirTouch that is intended to reflect separately less than all of the businesses of AirTouch and its subsidiaries); or (v) issue rights or warrants (other than rights to purchase AirTouch Common Stock pursuant to a plan for the reinvestment of dividends or interest) to all holders of AirTouch Common Stock entitling them to subscribe for or purchase shares of AirTouch Common Stock at a price per share less than the Market Price (as defined below) of the AirTouch Common Stock on the Business Day next following the record date for the determination of holders of AirTouch Common Stock entitled to receive such rights or warrants. In the case of the events referred to in clauses (i), (ii), (iii) and (iv) above, the Exchange Rate shall be adjusted by adjusting each of the Share Components of the Exchange Rate in effect immediately prior to such event so that the holders will be entitled to receive at Maturity, with respect to each PIES, the number of shares of AirTouch Common Stock (or, in the case of a reclassification referred to in clause (iv) above, the number of shares of other shares of common stock of AirTouch issued pursuant thereto) which it would have owned or been entitled to receive immediately following such event had Maturity occurred immediately prior to such event or any record date with respect thereto. For purposes of making dilution adjustments described herein, dividends will be deemed to be paid as of the record date for such dividend. In the case of the event referred to in clause (v) above, the Exchange Rate shall be adjusted pursuant to the following formula: OS + AS ER = SC X -------------- OS + ( AS X EP ) M
Where ER the adjusted Exchange Rate; = SC the Share Component of the Exchange Rate in effect on the = record date for the issuance of the rights or warrants referred to in clause (v) above; OS the number of shares of AirTouch Common Stock outstanding on = the record date for the issuance of such rights or warrants; AS the number of additional shares of AirTouch Common Stock = offered for subscription or purchase pursuant to such rights or warrants; EP the exercise price of such rights or warrants; and = M = the Market Price (as defined below) of the AirTouch Common Stock on the Business Day next following the record date for determination of holders of AirTouch Common Stock entitled to received such rights or warrants. To the extent that such rights or warrants expire prior to Maturity of the PIES and shares of AirTouch Common Stock are not delivered pursuant to such rights or warrants prior to such expiration, the Exchange Rate shall be readjusted to the Exchange Rate which would then be in effect had such adjustments for the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of AirTouch Common Stock actually delivered pursuant to such rights or warrants. S-19 "Market Price" means, as of any date of determination, the average Closing Price per share of AirTouch Common Stock on the five Trading Days immediately prior to (but not including) the date of determination; provided, however, that if there are not five Trading Days for the AirTouch Common Stock occurring later than the 60th calendar day immediately prior to, but not including, such date, the Market Price shall be determined as the market value per share of AirTouch Common Stock as of such date as determined by a nationally recognized investment banking firm retained for such purpose by MediaOne Group. For purposes of determining the Market Price, the Closing Price of any security on any day prior to any "ex-dividend" date occurring during such five Trading Day period for any dividend paid or to be paid with respect to such security shall be reduced by the amount of such dividend. All adjustments to the Exchange Rate will be calculated to the nearest 1/10,000th of a share of AirTouch Common Stock (or, if there is not a nearest 1/10,000th of a share, to the next higher 1/10,000th of a share). No adjustment in the Exchange Rate shall be required unless such adjustment would require an increase or decrease of at least one percent therein; provided, however that any adjustments which by reason of the foregoing are not required to be made shall be carried forward and taken into account in any subsequent adjustment. If an adjustment is made to the Exchange Rate pursuant to clauses (i), (ii), (iii), (iv) or (v) in the first paragraph under the caption "--Dilution Adjustments; Adjustment Events," an adjustment will also be made to the Maturity Price as such term is used to determine which of the clauses (a), (b) or (c) of the Exchange Rate definition will apply at maturity and for purposes of calculating the Maturity Price in subclause (b) (ii) of the definition of Exchange Rate. The required adjustment to the Maturity Price shall be made at Maturity by multiplying the Maturity Price by the cumulative number or fraction determined pursuant to the Exchange Rate adjustment procedure described by the preceding formula above. In the case of the reclassification of any shares of AirTouch Common Stock into any shares of common stock of AirTouch other than the AirTouch Common Stock, such common stock shall be deemed shares of AirTouch Common Stock for all purposes. Each such adjustment to the Exchange Rate and the Maturity Price shall be made successively. In the event of: (i) any dividend or distribution by AirTouch to all holders of AirTouch Common Stock of evidences of its indebtedness or other assets (excluding (1) any dividends or distributions referred to in clause (i) of the first paragraph under the caption "--Dilution Adjustments; Adjustment Events," (2) any common stock referred to in clause (iv) of such paragraph issued pursuant to a reclassification referred to in such clause and (3) any Ordinary Cash Dividends (as defined below)) or any issuance by AirTouch to all holders of AirTouch Common Stock of rights or warrants to subscribe for or purchase any of its securities (other than rights or warrants referred to in clause (v) of the first paragraph under such caption); (ii) any consolidation or merger of AirTouch with or into another entity (other than a merger or consolidation in which AirTouch is the continuing corporation and in which the AirTouch Common Stock outstanding immediately prior to the merger or consolidation is not exchanged for cash, securities or other property of AirTouch or another corporation); (iii) any sale, transfer, lease or conveyance to another corporation of the property of AirTouch as an entirety or substantially as an entirety; (iv) any statutory exchange of securities of AirTouch with another corporation (other than in connection with a merger or acquisition); or (v) any liquidation, dissolution or winding up of AirTouch (any such event, an "Adjustment Event"), MediaOne Group will be obligated to deliver at Maturity, in lieu of or (in the case of an Adjustment Event described in clause (i) above) in addition to, shares of AirTouch Common Stock as described above, cash in S-20 an amount equal to (A) if the Maturity Price is greater than or equal to the Threshold Appreciation Price, multiplied by the Transaction Value (as defined below), (B) if the Maturity Price is less than the Threshold Appreciation Price but is greater than the Initial Price, the product of (x) the Initial Price divided by the Maturity Price multiplied by (y) the Transaction Value and (C) if the Maturity Price is less than or equal to the Initial Price, the Transaction Value. Following an Adjustment Event, the Maturity Price, as such term is used in this paragraph and throughout the definition of Exchange Rate, shall be deemed to equal (A) if shares of AirTouch Common Stock are outstanding at Maturity, the Maturity Price of the AirTouch Common Stock, as adjusted pursuant to the method set forth in the preceding paragraph plus the Transaction Value or (B) if shares of AirTouch Common Stock are not outstanding at Maturity, the Transaction Value. Notwithstanding the foregoing, with respect to any securities received in an Adjustment Event that (A) are (i) listed on a United States national securities exchange, (ii) reported on a United States national securities system subject to last sale reporting, (iii) traded in the over-the-counter market and reported on the National Quotation Bureau or similar organization or (iv) for which bid and ask prices are available from at least three nationally recognized investment banking firms; and (B) are either (x) perpetual equity securities or (y) non-perpetual equity or debt securities with a stated maturity after the stated maturity of the PIES ("Reported Securities"), MediaOne Group may, at its option, in lieu of delivering cash in respect of all or a percentage (selected by MediaOne Group) of such Reported Securities received in an Adjustment Event, deliver a number of such Reported Securities with a value equal to all cash amounts that would otherwise be deliverable in respect of all or such percentage of Reported Securities received in such Adjustment Event, as determined in accordance with clause (ii) of the definition of Transaction Value; PROVIDED, HOWEVER, that (i) if such option is exercised, in respect of less than all cash amounts that would otherwise be deliverable in respect of Reported Securities received in an Adjustment Event MediaOne Group shall deliver all cash amounts as to which such option has not been exercised and (ii) MediaOne Group may not exercise such option if such Reported Securities have not yet been delivered to the holders entitled thereto following such Adjustment Event or any record date with respect thereto. If MediaOne Group delivers any Reported Securities, each holder of a PIES will be responsible for the payment of any and all brokerage and other transaction costs upon the sale of such Reported Securities. If, following any Adjustment Event, any Reported Security ceases to qualify as a Reported Security, then (x) MediaOne Group shall not deliver such Reported Security but instead shall deliver an equivalent amount of cash and (y) notwithstanding clause (ii) of the definition of Transaction Value, the Transaction Value of such Reported Security shall mean the fair market value of such Reported Security on the date such security ceases to qualify as a Reported Security, as determined by a nationally recognized investment banking firm retained for this purpose by MediaOne Group. The amount of cash and/or the kind and number of securities into which the PIES shall be exchangeable after an Adjustment Event shall be subject to adjustment following the date of such Adjustment Event in the same manner and upon the occurrence of the same type of events as described under this caption "--Dilution Adjustments; Adjustment Events" with respect to AirTouch Common Stock and AirTouch. For purposes of the foregoing, the term "Ordinary Cash Dividend" means, with respect to any consecutive 365-day period, any dividend with respect to AirTouch Common Stock paid in cash to the extent that the amount of such dividend, together with the aggregate amount of all other dividends on the AirTouch Common Stock paid in cash during such 365-day period, does not exceed on a per share basis 10% of the average of the Closing Prices of the AirTouch Common Stock over such 365-day period. The term "Transaction Value" means: S-21 (i) for any cash received in any Adjustment Event, the amount of cash received per share of AirTouch Common Stock; (ii) for any Reported Securities received in any Adjustment Event, an amount equal to (x) the average Closing Price per security of such Reported Securities on the 20 Trading Days immediately prior to (but not including) Maturity multiplied by (y) the number of such Reported Securities (as adjusted pursuant to the second preceding paragraph) received per share of AirTouch Common Stock; and (iii) for any property received in any Adjustment Event other than cash or such Reported Securities, an amount equal to the fair market value of the property received per share of AirTouch Common Stock on the date such property is received, as determined by a nationally recognized investment banking firm retained for this purpose by MediaOne Group; provided, however, that in the case of clause (ii), (x) with respect to securities that are Reported Securities by virtue of only clause (iv) of the definition of Reported Securities above, Transaction Value with respect to any such Reported Security means the average of the mid-point of the last bid and ask prices for such Reported Security as of Maturity from each of at least three nationally recognized investment banking firms retained for such purpose by MediaOne Group multiplied by the number of such Reported Securities (as adjusted pursuant to the method set forth in the second preceding paragraph) received per share of AirTouch Common Stock and (y) with respect to all other Reported Securities, if there are not 20 Trading Days for any particular Reported Security occurring after the 60th calendar day immediately prior to, but not including, the date of Maturity, Transaction Value with respect to such Reported Security means the market value per security of such Reported Security as of Maturity as determined by a nationally recognized investment banking firm retained for such purpose by MediaOne Group multiplied by the number of such Reported Securities (as adjusted pursuant to the method set forth in the second preceding paragraph) received per share of AirTouch Common Stock. For purposes of calculating the Transaction Value, any cash, Reported Securities or other property receivable in an Adjustment Event shall be deemed to have been received immediately prior to the close of business on the record date for such Adjustment Event or, if there is no record date for such Adjustment Event, immediately prior to the close of business on the effective date of such Adjustment Event. No dilution adjustments will be made for events, other than those described above, such as offerings of AirTouch Common Stock (other than through the issuance of rights or warrants described above) for cash or in connection with acquisitions. MediaOne Group is required, within ten Business Days following the occurrence of an event that requires an adjustment to the Exchange Rate or the occurrence of an Adjustment Event (or, in either case, if MediaOne Group is not aware of such occurrence, as soon as practicable after becoming so aware), to provide written notice to the Trustee and to each holder of PIES of the occurrence of such event including a statement in reasonable detail setting forth the method by which the adjustment to the Exchange Rate or change in the consideration to be received by holders of PIES following the Adjustment Event was determined and setting forth the revised Exchange Rate or consideration, as the case may be. In respect of any adjustment to the Maturity Price, such notice will only disclose the factor by which the Maturity Price is to be multiplied in order to determine which clause of the Exchange Rate definition will apply at Maturity. FRACTIONAL SHARES No fractional shares of AirTouch Common Stock will be issued if MediaOne Group exchanges the PIES for shares of AirTouch Common Stock and/or Reported Securities. If more than one PIES shall be surrendered for exchange at one time by the same holder, the number of full shares of AirTouch Common Stock or Reported Securities which shall be delivered upon exchange, in whole or in part, as the case may be, shall be computed on the basis of the aggregate number of PIES so surrendered at maturity. In lieu of S-22 any fractional share otherwise issuable in respect of all PIES of any holder which are exchanged at Maturity, such holder shall be entitled to receive an amount in cash equal to the value of such fractional share at the Maturity Price. DEFEASANCE MediaOne Group may terminate its obligations under the Indenture with respect to the PIES (other than the Continuing Obligations (as defined below)) including those described under the caption "Description of Debt Securities--Merger" in the accompanying Prospectus of MediaOne Group, on the 91st day after the applicable conditions set forth below have been satisfied: (1) MediaOne Group has irrevocably deposited in trust with the Trustee, with respect to each PIES (i) the maximum number of shares of AirTouch Common Stock and of any Reported Securities, in either case, that could (based on the Exchange Rate at the time of deposit and assuming no exercise of the Cash Delivery Option and full exercise of the option to deliver Reported Securities in lieu of cash in respect of such securities received in an Adjustment Event) be deliverable at Maturity with respect to such PIES and (ii) U.S. Government Obligations (as defined in the Indenture), cash or a combination thereof, in any case, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee at or prior to the time of such deposit, to pay not later than one day before due (a) all interest on such PIES to Stated Maturity and (b) the maximum cash amount with respect to such PIES that could be deliverable at Maturity with respect to any cash or property other than Reported Securities received in an Adjustment Event; (2) No Default or Event of Default with respect to the Indenture or the PIES shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which MediaOne Group is a party or by which it is bound, as evidenced to the Trustee in an Officers' Certificate delivered to the Trustee concurrently with such deposit; (3) MediaOne Group has delivered to the Trustee an Opinion of Counsel in form satisfactory to the Trustee to the effect that Holders will not recognize income, gain or loss for Federal income tax purposes as a result of MediaOne Group's exercise of its option described under this caption "--Defeasance" and will be subject to Federal income tax on the same amount and in the same manner and at the same time as would have been the case if such option had not been exercised; (4) MediaOne Group has paid or duly provided for payment of all amounts then due to the Trustee pursuant to the terms of the Indenture; (5) MediaOne Group has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating, as applicable, that all conditions precedent provided for in the relevant Indenture relating to the discharge of MediaOne Group's obligations to comply with certain covenants have been complied with; and (6) MediaOne Group has delivered to the Trustee an Opinion of Counsel to the effect that after the passage of 90 days after the deposit, the trust funds deposited pursuant to clause (1) above will not be subject to the effect of any applicable Federal or State bankruptcy, insolvency or similar law. "Continuing Obligations" means the obligation to exchange principal and pay interest with respect to the PIES, to deposit cash and securities from time to time with the Trustee pursuant to the provisions described under the caption "--Defeasance", to provide any notices required with respect to any Cash Delivery Option, to maintain a registrar and paying agencies, to register the transfer and exchange of PIES, to hold moneys for payment in trust, to replace stolen, lost or mutilated PIES certificates, to maintain and, if necessary, replace, the Trustee and to indemnify the Trustee. S-23 If any event requiring a dilution adjustment under the PIES shall occur following a deposit pursuant to clause (1) of the preceding paragraph, then MediaOne Group shall pledge (or the Trustee shall remit) a number of shares of AirTouch Common Stock, Reported Securities, U.S. Government Obligations and cash so that the Trustee will hold the number of such securities and amount of cash that it would be entitled to hold if such deposit (and any permitted substitutions described below) were made immediately following such adjustment. Unless MediaOne Group is in default under the Indenture, it may, at its option, substitute for the shares of AirTouch Common Stock or Reported Securities deposited pursuant to clause (1) of the second preceding paragraph above U.S. Government Obligations having an aggregate market value at the time of substitution and at daily mark-to-market valuations thereafter of not less than 125% (except as provided below) of the product of the Closing Price per share of AirTouch Common Stock or security of Reported Securities, respectively, on the day immediately preceding the time of each valuation multiplied by the number of shares of AirTouch Common Stock or Reported Securities, respectively, for which such obligations are being substituted. In the event of any Adjustment Event occurring subsequent to such deposit, MediaOne Group will deposit any Reported Securities received by it in respect of the maximum number of shares of AirTouch subject to the PIES at the time of the Adjustment Event, plus U.S. Government Obligations, cash or a combination thereof sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the maximum cash amount that could be deliverable at Maturity with respect to any cash or property other than Reported Securities received in an Adjustment Event. MediaOne Group may, at its option substitute U.S. Government Obligations for shares of AirTouch Common Stock or for Reported Securities pledged after any dilution adjustment or Adjustment Event in the same manner described above for such securities pledged pursuant to clause (1) of the third preceding paragraph. Except in the case of U.S. Government Obligations pledged in respect of a cash amount that could be deliverable at Maturity, the Trustee will promptly pay over to MediaOne Group any dividends, interest, principal or other payments received by the Trustee in respect of any securities and deposit with it, unless MediaOne Group is in default on its obligations under the PIES, or unless the payment of such amount to MediaOne Group would cause the cash and securities on deposit with the Trustee to become insufficient under the provisions of the Indenture described under this caption "--Defeasance." Notwithstanding anything to the contrary under this caption "--Defeasance," MediaOne Group shall not substitute collateral and shall not replace original collateral within the 21 Business Days preceding Stated Maturity. If at Maturity MediaOne Group has not replaced some or all of the substitute collateral with shares of AirTouch Common Stock (or, after an Adjustment Event, Reported Securities) sufficient to meet the obligations (based on the actual Maturity Price and the assumption that the Cash Delivery Option is not exercised) under any PIES to deliver such securities, the Trustee will distribute to the holders pro rata all of such securities held by it and, as to the remaining obligation to deliver such securities, shall deliver the cash equivalent that MediaOne Group would have been allowed to deliver thereunder, in the form of cash generated from the liquidation of U.S. Government Obligations then pledged by such MediaOne Group. Notwithstanding any requirement described under this caption "--Defeasance" for the deposit of U.S. Government Obligations having an aggregate market value of 125% of the amounts specified in the previous paragraphs, if MediaOne Group is unable to deliver to the Trustee a legal opinion of nationally recognized counsel to the effect that the deposit of U.S. Government Obligations having such percentage value is sufficient to avoid a violation of any applicable federal law or regulation, then all references to 125% shall be deemed to be references to such greater amount as, in the opinion of such counsel, shall be required to avoid any such violation. Unless the Trustee holds, as of the 21st Business Day preceding Stated Maturity, sufficient shares of AirTouch Common Stock with which to settle the PIES in their entirety, MediaOne Group will notify the S-24 Depository Trust Company and the Trustee and publish a notice in a daily newspaper of national circulation stating the proportions of securities and cash that will be delivered at Maturity. The Trustee shall promptly remit to MediaOne Group any excess cash or securities on deposit after all amounts owing in respect of the PIES at Maturity have been paid in full. EVENTS OF DEFAULT In addition to the Events of Default described in the accompanying Prospectus of MediaOne Group, the following shall constitute an Event of Default: MediaOne Group's failure after terminating certain of its obligations under the Indenture, as described under the caption "--Defeasance," to deposit with the Trustee from time to time cash and securities in the amounts and, in the case of securities, of the type required by the provisions described under such caption within two Business Days of receipt of notice of such failure by the Trustee or MediaOne Group. BOOK-ENTRY SYSTEM It is expected that the PIES will be issued in the form of one or more global securities (the "Global Securities") deposited with The Depository Trust Company (the "Depositary") and registered in the name of a nominee of the Depositary. The Depositary has advised MediaOne Group and the Underwriters as follows: The Depositary is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to Section 17A of the Exchange Act. The Depositary was created to hold securities of persons who have accounts with the Depositary ("participants") and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of certificates. Such participants include securities brokers and dealers, banks, trust companies and clearing corporations. Indirect access to the Depositary's book-entry system also is available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Upon the issuance of a Global Security, the Depositary or its nominee will credit the respective PIES represented by such Global Security to the accounts of participants. The accounts to be credited shall be designated by the Underwriters. Ownership of beneficial interests in the Global Securities will be limited to participants or persons that may hold interests through participants. Ownership of beneficial interests by participants in such Global Securities will be shown on, and the transfer of those ownership interests will be effected only through, records maintained by the Depositary or its nominee for such Global Securities. Ownership of beneficial interests in such Global Securities by persons that hold through participants will be shown on, and the transfer of that ownership interest within such participant will be effected only through, records maintained by such participant. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to transfer beneficial interests in a Global Security. So long as the Depositary for a Global Security, or its nominee, is the registered owner of such Global Security, such depositary or such nominee, as the case may be, will be considered the sole owner or holder of the PIES. Except as set forth below, owners of beneficial interests in such Global Securities will not be entitled to have the PIES registered in their names, will not receive or be entitled to receive physical delivery of the PIES in definitive form and will not be considered the owners or holders thereof. Payment of principal of and any interest on the PIES registered in the name of or held by the Depositary or its nominee will be made to the Depositary or its nominee, as the case may be, as the registered owner or the holder of the Global Security. None of MediaOne Group, the Trustee, any Paying Agent or any securities registrar for the PIES will have any responsibility or liability for any aspect of the S-25 records relating to or payments made on account of beneficial ownership interests in a Global Security or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. MediaOne Group expects that the Depositary, upon receipt of any payment of principal or interest in respect of a permanent Global Security, will credit immediately participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Security as shown on the records of the Depositary. MediaOne Group also expects that payments by participants to owners of beneficial interests in such Global Security held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such participants. A Global Security may not be transferred except as a whole by the Depositary to a nominee or a successor of the Depositary. If the Depositary is at any time unwilling or unable to continue as depositary and a successor depositary is not appointed by MediaOne Group within ninety days, MediaOne Group will issue PIES in definitive registered form in exchange for the Global Security representing such PIES. In addition, MediaOne Group may at any time and in its sole discretion determine not to have any PIES represented by, one or more Global Securities and, in such event will issue PIES in definitive form in exchange for all of the Global Securities representing the PIES. Further, if MediaOne Group so specifies with respect to the PIES, an owner of a beneficial interest in a Global Security representing PIES may, on terms acceptable to MediaOne Group and the Depositary for such Global Security, receive PIES in definitive form. In any such instance, an owner of a beneficial interest in a Global Security will be entitled to physical delivery in definitive form of PIES represented by such Global Security equal in number to that represented by such beneficial interest and to have such PIES registered in its name. UNITED STATES FEDERAL INCOME TAX CONSEQUENCES The following discussion is based upon the advice of MediaOne Group's counsel, Weil, Gotshal & Manges LLP as to certain of the material U.S. federal income tax consequences that may be relevant to a beneficial owner of a PIES that is (i) a citizen or resident of the United States, (ii) a corporation created or organized under the laws of the United States or any political subdivision thereof or therein, (iii) the estate, the income of which is subject to U.S. federal income tax regardless of the source or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust (a "U.S. holder"). The summary does not purport to be a comprehensive description of all of the tax consequences that may be relevant to a decision to purchase PIES by any particular investor, including tax consequences that arise from rules of general application to all taxpayers or to certain classes of taxpayers or that are generally assumed to be known by investors. All references to "holders" (including U.S. holders) are to beneficial owners of the PIES. This summary is based on U.S. federal income tax laws, regulations, rulings and decisions in effect as of the date of this Prospectus Supplement, all of which are subject to change at any time (possibly with retroactive effect). As the law is technical and complex, the discussion below necessarily represents only a general summary. This summary addresses the U.S. federal income tax consequences to holders who are initial holders of the PIES and who will hold the PIES and, if applicable, AirTouch Common Stock as capital assets. This summary does not address all aspects of U.S. federal income taxation that may be relevant to a particular holder in light of its individual investment circumstances or to certain types of holders subject to special treatment under the U.S. federal income tax laws, such as dealers in securities or foreign currency, traders in securities or commodities electing to mark to market, financial institutions, insurance companies, tax-exempt organizations and taxpayers holding the PIES as part of a "straddle", "hedge", "conversion transaction", "synthetic security", or other integrated investment. Moreover, the effect of any applicable state, local or foreign tax laws is not discussed. S-26 No statutory, judicial or administrative authority directly addresses the characterization of the PIES or instruments similar to the PIES for U.S. federal income tax purposes. As a result, significant aspects of the U.S. federal income tax consequences of an investment in the PIES are not certain. No ruling is being requested from the Internal Revenue Service (the "IRS") with respect to the PIES and no assurance can be given that the IRS will agree with the conclusions expressed herein. ACCORDINGLY, A PROSPECTIVE INVESTOR (INCLUDING A TAX-EXEMPT INVESTOR) IN THE PIES SHOULD CONSULT ITS TAX ADVISOR IN DETERMINING THE TAX CONSEQUENCES OF AN INVESTMENT IN THE PIES, INCLUDING THE APPLICATION OF STATE, LOCAL OR OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS. Pursuant to the terms of the Indenture, MediaOne Group and every holder of a PIES will be obligated (in the absence of an administrative determination or judicial ruling to the contrary) to characterize a PIES for all tax purposes as a forward purchase contract to purchase AirTouch Common Stock at Maturity (including as a result of acceleration or otherwise), under the terms of which contract (a) at the time of issuance of the PIES the holder deposits irrevocably with MediaOne Group a fixed amount of cash equal to the purchase price of the PIES to assure the fulfillment of the holder's purchase obligation described in clause (c) below, which deposit will unconditionally and irrevocably be applied at Maturity to satisfy such obligation, (b) until Maturity MediaOne Group will be obligated to pay interest on such deposit at a rate equal to the stated rate of interest on the PIES as compensation to the holder for MediaOne Group's use of such cash deposit during the term of the PIES, and (c) at Maturity such cash deposit unconditionally and irrevocably will be applied by MediaOne Group in full satisfaction of the holder's obligation under the forward purchase contract, and MediaOne Group will deliver to the holder the number of shares of AirTouch Common Stock that the holder is entitled to receive at that time pursuant to the terms of the PIES (subject to MediaOne Group's right to deliver cash in lieu of the AirTouch Common Stock). Prospective investors should note that cash proceeds of this offering will not be segregated by MediaOne Group during the term of the PIES, but instead will be commingled with MediaOne Group's other assets and applied in a manner consistent with the "Use of Proceeds" discussion above. Consistent with the above characterization, (i) amounts paid to MediaOne Group in respect of the original issue of a PIES will be treated as allocable in their entirety to the amount of the cash deposit attributable to such PIES, and (ii) amounts denominated as interest that are payable with respect to the PIES will be characterized as interest payable on the amount of such deposit, includible annually in the income of a U.S. holder as interest income in accordance with such holder's method of accounting. Special additional interest payable in respect of the PIES in the event that MediaOne Group exercises its second option to extend the maturity of the PIES will be includible in income during the second extension period in accordance with the taxpayer's method of accounting as described in the prior sentence. Under the above characterization of the PIES, a holder's tax basis in a PIES generally will equal the holder's cost for that PIES. Upon the sale or other taxable disposition of a PIES (including pursuant to an exchange of new PIES for old PIES), a U.S. holder generally will recognize gain or loss equal to the difference between the amount realized on the sale or other taxable disposition and the U.S. holder's tax basis in the PIES. Such gain or loss generally will be long-term capital gain or loss if the U.S. holder has held the PIES for more than one year at the time of disposition. Under recently enacted legislation, long-term capital gains recognized by an individual holder generally are subject to a maximum rate of 20 percent in respect of property held for more than one year, effective for amounts properly taken into account on or after January 1, 1998. Under the above characterization of the PIES, if MediaOne Group delivers AirTouch Common Stock at Maturity, a U.S. holder will recognize no gain or loss on the purchase of the AirTouch Common Stock against application of the monies received by MediaOne Group in respect of the PIES. A U.S. holder will have a tax basis in such stock equal to the U.S. holder's tax basis in the PIES (less the portion of the tax basis of the PIES allocable to cash or Reported Securities received, as described below). A U.S. holder will recognize gain or loss (which will be short-term capital gain or loss) with respect to cash received in lieu of S-27 fractional shares, in an amount equal to the difference between the cash received and the portion of the basis of the PIES allocable to fractional shares (based on the relative number of fractional shares and full shares delivered to the holder). If at Maturity MediaOne Group pays the PIES in cash in full, a U.S. holder will recognize capital gain or loss equal to any difference between the amount of cash received from MediaOne Group and the U.S. holder's tax basis in the PIES at that time. Such gain or loss generally will be long-term capital gain or loss if the U.S. holder has held the PIES for more than one year at Maturity. If cash, Reported Securities or a combination of cash and Reported Securities is delivered pursuant to the PIES, a holder of the PIES will have taxable gain or loss upon receipt equal to the difference between the amount of cash received, including cash received in lieu of fractional Reported Securities, and its basis in the PRO RATA portion of the PIES allocable to any shares of AirTouch Common Stock for which such cash or fractional Reported Securities were received. Any gain or loss will be capital gain or loss, and if the holder has held the PIES for more than one year, such gain or loss will be long-term capital gain or loss. A holder's basis in any Reported Securities received will be equal to its basis in the PRO RATA portion of the PIES less the portion of such basis allocable to any shares of AirTouch Common Stock for which cash or fractional Reported Securities were received and to any shares of AirTouch Common Stock received. Due to the absence of authority as to the proper characterization of the PIES, no assurance can be given that the IRS will accept, or that a court will uphold, the characterization and tax treatment described above. In particular, the IRS could seek to analyze the tax consequences of owning a PIES under Treasury regulations promulgated in June 1996 governing contingent payment debt instruments (the "Contingent Payment Regulations"). The Contingent Payment Regulations are complex, but very generally apply the original issue discount rules of the Internal Revenue Code to a contingent payment debt instrument by requiring that original issue discount be accrued every year at a "comparable yield" for the issuer of the instrument, determined at the time of issuance of the obligation. In addition, the Contingent Payment Regulations require that a projected payment schedule, which results in such a "comparable yield", be determined, and that adjustments to income accruals be made to account for differences between actual payments and projected amounts. To the extent that the comparable yield as so determined exceeds the interest actually paid on a contingent debt instrument, the owner of that instrument will recognize ordinary interest income in excess of the cash the owner receives. In addition, any gain realized on the sale, exchange or redemption of a contingent payment debt instrument will be treated as ordinary income. Any loss realized on such sale, exchange or redemption will be treated as an ordinary loss to the extent the holder's original issue discount inclusions with respect to the obligation exceed prior reversals of such inclusions required by the adjustment mechanism described above. Any loss realized in excess of such amount generally will be treated as a capital loss. The Company believes that the Contingent Payment Regulations do not apply to the PIES, because those Regulations apply only to debt instruments that provide for contingent payments. The PIES are payable by the delivery of AirTouch Common Stock (unless MediaOne Group exercises its option to deliver cash at Maturity) and provide economic returns that are indexed to the performance of AirTouch Common Stock. The PIES therefore offer no assurance that a holder's investment will be returned to the holder at Maturity. Accordingly, MediaOne Group believes that the PIES properly are characterized for U.S. federal income tax purposes, not as debt instruments, but as forward purchase contracts in respect of which holders have deposited a fixed amount of cash with MediaOne Group, on which interest is payable at a fixed rate. If, however, the IRS were successfully to maintain that the Contingent Payment Regulations applied to the PIES, then, among other matters, (i) gain realized by a holder on the sale or other taxable disposition of a PIES (including as a result of payments made at Maturity) generally would be characterized as ordinary income, rather than as short- or long-term capital gain (depending on whether the PIES had been held for more than one year at the time of such disposition), and (ii) a U.S. holder would recognize ordinary income, or ordinary or capital loss (as the case may be, under the rules summarized above) on the receipt of AirTouch Common Stock, rather than capital gain or loss upon the ultimate sale of such stock. S-28 Even if the Contingent Payment Regulations do not apply to the PIES, it is possible that the IRS could seek to characterize the PIES in a manner that results in tax consequences to initial holders of the PIES different from those reflected in the Indenture and described above. Under alternative characterizations of the PIES, it is possible, for example, that a PIES could be treated as including a forward contract and one or more options. A bill pending in Congress (H.R. 3170) would treat some or all of the net long-term capital gain arising from "constructive ownership" transactions involving certain derivative financial instruments as short-term capital gain, and would impose an interest charge on such short-term capital gain. The proposed legislation would be effective with respect to gain recognized after the date the legislation is enacted into law, without regard to when the constructive ownership transaction was entered into. If enacted in its current form, the legislation would not apply to the PIES transaction (and, even if the legislation in its current form were extended to cover the PIES transaction, would have no material effect on the PIES transaction). It is not possible to predict whether legislation addressing constructive ownership transactions will be enacted, or what form any such legislation might take (including with respect to effective dates). NON-U.S. HOLDERS In the case of a holder of the PIES that is a non-resident alien individual or foreign corporation (a "non-U.S. holder"), payments made with respect to the PIES, including payments of principal, should not be subject to U.S. withholding tax; PROVIDED that such holder complies with applicable certification requirements (including in general the furnishing of Internal Revenue Service Forms W-8 and 1001, or successor forms thereto). Gain upon the sale, exchange, redemption or repayment of a PIES realized by a non-U.S. holder will generally not be subject to U.S. federal income tax unless (i) such gain is effectively connected with a U.S. trade or business of such non-U.S. holder, (ii) subject to certain exceptions, the non-U.S. holder is an individual who holds the PIES as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition and meets certain other requirements or (iii) the non-U.S. holder is subject to tax pursuant to the provisions of U.S. tax law applicable to certain U.S. expatriates (including certain former citizens and residents of the United States). BACKUP WITHHOLDING AND INFORMATION REPORTING A holder of the PIES may be subject to information reporting and to backup withholding at a rate of 31 percent of certain amounts paid to the holder unless such holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with applicable requirements of the backup withholding rules. Any amounts withheld under the backup withholding rules are not an additional tax and may be refunded or credited against a U.S. holder's U.S. federal income tax liability, provided the required information is furnished to the IRS. S-29 PLAN OF DISTRIBUTION Lehman Brothers Inc., Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co., as underwriters of the offering (the "Underwriters"), have severally agreed, subject to the terms and conditions of the underwriting agreement (the "Underwriting Agreement") among MediaOne Group, AirTouch and the Underwriters, the form of which is filed as an exhibit to the Registration Statement of which this Prospectus Supplement is a part, to purchase from MediaOne Group, and MediaOne Group has agreed to sell to the Underwriters, the aggregate number of PIES set forth opposite their names below:
UNDERWRITERS NUMBER OF PIES - ------------------------------------------------------------------------------ -------------- Lehman Brothers Inc........................................................... Morgan Stanley & Co. Incorporated............................................. Goldman, Sachs & Co........................................................... -------------- Total..................................................................... -------------- --------------
The Underwriting Agreement provides that the obligation of the Underwriters to purchase PIES is subject to certain conditions, and that, if any of the foregoing PIES are purchased by the Underwriters pursuant to the Underwriting Agreement, all the PIES agreed to be purchased by the Underwriters must be so purchased. MediaOne Group has been advised by the Underwriters that the Underwriters propose to offer the PIES directly to the public at the public offering price set forth on the cover page of this Prospectus Supplement and to certain selected dealers at such initial public offering price less a selling concession not in excess of $ per PIES. The Underwriters may allow and such dealers may reallow, a concession not in excess of $ per PIES to certain brokers and dealers. After the initial public offering, the public offering price, the concession to selected dealers and the reallowance may be changed by the Underwriters. MediaOne Group and AirTouch have agreed not to offer for sale, sell or contract to sell, or otherwise dispose of, or announce the offering of, or file or cause the filing of any registration statement under the Securities Act with respect to, without the prior written consent of Lehman Brothers Inc., any shares of AirTouch Common Stock or any securities convertible into or exchangeable for, or warrants to acquire, shares of AirTouch Common Stock for a period of 90 days following the date of this Prospectus Supplement; provided, however, that such restriction shall not effect the ability of (i) MediaOne Group or AirTouch to take any such actions in connection with the offering of the PIES made hereby or (ii) AirTouch to take any such actions in connection with any employee stock option plan, stock ownership plan or dividend reinvestment plan of AirTouch in effect at the date of this Prospectus Supplement. MediaOne Group has granted to the Underwriters an option to purchase up to an additional PIES at the price to public less the aggregate underwriting discount, solely to cover over-allotments, if any. Such option may be exercised at any time up to 30 days after the date of this Prospectus Supplement. To the extent that this option is exercised, each Underwriter will be committed, subject to certain conditions, to purchase the same proportion of PIES as the number of PIES to be purchased and offered by such Underwriter in the above table bears to the total number of initial PIES to be purchased by the Underwriters. MediaOne Group and AirTouch have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the Underwriters may be required to make in respect thereof. Until the distribution of the PIES is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase PIES and AirTouch Common Stock. As an exception to these rules, the Underwriters are permitted to engage in certain transactions that stabilize the price of the PIES and AirTouch Common Stock. Such transactions S-30 may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the PIES and AirTouch Common Stock. If the Underwriters create a short position in the PIES in connection with the offering, (i.e., if they sell more PIES than are set forth on the cover page of this Prospectus Supplement), the Underwriters may reduce that short position by purchasing PIES in the open market. The Underwriters also may elect to reduce any short position by exercising all or part of the over-allotment option described herein. The Underwriters also may impose a penalty bid on certain selling group members. This means that if the Underwriters purchase PIES in the open market to reduce the Underwriters' short position or to stabilize the price of the PIES, they may reclaim the amount of the selling concession from the selling group members who sold those PIES as part of the offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might otherwise be in the absence of such purchases. The imposition of a penalty bid might have an effect on the price of a security to the extent that it were to discourage resales of the security by purchasers in the offering. In the ordinary course of their business, including without limitation in connection with their market making activities, the Underwriters and their affiliates may effect transactions for their own account or for the account of their customers, and hold long or short positions, in PIES and AirTouch Common Stock. In addition, in connection with the offering of the PIES, the Underwriters or their affiliates may enter into one or more hedging transactions with respect to the AirTouch Common Stock. In connection with such hedging or market-making activities or with respect to proprietary or other trading activities by the Underwriters and their affiliates, the Underwriters or their affiliates may enter into transactions in the AirTouch Common Stock which may affect the market price, liquidity or value of the PIES and which could be deemed to be adverse to the interests of the holders of the PIES. Lehman Brothers Inc., Morgan Stanley & Co. Incorporated and their respective affiliates have from time to time performed various investment banking and financial advisory services for AirTouch and its affiliates, for which customary compensation has been received. LEGAL MATTERS The validity of the PIES will be passed upon for MediaOne Group by Weil, Gotshal & Manges LLP and for the Underwriters by Cleary, Gottlieb, Steen & Hamilton. ADDITIONAL INFORMATION MediaOne Group has filed with the Securities and Exchange Commission, Washington, D.C. 20549, a Registration Statement under the Securities Act with respect to the PIES offered hereby. Further information concerning the PIES and MediaOne Group may be found in the Registration Statement, of which this Prospectus Supplement constitutes a part. The Registration Statement may be inspected without charge at the Commission's office in Washington, D.C., and copies of all or any part thereof may be obtained from such office after payment of the fees prescribed by the Commission. Such Registration Statement is also available on the Commission's website (http://www.sec.gov). S-31 [LOGO] PROSPECTUS $1,800,000,000 MEDIAONE GROUP, INC. DEBT SECURITIES ---------------- MediaOne Group, Inc., a Delaware corporation ("MediaOne Group"), from time to time may offer its notes, debentures, or other debt securities (the "Debt Securities"). The Debt Securities offered pursuant to this Prospectus may be issued in one or more series and will be limited to $1,800,000,000 aggregate public offering price. Certain specific terms of the particular series of Debt Securities will be set forth in a supplement to this Prospectus (the "Prospectus Supplement") which will be delivered together with this Prospectus, including, where applicable, the specific designation, aggregate principal amount, denomination, maturity, premium, if any, the rate (which may be fixed or variable), time and method of calculating payment of interest, if any, the place or places where principal of, premium, if any, and interest, if any, on such Debt Securities will be payable, optional or mandatory redemption and sinking fund provisions, if any, conversion, exercise or exchange provisions, if any, and any other specific terms in respect of the offering and sale of the Debt Securities. The Debt Securities may be offered and sold through one or more underwriters, directly by MediaOne Group, or through dealers or agents. The names of any underwriters, dealers or agents involved in the distribution of the Debt Securities in respect of which this Prospectus is being delivered, and any applicable discounts, commissions or allowances, will be set forth in the applicable Prospectus Supplement. See "Plan of Distribution" for possible indemnification arrangements for any underwriters, dealers or agents. Unless otherwise provided in the Prospectus Supplement relating thereto, the Debt Securities will not be listed on any securities exchange. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT. ------------------------ The date of this Prospectus is July 22, 1998. No dealer, salesperson or any other individual has been authorized by MediaOne Group to give any information or to make any representation other than those contained or incorporated by reference in this Prospectus or any accompanying Prospectus Supplement and, if given or made, such information or representation must not be relied upon as having been authorized. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of MediaOne Group since the date hereof. ------------------------ Prior to June 12, 1998, MediaOne Group was known as "U S WEST, Inc." ("Old U S WEST"). On June 12, 1998, Old U S WEST consummated a transaction in which it separated its businesses into two independent companies (the "Separation"). In the Separation, Old U S WEST distributed to its stockholders all of the capital stock of a subsidiary holding the businesses of the U S WEST Communications Group and the domestic directories business of the U S WEST Media Group known as "Dex". Following the Separation, Old U S WEST was renamed "MediaOne Group, Inc." and has continued as an independent company conducting all of the businesses of the U S WEST Media Group other than Dex. Unless the context otherwise requires, references herein and in the documents incorporated herein to MediaOne Group shall refer to the businesses of the U S WEST Media Group other than Dex prior to the Separation and to MediaOne Group after the Separation. ------------------------ AVAILABLE INFORMATION MediaOne Group is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements, and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements, and other information concerning MediaOne Group can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including MediaOne Group. MediaOne Group's Common Stock is listed and traded on the New York Stock Exchange (the "NYSE") and the Pacific Stock Exchange (the "PSE") and such material is available for inspection at the offices of the NYSE, 20 Broad Street, New York, New York 10005 and at the offices of PSE, 115 Sansome Street, 2nd Floor, San Francisco, California 94104. MediaOne Group has filed with the Commission a registration statement on Form S-3 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") relating to the Debt Securities under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement, which is available for inspection and copying as set forth above. Statements contained in this Prospectus or a Prospectus Supplement as to the contents of any contract or other document which is filed as an exhibit to the Registration Statement are not necessarily complete, and each such statement is qualified in its entirety by reference to the full text of such contract or document. 2 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents have been filed by MediaOne Group with the Commission and are incorporated herein by reference: (i) Annual Report on Form 10-K for the year ended December 31, 1997, as amended by Form 10-K/A filed April 13, 1998, (ii) Current Reports on Form 8-K dated January 29, 1998, February 17, 1998, March 25, 1998 (as amended by Form 8-K/A filed April 13, 1998), April 17, 1998, May 5, 1998, May 15, 1998, June 18, 1998 and June 24, 1998, (iii) Proxy Statement on Schedule 14A filed with the Commission on April 20, 1998, and (iv) Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. All reports filed on or prior to June 12, 1998 were filed by Old U S WEST. All documents filed by MediaOne Group pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Securities shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date any such document is filed. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in a Prospectus Supplement (or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein or therein) modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. MediaOne Group will provide without charge to each person to whom a Prospectus is delivered, upon written or oral request of such person, a copy of any or all of the documents which are incorporated by reference herein, other than exhibits to such documents (unless such exhibits are specifically incorporated by reference into such documents). Requests should be directed to Investor Relations, MediaOne Group, Inc., 188 Inverness Drive West, Englewood, Colorado 80112 (telephone number (303) 858-3696). ------------------------ FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE Some of the information presented herein or incorporated herein by reference constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although MediaOne Group believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that could cause actual results to differ from expectations include: (i) greater than anticipated competition from new entrants into the cable and wireless commmunications markets; (ii) changes in demand for MediaOne Group's products and services; (iii) regulatory changes affecting the cable and telecommunications industries; (iv) a change in economic conditions in the various markets served by MediaOne Group's operations, including international markets, that could adversely affect the level of demand for cable, wireless or other services offered by MediaOne Group; (v) greater than anticipated competitive activity requiring new pricing for services; (vi) higher than anticipated start-up costs associated with new business opportunities; (vii) higher than anticipated employee levels, capital expenditures and operating expenses (such as costs associated with the year 2000 remediation); (viii) consumer acceptance of broadband services, including telephony and data services, and wireless services; (ix) increases in fraudulent activity with respect to broadband and wireless services; and (x) delays in the development of anticipated technologies, or the failure of such technologies to perform according to expectations. 3 MEDIAONE GROUP, INC. MediaOne Group is a diversified global media and broadband communications company. MediaOne Group has operations and investments in two principal areas: (i) domestic broadband communications and (ii) international broadband and wireless communications. MediaOne Group is the third largest cable television system operator in the United States with large clusters in Atlanta, Georgia, Eastern Massachusetts, Southern California, Southern Florida, Detroit, Michigan and Minneapolis/St. Paul, Minnesota. As of March 31, 1998, MediaOne Group's domestic cable television systems passed approximately 8.4 million homes and provided services to approximately 4.9 million basic cable subscribers. MediaOne Group also owns a 25.51% priority capital and residual equity interest in Time Warner Entertainment Company, L.P. ("TWE"), a provider of cable programming, filmed entertainment and broadband communications services and the second largest cable television system operator in the United States. Outside of the United States, MediaOne Group owns interests in various providers of broadband and wireless communications services in markets in continental Europe, the United Kingdom and Asia, including a 26.8% interest in Telewest communications plc, the second largest provider of combined cable and telecommunications services in the United Kingdom, and a 50% interest in One 2 One, a provider of personal communications services in the United Kingdom. MediaOne Group has its principal executive offices at 188 Inverness Drive West, Englewood, Colorado 80112 (Telephone number (303) 858-3000). THE SEPARATION On June 12, 1998, the Separation was consummated and Old U S WEST was separated into two independent companies. Until the Separation, Old U S WEST conducted its businesses through two groups, the U S WEST Communications Group (the "Communications Group") and the U S WEST Media Group (the "Media Group"). In connection with the Separation, Old U S WEST contributed the business of the Communications Group and Dex--the domestic directories business of the Media Group-- to USW-C, Inc., a wholly-owned subsidiary of Old U S WEST ("New U S WEST"), and distributed all of the common stock of New U S WEST to Old U S WEST's stockholders. Upon consummation of the Separation, New U S WEST was renamed "U S WEST, Inc." and Old U S WEST was renamed "MediaOne Group, Inc." and has continued to conduct the businesses of the Media Group other than Dex. 4 USE OF PROCEEDS MediaOne Group will apply the net proceeds from the sale of the Debt Securities to its general funds to be used for general corporate purposes and/or loans to its affiliates, which in turn will use the funds for general corporate purposes, including working capital, acquisitions, the refinancing of short-term and long-term borrowings and other business opportunities. RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth the ratio of earnings to fixed charges for MediaOne Group based on the historical results of MediaOne Group, which have been restated to reflect the dispositon of New U S WEST in the Separation for the periods indicated. For the purpose of calculating this ratio, earnings consist of income from continuing operations before income taxes and fixed charges. Fixed charges include interest on indebtedness and the portion of rentals representative of the interest factor.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, - ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1997 1998 - --------- --------- --------- --------- --------- --------- --------- -- 1.73 -- -- -- -- --
Earnings for the year ended December 31, 1993, 1995, 1996 and 1997 were insufficient to cover fixed charges by $217 million, $61 million, $407 million and $553 million, respectively, and for the three months ended March 31, 1997 and 1998 by $169 million and $263 million, respectively. DESCRIPTION OF DEBT SECURITIES The following description sets forth certain general terms and provisions of the Debt Securities to which any Prospectus Supplement may relate. The particular terms and provisions of the series of Debt Securities offered by a Prospectus Supplement, and the extent to which such general terms and provisions described below may apply thereto, will be described in the Prospectus Supplement relating to such series of Debt Securities. The Debt Securities are to be issued under an Indenture (the "Indenture"), dated as of November 13, 1995, between MediaOne Group and The First National Bank of Chicago, as Trustee (the "Trustee"). The following summaries of certain provisions of the Debt Securities and the Indenture do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all provisions of the Debt Securities and the Indenture, including the definitions therein of certain terms. Wherever particular sections or defined terms of the Indenture are referred to, it is intended that such sections or defined terms shall be incorporated herein by reference. GENERAL The Indenture does not limit the aggregate principal amount of Debt Securities that can be issued thereunder and debt securities may be issued thereunder up to the aggregate principal amount which may be authorized from time to time by, or pursuant to a resolution of, MediaOne Group's Board of Directors or by a supplemental indenture. Reference is made to the Prospectus Supplement for the following terms of the particular series of Debt Securities being offered hereby: (i) the title of the Debt Securities of the series; (ii) any limit upon the aggregate principal amount of the Debt Securities of the series; (iii) the date or dates on which the principal of the Debt Securities of the series will mature; (iv) the rate or rates (or manner of calculations thereof), if any, at which the Debt Securities of the series will bear interest, the date or dates from which any such interest will accrue and on which such interest will be payable, and, with respect to Debt Securities of the series in registered form, the record date for the interest payable on any interest payment date; (v) the place or places where the principal of and interest, if any, on the Debt Securities of the series will be payable; (vi) any redemption or sinking fund provisions; (vii) if other than the entire principal amount thereof, the portion of the principal amount of Debt Securities of the series 5 which will be payable upon declaration of acceleration of the maturity thereof; (viii) whether the Debt Securities of the series will be issuable in registered or bearer form or both, any restrictions applicable to the offer, sale or delivery of Debt Securities in bearer form ("bearer Debt Securities"), and whether, and the terms upon which, bearer Debt Securities will be exchangeable for Debt Securities in registered form ("registered Debt Securities") and vice versa; (ix) whether and under what circumstances MediaOne Group will pay additional amounts on the Debt Securities of the series held by a person who is not a U.S. person (as defined below) in respect of taxes or similar charges withheld or deducted and, if so, whether MediaOne Group will have the option to redeem such Debt Securities rather than pay such additional amounts; (x) whether the Debt Securities will be denominated or provide for payment in United States dollars or a foreign currency or units of two or more such foreign currencies; (xi) whether the Debt Securities of the series will be convertible into or exchangeable or exercisable for shares of a class of capital stock of MediaOne Group or any other corporation and the terms and conditions relating thereto; and (xii) any additional provisions or other special terms not inconsistent with the provisions of the Indenture, including any terms which may be required by or advisable under United States laws or regulations or advisable in connection with the marketing of Debt Securities of such series. (Sections 2.01 and 2.02.) To the extent not described herein, principal, premium, if any, and interest will be payable, and the Debt Securities of a particular series will be transferable, in the manner described in the Prospectus Supplement relating to such series. Each series of Debt Securities will constitute unsecured and unsubordinated indebtedness of MediaOne Group and will rank on a parity with MediaOne Group's other unsecured and unsubordinated indebtedness. However, since MediaOne Group is a holding company, the right of MediaOne Group and, hence, the right of creditors of MediaOne Group (including the holders of the Debt Securities) to participate in any distribution of the assets of any subsidiaries of MediaOne Group, whether upon liquidation, reorganization, or otherwise, is subject to prior claims of creditors of the subsidiary, except to the extent that claims of MediaOne Group itself as a creditor of a subsidiary may be recognized. As of March 31, 1998, MediaOne Group's subsidiaries had outstanding approximately $9.6 billion of indebtedness which included $2.7 billion of MediaOne of Delaware, Inc. ("MediaOne Delaware") indebtedness and $400 million of the capital assets segment indebtedness. Certain other current and future unsecured and unsubordinated indebtedness of MediaOne Group has or will be guaranteed by MediaOne Delaware (formerly Continental Cablevision, Inc.), MediaOne Group's principal domestic operating subsidiary. The Debt Securities will not be guaranteed by MediaOne Delaware. As a result, the Debt Securities will be effectively subordinated to such other unsecured and unsubordinated indebtedness of MediaOne Group to the extent of such guarantee. Debt Securities of any series may be issued as registered Debt Securities or bearer Debt Securities or both as specified in the terms of the series. Unless otherwise indicated in the Prospectus Supplement, Debt Securities will be issued in denominations of $1,000 and integral multiples thereof, and bearer Debt Securities will not be offered, sold, resold or delivered to U.S. persons in connection with their original issuance. For purposes of this Prospectus, "U.S. person" means a citizen, national or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States, or any political subdivision thereof, or an estate or trust which is subject to United States federal income taxation regardless of its source of income. To the extent set forth in the Prospectus Supplement, except in special circumstances set forth in the Indenture, interest on bearer Debt Securities will be payable only against presentation and surrender of the coupons for the interest installments evidenced thereby as they mature at a paying agency of MediaOne Group located outside of the United States and its possessions. (Section 2.05(c).) MediaOne Group will maintain such an agency for a period of two years after the principal of such bearer Debt Securities has become due and payable. During any period thereafter for which it is necessary in order to conform to United States tax law or regulations, MediaOne Group will maintain a paying agent outside the United States and its possessions to which the bearer Debt Securities may be presented for payment and will provide the necessary funds therefor to such paying agent upon reasonable notice. (Section 2.04.) 6 The general provisions of the Indenture do not afford holders of the Debt Securities protection in the event of a highly-leveraged transaction, reorganization, merger or similar transaction involving MediaOne Group that may adversely affect holders of the Debt Securities. Bearer Debt Securities and the coupons related thereto will be transferable by delivery. (Section 2.08(e).) If appropriate, federal income tax consequences applicable to a series of Debt Securities will be described in the Prospectus Supplement relating thereto. GLOBAL SECURITIES The Debt Securities of a series may be issued in the form of one or more fully registered global securities (each a "Global Security") that will be deposited with, or on behalf of, a depositary (the "Depositary") identified in the Prospectus Supplement relating to such series. Unless and until it is exchanged for Debt Securities in definitive registered form, a Global Security may not be transferred except as a whole by the Depositary for such Global Security to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor of such Depositary or a nominee of such successor. The specific terms of the depositary arrangements with respect to a series of Debt Securities will be described in the Prospectus Supplement relating to such series. MediaOne Group anticipates that the following provisions will apply to all depositary arrangements. Upon the issuance of a Global Security, the Depositary for such Global Security will credit the accounts held with it with the respective principal amounts of the Debt Securities represented by such Global Security. Such accounts shall be designated by the underwriters or agents with respect to such Debt Securities or by MediaOne Group if such Debt Securities are offered and sold directly by MediaOne Group. Ownership of beneficial interests in a Global Security will be limited to persons that have accounts with the Depositary for such Global Security ("participants") or persons that may hold interests through participants. Ownership of beneficial interests in such Global Security will be shown on, and the transfer of that ownership will be effected only through, records maintained by the Depositary for such Global Security or on the records of participants. The laws of some states require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to transfer beneficial interests in a Global Security. So long as the Depositary for a Global Security, or its nominee, is the registered owner of such Global Security, such Depositary or such nominee, as the case may be, will be considered the sole owner or holder of the Debt Securities represented by such Global Security for all purposes under the Indenture governing such Debt Securities. Except as provided below, owners of beneficial interests in a Global Security will not be entitled to have Debt Securities of the series represented by such Global Security registered in their names, will not receive or be entitled to receive physical delivery of Debt Securities of such series in definitive form and will not be considered the owners or holders thereof under the Indenture governing such Debt Securities. Principal, premium, if any, and interest payments on Debt Securities registered in the name of a Depositary or its nominee will be made to the Depositary or its nominee, as the case may be, as the registered owner of the Global Security representing such Debt Securities. Neither MediaOne Group, the Trustee for such Debt Securities, any Paying Agent nor the Security Registrar for such Debt Securities will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Security for such Debt Securities or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. MediaOne Group expects that the Depositary for a series of Debt Securities issued in the form of a Global Security, upon receipt of any payment of principal, premium or interest, will credit immediately participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the Global Security for such Debt Securities as shown on the records of such 7 Depositary. MediaOne Group also expects that payments by participants to owners of beneficial interests in such Global Security held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such participants. If a Depositary for a series of Debt Securities is at any time unwilling or unable to continue as depositary and a successor depositary is not appointed by MediaOne Group within 90 days, MediaOne Group will issue Debt Securities of such series in definitive form in exchange for the Global Security representing such series of Debt Securities. In addition, MediaOne Group may at any time and in its sole discretion determine not to have the Debt Securities of a series represented by a Global Security and, in such event, will issue Debt Securities of such series in definitive form in exchange for the Global Security representing such series of Debt Securities. In either instance, an owner of a beneficial interest in a Global Security will be entitled to have Debt Securities of the series represented by such Global Security equal in principal amount to such beneficial interest registered in its name and will be entitled to physical delivery of such Debt Securities in definitive form. Debt Securities of such series so issued in definitive form will be issued in denominations of $1,000 and integral multiples thereof and will be issued in registered form only, without coupons. EXCHANGE OF SECURITIES To the extent permitted by the terms of a series of Debt Securities authorized to be issued in registered form and bearer form, bearer Debt Securities may be exchanged for an equal aggregate principal amount of registered Debt Securities of the same series and date of maturity in such authorized denominations as may be requested upon surrender of the bearer Debt Securities with all unpaid coupons relating thereto, at an agency of MediaOne Group maintained for such purpose and upon fulfillment of all other requirements of such agent. (Section 2.08(b).) As of the date of this Prospectus, United States Treasury regulations do not permit exchanges of registered Debt Securities for bearer Debt Securities and, unless such regulations are modified, the terms of a series of Debt Securities will not permit registered Debt Securities to be exchanged for bearer Debt Securities. AMENDMENT AND WAIVER Subject to certain exceptions, the Indenture may be amended or supplemented by MediaOne Group and the Trustee with the consent of the holders of a majority in principal amount of the outstanding Debt Securities of each series affected by the amendment or supplement (with each series voting as a class), or compliance with any provision may be waived with the consent of the holders of a majority in principal amount of the outstanding Debt Securities of each series affected by such waiver (with each series voting as a class). However, without the consent of each Debt Securityholder affected, an amendment or waiver may not (i) reduce the amount of Debt Securities whose holders must consent to an amendment or waiver; (ii) change the rate of or change the time for payment of interest on any Debt Security; (iii) change the principal of or change the fixed maturity of any Debt Security; (iv) change the terms of any Debt Securities so as to adversely affect the terms on which such Debt Securities are convertible into, or exchangeable or exercisable for, shares of a class of capital stock of MediaOne Group or any other corporation; (v) waive a default in the payment of the principal of or interest on any Debt Security; (vi) make any Debt Security payable in money other than that stated in the Debt Security; or (vii) impair the right to institute suit for the enforcement of any payment on or with respect to any Debt Security. (Section 9.02.) The Indenture may be amended or supplemented without the consent of any Debt Securityholder (i) to cure any ambiguity, defect or inconsistency in the Indenture, or the Debt Securities of any series; (ii) to provide for the assumption of all the obligations of MediaOne Group under the Debt Securities, any coupons related thereto and the Indenture by any corporation in connection with a merger, consolidation, transfer or lease of MediaOne Group's property and assets substantially as an entirety, as provided for in the Indenture; (iii) to provide for uncertificated Debt Securities in addition to or in place of certificated Debt Securities; (iv) to make any change that does not adversely affect the rights of any Debt Securityholder; (v) to provide for the issuance of and establish the form and terms and conditions of a series of Debt Securities endorsed 8 thereon or to establish the form of any certifications required to be furnished pursuant to the terms of the Indenture or any series of Debt Securities; or (vi) to add to the rights of Debt Securityholders. (Section 9.01.) MERGER MediaOne Group may consolidate with or merge into, or transfer or lease its property and assets substantially as an entirety to, another entity if the successor entity is a corporation and assumes all the obligations of MediaOne Group under the Debt Securities and any coupons related thereto and the Indenture and if, after giving effect to such transaction, a Default or Event of Default would not occur or be continuing. Thereafter, all such obligations of MediaOne Group shall terminate. (Sections 5.01 and 5.02.) DEFEASANCE MediaOne Group may terminate all of its obligations (other than for certain obligations to register the transfer or exchange of Debt Securities, maintain paying agencies and hold monies for payment in trust) under the Debt Securities and the Indenture with respect to the Debt Securities of any series or any installment of principal and premium, if any, or interest on the Debt Securities of that series if MediaOne Group irrevocably deposits in trust with the Trustee money or U.S. Government Obligations sufficient to pay, when due, principal, premium, if any, and interest on the Debt Securities of that series to maturity or redemption or such installment of principal and premium, if any, or interest, as the case may be, and if all other conditions set forth in the Debt Securities of that series are met. MediaOne Group shall designate the installment or installments of principal or interest to be so satisfied. With respect to the principal amount of the Debt Securities of any series, if the Debt Securities of that series are convertible or exchangeable or exercisable for shares of capital stock of MediaOne Group or any other corporation, in lieu of depositing money or U.S. Government Obligations in an amount sufficient to satisfy the principal amount of the Debt Securities of that series, MediaOne Group may deposit with the applicable Trustee such amount of capital stock for which the Debt Securities of that series are convertible or exchangeable or exercisable. "U.S. Government Obligations" means (i) direct obligations of the United States of America for the payment of which the full faith and credit of the United States of America is pledged; or (ii) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States of America, the full and timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America. EVENTS OF DEFAULT The following events are defined in the Indenture as "Events of Default" with respect to a series of Debt Securities: (i) default in the payment of interest on any Debt Security of such series for 90 days; (ii) default in the payment of the principal of any Debt Security of such series; (iii) failure by MediaOne Group for 90 days after notice to it to comply with any of its other agreements in the Debt Securities of such series, in the Indenture or in any supplemental indenture; and (iv) certain events of bankruptcy or insolvency of MediaOne Group. (Section 6.01.) If an Event of Default occurs with respect to the Debt Securities of any series and is continuing, the Trustee or the holders of at least 25% in principal amount of all of the outstanding Debt Securities of that series may declare the principal (or, if the Debt Securities of that series are original issue discount Debt Securities, such portion of the principal amount as may be specified in the terms of that series) of all the Debt Securities of that series to be due and payable. Upon such declaration, such principal (or, in the case of original issue discount Debt Securities, such specified amount) shall be due and payable immediately. (Section 6.02.) Securityholders may not enforce the Indenture or the Debt Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Debt Securities. (Section 7.01.) Subject to certain limitations, holders of a majority in principal amount of 9 the Debt Securities of each series affected (with each series voting as a class) may direct the Trustee in its exercise of any trust power. (Section 6.05.) The Trustee may withhold from holders of Debt Securities notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. (Section 7.05.) CONCERNING THE TRUSTEE MediaOne Group and certain of its affiliates maintain banking relationships in the ordinary course of business with the Trustee. In addition, the Trustee and certain of its affiliates serve as trustee, authenticating agent or paying agent with respect to certain debt securities of MediaOne Group and its affiliates. PLAN OF DISTRIBUTION DISTRIBUTION OF SECURITIES MediaOne Group may offer and sell the Debt Securities (i) to or through underwriting syndicates represented by managing underwriters, (ii) to or through underwriters without a syndicate, (iii) through dealers, (iv) through agents or (v) through a combination of any such methods of sale. The Prospectus Supplement with respect to each series of Debt Securities will set forth the terms of the offering, including the name or names of any underwriters, dealers or agents, the purchase price and the net proceeds to MediaOne Group from such sale, any underwriting discounts, agency fees and other items constituting underwriters' or agents' compensation, the initial public offering price and any discounts or concessions allowed, re-allowed or paid to dealers. If any underwriters are involved in the offer and sale, the Debt Securities will be acquired by the underwriters and may be resold by them from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. Unless otherwise set forth in the accompanying Prospectus Supplement, the obligations of the underwriters to purchase the Debt Securities will be subject to certain conditions precedent and the underwriters will be obligated to purchase all the Securities described in such Prospectus Supplement if any are purchased. Any initial public offering price and any discounts or concessions allowed or re-allowed or paid to dealers may be changed from time to time. The Debt Securities may be offered and sold by MediaOne Group directly or through an agent or agents designated by MediaOne Group from time to time. Unless otherwise indicated in the applicable Prospectus Supplement, any such agent or agents will be acting on a best efforts basis for the period of its or their appointment. Any agent participating in the distribution of the Debt Securities may be deemed to be an "underwriter," as that term is defined in the Securities Act, of the Securities so offered and sold. The Securities also may be sold to dealers, at the applicable price to the public set forth in the applicable Prospectus Supplement relating to a particular series of the Securities, who later resell to investors. Such dealers may be deemed to be "underwriters" within the meaning of the Securities Act. Underwriters, dealers and agents may be entitled, under agreements entered into with MediaOne Group, to indemnification by MediaOne Group against certain liabilities, including liabilities under the Securities Act. The place and time of delivery for the Debt Securities in respect of which this Prospectus is delivered will be set forth in the accompanying Prospectus Supplement, if appropriate. DELAYED DELIVERY ARRANGEMENTS If so indicated in the Prospectus Supplement, MediaOne Group will authorize dealers or other persons acting as MediaOne Group's agents to solicit offers by certain institutions to purchase Debt Securities from MediaOne Group pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contracts may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions, and others, but in all cases such institutions must be approved by MediaOne Group. The obligations of any purchaser 10 under any such contract will not be subject to any conditions except that (a) the purchaser of the Debt Securities shall not at the time of delivery be prohibited from purchasing such securities under the laws of the jurisdiction to which such purchaser is subject and (b) if the Debt Securities are also being sold to underwriters, MediaOne Group shall have sold to such underwriters the Debt Securities not sold for delayed delivery. The dealers and such other persons will not have any responsibility in respect of the validity or performance of such contracts. LEGAL OPINIONS The validity of the Debt Securities will be passed upon by Stephen E. Brilz, Corporate Counsel of MediaOne Group. EXPERTS The consolidated financial statements and the consolidated financial statement schedule included in Old U S WEST's Annual Report on Form 10-K as of and for the years ended December 31, 1997 and 1996, as amended by Form 10-K/A filed April 13, 1998, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are incorporated herein by reference in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. The consolidated financial statements and the consolidated financial statement schedule of MediaOne Group as of and for the years ended December 31, 1997 and 1996 included in the Current Report on Form 8-K of MediaOne Group, dated June 18, 1998, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are incorporated herein by reference in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. The consolidated financial statements and consolidated financial statement schedule of Old U S WEST for the year ended December 31, 1995, included in Old U S WEST's Annual Report on Form 10-K for the year ended December 31, 1997, as amended by Form 10-K/A filed April 13, 1998, and the restated consolidated financial statements and restated consolidated financial statement schedule of MediaOne Group included in MediaOne Group's Current Report on Form 8-K, dated June 18, 1998, are incorporated herein by reference in reliance on the reports of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. 11 This prospectus and the information contained herein are subject to completion or amendment and prospective purchasers are referred to the related final prospectus for definitive information on any matter contained herein. Neither this prospectus nor the accompanying prospectus shall constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. Subject to Completion, dated July 22, 1998 [LOGO] SHARES AIRTOUCH COMMUNICATIONS, INC. COMMON STOCK (PAR VALUE $.01 PER SHARE) --------------------- This Prospectus relates to up to million shares of common stock, par value $.01 per share (the "Common Stock"), of AirTouch Communications, Inc. (the "Company" or "AirTouch"), which may be delivered by MediaOne Group, Inc. ("MediaOne Group"), at its option, pursuant to the terms of MediaOne Group's Premium Income Equity Securities ("PIES"). This Prospectus accompanies a prospectus of MediaOne Group (the "PIES Prospectus") relating to the sale of PIES (the "PIES Offering"). The PIES Prospectus does not constitute a part of this Prospectus nor is it incorporated by reference herein. MediaOne Group has granted to the Underwriters of the PIES a 30-day option to purchase up to an additional PIES, which may be exchanged at their maturity for up to an additional shares of Common Stock. Such option has been granted solely to cover over-allotments, if any. THE COMPANY IS NOT AN AFFILIATE OF MEDIAONE GROUP, WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE PIES AND WILL HAVE NO OBLIGATION WITH RESPECT TO THE PIES. The Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "ATI." On July 21, 1998, the last reported sale price of Common Stock on the NYSE Composite Tape was $64 7/8 per share. See "Price Range of Common Stock." Other than (i) the sale of shares of Common Stock by MediaOne Group to the Company and (ii) options granted and Common Stock issued pursuant to the Company's existing benefit and stock option plans, the Company, MediaOne Group and its wholly-owned subsidiaries have agreed not to issue, sell, agree to sell or otherwise dispose of, without the prior written consent of Lehman Brothers, any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for Common Stock for a period of 90 days after the date of this Prospectus. See "Plan of Distribution." SEE "RISK FACTORS" BEGINNING ON PAGE 13 HEREIN FOR CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- "Premium Income Exchangeable Securities-SM-" and "PIES-SM-" are service marks owned by Lehman Brothers Inc. Prospectus dated , 1998 CERTAIN DEFINITIONS Unless the context otherwise requires, references to "AirTouch" or the "Company" include AirTouch Communications, Inc. and entities over which it has or shares operational control, and references to "MediaOne Group" include MediaOne Group, Inc. (formerly U S WEST Media Group, Inc.) and entities over which it has or shares operational control. CELLULAR AND PCS. When used in this Prospectus, "cellular service" refers to wireless service operating at the 800 MHz band in the United States and South Korea and at the 900 MHz band in Europe, and "broadband personal communication service" or "PCS" refers to wireless service operating at the 1900 MHz band in the United States and South Korea and at the 1800 MHz band in Europe. The Company considers the functionality of both services to be similar despite the different bands at which they operate. POPS. POPs means the population of a licensed market (based on population estimates for such market) multiplied by the Company's ownership interest in a licensee operating in such market as of the date specified and includes networks under construction and markets of certain cost-based investments not included in proportionate financial results. PROPORTIONATE ACCOUNTING. The Company uses United States generally accepted accounting principles ("GAAP") and includes supplemental information prepared using proportionate accounting to present certain financial information. Proportionate financial and operating information is not required by GAAP and is not intended to replace the consolidated financial statements prepared in accordance with GAAP and incorporated by reference herein. Because significant assets of the Company are not consolidated and because of the substantial effect of certain entities on the year-to-year comparability of the Company's consolidated financial results, the Company believes that proportionate financial and operating data facilitate the understanding and assessment of its consolidated financial statements. Under GAAP, the Company consolidates the entities in which it has a direct controlling interest and uses the equity method to account for entities over which the Company has significant influence but does not have a direct controlling interest. In contrast, proportionate accounting reflects the Company's relative ownership interests in operating revenues and expenses for both its consolidated and equity method entities. For example, United States cellular proportionate results present the Company's share--its percentage ownership--for all significant United States cellular operations, including those corporations and partnerships where the Company does not own more than 50%. Similarly, total proportionate operating cash flow represents the Company's ownership interests in the respective entities' operating cash flows. As such, proportionate operating cash flow does not represent cash available to the Company. Net income is the same under GAAP and proportionate presentations. PROPORTIONATE OPERATING CASH FLOW means proportionate operating income plus proportionate depreciation and proportionate amortization. PRO FORMA INFORMATION. On April 6, 1998, the Company acquired the United States cellular business of MediaOne and its 25% interest in PrimeCo Personal Communications, L.P. Except as set forth under "Pro Forma Condensed Combined Financial Statements," the pro forma information presented in this Prospectus reflects the impacts of that acquisition as if it had been effected at the beginning of each period presented, after giving effect to the purchase method of accounting and other merger-related adjustments. Pro forma information should be read in conjunction with the Pro Forma Condensed Combined Financial Statements and explanatory notes included herein. ------------------------ THE COMPANY HAS BEEN ADVISED THAT, IN CONNECTION WITH THE OFFERING BY MEDIAONE GROUP OF THE PIES, THE UNDERWRITERS OF THE PIES AND CERTAIN OTHER PERSONS PARTICIPATING IN THE PIES OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PIES AND THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON STOCK PRIOR TO THE PRICING OF THE PIES OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE PIES AND THE COMMON STOCK, THE PURCHASE OF PIES FOLLOWING THE PRICING OF THE PIES OFFERING TO COVER A SHORT POSITION IN THE PIES AND THE PURCHASE OF COMMON STOCK FOLLOWING THE PRICING OF THE PIES OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE PIES AND THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION." 2 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information concerning AirTouch Communications, Inc. can be inspected and copied at the public reference facilities maintained by the Commission at its offices at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as well as the Regional Offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, such reports, proxy statements and other information may be accessed electronically at the Commission's site on the World Wide Web at http://www.sec.gov. Such reports, proxy statements and other information can also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005 and at the offices of the Pacific Exchange, 301 Pine Street, San Francisco, California 94104. ------------------------ The shares of Common Stock which may be delivered by MediaOne Group pursuant to the terms of the PIES were included in the Registration Statement of the Company filed under Form S-3 (Reg. No. 333-56645), of which this Prospectus is a part, with the Commission on June 11, 1998 at the time such registration statement became effective. ------------------------ INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed with the Commission by the Company pursuant to the Exchange Act are incorporated herein by reference: (a) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997; (b) the Company's Current Report on Form 8-K dated January 29, 1998; (c) the Company's Current Report on Form 8-K dated April 6, 1998, as amended on April 23, 1998; (d) the Company's Current Report on Form 8-K dated April 27, 1998; (e) the Company's Current Report on Form 8-K dated April 29, 1998; (f) the Company's Current Report on Form 8-K dated April 29, 1998 (filed as of May 1, 1998); (g) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998; (h) the Company's Current Report on Form 8-K dated May 28, 1998; and (i) the Company's Current Report on Form 8-K dated May 29, 1998. All documents subsequently filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the effective date of the Registration Statement shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom a copy of this Prospectus has been delivered, and who makes a written or oral request, a copy of any and all of the information that has been incorporated by reference in this Prospectus or any Prospectus Supplement, excluding exhibits. Requests should be directed to: Investor Relations, AirTouch Communications, Inc., One California Street, San Francisco, California 94111, telephone number: (415) 658-2000. 3 SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION SET FORTH ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. THE COMPANY AirTouch Communications, Inc. ("AirTouch" or the "Company") is the largest wireless telecommunication services company in the world based on the 31.5 million total wireless customers served by the Company and its ventures as of June 30, 1998. Through its operations in the United States, Europe, Asia and North Africa, the Company provides a full range of wireless telecommunication services, including cellular, PCS and paging, and in the future will provide global satellite communication services. The cellular and PCS licenses of the Company and its ventures cover more than 719 million people around the world in 13 countries on four continents. Based on its ownership percentages, the Company's cellular and PCS interests represented approximately 233.8 million POPs and, together with paging customers, 15.1 million proportionate customers as of June 30, 1998. Worldwide Wireless Presence as of June 30, 1998
TOTAL VENTURES(1) PROPORTIONATE -------------------------- ---------------------- POPULATION(2) CUSTOMERS POPS CUSTOMERS ------------- ----------- --------- ----------- (IN MILLIONS) U.S. Cellular & PCS.................. 146.9 8.9 95.2 7.6 Europe............................... 269.3 13.1 67.7 3.6 Asia................................. 248.5 6.1 54.5 0.6 Egypt(3)............................. 54.5 n/a 16.4 n/a Paging(4)............................ n/a 3.4 n/a 3.3 ----- --- --------- --- Total................................ 719.2 31.5 233.8 15.1
- ------------------------ (1) Includes total population and all customers served by the ventures in which AirTouch has an ownership interest. (2) As of December 31, 1997. Population estimates for Europe, Asia and Egypt are from INTERNATIONAL CELLULAR, May 29, 1998, published by Kagan World Media, Ltd. U.S. population estimates are from . (3) License issued on May 5, 1998. The Company anticipates launch of service in the second half of 1999. (4) Includes customers of Canadian, Spanish and Portuguese paging ventures. The Company has experienced significant growth in the number of cellular, PCS and paging customers that it serves as a result of growing worldwide demand for wireless services and acquisitions and new license awards that have more than doubled the Company's worldwide presence from 75 million POPs in 1993 to 233 million POPs today. From 1993 to 1997, the Company's proportionate subscribers increased at a compounded annual growth rate of 44% to 10.7 million and its proportionate operating cash flow increased at a compounded annual growth rate of 49% to $1.7 billion. Total proportionate customers reached 15.1 million as of June 30, 1998, and proportionate operating cash flow on a proforma basis including the effect of the Merger was $1.4 billion for the six month period ended June 30, 1998. Although recent increases in competition in most of the Company's markets will likely slow the rate of customer and operating cash flow growth in future years, the Company believes that its proven ability to carry out its business strategy will continue to make it an effective and efficient competitor. The Company's operations are divided into three principal businesses: U.S. Cellular and PCS, International Cellular, and Paging: - U.S. CELLULAR AND PCS. The Company is the largest provider of cellular and PCS services in the United States based on the 8.9 million total customers served by the Company and its ventures as of June 30, 1998. The Company and its ventures provide cellular service in 22 of the 30 largest metropolitan statistical areas in the United States. The Company provides cellular service directly 4 in certain markets and through joint ventures in others and provides PCS through PrimeCo Personal Communications, L.P. ("PrimeCo"), in which it owns a 50% interest. On a proportionate basis, the Company's United States cellular and PCS business had 7.6 million customers as of June 30, 1998, a 28% increase over pro forma customers for the prior year, and $827 million in pro forma proportionate operating cash flow for the first six months of 1998, a 12% increase over the prior year's pro forma proportionate operating cash flow. - INTERNATIONAL CELLULAR. Outside the United States, the Company owns interests in 16 cellular ventures in 12 countries on three continents, including Europe, Asia and Africa. The Company's international operations represented 4.2 million proportionate international customers as of June 30, 1998, an 86% increase over the prior year, and proportionate operating cash flow of $533 million for the first six months of 1998, a 78% increase over the prior year. - PAGING. The Company had approximately 3.3 million paging units in service worldwide as of June 30, 1998. With approximately 3.2 million of such units in service in the United States, the Company is one of the largest providers of paging services in the United States and the only large paging company in the United States to have achieved and maintained positive net income and free cash flow. The Company's United States paging business experienced a 7.9% increase in units in service over June 30, 1997, with proportionate operating cash flow for the first six months of 1998 of $60 million, a 13% increase over the same period of the prior year. The Company also has a 5.7% interest in Globalstar, L.P. ("Globalstar"), a satellite communications company that expects to begin commercial service in the third quarter of 1999. The Company has the exclusive right to provide Globalstar service in the United States and, through a partnership with Loral Space & Communications Corporation Ltd. ("Loral"), in Canada and Mexico. BUSINESS STRATEGY The Company's principal objective is to be the premier provider of wireless telecommunication services worldwide. The Company believes that the following elements of its business strategy will enable it to meet that objective: FOCUS ON WIRELESS. By concentrating on wireless telecommunications services, the Company has invested its capital in a proven industry that is expected to grow dramatically on a worldwide basis. The Company believes that the knowledge and experience developed by its senior management team through extensive involvement in the industry since its inception in 1983 give it an advantage as an operator and in identifying and pursuing new value-creating wireless opportunities. GLOBAL PRESENCE. With investments in the United States, Europe, Asia and North Africa, the Company has a diverse global presence that limits its risks from negative market conditions in any one region. In addition, the international markets in which the Company has investments are relatively less penetrated--14% on average--providing even greater growth potential than in the United States, where penetration is 23%. Its global reach also enables the Company to identify emerging trends and share best practices across its many ventures. SCALE ADVANTAGES. The Company and its ventures served a total of 31.5 million customers as of June 30, 1998. The scale of the Company's operations has contributed to cost savings and operational efficiencies that generate competitive advantages. The Company is able to reduce its costs per customer by spreading expenses over a large subscriber base and by consolidating headquarter services and certain shared operational functions. In addition, by purchasing infrastructure and handsets jointly with its partners, the Company has been able to obtain favorable pricing from manufacturers. 5 CORE COMPETENCIES. As competition increases worldwide, AirTouch's advantages lie in the execution of the basic components of its business: - World class customer care--The Company's focus on providing customers with world class customer care gives AirTouch a competitive advantage in subscriber retention. Through proactive outreach efforts, AirTouch has been able to keep its churn (customers leaving the system) from increasing despite growing competition. - Extensive distribution channels--As an early entrant into the wireless market AirTouch has developed extensive direct and indirect distribution channels to sell its services in its U.S. and international markets. The Company's strategy is to increase the proportion of its sales made through direct channels, where the Company is better able to control and reduce selling costs. - Quality products and services--The Company offers competitive products and pricing plans. Its combined analog and digital network and the availability of dual-mode handsets provide the advantage of extensive coverage and nationwide roaming capabilities. The Company offers analog and digital products that appeal to different market segments. - Network expertise--With operations throughout the world, the Company has engineered cellular networks using every major wireless technology, including different digital standards as well as analog. AirTouch built the world's first commercial GSM network, which commenced service in Germany in 1992, and was a pioneer in the development of CDMA-digital technology. The Company has also developed many patented tools for detecting and preventing cellular fraud and for enhancing analog capacity. - Profitable growth--The Company focuses on profitably attracting new subscribers and retaining existing customers. Its cost containment and efficiencies of scale have helped it to reduce cash costs per customer faster than declines in the average revenue per customer, resulting in record 1997 total Company proportionate operating cash flow margins of 35%. EFFICIENT MANAGEMENT STRUCTURE. In the United States, the Company's decentralized management structure makes AirTouch an agile competitor in an increasingly competitive industry. Decision-making is kept close to customers and separate profit and loss responsibility is given to local management. Although the Company generally has minority interests in its international ventures, it plays an active role, with board representation and the right to appoint key management positions and participate in key business decisions. STRICT FINANCIAL INVESTMENT CRITERIA. The Company's strong financial performance and investment grade credit ratings are due in part to its financial discipline and structured approach to new opportunities and ventures. Each potential investment is measured against a strict set of financial criteria to determine whether the investment offers an opportunity for value creation. RECENT DEVELOPMENTS On April 6, 1998, the Company and MediaOne Group, Inc. ("MediaOne Group") completed the merger of MediaOne Group's U.S. cellular and PCS interests into the Company (the "Merger"). In the Merger, the Company acquired U S WEST NewVector Group, Inc. ("NewVector"), which held MediaOne Group's U.S. cellular business, and MediaOne Group's 25% interest in PrimeCo. As a result of the Merger, the Company added 2.5 million proportionate U.S. wireless customers and 35 million proportionate POPs. The total value of the Merger was approximately $5.9 billion. The Company issued approximately 59.4 million shares of Common Stock valued at $2.9 billion based on the April 3, 1998 closing price of $49 per share and $1.65 billion of preferred stock and assumed $1.35 billion of debt. 6 The Company expects earnings per share dilution from the Merger to reach $0.40 per share in 1999 and to decline thereafter. This dilution represents the net amount of amortization of acquisition intangibles, incremental interest expense, preferred dividends and common shares issued, as partially offset by incremental earnings. The Company plans to pursue cost savings to partially mitigate this dilution, there being no assurance that such plans will be successful. RECENT FINANCIAL RESULTS On July 22, 1998, the Company announced its earnings for the second quarter of 1998, which ended on June 30, 1998. Consolidated revenues for the quarter were $1.3 billion, with net income of $147 million and diluted earnings per share of $0.25. The strength in the Company's financial and operating performance has been driven by increased demand for wireless services, continued growth in the Company's U.S. cellular wireless operations, significant growth in the Company's international operations, and the Company's continued efforts to control costs. In order to better compare year-over-year growth, results in this discussion have been presented on a pro forma basis as if the acquisition of MediaOne Group's U.S. wireless interests occurred on January 1, 1997. ON A GAAP BASIS Comparing the first six months of 1998 to the same period in 1997, the Company's total operating revenues grew 10% to $2.7 billion, and operating income grew 13% to $556 million. Net income applicable to common stockholders was $262 million, up 176% over the first six months in 1997. ON A PROPORTIONATE BASIS The Company's proportionate service and other revenues were $3.5 billion in the first six months of 1998, a 20% increase over the same period in 1997. Proportionate operating cash flow was $1.4 billion, a 31% increase over the first six months of 1997. During the first six months of 1998 the Company's total proportionate customers increased by 1.6 million to 15.1 million, an increase of 35% from proportionate customers as of June 30, 1997. THE OFFERING OF THE PIES The PIES are being offered by MediaOne Group pursuant to the PIES Prospectus. Pursuant to the terms of the PIES, MediaOne Group may deliver shares of Common Stock to the holders of the PIES at the maturity thereof. This Prospectus relates to the delivery by MediaOne Group pursuant to the PIES of up to shares of Common Stock, plus up to an additional shares of Common Stock with respect to the PIES that are subject to an option granted by MediaOne Group to the Underwriters in the PIES Offering solely to cover over-allotments. For a description of the relationship between MediaOne Group and the Company see "Selling Stockholder." RISK FACTORS See "Risk Factors" for a discussion of certain factors that should be considered carefully by prospective investors. 7 SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following tables set forth selected historical data for the Company on a GAAP basis. Except for capital expenditures and capital calls, which are unaudited, the data for each of the five years ended December 31, 1997 were derived from the Company's audited financial statements. The data for the three months ended March 31, 1998 and March 31, 1997 were derived from the unaudited quarterly financial statements. The following information should be read in conjunction with the audited consolidated financial statements, including the accompanying notes, of the Company which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and in its Quarterly Report on Form 10-Q for the period ended March 31, 1998, each incorporated herein by reference.
THREE MONTHS ENDED MARCH 31 YEAR ENDED DECEMBER 31 -------------------- ------------------------------------------------ 1998 1997 1997(a) 1996(a) 1995 1994(b) --------- --------- ----------- ----------- --------- ----------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA Operating revenues.............................. $ 958 $ 836 $ 3,594 $ 2,252 $ 1,619 $ 1,247 Operating income................................ $ 234 $ 208 $ 706 $ 281 $ 113 $ 73 Equity in net income of unconsolidated wireless systems....................................... $ 77 $ 8 $ 200 $ 133 $ 152 $ 110 Interest: Expense....................................... $ (19) $ (26) $ (90) $ (52) $ (13) $ (10) Income........................................ $ 6 $ 5 $ 18 $ 14 $ 35 $ 55 Income from operations(c)....................... $ 167 $ 77 $ 448 $ 199 $ 132 $ 98 Preferred dividends............................. $ 14 $ 13 $ 54 $ 20 $ -- $ -- Net income applicable to common stockholders.... $ 153 $ 64 $ 394 $ 179 $ 132 $ 98 Per share data: Income from operations(c) Basic and diluted........................... $ 0.33 $ 0.15 $ 0.89 $ 0.40 $ 0.27 $ 0.20 Net income applicable to common stockholders Basic and diluted........................... $ 0.30 $ 0.13 $ 0.78 $ 0.36 $ 0.27 $ 0.20 MARCH 31 DECEMBER 31 -------------------- ------------------------------------------------ 1998 1997 1997(a) 1996(a) 1995 1994(b) --------- --------- ----------- ----------- --------- ----------- BALANCE SHEET DATA Investments in unconsolidated wireless systems....................................... $ 2,382 $ 1,888 $ 2,068 $ 1,992 $ 3,076 $ 1,698 Intangible assets, net.......................... $ 3,279 $ 3,358 $ 3,297 $ 3,409 $ 606 $ 471 Total assets.................................... $ 9,401 $ 8,486 $ 8,970 $ 8,524 $ 5,648 $ 4,488 Long-term debt, including current portion....... $ 1,534 $ 1,622 $ 1,419 $ 1,669 $ 906 $ 130 Total stockholders' equity...................... $ 5,918 $ 5,114 $ 5,529 $ 5,062 $ 3,751 $ 3,459 OTHER DATA Working capital (deficit)....................... $ 30 $ ( 44) $ ( 254) $ ( 120) $ 19 $ 736 Capital expenditures and capital calls, excluding acquisitions(d)..................... $ 265 $ 164 $ 1,023 $ 890 $ 1,015 $ 494 1993(b) ----------- INCOME STATEMENT DATA Operating revenues.............................. $ 1,058 Operating income................................ $ 129 Equity in net income of unconsolidated wireless systems....................................... $ 32 Interest: Expense....................................... $ (22) Income........................................ $ 12 Income from operations(c)....................... $ 41 Preferred dividends............................. $ -- Net income applicable to common stockholders.... $ 35 Per share data: Income from operations(c) Basic and diluted........................... $ 0.09 Net income applicable to common stockholders Basic and diluted........................... $ 0.08 1993(b) ----------- BALANCE SHEET DATA Investments in unconsolidated wireless systems....................................... $ 1,155 Intangible assets, net.......................... $ 413 Total assets.................................... $ 4,077 Long-term debt, including current portion....... $ 79 Total stockholders' equity...................... $ 3,337 OTHER DATA Working capital (deficit)....................... $ 1,347 Capital expenditures and capital calls, excluding acquisitions(d)..................... $ 304
- ------------------------------ (a) In December 1996, the Company obtained a controlling interest in Telecel. The Company consolidated Telecel's Balance Sheet as of December 31, 1996 and began consolidating Telecel's results of operations on January 1, 1997. In August 1996, the Company completed its acquisition of Cellular Communications, Inc. See Note F, "Partnerships and Acquisitions," to the Consolidated Financial Statements in the Company's Annual Report for further information. (b) Prior to April 1, 1994, the Company was an 86.1% owned subsidiary of Pacific Telesis Group ("Telesis"). On April 1, 1994, the Company was spun off from Telesis. Prior to December 3, 1993, the Company was 100% owned by Telesis. (c) Income before preferred dividends (1997 and 1996) and cumulative effect of accounting changes (1993). (d) For the three months ended March 31 and year ended December 31. 8 SUMMARY HISTORICAL PROPORTIONATE DATA The following tables are not required by GAAP and are not intended to replace the Company's Consolidated Financial Statements prepared in accordance with GAAP. They are presented to provide supplemental data and have not been audited. Because significant assets of the Company are not consolidated and because of the substantial effect of the formation of certain entities on the year-to-year comparability of the Company's consolidated financial results, the Company believes that proportionate financial and operating data facilitate the understanding and assessment of its Consolidated Financial Statements.
THREE MONTHS ENDED MARCH 31 YEAR ENDED DECEMBER 31 -------------------- ----------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) TOTAL COMPANY FINANCIAL DATA Service and other revenues...................... $ 1,355 $ 1,113 $ 4,907 $ 3,925 $ 2,679 $ 1,799 $ 1,228 Operating expenses before depreciation and amortization expenses (1)..................... 808 700 3,171 2,801 1,976 1,293 876 --------- --------- --------- --------- --------- --------- --------- Operating cash flow (2)......................... 547 413 1,736 1,124 703 506 352 Depreciation and amortization expenses.......... 216 188 789 603 406 334 254 --------- --------- --------- --------- --------- --------- --------- Operating income................................ $ 331 $ 225 $ 947 $ 521 $ 297 $ 172 $ 98 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income applicable to common stockholders.... $ 153 $ 64 $ 394 $ 179 $ 132 $ 98 $ 35 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL COMPANY OPERATING AND FINANCIAL DATA (CUSTOMERS AND POPS IN THOUSANDS) Cellular and PCS POPS......................... 180,759 178,367 180,032 178,317 164,908 99,508 75,290 Total customers............................... 11,498 8,447 10,724 8,032 5,533 3,595 2,475 Cellular and PCS customers.................... 8,270 5,487 7,536 5,146 3,059 1,948 1,206 Net cellular and PCS adds (3)................. 655 341 2,336 1,625 974 713 409 Operating cash flow margin (4)................ 40.4% 37.1% 35.4% 28.6% 26.2% 28.1% 28.7% FINANCIAL AND OPERATING DATA BY BUSINESS (CUSTOMERS AND POPS IN THOUSANDS) U.S. Cellular Operations POPS.......................................... 44,092 43,364 43,364 43,364 37,739 35,390 34,889 Customers..................................... 4,560 3,550 4,309 3,403 2,262 1,560 1,046 Net adds (3).................................. 171 147 906 770 591 514 286 Operating cash flow........................... $ 297 $ 272 $ 1,056 $ 821 $ 605 $ 479 $ 380 Operating cash flow margin (4)................ 47.8% 48.4% 44.7% 41.4% 39.7% 41.3% 42.6% International Operations POPS.......................................... 122,438 120,774 122,439 120,724 112,869 64,118 40,401 Customers..................................... 3,589 1,910 3,135 1,734 797 388 160 Net adds (3).................................. 455 176 1,347 846 383 199 123 Operating cash flow........................... $ 256 $ 149 $ 729 $ 321 $ 124 $ 30 $ (30) Operating cash flow margin (4)................ 40.9% 31.7% 33.4% 19.6% 13.5% 6.9% (17.1)% U.S. PCS Operations (5) POPS.......................................... 14,229 14,229 14,229 14,229 14,300 -- -- Customers..................................... 121 27 92 9 -- -- -- Net adds (3).................................. 29 18 83 9 -- -- -- U.S. Paging Operations Paging units in service....................... 3,140 2,923 3,101 2,850 2,338 1,525 1,167 Net adds (3).................................. 38 73 246 512 463 358 324 Operating cash flow........................... $ 30 $ 25 $ 108 $ 88 $ 75 $ 67 $ 50 Operating cash flow margin (4)................ 33.7% 31.6% 32.7% 29.6% 33.2% 35.4% 33.6%
- ------------------------------ (1) Includes net losses on equipment sold to acquire and retain customers. (2) Operating cash flow is defined as operating income plus depreciation and amortization and is not the same as cash flow from operating activities in the Company's Consolidated Statements of Cash Flows. Proportionate operating cash flow represents the Company's ownership interests in the respective entities' operating cash flows. As such, proportionate operating cash flow does not represent cash available to the Company. (3) New customers during the period, net of disconnects and excluding the impact of acquisitions. (4) Operating cash flow margin is calculated by dividing "Operating cash flow" by "Service and other revenues" or in the case of U.S. Paging Operations, dividing "Operating cash flow" by "Net operating revenues." (5) PCS data relates to PrimeCo Personal Communications, L.P., a U.S. PCS business in which the Company had a 25% interest immediately prior to the Merger. 9 RECENT FINANCIAL DEVELOPMENTS ON A GAAP BASIS On July 22, 1998, the Company announced its earnings for the second quarter of fiscal 1998 which ended June 30, 1998. The following tables set forth selected unaudited Income Statement and Balance Sheet data for the periods and as of the dates indicated for the Company. The following unaudited pro forma Income Statement data reflect the Merger as if it had been effective as of the beginning of each period presented, and after giving effect to the purchase method of accounting and other merger-related adjustments. Changes to these adjustments are expected as valuations and appraisals of the acquired assets and liabilities are completed. However, based on the preliminary results of the appraisal of assets and liabilities acquired, such changes are not expected to be material. These selected pro forma data are intended for informational purposes only and are not necessarily indicative of the future results of operations of the combined Company or the results of operations of the combined Company that would have actually occurred.
AS REPORTED PRO FORMA -------------------- ------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED JUNE 30 JUNE 30 DECEMBER 31, -------------------- -------------------- --------------- 1998 1997 1998 1997 1997 --------- --------- --------- --------- --------------- (DOLLARS IN MILLIONS) INCOME STATEMENT DATA Operating revenues............................................... $ 2,306 $ 1,737 $ 2,667 $ 2,432 $ 5,022 Operating income................................................. $ 520 $ 407 $ 556 $ 493 $ 843 Equity in net income (loss) of unconsolidated wireless systems... $ 162 $ 63 $ 126 $ (2) $ 81 Minority interests in net (income) loss of consolidated wireless systems........................................................ $ (87) $ (71) $ (97) $ (92) $ (161) Miscellaneous income (expenses).................................. $ (53) $ (43) $ (67) $ (80) $ (156) Income before preferred dividends................................ $ 347 $ 196 $ 332 $ 164 $ 365 Preferred dividends.............................................. $ 47 $ 26 $ 70 $ 69 $ 139 Net income applicable to common stockholders..................... $ 300 $ 170 $ 262 $ 95 $ 226 Per share data: Income before preferred dividends Basic........................................................ $ 0.64 $ 0.39 $ 0.58 $ 0.29 $ 0.65 Diluted...................................................... $ 0.63 $ 0.39 $ 0.57 $ 0.29 $ 0.64 Net income applicable to common stockholders Basic........................................................ $ 0.56 $ 0.34 $ 0.46 $ 0.17 $ 0.40 Diluted...................................................... $ 0.55 $ 0.34 $ 0.45 $ 0.17 $ 0.40 JUNE 30 -------------------- 1998 1997 --------- --------- BALANCE SHEET DATA Investments in unconsolidated wireless systems................... $ 3,303 $ 1,925 -- -- -- Intangible assets, net........................................... $ 8,921 $ 3,328 -- -- -- Total assets..................................................... $ 17,228 $ 8,523 -- -- -- Long-term debt, including current portion........................ $ 3,007 $ 1,566 -- -- -- Total stockholders' equity....................................... $ 9,023 $ 5,239 -- -- -- OTHER DATA Working capital (deficit)........................................ $ (151) $ (15) -- -- -- Capital expenditures and capital calls, excluding acquisitions(a)................................................ $ 588 $ 431 $ 720 $ 648 $ 1,491
- ------------------------------ (a) For the six months ended June 30 and year ended December 31. 10 RECENT FINANCIAL DEVELOPMENTS ON A PROPORTIONATE BASIS On July 22, 1998, the Company announced its earnings for the second quarter of fiscal 1998 which ended June 30, 1998. The following tables set forth selected unaudited proportionate financial and operating data for the periods and as of the dates presented. The following unaudited pro forma proportionate data reflect the Merger as if it had been effective as of the beginning of the each period presented, and after giving effect to the purchase method of accounting and other merger-related adjustments. Changes to these adjustments are expected as valuations and appraisals of assets and liabilities acquired are completed. However, based on the preliminary results of the appraisal of assets and liabilities acquired, such changes are not expected to be material. These selected pro forma data are intended for information purposes only and are not necessarily indicative of the future results of operations of the combined Company or the results of operations of the combined Company that would have actually occurred.
AS REPORTED PRO FORMA -------------------- ----------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED JUNE 30 JUNE 30 DECEMBER 31, -------------------- -------------------- ------------- 1998 1997 1998 1997 1997 --------- --------- --------- --------- ------------- (DOLLARS IN MILLIONS) TOTAL COMPANY FINANCIAL DATA Service and other revenues.............................. $ 3,153 $ 2,311 $ 3,479 $ 2,891 $ 6,094 Operating expenses before depreciation and amortization expenses (1).......................................... 1,898 1,472 2,106 1,839 3,958 --------- --------- --------- --------- ------------- Operating cash flow (2)................................. 1,255 839 1,373 1,052 2,136 Depreciation and amortization expenses.................. 551 378 673 589 1,218 --------- --------- --------- --------- ------------- Operating income........................................ $ 704 $ 461 $ 700 $ 463 $ 918 --------- --------- --------- --------- ------------- --------- --------- --------- --------- ------------- Net income applicable to common stockholders............ $ 300 $ 170 $ 262 $ 95 $ 226 --------- --------- --------- --------- ------------- --------- --------- --------- --------- ------------- TOTAL COMPANY OPERATING AND FINANCIAL DATA (CUSTOMERS AND POPS IN THOUSANDS) Cellular and PCS POPS................................. 233,815 178,071 233,815 212,730 214,691 Total customers....................................... 15,051 9,064 15,051 11,184 13,190 Cellular and PCS Customers............................ 11,734 6,033 11,734 8,153 10,002 Net adds (3).......................................... 1,524 887 1,600 1,124 2,921 Operating cash flow margin (4)........................ 39.8% 36.3% 39.5% 36.4% 43.7% Capital expenditures and capital calls (excluding acquisitions)....................................... $ 692 $ 588 $ 773 $ 733 $ 1,718 FINANCIAL AND OPERATING DATA BY BUSINESS (CUSTOMERS AND POPS IN THOUSANDS) U.S. Cellular Operations POPS.................................................. 65,962 43,364 65,962 63,794 63,794 Customers............................................. 7,290 3,745 7,290 5,818 6,683 Net adds (3).......................................... 427 342 474 542 1,408 Operating cash flow................................... $ 753 $ 568 $ 888 $ 823 $ 1,535 Operating cash flow margin............................ 48.1% 48.7% 47.4% 47.4% 43.7% U.S. PCS Operations POPS.................................................. 29,195 14,229 29,195 28,458 28,458 Customers............................................. 282 47 282 94 184 Net adds (3).......................................... 70 38 98 74 166
11 RECENT FINANCIAL DEVELOPMENTS ON A PROPORTIONATE BASIS
AS REPORTED -------------------- SIX MONTHS ENDED JUNE 30 -------------------- 1998 1997 --------- --------- (DOLLARS IN MILLIONS) International Operations POPS..................................................................................... 138,658 120,478 Customers................................................................................ 4,162 2,241 Net adds (3)............................................................................. 1,027 507 Operating cash flow...................................................................... $ 533 $ 299 Operating cash flow margin (4)........................................................... 39.8% 30.6% U.S. Paging Operations (5) Paging units in service.................................................................. 3,228 2,992 Net adds (3)............................................................................. 127 142 Operating cash flow...................................................................... $ 60 $ 53 Operating cash flow margin............................................................... 33.1% 33.1%
- ------------------------------ (1) Includes net losses on equipment sold to acquire and retain customers. (2) Operating cash flow is defined as operating income plus depreciation and amortization and is not the same as cash flow from operating activities in the Company's Consolidated Statements of Cash Flows. Proportionate operating cash flow represents the Company's ownership interests in the respective entities' operating cash flows. As such, proportionate operating cash flow does not represent cash available to the Company. (3) New customers during the period net of disconnects excluding the impact of acquisitions. (4) Operating cash flow margin is calculated by dividing "Operating cash flow" by "Service and other revenues" or in the case of U.S. Paging Operations, dividing "Operating cash flow" by "Net operating revenues." (5) PCS data relates to PrimeCo Personal Communications, L.P., a U.S. PCS business in which the Company had a 50% interest immediately after the Merger. OUTLOOK FOR 1998 The following guidance is provided on a pro forma basis as if the Merger had closed on January 1, 1997. In 1998, AirTouch expects to add over three million proportionate global cellular and PCS customers, reflecting the record performance of its international ventures in the first half of 1998. Pro forma proportionate operating cash flow is expected to increase approximately 25% over 1997's pro forma proportionate operating cash flow of $2.1 billion. Pro forma proportionate capital expenditures are currently expected to be 5% higher than 1997 pro forma proportionate capital expenditures, or approximately $1.9 billion. These expectations do not include the impact of any new investment opportunities such as new licenses, acquisitions or increases in ownership in existing ventures. 12 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WHEN USED IN THIS PROSPECTUS, THE WORDS "ESTIMATE," "PROJECT," INTEND," "EXPECT," "PLAN," "GOAL" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS REGARDING EVENTS AND FINANCIAL TRENDS WHICH MAY AFFECT THE COMPANY'S FUTURE OPERATING RESULTS AND FINANCIAL POSITION. SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS AND FINANCIAL POSITION TO DIFFER MATERIALLY. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO THOSE DESCRIBED BELOW UNDER "RISK FACTORS." READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO RESPONSIBILITY TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. RISK FACTORS COMPETITION. The Company and its ventures face an increasing number of competitors in each of their markets. In the United States, competition has been steadily increasing since PCS providers first began offering service in late 1996. There can now be up to nine wireless competitors in each cellular and PCS market in the United States. Germany and Sweden currently have four licensees per market, and Italy, Spain, Poland, Portugal and Romania have three. A third license is expected to be awarded in Belgium in 1998. South Korea has licensed a total of five mobile operators and Japan a total of seven operators per market. There are currently two licensees in Egypt and India. The Company also faces intense competition in each of its paging markets. Increased competition has led to declines in the prices the Company charges for its wireless services and is expected to lead to further price declines in the future. Price reductions have attracted an increasing number of consumer customers, who tend to make calls during lower-rate, off-peak periods. As a result of these factors, in recent years the Company's proportionate average revenue per customer has declined at rates between 12% and 15% per year in the United States to $53 for 1997 and between 20% and 30% per year, including the impact of foreign exchange fluctuations, to $79 for 1997 in the Company's international markets and is expected to continue to decline at similar rates in 1998. Historically the Company has been able to match or exceed declines in average revenue per customer with reductions in operating cash costs per customer. However, there can be no assurance that the Company will be able to continue to do so. If it cannot, the Company may experience decreased profitability. Competition could also lead to a decrease in the rate at which the Company adds new customers and even to a decrease in the size of the Company's customer base as customers choose to receive wireless service from other providers. Customer deactivations are measured by the Company's churn rate, which is the number of subscribers in a given period who terminate their service or have their service terminated by the Company divided by the average number of customers for the same period, expressed as a percentage. Historically the Company has experienced average churn rates in its United States and international markets of approximately 2% per month. There can be no assurance that the Company will not experience an increase in churn rates, particularly as competition intensifies. An increase in churn rates could adversely affect profitability because the Company would experience lower revenues and increased selling costs to replace customers. INCREASED RATE OF INVESTMENT IN NETWORKS AND NEW TECHNOLOGY. The Company expects that it will be required to make substantial future investments in its wireless networks due to customer growth, increased usage and the need to offer new services and greater functionality. Accordingly, the rate of the Company's capital expenditures in future years could materially exceed that experienced by the Company in recent years. The operations of the Company and its ventures depend in part upon the successful deployment of continuously evolving wireless telecommunications technologies. The Company uses technologies from a number of vendors and makes significant capital expenditures in connection with the deployment of such 13 technologies. There can be no assurance that technologies will be developed according to anticipated schedules, that they will perform according to expectations or that they will achieve commercial acceptance. The failure of vendor performance or technology performance to meet the Company's expectations or the failure of a technology to achieve commercial acceptance could result in additional capital expenditures by the Company or a reduction in net income due to the recognition of the impairment of assets. LICENSE RENEWAL. The Company's international and U.S. wireless licenses are granted for specific periods of time. The most significant U.S. cellular and paging licenses are granted for a period of ten years. Based upon its prior experience with expired licenses and upon FCC rules establishing a presumption in favor of licensees that have substantially complied with their regulatory obligations during the license period, the Company believes that each of its U.S. licenses will be renewed as they expire. The terms of the licenses granted to the Company's international ventures and conditions for license renewal vary from country to country. In some countries, there is no specified mechanism for license renewal and accordingly it is not certain what criteria will be used by the governments of those countries to determine whether the licenses should be renewed. There can be no assurance that any U.S. or international license will be renewed. EARNINGS DILUTION. The Company expects to experience start-up losses associated with its recent investment in Egypt and continues to experience start up losses associated with its Korean, Romanian and Indian ventures. In addition, the Company expects to continue to experience losses associated with PrimeCo for the next several years. The Company expects to continue to pursue selected new opportunities in international markets. The Company expects the foregoing to have a dilutive effect on the Company's earnings. In addition, the Company has granted certain restricted stock awards which provide early vesting if the Company meets certain targets for the Company's common stock and operating cash flows. If this happens, the Company would need to accelerate the recognition of compensation expense which could be material to the quarter in which the goal is achieved. On April 6, 1998, the Company acquired the U.S. cellular and PCS interests of MediaOne Group, as described under "Business--Recent Developments." The Company expects earnings per share dilution from the acquisition to reach approximately $0.40 per share in the first full year following the transaction and to decline thereafter. This dilution represents the net amount of amortization of acquisition intangibles, incremental interest expense, preferred dividends and common shares issued, as partially offset by incremental earnings. ANTITRUST PROCEEDINGS. The Company believes that its cellular and paging pricing and marketing practices were and are in compliance with antitrust laws. However, the Company was and is a defendant in certain class action complaints and complaints filed by individual agents with respect to its Los Angeles, San Francisco and San Diego cellular operations which allege that the Company conspired to fix retail and wholesale cellular prices. The Company has reached settlements in each of the class action proceedings which in the aggregate will not have a material adverse effect on the Company's financial condition or results of operations. No assurance can be given, however, that any disposition of the remaining proceedings, if adverse to the Company, might not have a material adverse effect on the Company's results of operations in the year of such disposition. IMPLICATIONS OF LICENSEE OWNERSHIP STRUCTURE. The Company holds most of its U.S. cellular properties and PCS properties through partnership interests, a number of which are controlling interests. In addition, except for its interests in Europolitan Holdings AB ("Europolitan"), the Company's cellular system in Sweden, and Telecel Communicacoes Pessoais, S.A. ("Telecel"), its cellular system in Portugal, the Company's interests in international wireless licenses are held through foreign entities in which the Company is a significant but not controlling owner. Under the governing documents for certain of these partnerships and corporations, certain key matters such as the approval of business plans and decisions as to the timing and amount of cash distributions require the consent of the Company's partners or may be 14 approved without the consent of the Company. Although the Company has not been materially constrained by the nature of its wireless ownership interests from pursuing its corporate objectives, no assurance can be given that it will not experience difficulty in this regard in the future. The Company may enter into similar arrangements as it participates in ventures formed to pursue additional opportunities. RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company has investments in operations outside the United States and proportionate operating cash flow from these investments represent a substantial portion of total Company proportionate operating cash flow. Investments in international operations are subject to risks and uncertainties which may include taxation, nationalization, inflation, currency fluctuations, increased regulation and approval requirements. Certain Asian countries are currently experiencing severe economic turmoil, resulting in depressed business conditions, volatility in local currencies and ongoing financial market dislocations. In addition to the negative impact that such economic turmoil could have on usage of wireless services, it could also have a negative effect on the ability of the Company's partners to provide their share of the ventures' funding requirements. There can be no assurance that the foregoing risks and uncertainties or that present or future economic turmoil or dislocations will not have a material adverse effect on the Company's business, operating results and financial condition. EXCHANGE RATE FLUCTUATIONS. Foreign currency exchange rates may be material to the Company's results of operations. The Company evaluates the risk of significant exchange rate volatility and its ability to hedge against such volatility as part of its decision whether to pursue an international opportunity. A significant weakening against the dollar of the currency of a country where the Company generates revenues or earnings may adversely affect the Company's results, while any weakening of the dollar against such currency could have an adverse effect if the Company is obligated to make significant foreign currency denominated capital investments in such country. The Company attempts to mitigate the effect of certain foreign currency fluctuations through the use of foreign currency contracts and foreign currency denominated credit arrangements. There can be no assurance that the Company will be successful in its foreign currency hedging efforts. FRAUD. The cellular industry continues to be subject to fraudulent activity. The Company is working to reduce the negative impacts of fraud in its U.S. markets through the deployment of new technologies and other measures including Fraud Detection Profiler, RF Fingerprinting, authentication, roamer verification and precision roaming. The cost of fraud, including the cost of developing and deploying anti-fraud technologies, will have an impact on the Company's operating results for the foreseeable future. THE YEAR 2000 ISSUE. Many of the Company's systems are affected by the year 2000 problem, which refers to the inability of information technology to process dates beyond December 31, 1999. The Company has implemented a comprehensive plan to address the year 2000 problem in its mission critical systems. Mission critical systems are those whose failure poses a risk of disruption to the Company's ability to provide wireless services, to collect revenues, to meet safety standards or to comply with legal requirements. The Company's plan includes (i) the complete inventory of all mission critical systems employed in the Company's consolidated markets and the identification of the hardware and software affected by the year 2000 problem; (ii) modification of the affected systems; and (iii) testing of the modified systems, including testing of systems on an integrated basis. The Company is using both internal and external sources to implement its plan. Much of the Company's information technology, including technology associated with its mission critical systems, is purchased from third parties. The Company is dependent on those third parties to assess the impact of the year 2000 problem on the technology they have supplied and to take any necessary corrective action. The Company is monitoring the progress of these third parties and conducting tests to determine whether they have accurately assessed the problem and taken corrective action. Based on its current assessments and its remediation plan, which are based in part upon certain representations of third parties, the Company expects that it will not experience a disruption of its 15 operations as a result of the change to the new millennium. However, there can be no assurance that the third parties who have supplied information technology used in the Company's mission critical systems will be successful in taking corrective action in a timely manner. The Company is developing contingency plans with respect to certain key information technology used in its mission critical systems, although there can be no assurance that these contingency plans will successfully avoid service disruption. In addition, the Company's systems are interconnected with public switch telecommunications networks ("PSTNs") and the networks of other service providers who are responsible for addressing the year 2000 problem in their own systems. The ability of the Company's systems to operate is dependent upon such PSTNs and other networks being year 2000 compliant, as to which there can be no assurance. If the Company is unsuccessful in its efforts to correct or cause to be corrected its mission critical systems or if third parties with whom the Company's systems interconnect do not correct their systems, the Company could experience significant disruption to its operations, including disruption of its ability to provide certain wireless services and to correctly bill customers resulting in potential revenue loss and increased costs that could have a material adverse effect on the Company's financial condition or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Basis of Presentation--Year 2000 Compliance." IMPACT OF THE PIES ON THE MARKET FOR THE COMMON STOCK. The price of the shares of Common Stock could become more volatile and could be depressed by investors' anticipation of the potential distribution into the market of additional shares of Common Stock as a result of the delivery of shares of Common Stock by MediaOne Group at the maturity of the PIES, by possible sales of shares of Common Stock by investors who view the PIES as a more attractive means of equity participation in the Company and by hedging or arbitrage trading activity that may develop involving the PIES and the Common Stock. The price of the Common Stock could also be impacted by investors' anticipation of the distribution into the market by MediaOne Group of additional shares of Common Stock otherwise than in connection with the PIES. MediaOne Group currently owns a total of 59,313,621 shares of Common Stock (constituting approximately 10.3% of the outstanding Common Stock), up to shares of which may be delivered at the maturity of the PIES. USE OF PROCEEDS The Company will not receive any proceeds from the sale of the PIES or delivery thereunder of the shares of Common Stock by MediaOne Group. 16 CAPITALIZATION TABLE The following table sets forth the capitalization of the Company as of June 30, 1998. This table should be read in conjunction with the Consolidated Financial Statements of the Company and related notes thereto included in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, incorporated herein by reference, and in its Annual Report on Form 10-K for the year ended December 31, 1997, incorporated herein by reference.
AS OF JUNE 30, 1998 ------------------- (DOLLARS IN MILLIONS) Current portion of long-term debt............................................................ $ 49 ------- Long-term debt: Bank debt and commercial paper............................................................. 949 Notes due 2001 to 2008..................................................................... 2,000 Capital lease obligations.................................................................. 9 ------- Long-term debt, excluding current portion................................................ 2,958 ------- Minority interests in consolidated wireless systems.......................................... 372 ------- Redeemable preferred stocks: 5.143% Class D Cumulative Preferred Stock, Series 1998..................................... 786 5.143% Class E Cumulative Preferred Stock, Series 1998..................................... 787 ------- Total redeemable preferred stocks........................................................ 1,573 ------- Stockholders' equity: Preferred stock and additional paid-in capital: 6.0% Class B Mandatorily Convertible Preferred Stock, Series 1996........................ 500 4.25% Class C Convertible Preferred Stock, Series 1996................................... 541 Common stock and additional paid-in capital................................................ 7,302 Retained earnings.......................................................................... 715 Other comprehensive income................................................................. 1 Deferred compensation...................................................................... (36) ------- Total stockholders' equity............................................................... 9,023 ------- Total capitalization................................................................... $ 13,975 ------- -------
17 PRICE RANGE OF COMMON STOCK The Common Stock is listed on the NYSE and is traded under the symbol "ATI." The following table sets forth the high and low sales prices for the Common Stock, as reported on the NYSE Composite Tape:
SALES PRICE -------------------- 1996 HIGH LOW - ------------------------------------------------------------------------------------------------- --------- --------- First Quarter.................................................................................... 33 5/8 25 5/8 Second Quarter................................................................................... 33 1/8 27 5/8 Third Quarter.................................................................................... 29 5/8 25 Fourth Quarter................................................................................... 28 3/8 24 7/8
1997 - ------------------------------------------------------------------------------------------------- First Quarter.................................................................................... 29 1/2 22 7/8 Second Quarter................................................................................... 29 1/4 22 Third Quarter.................................................................................... 38 1/8 26 15/16 Fourth Quarter................................................................................... 42 33
1998 - ------------------------------------------------------------------------------------------------- First Quarter.................................................................................... 50 7/8 40 5/16 Second Quarter................................................................................... 58 15/16 46 1/4 Third Quarter through July 21, 1998.............................................................. 65 5/8 58 1/8
On July 21, 1998, the last reported sale price of the Common Stock on the NYSE Composite Tape was 64 7/8 per share. As of June 30, 1998, there were 532,342 holders of record of Common Stock and 573,537,166 shares of Common Stock outstanding. Dividends are not currently paid on the Common Stock. The declaration of dividends on the Common Stock is at the discretion of the Board of Directors of the Company. The declaration and payment of future dividends and the amount thereof will be dependent upon the Company's results of operations, financial condition, cash requirements for its business, future prospects and other factors deemed relevant by the Board of Directors. 18 BUSINESS GENERAL AirTouch Communications, Inc. is the largest wireless telecommunication services company in the world based on the 31.5 million total wireless customers served by the Company and its ventures as of June 30, 1998. Through its operations in the United States, Europe, Asia and North Africa, the Company provides a full range of wireless telecommunications services, including cellular, PCS and paging, and in the future will also provide global satellite communications. The Company's principal objective is to be the premier provider of wireless telecommunication services worldwide. To achieve its objective the Company focuses on profitable growth of its existing operations; pursues new wireless licenses in selected countries and ownership increases in existing markets; and pursues other value-creating opportunities around the world. The cellular and PCS licenses of the Company and its ventures cover more than 719 million people around the world in 13 countries on four continents. Based on its ownership percentages, the Company's cellular and PCS interests represented approximately 233.8 million POPs and, together with paging customers, 15.1 million proportionate customers as of June 30, 1998. Driven by growing worldwide demand for wireless service and acquisitions and new license awards that have more than doubled AirTouch's worldwide presence from 100 million POPs in 1994 to 233 million POPs at June 30, 1998, the Company has experienced significant growth in the number of cellular, PCS and paging customers that it serves, as demonstrated by the following chart: EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
END OF PERIOD Proportionate Subscribers (000's) Paging US Cellular/PCS International Totals 1991 669 558 1,227 1992 899 744 35 1,678 1993 1,269 1,046 160 2,475 1994 1,647 1,560 388 3,595 1995 2,474 2,262 797 5,533 1996 2,895 3,403 1,734 8,032 1997 3,188 4,401 3,135 10,724 1997* 3,188 6,867 3,135 13,190* 6/30/98 3,317 7,572 4,162 15,051 Year over year growth 29% 37% 48% 45% 54% 45% * Restated on a pro forma basis as if the Merger had closed on 1/1/97. 1997 growth rate shown is for AirTouch as reported. Year over year growth 34% N/A 35%
RECENT DEVELOPMENTS On April 6, 1998, the Company and MediaOne Group completed the merger of MediaOne Group's U.S. cellular and PCS interests into the Company. In the Merger, the Company acquired NewVector, which held MediaOne Group's U.S. cellular business, and MediaOne Group's 25% interest in PrimeCo. As a result of the Merger, the Company added 2.5 million proportionate U.S. wireless customers and 35 million proportionate POPs. 19 The total value of the Merger was approximately $5.9 billion. The Company issued approximately 59.4 million shares of Common Stock valued at $2.9 billion based on the April 3, 1998 closing price of $49 per share and $1.65 billion of preferred stock and assumed $1.35 billion of debt. The Company expects earnings per share dilution from the Merger to reach $0.40 per share in 1999 and to decline thereafter. This dilution represents the net amount of amortization of acquisition intangibles, incremental interest expense, preferred dividends and common shares issued, as partially offset with incremental earnings. The Company plans to pursue cost savings to partially mitigate this dilution, there being no assurance that such plans will be successful. OVERVIEW OF WIRELESS INDUSTRY Wireless telecommunications services are fundamentally changing the way people live and work. Driven by customer preference for the convenience of mobility as well as regulatory liberalization, technological improvements, and lower priced service plans, the number of global wireless customers has reached more than 200 million. Dataquest, a research and analysis company that follows the wireless industry, expects that number to triple by 2001. Over the last five years, the number of cellular and PCS subscribers has increased tenfold. Since its introduction in 1983 in the United States, wireless telecommunication has grown dramatically. According to Dataquest, as of June 30, 1998, there were approximately 61 million cellular and PCS subscribers in the United States--representing a penetration rate of approximately 23%. In comparison, Sweden and Japan had penetration rates of approximately 38.1% and 30.6%, respectively, at March 31, 1998 and, like the United States, are expected to experience continued growth. The following table shows industry-wide penetration rates and subscriber growth figures in the 13 countries where AirTouch and its ventures offer wireless telecommunication services: ANNUAL HISTORICAL PENETRATION AND SUBSCRIBER GROWTH BY COUNTRY
% GROWTH IN SUBSCRIBERS OVER PENETRATION PRIOR YEAR ------------------------------- -------------------- COUNTRY 1995 1996 1997 1996 1997 - ------------------------ --------- --------- --------- --------- --------- UNITED STATES 13.4% 16.8% 21.9% 27.6% 30.7% GERMANY 4.7% 6.8% 10.1% 46.4% 49.2% ITALY 6.8% 11.2% 19.9% 63.6% 78.6% SPAIN 2.3% 7.6% 11.0% 226.9% 44.7% PORTUGAL 3.1% 6.7% 15.2% 107.0% 127.2% BELGIUM 2.4% 4.7% 9.6% 103.4% 103.9% SWEDEN 22.8% 28.3% 36.0% 23.9% 27.4% POLAND 0.2% 0.6% 2.3% 158.5% 324.5% ROMANIA 0.05% 0.07% 0.56% 36.8% 712.5% JAPAN 6.4% 18.4% 28.5% 187.0% 54.7% SOUTH KOREA 3.4% 7.0% 14.4% 104.8% 105.0% INDIA 0.01% 0.03% 0.09% 321.3% 246.5% EGYPT 0.02% 0.08% 0.08% 258.3% -2.3%
- ------------------------------ Source: Kagan World Media, Ltd. INTERNATIONAL CELLULAR, January 31, 1996 and February 26, 1998. (1) License issued on May 5, 1998. The Company anticipates launch of service in the second half of 1999. As wireless telecommunications continue to evolve, service providers will measure success not just in increased customers but in increased usage. As the quality and cost of wireless telecommunication continue to converge with wireline, wireless is expected to earn a greater share of overall telecommunications usage. By one estimate, in 1996 wireline usage worldwide constituted 98% of the total telecommunication usage, whereas wireless accounted for only 2%. By 2007, it is estimated that 25% of telecommunication usage will occur on wireless networks (STRATEGY ANALYTICS, January 1998). 20 OVERVIEW OF U.S. CELLULAR AND PCS OPERATIONS The Company is the largest provider of cellular and PCS services in the United States based on the 8.9 million total customers served by the Company and its ventures as of June 30, 1998. The Company's U.S. cellular and PCS interests represented approximately 95.2 million POPs and over 7.6 million proportionate customers as of June 30, 1998, and include some of the most attractive cellular markets based upon population size and demographic characteristics. The Company controls or shares control over cellular and PCS systems operating in 22 of the 30 largest metropolitan statistical areas in the United States.
CELLULAR PROPERTIES - ------------------------------------------------------------------------------------------------------------------------- MSA(1) POPULATION(2) PERCENT POPS RANK CITY STATE (000) OWNERSHIP (000) BRAND NAME - ------------- ------------------------------ ------------- ------------- ----------- --------- -------------------- 2 Los Angeles CA 14,978 82.30% 12,327 AirTouch Cellular 5 Detroit-Ann Arbor MI 4,596 100.00% 4,596 AirTouch Cellular 10 San Francisco-Oakland(3) CA 3,925 47.00% 1,845 CellularOne 12 Atlanta GA 3,235 100.00% 3,235 AirTouch Cellular 13 San Diego CA 2,705 100.00% 2,705 AirTouch Cellular 14 Minneapolis-St. Paul(4) MN-WI 2,649 100.00% 2,649 AirTouch Cellular 15 Phoneix(4) AZ 2,519 100.00% 2,519 AirTouch Cellular 18 Seattle-Everett(4) WA 2,165 99.13% 2,146 AirTouch Cellular 19 Denver-Boulder(4) CO 2,162 100.00% 2,162 AirTouch Cellular 23 Cleveland OH 1,835 100.00% 1,835 AirTouch Cellular 24 Portland(4) OR-WA 1,642 100.00% 1,642 AirTouch Cellular 25 San Jose CA 1,600 47.00% 752 CellularOne 26 Kansas City MO-KS 1,539 50.00% 770 CellularOne 27 Cincinnati OH-KY-IN 1,519 100.00% 1,519 AirTouch Cellular 28 Sacramento CA 1,503 49.88% 750 AirTouch Cellular Other 35,942 24,510 ------ --------- TOTAL UNITED STATES CELLULAR 84,514 65,962 ------ ---------
PCS PROPERTIES(6) - ----------------------------------------------------------------------------------------------------------------- MTA(5) POPULATION(5) PERCENT POPS RANK MARKET (000) OWNERSHIP(7) (000) BRAND NAME - ------------- -------------------- ------------- ------------- ------------ ------------ 3 Chicago 12,624 50.00% 6,312 PrimeCo 7 Dallas(8) 10,697 40.00% 4,279 PrimeCo 13 Tampa 6,064 50.00% 3,032 PrimeCo 14 Houston(8) 5,832 40.00% 2,333 PrimeCo 15 Miami 5,792 50.00% 2,896 PrimeCo 17 New Orleans 5,235 50.00% 2,618 PrimeCo 20 Milwaukee 4,782 50.00% 2,391 PrimeCo 23 Richmond 4,115 50.00% 2,057 PrimeCo 33 San Antonio(8) 3,518 40.00% 1,407 PrimeCo 37 Jacksonville 2,531 50.00% 1,265 PrimeCo 47 Honolulu 1,210 50.00% 605 PrimeCo ------------- ------------ TOTAL UNITED STATES PCS 62,400 29,195 ------------- ------------ TOTAL UNITED STATES WIRELESS 146,914 95,157 ------------- ------------ ------------- ------------
- ------------------------------ (1) MSA refers to metropolitan statistical area. There are 306 MSAs in the United States, as determined by Rand McNally and adopted by the FCC to establish coverage areas for cellular networks. (2) MSA 1996 population figures and rank according to 1997 Paul Kagan Associates, Inc. CELLULAR TELEPHONE ATLAS. (3) Ownership interest held through CMT Partners, the Company's partnership with AT&T Wireless. (4) Acquired in the Merger. (5) There are 51 MTAs, as determined by Rand McNally and adopted by the FCC to establish PCS service areas. (6) MTA 1996 population figures and rank according to Paul Kagan Associates, Inc. 1996 CELLULAR/PCS POP BOOK. (7) The Company's percent ownership increased from 25% to 50% as a result of the Merger. (8) PrimeCo's ownership percentage of Texas MTAs reflects partnership with Texas Utilities. 21 U.S. CELLULAR OPERATIONS MARKETING The Company markets its cellular services under the AirTouch Cellular name, with the exception of its systems in the San Francisco Bay Area, Kansas and Missouri, which market service under the CellularOne-Registered Trademark- brand name. The Company sells its service directly to customers through its own sales force, telemarketing centers and the Internet and indirectly through arrangements with independent agents such as consumer electronic stores, specialized cellular stores, automobile dealers and department and other retail stores. In certain markets, the Company's cellular service is sold through resellers who, pursuant to FCC requirements, are allowed to purchase blocks of cellular telephone numbers and to access cellular services at wholesale rates for resale to the public. The Company's costs for attracting new customers (referred to as "selling costs") primarily consist of advertising and marketing costs, sales commissions paid to independent agents or to its own sales force and handset subsidies. The Company has been taking steps to align selling costs with revenues by emphasizing residual or account management payments to agents over upfront commissions and by increasing the proportion of sales through Company-controlled direct distribution channels, which have historically been less costly. As a result of these efforts, average selling costs per new customer for 1997 were about $350, down 13% over 1996. PRODUCTS AND SERVICES The Company offers analog service in all of its markets and offers digital service in most markets. In most markets the Company offers custom calling services such as voice mail, call forwarding, call waiting, three way calling, no-answer and busy transfer. The Company also offers a variety of other enhanced features, including display messaging, which allows a cellular phone to receive and store voice mail messages, short alphanumeric messages and pages even if the handset is in use or switched off, and enhanced directory assistance, which enables callers to be connected to the party whose number was requested without hanging up and redialing. In many markets, the Company has introduced a pre-paid cellular calling program with no monthly service charge, no contract commitment, and no billings. The Company maintains a customer service department in each of its managed cellular markets for billing and service inquiries. The majority of the Company's customers elect to receive long-distance service from the Company, which it offers as a reseller. Alternatively, customers can select a long-distance provider and be billed directly by that carrier. The Company has a variety of pricing plans that differ from market to market. Certain pricing plans feature a fixed monthly access fee and per-minute charges while others offer a fixed monthly price for a bundle of minutes with per-minute charges for excess minutes. Most of the Company's new customers select pricing plans that require them to sign a service contract for one or more years. The Company believes that one of its competitive strengths lies in its ability to offer customers choice through service and handset pricing that appeal to different market segments. Customers seeking safety and convenience are attracted to the low monthly access fees and inexpensive handsets generally available with analog service. To meet the needs of higher volume users, the Company offers digital service with rate plans that include higher monthly access fees and bundles of lower-priced minutes. The Company believes that its pricing plans are generally competitive with those being offered by other providers in the markets in which they are applicable. NETWORK The Company offers analog service in all of its markets and offers digital service in most markets. The Company's digital service is based on Code Division Multiple Access ("CDMA"), except in the San Francisco Bay Area, Kansas and Missouri, where it is based on Time Division Multiple Access ("TDMA"). The Company's digital networks cover about 70% of the Company's POPs in the United States and in the second quarter approximately 30% of the Company's peak minutes were carried on its digital networks. 22 Because the Company offers dual-mode cellular telephones capable of sending and receiving both analog and certain digital transmissions, the Company's analog and digital cellular customers can roam to virtually any cellular market in the United States. The Company believes that digital cellular technology offers certain advantages over analog technology, including substantially increased capacity, greater call privacy, superior voice quality, enhanced services, reduced susceptibility to fraud and the opportunity to provide improved data transmissions. However, the Company expects that analog and digital technologies will continue to coexist for the foreseeable future due to continued demand for analog service and the fact that analog networks provide the only common roaming platform currently available throughout the United States. The Company expects the majority of its capital expenditures in the future to be spent on its digital networks. COST STRUCTURE The Company's cash costs consist primarily of costs for attracting new customers, as described above under "--Marketing," customer service and billing costs, fees paid to the local telephone service company for interconnection of cellular networks with the wireline telephone network, and general and administrative costs. The Company attempts to decrease its cash costs per customer at a rate equal to declines in average revenue per customer. The Company has taken the following steps to decrease cash costs: - increased the scale of its operations through acquisitions, allowing the Company to consolidate common functions and spread costs over a larger customer base; - negotiated handset and infrastructure contracts jointly with partners, resulting in lower prices; - executed new interconnection agreements with the major local carriers in its markets, resulting in significant savings on interconnect costs; and - managed churn and associated selling costs by taking proactive steps to retain customers, including changing customer rate plans and offering free handsets. As a result of these and other cost saving efforts, the Company reduced its average monthly cash cost per customer to $29 in 1997, a 19% decline from 1996. In addition, ongoing investments by the Company in its networks are necessary in order to increase coverage and capacity. These expenditures are reflected as depreciation expense. In the future, the Company believes the majority of such expenditures will be directed towards increasing digital coverage and capacity. JOINT VENTURES CMT PARTNERS. In September 1993, the Company and AT&T Wireless (at the time, McCaw Cellular Communications Inc.) formed CMT Partners, an equally owned partnership that holds interests in cellular systems operating in San Francisco, San Jose, Dallas/Ft. Worth, Kansas City and certain adjacent suburban areas. In a related transaction, the Company purchased McCaw's Wichita and Topeka systems. CMT Partners is governed by a four-person committee consisting of two members from each company. CMT Partners has a 15 year term, ending in 2008, which may be extended by either partner or shortened under certain circumstances. Upon dissolution of CMT Partners its assets will be sold unless either the Company or AT&T Wireless elects to have the assets distributed in kind to the partners. TOMCOM. The Company and Bell Atlantic are partners in TOMCOM, L.P., a partnership formed to develop technical and service standards for the partners' wireless properties, pursue national marketing strategies, develop information technology, create a national distribution strategy and implement joint purchasing arrangements. TOMCOM is governed by a board composed of three members from AirTouch and three members from Bell Atlantic. 23 U.S. PCS OPERATIONS The Company and Bell Atlantic Mobile are equal partners in PrimeCo Personal Communications, L.P., which owns eleven 30 MHz PCS licenses covering approximately 62 million POPs in the Chicago, Dallas, Tampa, Houston, Miami, New Orleans, Milwaukee, Richmond, San Antonio, Jacksonville and Honolulu markets. The Company's interest in PrimeCo increased from 25% to 50% in connection with the Merger. The PrimeCo markets complement the existing U.S. cellular franchises of the partners. PrimeCo began providing service in November 1996 and as of June 30, 1998, PrimeCo had over 598,000 customers and provided service in more than 20 major cities. The Company expects to continue to make significant capital contributions to PrimeCo and to experience substantial operating losses associated with the start-up phase of the PCS business, which is expected to last several years. PrimeCo's success as a competitor depends on the same factors as that of the Company's United States cellular operations. PrimeCo's operations are structured in a manner similar to those of the Company's United States cellular businesses with respect to marketing, products and services and cost structure. PrimeCo initiated service in late 1996 and has not yet achieved the critical size to enable it to achieve all of the economies of scale that the Company's cellular business currently enjoys. PrimeCo, a 100% CDMA-digital network, has recently introduced dual-mode handsets that enable customers to roam on a nationwide basis on analog cellular networks. Either the Company or Bell Atlantic may cause PrimeCo to be dissolved on October 20, 2001, and if dissolution occurs the PrimeCo properties will be allocated between them according to agreed upon criteria. Bell Atlantic is subject to certain standstill restrictions with respect to the Company through October 20, 2001, unless such restrictions are earlier terminated or suspended. 24 INTERNATIONAL CELLULAR OPERATIONS The Company has ownership interests, with board representation and significant operating influence, in diverse markets throughout the world. The Company's international cellular interests represented 138.6 million POPs and 4.2 million proportionate customers as of June 30, 1998. OVERVIEW OF INTERNATIONAL CELLULAR VENTURES (ALL INFORMATION AS OF JUNE 30, 1998 UNLESS OTHERWISE INDICATED)
Market Market Service Total Increase Total Population Penetra- Initiation Venture Over AirTouch Licensees in (millions)(1) tion(2) Date Customers 6/30/97 Interest(3) Market ------------- --------- ------------- ---------- ------- ----------- ------------- EUROPEAN OPERATIONS: Germany/D2 PRIVAT............. 81.9 11.3% 6/92 >4,600,000 ~64% 34.8% 4 Italy/OMNITEL................. 57.5 22.5% 10/95 3,900,000 211% 15.5%(4) 3 Spain/AIRTEL.................. 39.4 12.1% 10/95 1,508,000 73% 21.7% 3 Portugal/TELECEL.............. 9.9 17.4% 10/92 981,000 115% 50.9% 3 Belgium/PROXIMUS.............. 10.1 11.5% 1/94(5) >900,000 74% 25.0% 2 Sweden/EUROPOLITAN............ 8.8 38.1% 9/92(5) 528,000 62% 51.1% 4 Poland/PLUS GSM............... 38.5 2.6% 10/96 ~450,000 ~136% 19.3% 3 Romania/CONNEX................ 23.2 1.4% 4/97 ~195,000 786% 10.0%(6) 3 ASIAN AND OTHER OPERATIONS: Japan: 30.6% DIGITAL PHONE COMPANIES(7).............. 77.2 4/94-7/94 2,672,000 28% 13.0- 7 15.0% DIGITAL TU-KA(8)............ 46.3 1/96-2/97 1,905,000 50% 4.5% 7 South Korea/SHINSEGI TELECOMM LTD.......................... 45.6 18.5% 4/96 1,537,000 139% 10.7% 5 India 0.1% Madhya Pradesh/CCIL......... 72.7 2/97 * 49.0% 2 Madras/RPG CELLCOM LIMITED................... 6.7 9/95 * 20.0% 2 ---------- 29,000 71% Egypt/MISRFONE(9)............. 54.5 0.2% (n/a9) n/a (9) n/a(9) 30.0% 2 ----- ------------- Total..................... 572.3 ~19,205,000
- ------------------------------ * Not disclosed (1) Population estimates as of December 31, 1997 from Kagan World Media, Ltd. INTERNATIONAL CELLULAR, May 29, 1998. (2) Penetration estimates as of March 31, 1998 from Kagan World Media, Ltd. INTERNATIONAL CELLULAR, May 29, 1998. Market penetration reflects penetration by the cellular industry as a whole and is not specific to the Company's ventures. (3) Exclusive of any options, warrants or other rights to increase ownership. (4) Indirect ownership interest through Pronto-Italia S.p.A. The Company holds an option to acquire an additional 6.2% indirect interest in Omnitel-Pronto Italia, which, if exercised, would bring its interest to 21.7%. (5) The Company acquired its interest after commercial launch. In Belgium, reflects launch of digital system only; analog system was launched in January 1987. (6) The Company holds an option to purchase an additional 10%. (7) Includes the Tokyo, Kansai and Central Japan Digital Phone Companies. (8) Includes Kyushu, Chugoku, Tohoku, Hokkaido, Hokuriku and Shikoku regions. Customers are not included in proportionate customer numbers because the Company accounts for these investments on a cost basis. (9) License issued on May 5, 1998. The Company anticipates launch of service in the second half of 1999. 25 OPERATIONS The Company's international ventures rely on the same core competencies for success as its United States business: high quality networks with extensive roaming capabilities, well-established direct and indirect distribution channels, and innovative products and services that appeal to various customer segments. A number of the Company's international ventures are less mature than its United States cellular ventures and accordingly have not yet achieved the critical size that will provide economies of scale from cost reductions and operating efficiencies. However, because the markets are generally newer and less penetrated, they have on average over the past year experienced stronger customer growth than in the United States. In addition to being driven by strong overall demand for wireless service, the growth in wireless usage in the Company's international markets is attributable to two factors not present in the United States. The first is known as calling party pays. In most countries, calls received by wireless customers are paid for by the calling party, thereby encouraging customers to distribute their mobile phone numbers widely. The second factor is the popularity of pre-paid pricing plans, which allow customers to have wireless service without minimum monthly access or service charges. These two factors have enabled a large segment of the population who would otherwise be unable to afford wireless service to more fully use the service. Pre-paid customers accounted for about half of the Company's new international customers in the first six months of 1998 and about 25% of its international customer base as of June 30, 1998. Due to strong customer growth and usage, 12 of the Company's 16 international ventures currently generate positive operating cash flow. To date, the Company has received $279 million of distributions from its German venture, $12 million from its Swedish venture and $17 million from its Portuguese venture. OWNERSHIP RIGHTS AND OBLIGATIONS The ownership of the Company's international cellular ventures typically includes majority local ownership at the time of the award of a license, necessitated as a result of political, legal, and economic factors. This frequently changes over time. In structuring its international investments, the Company attempts to obtain operating influence through board representation, the right to appoint certain key members of management and consent rights for significant matters such as capital contributions, incurrence of recourse debt and fundamental corporate transactions. In addition, the Company tries to ensure its ability to maintain a position of influence in its ventures by obtaining rights of first refusal on future sales by other partners and issuances of new equity by the venture. The particular governance rights of the Company vary from venture to venture and are often dependent upon the size of the Company's investment relative to other investors. The Company currently has the majority interest in its Portuguese and Swedish ventures, the largest ownership interest in its Spanish venture, the second largest ownership interest in three of its Japanese ventures, the third largest ownership interest in its Korean and Italian ventures. It also shares the largest ownership interest in its Egyptian venture. In Germany, the Company is the only shareholder other than the majority shareholder, Mannesmann A.G., and in Belgium, the Company is the only other partner in a joint venture with Belgacom. TECHNOLOGICAL EXPERTISE LEAD TECHNOLOGICAL PARTNER. The Company usually plays the lead role in the design, construction, operation and maintenance of the cellular networks for the ventures in which it has ownership interests. For example, the Company has taken the technical lead in the development of the digital systems in Belgium, Germany, India (Madras and Madhya Pradesh), Italy, Poland, Portugal, Romania, South Korea and Spain, and was integrally involved in the design and construction of three of the systems in Japan. In all of those markets, the Company has appointed the chief technical officer, who is responsible for network construction and technical operations. 26 GSM. The Company's cellular systems in Europe and India conform to the GSM digital cellular standard. Developed by a standards body within the European Telecommunications Standards Institute with substantial input from the Company's engineers, the GSM standard is a wide-band TDMA standard substantially different from United States TDMA technology and has been adopted in more than 110 countries worldwide, including all European union member countries Australia, New Zealand, Singapore, Hong Kong and South Africa. The Company's German venture, Mannesmann Mobilfunk GmbH, was the first GSM system to offer commercial service. In 1996 and 1997, one of the Company's employees held the position of Chairman of the GSM MOU Association, an organization with 256 members representing 227 GSM networks that oversees GSM technical standards and promotes the use and evolution of GSM throughout the world. JAPAN DIGITAL CELLULAR STANDARD. The technology utilized by the Company's Japanese ventures represents Japan's entry into second-generation cellular communications. The Japan Digital Cellular standard uses a narrowband Japanese TDMA standard that allows enhanced roaming and expanded supplementary services potential. To provide service to customers away from their home regions, all of the Company's Japanese ventures are implementing automatic roaming throughout their combined coverage areas. Customers of any of the companies will be able to initiate and receive calls anywhere within the combined coverage area. KOREAN CDMA. The Company's cellular venture in South Korea employs a CDMA technology standard developed by Samsung, Lucent and Hyundai under a license from QUALCOMM, Inc. NEW OPPORTUNITIES. The Company constantly evaluates opportunities to increase its ownership in its existing international ventures, especially where contractual rights of first refusal provide the Company with favorable opportunities. The Company also plans to continue pursuing selected opportunities to acquire new interests in wireless systems throughout the world. The Company believes that its proven technical, operating and marketing expertise makes it a highly desired participant in ventures formed to pursue new international opportunities and that such expertise has been a significant factor in the success of the subsequent license applications by its ventures. The Company measures each international investment against a strict set of criteria in determining whether the investment offers an opportunity for value creation. These criteria include the country's demographic factors, the degree of economic, political and regulatory stability, the quality of local partners and the degree to which the Company would control or meaningfully participate in management. Until recently, the Company's primary focus in pursuing licenses has been Europe and Asia; however, the Company has increasingly been considering opportunities in other parts of the world, as demonstrated by its recent investment in Egypt. The Company is currently considering making an investment in certain cellular companies being privatized in Brazil, for which bids are due July 29, 1998. The pursuit of new international wireless telecommunications opportunities is expected to remain highly competitive and may introduce a greater degree of political and currency risk as new opportunities are concentrated in developing economies. The trend toward awarding new licenses on the basis of an auction rather than on merit-based selection criteria may limit the Company's ability to win new licenses, particularly if competing bidders place a higher value on the license or have less stringent return requirements than the Company. PAGING The Company offers local, regional, statewide, and nationwide paging services under the AirTouch Paging brand name in 32 states and the District of Columbia. As of June 30, 1998, the Company had approximately 3.2 million paging units in service in the United States. Based upon industry surveys, the Company is among the largest providers of paging services in the United States and the only large paging 27 company in the United States to achieve and maintain positive net income and free cash flow. The Company's growth strategy is to offer new services, to provide superior customer service, to refine its distribution channels, and to expand into new geographic markets through start-ups or acquisitions. OTHER SERVICES The Company believes that its focus on wireless services offers the best opportunity for value creation. However, in light of the continuing evolution of telecommunications technology and customer requirements, the Company continuously evaluates the possibility of expanding its operations into lines of business beyond its historical base of high mobility wireless services where such expansion would enhance or complement existing wireless services. Some areas of possible expansion could include: wireless local loop (the construction and operation of dedicated wireless networks designed to compete directly with or substitute for wireline networks); international long-distance service for the Company's wireless subscribers; and international wireline long-distance services that complement the Company's wireless properties. Any decision by the Company to enter any of these lines of business will depend on the Company's evaluation of its ability to create value by employing the assets or expertise of its wireless operations, including networks and customer bases, as well as the standalone attractiveness of the opportunity. ARCOR The Company owns a 3.37% indirect interest in Mannesmann Arcor K.G. ("Arcor"), Germany's second largest wireline telecommunications company. The interest is owned through a consortium, led by Mannesmann A.G. (the "Consortium"), that has a 74.9% interest in Arcor. Deutsche Bahn, the German national railway company, holds the other 25.1% of Arcor. The Company has an option to increase its 4.5% interest in the Consortium to 9% by 2000. The Company and Mannesmann A.G. currently jointly own Mannesmann Mobilfunk GmbH ("MMO"), Germany's leading cellular operator. MMO plans to resell Arcor long distance service beginning in 1998, and Arcor has plans to resell MMO's cellular service. GLOBALSTAR The Company holds a 5.7% interest in Globalstar, L.P. ("Globalstar"), a limited partnership led by Loral Space & Communications Corporation Ltd. ("Loral") and QUALCOMM, Inc. ("QUALCOMM") that will construct and operate a 48 satellite low earth orbit constellation utilizing CDMA technology designed to offer wireless communications services in virtually every populated area of the world. Commercial service is expected to begin in the third quarter of 1999. The Company has the exclusive right to provide Globalstar services in the United States, the Caribbean and eastern Asia (Indonesia, Japan, Malaysia) and, though a partnership with Loral, in Canada and Mexico. EMPLOYEES The Company believes that setting goals for its employees and providing incentives to reach those goals contribute to the Company's success. The Company's current employee goals are to deliver world class performance by ranking first in customer loyalty in every market, ranking in the top 10% of companies in employee satisfaction, and achieving a "stretch" goal of an average annual compound growth in proportionate operating cash flow of 25% from December 31, 1997 or reaching a $65 or higher stock price for 15 consecutive trading days by end of year 2000. No assurance can be given that the Company will meet its employee goals. At June 30, 1998, the Company and its wholly-owned subsidiaries had approximately 12,333 employees. None of the Company's employees are represented by a labor organization, although employees of certain international subsidiaries and joint ventures are represented by labor or trade organizations. Management considers its relations with the Company's employees to be good. 28 REGULATION UNITED STATES GENERAL. The Company's U. S. cellular, paging and PCS licenses are issued and regulated by the FCC. In addition, the Company's U.S. wireless operations are subject to public utility regulation in the states in which service is provided and to local regulations. States are preempted from regulating cellular and paging rates and market entry but may regulate certain other terms and conditions of service. The Company does not anticipate that state regulation will interfere with efficient operation of its wireless businesses. The location and construction of wireless service facilities are also often subject to state or local zoning, land use and other local regulation and fees. TELECOMMUNICATIONS ACT OF 1996 AND FCC IMPLEMENTATION. This Act, which fundamentally changed the rules and regulations under which all U.S. providers of telecommunications services operate, did not impose rate regulation on wireless operators. Among other things, the Act modified certain requirements for interconnection between local telephone companies and commercial mobile radio service carriers and established requirements for wireline number portability. The Company has executed cellular interconnection agreements with the major local carriers in its managed markets with terms of between one and three years. These agreements resulted in substantial savings on the Company's interconnect costs in 1997. The FCC extended number portability requirements to wireless carriers following the passage of the Act. Number portability is the ability of customers to retain telephone numbers if they change landline or wireless carriers. FCC rules require carriers such as the Company to provide certain number portability services by December 31, 1998, and to complete local number portability services by June 30, 1999. The Company and other wireless industry groups have petitioned the FCC for a delay in the June 30, 1999, implementation date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PAGING MARKET AREA LICENSING. In February 1997, the FCC issued an order significantly altering the manner in which paging licenses will be offered in the future, changing from the "site" or transmitter by transmitter licenses previously awarded to "market area" licenses which will be auctioned beginning in late 1998. Previously awarded "site" licenses are not affected. INTERNATIONAL The Company's international cellular and paging operations provide services pursuant to the terms of licenses granted by the telecommunications agency or similar supervisory authority in the various countries. Such agencies typically also promulgate and enforce regulations regarding the construction and operation of network equipment. Other regulations commonly encountered in international markets include legal restrictions on the percentage ownership of telecommunications licensees by foreign entities such as the Company, and transfer restrictions or governmental approval requirements regarding changes in the ownership of such licensees. 29 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following tables set forth selected historical data for the Company on a GAAP basis. Except for capital expenditures and capital calls, the data for each of the five years ended December 31, 1997 were derived from the Company's audited financial statements. Data for the quarters ended March 31, 1998 and March 31, 1997 were derived from the unaudited quarterly financial statements. The following information should be read in conjunction with the audited Consolidated Financial Statements, including the accompanying notes, of the Company which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and in its Quarterly Report on Form 10-Q for the period ended March 31, 1998 and which are incorporated herein by reference.
THREE MONTHS ENDED MARCH 31 YEAR ENDED DECEMBER 31 -------------------- ------------------------------------------------ 1998 1997 1997(a) 1996(a) 1995 1994(b) --------- --------- ----------- ----------- --------- ----------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA Operating revenues................................... $ 958 $ 836 $ 3,594 $ 2,252 $ 1,619 $ 1,247 Operating income..................................... $ 234 $ 208 $ 706 $ 281 $ 113 $ 73 Equity in net income of unconsolidated wireless systems............................................ $ 77 $ 8 $ 200 $ 133 $ 152 $ 110 Interest: Expense............................................ $ (19) $ (26) $ (90) $ (52) $ (13) $ (10) Income............................................. $ 6 $ 5 $ 18 $ 14 $ 35 $ 55 Income from operations(c)............................ $ 167 $ 77 $ 448 $ 199 $ 132 $ 98 Preferred dividends.................................. $ 14 $ 13 $ 54 $ 20 $ -- $ -- Net income applicable to common stockholders......... $ 153 $ 64 $ 394 $ 179 $ 132 $ 98 Per share data: Income from operations(c) Basic and diluted................................ $ 0.33 $ 0.15 $ 0.89 $ 0.40 $ 0.27 $ 0.20 Net income applicable to common stockholders Basic and diluted................................ $ 0.30 $ 0.13 $ 0.78 $ 0.36 $ 0.27 $ 0.20 1993(b) ----------- INCOME STATEMENT DATA Operating revenues................................... $ 1,058 Operating income..................................... $ 129 Equity in net income of unconsolidated wireless systems............................................ $ 32 Interest: Expense............................................ $ (22) Income............................................. $ 12 Income from operations(c)............................ $ 41 Preferred dividends.................................. $ -- Net income applicable to common stockholders......... $ 35 Per share data: Income from operations(c) Basic and diluted................................ $ 0.09 Net income applicable to common stockholders Basic and diluted................................ $ 0.08
MARCH 31 DECEMBER 31 -------------------- ------------------------------------------------ 1998 1997 1997(a) 1996(a) 1995 1994(b) --------- --------- ----------- ----------- --------- ----------- (DOLLARS IN MILLIONS) BALANCE SHEET DATA Investments in unconsolidated wireless systems..... $ 2,382 $ 1,888 $ 2,068 $ 1,992 $ 3,076 $ 1,698 Intangible assets, net............................. $ 3,279 $ 3,358 $ 3,297 $ 3,409 $ 606 $ 471 Total assets....................................... $ 9,401 $ 8,486 $ 8,970 $ 8,524 $ 5,648 $ 4,488 Long-term debt, including current portion.......... $ 1,534 $ 1,622 $ 1,419 $ 1,669 $ 906 $ 130 Total stockholders' equity......................... $ 5,918 $ 5,114 $ 5,529 $ 5,062 $ 3,751 $ 3,459 OTHER DATA Working capital (deficit).......................... $ 30 $ (44) $ (254) $ (120) $ 19 $ 736 Capital expenditures and capital calls, excluding acquisitions(d).................................. $ 265 $ 164 $ 1,023 $ 890 $ 1,015 $ 494 1993(b) ----------- BALANCE SHEET DATA Investments in unconsolidated wireless systems..... $ 1,155 Intangible assets, net............................. $ 413 Total assets....................................... $ 4,077 Long-term debt, including current portion.......... $ 79 Total stockholders' equity......................... $ 3,337 OTHER DATA Working capital (deficit).......................... $ 1,347 Capital expenditures and capital calls, excluding acquisitions(d).................................. $ 304
- ------------------------------ (a) In December 1996, the Company obtained a controlling interest in Telecel. The Company consolidated Telecel's Balance Sheet as of December 31, 1996 and began consolidating Telecel's results of operations on January 1, 1997. In August 1996, the Company completed its acquisition of Cellular Communications, Inc. See Note F, "Partnerships and Acquisitions," to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 for further information. (b) Prior to April 1, 1994, the Company was an 86.1% owned subsidiary of Pacific Telesis Group ("Telesis"). On April 1, 1994, the Company was spun off from Telesis. Prior to December 3, 1993, the Company was 100% owned by Telesis. (c) Income before preferred dividends (1997 and 1996) and cumulative effect of accounting changes (1993). (d) For the three months ended March 31 and the year ended December 31. 30 SELECTED HISTORICAL CONSOLIDATED DATA BY BUSINESS UNIT The following tables set forth the results of operations for selected business units of the Company on a GAAP basis. The following unaudited financial information is provided to facilitate the discussion and analysis of the results of the Company's operations. Effective August 16, 1996, the Company owned 100% of CCI and New Par (referred to elsewhere herein as "Great Lakes" market). The Pro Forma 1996 column for U.S. cellular operations presents the results as if the Great Lakes market had been wholly owned and consolidated during the year ended December 31, 1996. On December 31, 1996, the Company consolidated Telecel after acquiring a 51% controlling interest. The Pro Forma 1996 column for International Operations presents the results for the year ended December 31, 1996 as if (1) Telecel had been consolidated and the Company's ownership interest in Telecel had been 51% and (2) the Company's 1997 ownership interests in its unconsolidated wireless systems had been the ownership interests during the corresponding periods of 1996. This table should be read in conjunction with the management's discussion and analysis herein and with the Consolidated Financial Statements, including the accompanying notes, of the Company included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, incorporated herein by reference and in its Quarterly Report on Form 10-Q for the period ended March 31, 1998, incorporated herein by reference.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31 MARCH 31 -------------------------------------------- -------------------- PRO FORMA 1998 1997 1997 1996 1996(E) 1995 --------- --------- --------- --------- ----------- --------- (DOLLARS IN MILLIONS) U.S. CELLULAR OPERATIONS Service and other revenues............................. $ 617 $ 557 $ 2,351 $ 1,634 $ 2,092 $ 1,145 Equipment sales........................................ 30 28 125 60 81 44 --------- --------- --------- --------- ----------- --------- Operating revenues..................................... 647 585 2,476 1,694 2,173 1,189 --------- --------- --------- --------- ----------- --------- Operating expenses before depreciation and amortization expenses............................ 359 316 1,452 1,055 1,301 771 Depreciation and amortization expenses................. 98 94 381 240 350 128 --------- --------- --------- --------- ----------- --------- Operating income....................................... 190 175 643 399 522 290 Equity in net income (loss) of unconsolidated wireless systems..................................... 30 30 121 200 105 197 Minority interests in net (income) loss of consolidated wireless systems........................ (21) (24) (70) (71) (71) (56) Other (income) expense included in equity income and minority interests(a)..................... (4) (4) (26) 1 (23) (15) --------- --------- --------- --------- ----------- --------- U.S. cellular operating contribution to net income(b)..................................... $ 195 $ 177 $ 668 $ 529 $ 533 $ 416 --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- ----------- --------- U.S. PAGING OPERATIONS Service and other revenues............................. $ 88 $ 79 $ 330 $ 293 -- $ 220 Equipment sales........................................ 10 9 39 50 -- 45 --------- --------- --------- --------- --------- Operating revenues..................................... 98 88 369 343 -- 265 --------- --------- --------- --------- --------- Operating expenses before depreciation and amortization expenses............................ 68 63 261 255 -- 190 Depreciation and amortization expenses................. 19 18 74 64 -- 43 --------- --------- --------- --------- --------- Operating income....................................... $ 11 $ 7 $ 34 $ 24 -- $ 32 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Operating cash flow(c)................................. $ 30 $ 25 $ 108 $ 88 -- $ 75 Operating cash flow margin(d).......................... 30.6% 28.4% 29.3% 25.7% -- 28.3% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
31 SELECTED HISTORICAL CONSOLIDATED DATA BY BUSINESS UNIT
THREE MONTHS ENDED YEAR ENDED DECEMBER 31 MARCH 31 -------------------------------------------- -------------------- PRO FORMA 1998 1997 1997 1996 1996(F) 1995 --------- --------- --------- --------- ----------- --------- (DOLLARS IN MILLIONS) INTERNATIONAL OPERATIONS Service and other revenues.......................... $ 198 $ 151 $ 685 $ 190 $ 521 $ 133 Equipment sales..................................... 15 12 66 22 62 19 --------- --------- --------- --------- ----------- --------- Operating revenues.................................. 213 163 751 212 583 152 --------- --------- --------- --------- ----------- --------- Operating expenses before depreciation and amortization expenses......................... 134 104 551 239 479 214 Depreciation and amortization expenses.............. 25 21 85 34 68 27 --------- --------- --------- --------- ----------- --------- Operating income (loss)............................. 54 38 115 (61) 36 (89) Equity in net income (loss) of unconsolidated wireless systems.................................. 81 10 199 (18) (42) (36) Minority interests in net (income) loss of consolidated wireless systems..................... (22) (15) (49) (24) (49) 20 Other (income) expense included in equity income and minority interests(a).................. 62 52 181 198 155 75 --------- --------- --------- --------- ----------- --------- International operating contribution to net income(b).................................. $ 175 $ 85 $ 446 $ 95 $ 100 $ (30) --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- ----------- ---------
- ------------------------------ (a) Represents income taxes and non-operating expenses or income included in equity in net income (loss) of unconsolidated wireless systems and in minority interests in net (income) loss of consolidated wireless systems. (b) Represents the Company's share of combined operating income of consolidated and unconsolidated U.S. cellular and international operations, net of the interests of minority and equity partners (equal to proportionate operating income). (c) Operating cash flow is defined as operating income plus depreciation and amortization and is not the same as cash flow from operating activities in the Company's Consolidated Statements of Cash Flows. Proportionate operating cash flow represents the Company's ownership interests in the respective entities' operating cash flows. As such, proportionate operating cash flow does not represent cash available to the Company. (d) Operating cash flow margin is calculated by dividing "Operating cash flow" by "Service and other revenues." (e) Adjusted to present results as if the Great Lakes market had been wholly owned and consolidated during the year ended December 31, 1996. (f) Adjusted to present results for the year ended December 31, 1996 as if (1) Telecel had been consolidated and the Company's ownership interest in Telecel had been 51% and (2) the Company's 1997 ownership interests in its unconsolidated wireless systems had been the ownership interests during the corresponding periods in 1996. 32 SELECTED HISTORICAL PROPORTIONATE DATA The following tables are not required by GAAP and are not intended to replace the Company's Consolidated Financial Statements prepared in accordance with GAAP. They are presented to provide supplemental data and have not been audited. Because significant assets of the Company are not consolidated and because of the substantial effect of the formation of certain entities on year-to-year comparability of the Company's consolidated financial results, the Company believes that proportionate financial and operating data facilitates the understanding and assessment of its Consolidated Financial Statements. Under GAAP, the Company consolidates the entities in which it has a direct controlling interest and uses the equity method to account for entities over which the Company has significant influence but does not have a direct controlling interest. In contrast, proportionate accounting reflects the Company's relative ownership interests in operating revenues and expenses for both its consolidated and equity method entities. For example, U.S. cellular proportionate results present the Company's share--its percentage ownership--for all significant U.S. cellular operations, including those corporations and partnerships where the Company does not own more than 50%. Similarly, total proportionate results show the Company's share of all its significant worldwide operations. Net income is the same under GAAP and proportionate presentations.
THREE MONTHS ENDED MARCH 31 YEAR ENDED DECEMBER 31 -------------------- ----------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) TOTAL COMPANY Service and other revenues.................. $ 1,355 $ 1,113 $ 4,907 $ 3,925 $ 2,679 $ 1,799 $ 1,228 Operating expenses before depreciation and amortization expenses(1)............................... 808 700 3,171 2,801 1,976 1,293 876 --------- --------- --------- --------- --------- --------- --------- Operating cash flow(2)...................... 547 413 1,736 1,124 703 506 352 Depreciation and amortization expenses.................................. 216 188 789 603 406 334 254 --------- --------- --------- --------- --------- --------- --------- Operating income............................ $ 331 $ 225 $ 947 $ 521 $ 297 $ 172 $ 98 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income applicable to common stockholders.............................. $ 153 $ 64 $ 394 $ 179 $ 132 $ 98 $ 35 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Operating cash flow margin(3)............... 40.4% 37.1% 35.4% 28.6% 26.2% 28.1% 28.7% U.S. CELLULAR OPERATIONS Service and other revenues.................. $ 621 $ 562 $ 2,363 $ 1,984 $ 1,523 $ 1,160 $ 892 Cost of revenues............................ 63 57 236 222 188 136 116 Selling and customer operations expenses(1)............................... 225 197 902 781 591 423 299 General, administrative, and other expenses............................ 36 36 169 160 139 122 97 Depreciation and amortization expenses.................................. 102 95 388 292 189 186 165 --------- --------- --------- --------- --------- --------- --------- Operating income............................ $ 195 $ 177 $ 668 $ 529 $ 416 $ 293 $ 215 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Operating cash flow(2)...................... $ 297 $ 272 $ 1,056 $ 821 $ 605 $ 479 $ 380 Operating cash flow margin(3)............... 47.8% 48.4% 44.7% 41.4% 39.7% 41.3% 42.6%
33 SELECTED HISTORICAL PROPORTIONATE DATA
THREE MONTHS ENDED MARCH 31 YEAR ENDED DECEMBER 31 -------------------- ----------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) INTERNATIONAL OPERATIONS Service and other revenues.................. $ 626 $ 470 $ 2,181 $ 1,640 $ 918 $ 435 $ 175 Operating expenses before depreciation and amortization expenses(1)............................... 370 321 1,452 1,319 794 405 205 Depreciation and amortization expenses.................................. 81 64 283 226 154 96 48 --------- --------- --------- --------- --------- --------- --------- Operating income (loss)..................... $ 175 $ 85 $ 446 $ 95 $ (30) $ (66) $ (78) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Operating cash flow(2)...................... $ 256 $ 149 $ 729 $ 321 $ 124 $ 30 $ (30) Operating cash flow margin(3)............... 40.9% 31.7% 33.4% 19.6% 13.5% 6.9% (17.1)% U.S. PAGING OPERATIONS(4) Service and other revenues(5)............... $ 89 $ 79 $ 330 $ 297 $ 226 $ 189 $ 149 Operating expenses before depreciation and amortization expenses.................................. 59 54 222 209 151 122 99 Depreciation and amortization expenses.................................. 19 18 74 64 43 37 31 --------- --------- --------- --------- --------- --------- --------- Operating income............................ $ 11 $ 7 $ 34 $ 24 $ 32 $ 30 $ 19 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Operating cash flow(2)...................... $ 30 $ 25 $ 108 $ 88 $ 75 $ 67 $ 50 Operating cash flow margin(3)............... 33.7% 31.6% 32.7% 29.6% 33.2% 35.4% 33.6% U.S. PCS OPERATIONS(6) Service and other revenues.................. $ 19 $ 3 $ 33 $ 1 $ -- $ -- $ --
- ------------------------------ (1) Includes net losses on equipment sold to acquire and retain customers. (2) Operating cash flow is defined as operating income plus depreciation and amortization and is not the same as cash flow from operating activities in the Company's Consolidated Statements of Cash Flows. Proportionate operating cash flow represents the Company's ownership interests in the respective entities' operating cash flows. As such, proportionate operating cash flow does not represent cash available to the Company. (3) Operating cash flow margin is calculated by dividing "Operating cash flow" by "Service and other revenues." (4) U.S. Paging Operations, which are wholly owned by the Company, include operations in Canada. (5) Includes any gain or loss on equipment sales. (6) PCS data relates to PrimeCo, in which the Company had a 25% interest as of March 31, 1998, which was prior to the Merger. Because PrimeCo does not own 100% of all its markets, the Company's overall effective ownership in these markets is slightly less. 34 RECENT FINANCIAL DEVELOPMENTS ON A PROPORTIONATE BASIS On July 22, the Company announced its earnings for the second quarter of fiscal 1998 which ended June 30, 1998. The following tables set forth selected unaudited pro forma and historical Income Statement data for the periods presented. The pro forma proportionate data reflect the Merger as if it had been effective as of the beginning of each period presented, after giving effect to the purchase method of accounting and other merger-related adjustments. Changes to these adjustments are expected as valuations and appraisals of the acquired assets and liabilities are completed. However, based on the preliminary results of the appraisal of assets and liabilities acquired, such changes are not expected to be material. These selected pro forma proportionate data are intended for informational purposes only and are not necessarily indicative of the future results of operations of the combined Company or the results of operations of the combined Company that would have actually occurred.
HISTORICAL PROPORTIONATE PRO FORMA PROPORTIONATE ------------------------ --------------------------------------- SIX MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30 YEAR ENDED ------------------------ ------------------------ DECEMBER 31, 1998 1997 1998 1997 1997 ----------- ----------- ----------- ----------- ------------- (DOLLARS IN MILLIONS) TOTAL COMPANY Service and other revenues.......................... $ 3,153 $ 2,311 $ 3,479 $ 2,891 $ 6,094 Operating expenses before depreciation and amortization expenses(1).......................... 1,898 1,472 2,106 1,839 3,958 ----------- ----------- ----------- ----------- ------ Operating cash flow(2).............................. 1,255 839 1,373 1,052 2,136 Depreciation and amortization expenses.............. 551 378 673 589 1,218 ----------- ----------- ----------- ----------- ------ Operating income.................................... $ 704 $ 461 $ 700 $ 463 $ 918 ----------- ----------- ----------- ----------- ------ ----------- ----------- ----------- ----------- ------ Net income applicable to common stockholders........ $ 300 $ 170 $ 262 $ 95 $ 226 ----------- ----------- ----------- ----------- ------ ----------- ----------- ----------- ----------- ------ Operating cash flow margin(3)....................... 39.8% 36.3% 39.5% 36.4% 35.1% U.S. CELLULAR OPERATIONS Service and other revenues.......................... $ 1,566 $ 1,166 $ 1,873 $ 1,736 $ 3,516 Cost of revenues.................................... 161 118 190 186 349 Selling and customer operations expenses(1)......... 556 406 676 613 1,377 General, administrative, and other expenses......... 96 74 119 114 255 ----------- ----------- ----------- ------ Operating cash flow(2).............................. 753 568 888 823 1,535 Depreciation and amortization expenses.............. 305 191 413 381 775 ----------- ----------- ----------- ----------- ------ Operating income.................................... $ 448 $ 377 $ 475 $ 442 $ 760 ----------- ----------- ----------- ----------- ------ ----------- ----------- ----------- ----------- ------ Operating cash flow margin(3)....................... 48.1% 48.7% 47.4% 47.4% 43.7% U.S. PCS OPERATIONS(6) Service and other revenues.......................... $ 66 $ 10 $ 86 $ 20 $ 68 INTERNATIONAL OPERATIONS Service and other revenues.......................... $ 1,339 $ 977 -- -- -- Operating expenses before depreciation and amortization expenses(1).......................... 806 678 -- -- -- ----------- ----------- Operating cash flow(2).............................. 533 299 -- -- -- Depreciation and amortization expenses.............. 167 131 -- -- -- ----------- ----------- Operating income.................................... $ 366 $ 168 -- -- -- ----------- ----------- ----------- ----------- Operating cash flow margin(3)....................... 39.8% 30.6% -- -- --
35 RECENT FINANCIAL DEVELOPMENTS ON A PROPORTIONATE BASIS
HISTORICAL PROPORTIONATE ------------------------ SIX MONTHS ENDED JUNE 30 ------------------------ 1998 1997 ----------- ----------- (DOLLARS IN MILLIONS) U.S. PAGING OPERATIONS(4) Net operating revenues(5)............................................................... $ 181 $ 160 Operating expenses before depreciation and amortization expenses........................ 121 107 ----------- ----------- Operating cash flow(2).................................................................. 60 53 Depreciation and amortization expenses.................................................. 38 37 ----------- ----------- Operating income........................................................................ $ 22 $ 16 ----------- ----------- ----------- ----------- Operating cash flow margin(3)........................................................... 33.1% 33.1%
- ------------------------------ (1) Includes net losses on equipment sold to acquire and retain customers. (2) Operating cash flow is defined as operating income plus depreciation and amortization and is not the same as cash flow from operating activities in the Company's Consolidated Statements of Cash Flows. Proportionate operating cash flow represents the Company's ownership interests in the respective entities' operating cash flows. As such, proportionate operating cash flow does not represent cash available to the Company. (3) Operating cash flow margin is calculated by dividing "Operating cash flow" by "Service and other revenues" or in the case of U.S. Paging Operations, dividing "Operating cash flow" by "Net operating revenues." (4) U.S. Paging Operations, which are wholly owned by the Company, include operations in Canada. (5) Includes any gain or loss on equipment sales. (6) PCS data relates to PrimeCo Personal Communications, L.P., a U.S. personal communications service business in which the Company has a 50% interest including the interest acquired in the Merger. Because PrimeCo does not own 100% of all its markets, the Company's overall effective ownership in these markets is slightly less than 50%. 36 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Management's discussion and analysis is intended to assist in the understanding and assessment of significant changes and trends related to the results of operations and financial condition of the Company together with its subsidiaries and partnerships. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and accompanying Notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, incorporated herein by reference. BASIS OF PRESENTATION CONSOLIDATION V. THE EQUITY METHOD In accordance with GAAP, the Company consolidates revenues and expenses of each subsidiary and partnership in which the Company has a direct controlling interest. The Company uses the equity method to record the operating results of entities in which the Company has significant influence, but does not have a direct controlling interest. Consolidated operating revenues and expenses during 1997, 1996, and 1995 principally included six U.S. cellular markets, all U.S. paging markets, and Europolitan, the Company's cellular system in Sweden. On December 31, 1996, AirTouch consolidated Telecel, its cellular system in Portugal, subsequent to acquiring a controlling interest and, accordingly, Telecel's results were included in consolidated results for the year ended December 31, 1997. The six U.S. cellular markets included in consolidated revenues and expenses during 1997, 1996, and 1995 were Los Angeles, Sacramento, Atlanta, San Diego, Wichita, and Topeka. In addition, the Company began consolidating the results of its Great Lakes market (cellular properties in Michigan and Ohio, including Detroit, Cleveland and Columbus) on August 16, 1996, the date on which AirTouch completed its acquisition of the remaining capital stock of Cellular Communications, Inc. ("CCI") that it did not already own. For further information regarding this acquisition, see "1997 v. Pro Forma 1996." GAAP V. PROPORTIONATE PRESENTATION Proportionate information is included as supplementary information in the discussion and analysis of results of operations for the Company's U.S. cellular and international operations. Proportionate presentation is a pro rata consolidation which reflects the Company's share of revenues and expenses in both its consolidated and unconsolidated wireless systems, net of interests of minority and equity partners. Proportionate results are calculated by multiplying the Company's ownership interest in each wireless system by each system's total operating results, whereas the presentation prepared in accordance with GAAP requires consolidation of wireless systems controlled by the Company and the equity method of accounting for wireless systems in which the Company has significant influence, but not a direct controlling interest. Net income is the same under both GAAP and proportionate presentations. Proportionate presentation is not required by GAAP, nor is it intended to replace the consolidated operating results prepared and presented in accordance with GAAP. However, since significant wireless systems are not consolidated, proportionate information is provided as supplemental data to facilitate a more detailed understanding and assessment of consolidated operating results prepared and presented in accordance with GAAP. COMPOSITION OF OPERATING REVENUES AND EXPENSES Operating revenues include cellular and paging service revenues, as well as equipment sales. Cellular service revenues primarily consist of charges for air time use, monthly network access fees, and in-bound 37 roaming charges (in-bound roaming refers to use of the Company's wireless networks by customers of other cellular carriers). Paging service revenues primarily consist of paging service charges and rentals of paging units in the United States. Equipment sales consist of revenues from sales of cellular telephones, pagers, and accessories. Equipment sales are not a primary part of the Company's cellular or paging businesses. Rather, the Company offers cellular and paging equipment at competitive prices, which are often at or below cost, as an incentive for new customers to subscribe to its cellular and paging services. The Company also offers discounted or free equipment as an incentive for certain existing customers to remain a subscriber to its wireless services. For purposes of proportionate presentation, the Company reflects the net loss on sales of cellular telephones as a selling and customer operations expense. Operating expenses include: cost of revenues; cost of equipment sales; selling and customer operations expenses; general, administrative, and other expenses; and depreciation and amortization expenses. Cost of revenues primarily consists of cellular and paging network operating costs, interconnection fees assessed by local exchange carriers, and costs of cellular roaming fraud. Interconnection costs have fixed and variable components. The fixed component of interconnection costs consists of monthly flat-rate fees for facilities leased from local exchange carriers. The variable component of interconnection costs, which fluctuates in relation to the level of cellular calls and paging messages, consists of per-minute use fees charged by local exchange carriers for cellular calls or paging messages terminating on their networks. Selling and customer operations expenses primarily consist of compensation to sales channels; salaries, wages, and related benefits for sales and customer service personnel; and billing, advertising, and promotional expenses. General, administrative, and other expenses primarily consist of salaries, wages, and related benefits for general and administrative personnel, international license application costs, bad debt, and other overhead expenses. Depreciation and amortization primarily consists of depreciation recorded for the Company's cellular and paging networks and amortization of intangibles such as wireless license costs, subscriber lists, and goodwill. YEAR 2000 COMPLIANCE. Many of the Company's systems are affected by the year 2000 problem, which refers to the inability of information technology to process dates beyond December 31, 1999. The Company has implemented a comprehensive plan to address the year 2000 problem in its mission critical systems. Mission critical systems are those whose failure poses a risk of disruption to the Company's ability to provide wireless services, to collect revenues, to meet safety standards or to comply with legal requirements. The Company's plan includes (i) the complete inventory of all mission critical systems employed in the Company's consolidated markets and the identification of the hardware and software affected by the year 2000 problem; (ii) modification of the affected systems; and (iii) testing of the modified systems, including testing of systems on an integrated basis. The Company is using both internal and external sources to implement its plan. Much of the Company's information technology, including technology associated with its mission critical systems, is purchased from third parties. The Company is dependent on those third parties to assess the impact of the year 2000 problem on the technology they have supplied and to take any necessary corrective action. The Company is monitoring the progress of these third parties and conducting tests to determine whether they have accurately assessed the problem and taken corrective action. Based on its current assessments and its remediation plan, which are based in part upon certain representations of third parties, the Company expects that it will not experience a disruption of its operations as a result of the change to the new millennium. However, there can be no assurance that the third parties who have supplied information technology used in the Company's mission critical systems will be successful in taking corrective action in a timely manner. The Company is developing contingency plans with respect to certain key information technology used in its mission critical systems, although there can be no assurance that these contingency plans will successfully avoid service disruption. In addition, the Company's systems are interconnected with PSTNs and the networks of other service providers who are 38 responsible for addressing the year 2000 problem in their own systems. The ability of the Company's systems to operate is dependent upon such PSTNs and other networks being year 2000 compliant, as to which there can be no assurance. While costs incurred to date to address the year 2000 problem have not been material, the Company expects to incur incremental consolidated pre-tax expenses of approximately $75 million through the end of 1999 to implement its plan for its mission critical systems. In addition, the Company has redeployed internal resources to address the problem. The substantial majority of these expenses will be incurred in the second half of 1998 and the first half of 1999. Additionally, the Company will incur capitalized costs that represent ongoing investment in new systems and system upgrades, the timing of which is being accelerated in order to facilitate year 2000 compliance and which are not expected to have a material impact on the Company's financial position or results of operations. This estimate assumes that third party suppliers have accurately assessed the compliance of their products. Because of the complexity of correcting the year 2000 problem, actual costs may vary from this estimate. Subject to these assumptions, the Company's guidance for 1998 as described under "Summary--Outlook for 1998" includes the impact of the estimated costs for 1998. If the Company is unsuccessful in its efforts to correct or cause to be corrected its mission critical systems or if third parties with whom the Company's systems interconnect do not correct their systems, the Company could experience significant disruption to its operations, including disruption of its ability to provide certain wireless services and to correctly bill customers resulting in potential revenue loss and increased costs that could have a material adverse effect on the Company's financial condition or results of operations. Management believes that the original manufacturers of handsets and pagers are primarily liable for failures of such products. However, in the event of such product failures, the Company could experience service revenue loss and be required to incur additional costs to furnish customers with replacement equipment on a temporary or permanent basis to prevent further service revenue loss. RESULTS OF OPERATIONS The following discussions compare the results of operations for the quarter ended March 31, 1998 to the quarter ended March 31, 1997 and the results of operations for the year ended December 31, 1997 to the year ended December 31, 1996. The operating results of these periods are not necessarily indicative of operating results in future periods. The following comparative information should be read in conjunction with the Consolidated Financial Statements and accompanying Notes for each period discussed, as well as the information presented in all other sections of management's discussion and analysis. Because the Merger was effective on April 6, 1998, results of operations do not include the properties acquired from MediaOne. See "Pro Forma Condensed Combined Financial Statements" for a description of the Merger and certain pro forma financial statements. CONSOLIDATED RESULTS OF OPERATIONS First Quarter 1998 v. First Quarter 1997. Consolidated operating revenues increased 15% while consolidated operating income rose 13% primarily as a result of substantial subscriber growth in the Company's U.S. and international cellular markets. Increases in equity in net income of unconsolidated international wireless systems is primarily attributable to continued growth in the subscriber base by the wireless systems operated by the Company's equity investees. The net change in miscellaneous income (expense) was primarily related to foreign currency exchange losses and reflects the unfavorable changes in foreign currency exchange rates compared to the U.S. Dollar. 39 Excluding the effect of equity in net income of unconsolidated international wireless systems and the effect of foreign consolidated entities, the effective tax rates were approximately 40% and 45% for the three-month periods ended March 31, 1998 and 1997, respectively. 1997 v. 1996. Improvements in consolidated operating income resulted primarily from increases in the operating income of U.S. cellular and international operations. As indicated in the U.S. cellular and international operations' discussions, the increase in consolidated operating income resulted from consolidation during 1997 of the Great Lakes (Michigan and Ohio) market and Telecel, as well as substantial subscriber growth in U.S. and international cellular markets. The decrease in U.S. equity in net income (loss) of unconsolidated wireless systems was attributable to consolidation of the Great Lakes market beginning August 16, 1996 as a result of the Company's acquisition of CCI (see "1997 v. Pro Forma 1996") and increased operating losses of PrimeCo associated with the start-up phase of the PCS business. Decreases due to consolidation of the Great Lakes market and increased losses of PrimeCo were partially offset by improved operating results of CMT Partners. The improvements in international equity in net income (loss) of unconsolidated wireless systems were due primarily to improved profitability resulting from substantial growth in the subscriber base and, secondarily, to favorable adjustments resulting from changes in estimates based on the Company's assessment of various tax positions recorded in 1997. The increases in interest expense resulted from higher average debt balances and a reduction in capitalized interest as the related assets under construction were placed in service. The decrease in miscellaneous income was primarily attributable to a $56 million gain recorded during 1996 for the sale of Dansk Mobiltelefon AB ("DMT"), an investment held by Europolitan. Net of minority interest and taxes, the sale of DMT resulted in a $6 million increase in consolidated net income. Excluding the effect of equity in net income (loss) of unconsolidated international wireless systems, foreign income tax rate differences and minority interest for consolidated international operations, and a 1996 reduction in the valuation allowance related to consolidated international operations, the effective tax rates were approximately 43% and 44% for the years ended December 31, 1997 and 1996, respectively. U.S. CELLULAR OPERATIONS First Quarter 1998 v. First Quarter 1997. The improvement in the Company's U.S. cellular operating revenues was primarily the result of a 26% increase in subscribers. Continued customer growth in U.S. cellular's consolidated markets was primarily achieved through advertising and by continuing to offer competitive incentive programs such as waived service establishment charges, discounted monthly access fees, discounted cellular handsets, discounted air time packages, promotional air time credits at the beginning of service contracts, options to purchase bundled minutes of use at fixed monthly rates, and reduced or fixed rates for off-peak usage and roaming. Year-over-year revenue improvement associated with the increase in subscribers was partially offset by a 12% decline in revenue per minute of use (excluding revenue from equipment sales) primarily attributable to continued penetration of consumer markets and to rate reductions and discounts offered to new and existing customers in response to increasing competition. In addition, average revenue per customer (excluding revenue from equipment sales) declined 12%. Consumer usage patterns contributed to declines in average revenue per customer because consumers typically use their telephones more during lower-rate, off-peak calling periods. The Company anticipates increasing competitive pressure to result in continuing price declines and reduced customer growth rates in the near term and possibly in future years, which could reduce revenues of its U.S. cellular operations compared to current revenue levels. The Company expects the shift toward 40 consumer markets and such increasing competitive pressures to continue to result in declines in average revenue per customer and revenue per minute of use. However, the Company believes that, over time, declining prices and other factors may lead to increases in per subscriber usage as customers shift their calling from landline to wireless networks. U.S. cellular operating margins remained relatively constant year-over-year, going from 29.9% in 1997 to 29.4% in 1998. Operating cash flow margins (operating margins excluding the effect of depreciation and amortization expenses) moved slightly downward from 46.0% during 1997 to 44.5% during 1998. The stability in operating margins despite a decline in revenue per minute of use resulted from a decline of 10% in the cash cost per minute of use (including the loss on equipment sales). Decreases in average revenue per customer were partially offset by decreases in the average cash costs per customer (including the loss on equipment sales) of 10%. Decreases in cash costs resulted from several factors, including increased economies of scale, reductions in roaming fraud, a reduction in interconnection rates, declines in handset costs and reductions in handset subsidies offered to customers, and a shift to lower cost sales channels. The Company continues to focus on improving customer service and on its customer incentive programs designed to retain existing customers. Retaining customers is significantly less expensive than replacing customers who discontinue service. Depreciation and amortization expenses increased 4% during 1998 primarily due to depreciation of larger property, plant, and equipment balances associated with digital cellular deployment across all consolidated markets. U.S. cellular operations' equity in net income (loss) of unconsolidated wireless systems remained constant and primarily reflects the operating results of CMT Partners. 1997 v. Pro Forma 1996. Effective August 16, 1996, AirTouch acquired the remaining 63% of CCI's capital stock that it did not already own. As a result of the acquisition, AirTouch now owns 100% of CCI and New Par, the equally owned partnership between the Company and CCI that operated cellular properties in Michigan and Ohio prior to the merger. Accordingly, the operating results of CCI and New Par (referred to elsewhere in management's discussion and analysis as the "Great Lakes" market) are reflected in equity earnings at the Company's ownership interest prior to the merger and in consolidated results at 100% thereafter. Since the actual results of operations for the years ended December 31, 1997 and 1996 are not comparable, pro forma results for the year ended December 31, 1996 are included in the table set forth on page 31 to reflect results as if the Great Lakes market had been wholly owned and consolidated during all of 1996. The improvement in U.S. cellular consolidated operating revenues during the year ended December 31, 1997, was due to an approximate 30% increase in total minutes of use attributable primarily to a 26% increase in subscribers, partially offset by an approximate 14% decline in average revenue per minute of use. The average revenue per customer declined approximately 13% comparing the year ended December 31, 1997 to the year ended December 31, 1996. The Company achieved customer growth in its consolidated markets through advertising and by continuing to offer competitive incentive programs such as waived service establishment charges, discounted monthly access fees, discounted cellular handsets, discounted air time packages, promotional air time credits at the beginning of service contracts, options to purchase bundled minutes of use at fixed monthly rates, and reduced or fixed rates for off-peak usage and roaming. The declines in average revenue per customer and average revenue per minute of use were primarily attributable to continued penetration of consumer markets and to rate reductions and discounts offered to new and existing customers in response to increasing competition. Consumer usage patterns contributed to declines in average revenue per customer because consumers typically use their telephones more during lower-rate, off-peak calling periods. Declines in average revenue per customer and average revenue per minute of use were partially offset by a slight increase in minutes of use per customer during 1997, as compared to the prior year. The Company anticipates increasing competitive pressure to result in continuing price declines and reduced customer growth rates in the near term and possibly in future years, which could reduce revenues in the Company's U.S. cellular business compared to current revenue levels. The Company expects the shift toward consumer markets and such increasing competitive pressures to 41 continue to result in declines in average revenue per customer and average revenue per minute of use. However, the Company believes, that over time, declining prices and other factors will result in migration of minutes of use from landline systems to the Company's wireless systems. U.S. cellular operating margins increased from 24% during 1996 to 26% during 1997. Operating cash flow margins (operating margins excluding the effect of depreciation and amortization expenses) increased from 40% during 1996 to 41% during 1997. Improvements in operating margins despite a 14% decline in average revenue per minute of use resulted from a greater decline of 16% in the average cash cost per minute of use (including the loss on equipment sales). The average revenue per customer declined 13%, while the average cash cost per customer (including the loss on equipment sales) declined 15%. Declining cash costs per customer and per minute of use reflect the Company's continuing efforts to reduce cash costs more rapidly than the related declines in average revenue per customer and average revenue per minute of use. Decreases in average cash costs resulted from several factors, including increased economies of scale, reductions in roaming fraud, a reduction in interconnection rates, declines in handset costs and reductions in handset subsidies offered to customers, and a shift in customer acquisitions to lower-cost direct sales channels. The Company has also reduced the rate at which customers discontinue service ("churn") by continually improving customer service and increasing its focus on customer incentive programs designed to retain existing customers, which is significantly less expensive than replacing customers who discontinue service. Depreciation and amortization increased 9%, due primarily to depreciation of significantly larger property, plant, and equipment balances associated with analog network expansion and digital cellular deployment across all consolidated markets. The improvement in U.S. cellular equity in net income (loss) of unconsolidated wireless systems resulted from improved operating results of CMT Partners. Consistent with the Company's consolidated U.S. markets, CMT Partners achieved increased earnings through substantial customer growth and significant reductions in the average cash cost per customer, partially offset by declines in average revenue per customer. U.S. PAGING OPERATIONS First Quarter 1998 v. First Quarter 1997. Operating revenues increased 11% primarily due to a 7% increase in paging units in service and a 3% increase in the average revenue per unit in service. Operating cash flow margins (operating margins excluding the effect of depreciation and amortization) increased from 28.4% to 30.6% due to increased service and other revenues, partially offset by moderate increases in network operating costs necessary to serve the expanded customer base. 1997 v. 1996. Operating revenues increased approximately 8%, due primarily to a 9% increase in paging units in service, partially offset by an approximate 3% decline in the average revenue per unit in service. Increased revenues associated with subscriber growth were also offset by declines in pager sales attributable to decreases in the number of units in service added. Operating cash flow margins (operating margins excluding the effect of depreciation and amortization) increased from 26% to 29%, due to increased service and other revenues and lower costs of paging equipment sales attributable to declines in units in service added, partially offset by moderate increases in network operating costs necessary to serve the expanded customer base. Increased service and other revenues resulted from growth in paging units in service, a shift from paging service sold at wholesale rates through resellers to service sold directly by the Company or through retail sales channels, and retail service price increases in selected markets. Increased depreciation and amortization resulted from expansion of paging networks and higher depreciation of more expensive leased alphanumeric pagers, which comprised a larger percentage of leased pagers during 1997. 42 INTERNATIONAL OPERATIONS First Quarter 1998 v. First Quarter 1997. International operating revenues increased 31% over the first quarter of 1997 primarily due to an increase of approximately 100% in Europolitan's and Telecel's combined subscribers. The increase in operating revenues associated with the increase in subscribers was partially offset by a 33% decrease in Europolitan's and Telecel's combined average revenue per customer and unfavorable changes in foreign exchange rates compared to the U.S. Dollar. If foreign exchange rates had remained constant, operating revenues would have increased by 46%. Operating margins improved 2.1 percentage points in 1998 primarily from substantial subscriber growth and a 38% decline in the combined cash cost per customer achieved as Europolitan's and Telecel's operations continued to gain operating scale. If foreign exchange rates had remained constant, the operating margin would have increased 3.1 percentage points. The significant improvement in equity in net income of international unconsolidated wireless systems was primarily due to strong operating results achieved by the Company's equity investees in Europe. Improved results in these wireless systems resulted primarily from increasing economies of scale and continued subscriber growth, partially offset by overall declines in the average revenue per customer. Equity income increases were partially offset by unfavorable movements in foreign currency exchange rates. 1997 v. Pro Forma 1996. Actual consolidated international operating results presented in the tables for the year ended December 31, 1996 included on page 32 reflect the operations of Europolitan, the Company's 51%-owned cellular system in Sweden. On December 31, 1996, the Company consolidated Telecel, its cellular system in Portugal, subsequent to acquiring a 51% controlling interest and, accordingly, consolidated international operating results presented in the preceding table for the year ended December 31, 1997 reflect the operations of both Telecel and Europolitan. Operating results for other international markets are reflected in equity in net income (loss) of unconsolidated wireless systems during all periods presented. Since the actual results of operations for each period are not comparable, pro forma results for the year ended December 31, 1996 are included in the table set forth on page 32 to reflect results, as described in footnote (f) of that table. The increase in operating revenues resulted primarily from an 80% increase in Europolitan and Telecel's combined average subscribers, partially offset by a 25% decrease in Europolitan and Telecel's combined average revenue per customer and unfavorable changes in foreign exchange rates compared to the U.S. Dollar. If foreign exchange rates had remained constant, operating revenues would have increased 46%. Operating margins improved from 6% during 1996 to 15% during 1997, due primarily to substantial subscriber growth and rapidly declining cash costs per customer achieved as Europolitan and Telecel's operations continued to gain operating scale. If foreign exchange rates had remained constant, operating income would have increased 344%. Improvement in equity in net income (loss) of unconsolidated wireless systems was due to improved operating results in Europe and Japan. Improved results in these wireless systems resulted primarily from increasing economies of scale and continued subscriber growth, partially offset by overall declines in the average revenue per customer. In addition, the Company recognized certain favorable adjustments resulting from changes in estimates based on the Company's assessment of various tax positions. Improvements were also partially offset by unfavorable movements in all foreign currency exchange rates. Other Matters Affecting International Operations Foreign Currencies. The Company engages in risk management activities to hedge foreign currency denominated investments and firm capital commitments. The Company does not engage in speculative foreign exchange activities. 43 The Company's foreign exposures primarily take the form of equity investments in foreign wireless systems and are viewed as long-term assets valued in the local currency, translated into United States dollars and reported in the Company's financial statements. The Company hedges a portion of these investments with forward foreign currency exchange contracts and foreign currency denominated loans. These hedges are in accordance with the Company's objective to offset the United States dollar values of foreign currency denominated assets with foreign currency denominated liabilities. The accounting treatment is described in Note A, "Summary of Significant Accounting Policies--Financial Instruments," to the Consolidated Financial Statements for the year ended December 31, 1997. Virtually all of the Company's economic hedges qualify as hedges under accounting rules. Non-qualifying hedges relate to cost method investments that do not qualify for hedge accounting or mismatches between the hedge instruments and the hedged investments due to equity losses of foreign wireless systems during start-up. All gains and losses pertaining to hedges that do not qualify for hedge accounting are included in net income. Deferred Taxes. International equity in net income (loss) of unconsolidated wireless systems included tax benefits of $30 million and $10 million in 1997 and 1996, respectively. These tax benefits are recorded in "Equity in net income (loss) of unconsolidated wireless systems" on the Consolidated Statements of Income. The tax benefits were recorded as an asset that represents future benefits the international unconsolidated wireless systems will receive by deducting the net operating losses from future taxable income. At December 31, 1997, the Company's proportionate share of deferred tax assets of its international equity investees was approximately $161 million, which was offset by a valuation allowance of approximately $84 million. While the Company believes that it is more likely than not that the net deferred tax assets will be fully realized, there can be no assurance this will happen as certain factors beyond the control of the equity investees and the Company, such as deteriorating local economic conditions and increasing competition, can affect future timing and amounts of taxable income. MARKET RISK INTEREST AND FOREIGN EXCHANGE RATE RISKS The Company is exposed to risks of unfavorable movements in interest and foreign currency exchange rates. In certain cases, the Company enters into derivative financial instrument contracts to manage its exposure to such risks. With respect to foreign currency exchange rate risk, the Company enters into forward foreign currency exchange contracts ("forward contracts") to hedge its net investment in its international wireless systems and to manage risks associated with firm capital commitments denominated in foreign currencies. With respect to interest rate risks, the Company attempts to mitigate its exposure to interest rate changes and to minimize its costs of funds using interest rate swaps. In general interest rate swaps are used to convert variable-rate debt to fixed-rate debt and to reduce interest rate risk associated with future borrowings. The Company does not enter any such arrangements for purposes of trading or speculation. Additionally, the Company does not anticipate any near-term changes in the nature of its market risk exposures or in management's objectives and strategies with respect to managing such exposures. As of December 31, 1997, the Company's financial instruments that are subject to interest and foreign currency exchange rate risks included long-term debt with an aggregate fair value of $1.4 billion and forward contracts with an aggregate positive market value of $60 million. The long-term debt was denominated in U.S. Dollars, Swedish Krona, German Deutschmarks, Japanese Yen, and Portuguese Escudos. The forward contracts were denominated in German Deutschmarks, Japanese Yen, Belgian Francs, Spanish Pesetas, Italian Lira, Korean Won, Portuguese Escudos, and Swedish Krona. Long-term debt held in the U.S. and denominated in U.S. Dollars totaled approximately $1 billion, which included $900 million in public debt bearing interest at fixed rates between 7.0% and 7.5% and $70 million in commercial paper bearing interest at a variable money market rate. Long-term debt held in the U.S. also 44 included $180 million denominated in German Deutschmarks bearing interest at a weighted average Deutschmark interest rate of 3.87%. In addition, as of December 31, 1997, Europolitan and Telecel also held various long-term debt instruments totaling $148 million and $55 million, respectively, all of which were denominated in their domestic currencies. The remaining long-term debt consisted of individually insignificant, fixed-rate instruments predominantly denominated in U.S. Dollars. See Note H, "Debt and Credit Facilities," to the Consolidated Financial Statements for the year ended December 31, 1997 for further detailed information concerning the Company's debt instruments and credit facilities. The Company uses a statistical modeling technique known as "value-at-risk" ("VAR") to compute required disclosures of the maximum probable loss, within a certain confidence level, in the fair value of its financial instruments subject to interest and foreign currency exchange rate risks. VAR may be calculated using several types of models. The Company uses the "variance/co-variance" model, which calculates VAR based on the actual historical volatility of the related interest and foreign exchange rates and the actual historical correlation of such rates with one another. The Company's calculations were based on the actual correlation of such rates observed during the preceding year, a 95% confidence level, and a one-year holding period for each financial instrument (except for those instruments maturing prior to December 31, 1998). The model was applied to all of the Company's debt instruments and forward contracts. With respect to foreign exchange rate risk, the VAR for the Company's debt instruments and forward contracts was $18 million and $49 million, respectively. With respect to interest rate risk, the VAR for the Company's debt instruments and forward contracts was $58 million and $53 million, respectively. VAR amounts are statistical estimates representing the maximum probable loss in fair value that the Company could incur given a certain confidence level (i.e., with 95% certainty, the value of the instruments included in the VAR model is not likely to decline more than the VAR amounts shown above due to movements in the relevant market rates). VAR amounts do not represent actual losses which will be incurred by the Company. In addition, although changes in market rates may adversely impact the fair value of the Company's debt instruments, market rate changes will have an immaterial impact on earnings or cash flows since the majority of the Company's existing debt bears interest at fixed rates. Further, potential changes in the fair value of forward contracts will be offset by changes in the fair value of the underlying asset hedged by the forward contract. EQUITY PRICE RISK The Company also holds a cost-based, available-for-sale investment in common stock and warrants for common stock of QUALCOMM, Inc., a publicly traded company in the U.S. In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the investment in common stock of QUALCOMM is reported at its market value of $55 million in the Company's financial statements for the year ended December 31, 1997. The Company's investment in QUALCOMM is subject to equity price risks. A 10% decline in the price of QUALCOMM stock would result in a $6 million decrease in the fair value of the Company's investment. In addition to QUALCOMM, the Company holds certain cost-based investments in Globalstar L.P. (a satellite-based wireless communications partnership), a German landline telephone company, a Japanese long distance company, certain smaller U.S. cellular properties, and certain Japanese cellular properties. As of December 31, 1997, investment balances for these entities totaled $110 million and were reported in "Investments in unconsolidated wireless systems," in the Company's Consolidated Balance Sheets. These investments also expose the Company to risk of loss; however, it is not practicable to estimate the fair value of these investments as quoted market prices are not available and alternative information which might be relevant to estimating such fair value is not readily available to the Company. Accordingly, it is not practicable to provide information concerning sensitivity to relevant market rates for these investments. 45 LIQUIDITY AND CAPITAL RESOURCES The Company defines liquidity as its ability to generate resources to finance business expansion, construct capital assets, and pay its current obligations. The Company requires substantial capital to operate and expand its existing wireless systems, to construct new wireless systems, and to acquire interests in existing wireless systems. CAPITAL SPENDING, DEBT SERVICE, AND DIVIDEND REQUIREMENTS The Company spent $171 million during the first quarter of 1998 for additions to property, plant, and equipment primarily to increase cellular and paging network system capacity. The Company invested an additional $137 million during the first quarter of 1998 in its unconsolidated wireless systems to fund the expansion and build-out of cellular and PCS networks and to purchase interests in certain cellular systems. The Company also paid $13 million during the first quarter of 1998 for preferred dividends. During 1997, the Company incurred capital expenditures of $683 million for additions to property, plant, and equipment for its consolidated wireless networks and other capital expenditures, primarily to increase cellular and paging network capacity and to expand customer operations functions necessary to support customer growth. The Company invested an additional $445 million in its unconsolidated wireless systems to fund the expansion and build-out of cellular and PCS networks and to increase its interest in certain systems. In addition to capital funding, the Company elected to retire $179 million of long-term debt in the U.S. prior to its maturity. The Company also paid $54 million in preferred dividends and reduced its net commercial paper and debt position approximately $42 million. FUNDING OF CAPITAL SPENDING, DEBT SERVICE, AND DIVIDEND REQUIREMENTS In the first quarter of 1998, cash flows from operations of $142 million, proceeds from the issuance of commercial paper and other long-term debt, and proceeds from the exercise of stock options were the primary sources utilized to fund capital requirements, preferred dividends, debt service, and net distributions to minority partners. In 1997, cash flows from operations of $1.3 billion, combined with beginning cash balances, proceeds from the issuance of common stock, and net proceeds from other investing and financing activities, were sufficient to fund net debt retirement, capital requirements, preferred dividend obligations, and net distributions to minority partners. FUTURE FUNDING REQUIREMENTS The Company will continue to be required to make substantial expenditures in connection with its efforts to expand its existing wireless business and, potentially, to pursue opportunities to expand into new markets. U.S. and international capital expenditures and contributions to unconsolidated wireless systems for existing operations are expected to be approximately $1.4 billion from March 31, 1998 through the end of 1998, including the impact of the Merger. CONSOLIDATED EXPENDITURES The Company plans to incur significant capital expenditures in its consolidated U.S. markets to expand its existing analog and CDMA digital wireless networks and to construct and deploy new digital wireless networks to meet current and future capacity requirements resulting from both subscriber growth and increased network use by existing customers. The Company now offers CDMA digital cellular service in all of its AirTouch-branded U.S. cellular markets. The Company's 1997 capital expenditures for digital technology surpassed 1997 capital expenditures for analog technology, and the Company expects annual digital spending to continue to be greater than annual analog spending for the foreseeable future. Digital networks enable significant increases in the 46 Company's cellular network capacity and allow the Company to offer additional services and features comparable to those available on digital networks operating at PCS frequencies. Accordingly, the Company anticipates that a significant portion of its future U.S. wireless network traffic will migrate to digital service as customers take advantage of enhanced digital features such as greater call privacy and security, superior voice quality, reduced susceptibility to fraud and the opportunity to provide improved data transmissions. However, both analog and digital technologies are expected to coexist for the foreseeable future due to continued demand for analog service and the fact that analog networks provide the only common roaming platform currently available throughout the United States. Management believes that a viable analog market will continue to exist for the foreseeable future to serve customers who do not desire digital features or who do not wish to purchase new digital handsets. With respect to roaming capabilities, the Company believes that a significant portion of its digital and analog customer base, as well as customers of other carriers who roam on the Company's networks, will continue to require access to nationwide analog networks in the United States. Accordingly, the Company plans to maintain and, as required, expand its analog networks and to offer dual-mode (analog/CDMA digital), dual-band (cellular/PCS frequencies) handsets in each of its U.S. markets to facilitate the greatest possible roaming capabilities for its customers. At March 31, 1998, excluding the impact of the Merger, the Company's existing U.S. and international operations were committed to spend approximately $286 million for the acquisition of property, plant, and equipment and approximately $147 million for the purchase of cellular handsets, pagers, and other items. For the remainder of 1998 the Company plans to make additional capital expenditures of approximately $600 million, including the impact of the Merger, to increase the capacity of its existing wireless networks and to continue deployment of CDMA digital technology. In addition, the FCC has recently adopted rules requiring carriers such as the Company to provide customers in the U.S. with local number portability, the ability for customers to retain their telephone numbers if they choose to switch landline or wireless carriers. Providing this functionality will result in additional capital requirements and operating expenses in future years. FCC rules require the Company to provide certain local number portability services by December 31, 1998 and to provide complete local number portability services by June 30, 1999. The Company and certain wireless industry groups have petitioned the FCC for a delay in the June 30, 1999 implementation date. The Company has not yet fully assessed the cost of complying with the FCC's number portability rules; such costs could be material to the Company's results of operations or financial position in future reporting periods. The Company will also be required to upgrade its wireless networks in the U.S. to provide certain functionality to authorized law enforcement agencies. In this regard, the FCC has adopted rules requiring wireless carriers to electronically provide "Emergency 911" authorities with the physical location of wireless callers requesting emergency assistance. In addition, new U.S. Federal laws pursuant to the Communications Assistance Law Enforcement Act ("CALEA") will require the Company to provide law enforcement agencies with certain network functionality and other assistance in criminal investigations, including digital wiretapping capabilities. The FCC rules concerning "Emergency 911" services and CALEA both require the responsible government agencies to reimburse the Company for its costs incurred to upgrade its networks and to provide on-going assistance to law enforcement agencies; however, the Company can provide no assurance that all such costs will be recoverable. UNCONSOLIDATED WIRELESS SYSTEMS As of March 31, 1998, commitments for capital contributions to existing unconsolidated wireless systems were not significant. However, the Company plans to make additional capital contributions of approximately $265 million, including the impact of the Merger, during the remainder of 1998 to certain of its existing U.S. and international unconsolidated wireless systems, including contributions to PrimeCo to fund its operating losses and the continuing build-out of its PCS networks. 47 On March 4, 1998, the Company announced that a venture, of which it is a member, was named the winner of a nationwide cellular service license in Egypt. The venture bid $516 million for the license, of which the Company's share is expected to be approximately $155 million. In addition to the license cost, the Company could be required to begin funding operations of the Egyptian venture during 1998. The Company continually evaluates opportunities to increase its ownership interests in its existing international wireless systems and to acquire interests in new international wireless licenses, either of which could result in incremental capital commitments. OTHER REQUIREMENTS In October 1997, the Company's Board of Directors authorized the repurchase of up to $1 billion of AirTouch common and preferred stock. The Company plans to buy shares on the open market from time to time, based on market conditions. FINANCING SOURCES In March 1996, the Company initiated a commercial paper program consisting of the sale of discounted notes that are exempt from registration under the Securities Act of 1933. The Company's Board of Directors authorized the issuance of commercial paper in amounts necessary to finance the Company's working capital requirements, provided that the amount outstanding under the commercial paper program, together with all indebtedness incurred under the Company's $2 billion long-term revolving credit facility (the "Facility"), does not in the aggregate exceed $2 billion. In addition to its Facility and commercial paper program, the Company may obtain any required financing under its Registration Statement on Form S-3 (Reg. No. 33-56645) of which this Prospectus is a part, which registered $2.5 billion in various forms of debt and equity securities (the "Shelf"). As of June 30, 1998, there had been no issues pursuant to the Shelf. The Company has undertaken an offering of DEM 400 million 5.5% Notes due 2008, which it expects to conclude shortly. The Company intends to use the proceeds of that offering to retire commercial paper and borrowings under the Facility. Approximately $1 billion is expected to be available under the Shelf after giving effect to the offer and sale of the Common Stock by MediaOne Group pursuant to the PIES and based upon the last reported sale price of the Common Stock on the NYSE Composite Tape. Under a prior registration statement, the Company issued a series of Notes in an aggregate principal amount of $1.6 billion due 2001, 2003, 2005, 2006 and 2008. FUNDING OF FUTURE REQUIREMENTS The Company anticipates cash flows from operations to be its primary source of funding for capital requirements of its existing operations, debt service, and preferred dividends through the end of 1998, including the Company's incremental debt service and preferred dividend obligations resulting from the Merger. However, should additional funding be required due to award of one or more new international cellular licenses, new investment opportunities, other unanticipated events, or the repurchase of AirTouch common or preferred stock, the Company may raise the required funds through borrowings or public or private sales of debt or equity securities. Such funding may be obtained through borrowings under the Facility; through the Company's commercial paper program; from additional securities which may be issued from time to time under the Shelf; through the issuance of securities in a transaction exempt from registration under the Securities Act of 1933; or a combination of one or more of the foregoing. The Company believes, that in the event of such requirements, it will be able to access the capital markets on terms and in amounts adequate to meet its objectives. However, given the possibility of changes in market conditions or other occurrences, there can be no certainty that such funding will be available in quantities or on terms favorable to the Company. 48 PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited Pro Forma Condensed Combined Balance Sheet combine (1) the historical consolidated balance sheets of the Company and its subsidiaries and NewVector and its subsidiaries as if the Merger had been effected on March 31, 1998 and after giving effect to the purchase method of accounting and other merger-related adjustments described in the accompanying explanatory notes, and (2) MediaOne Group's 25% interest in PrimeCo as if the interest had been acquired on March 31, 1998 and after giving effect to related adjustments described in the accompanying explanatory notes. The following unaudited Pro Forma Condensed Combined Statements of Income present the combined results of operations of the Company, NewVector and MediaOne Group's interest in PrimeCo as if the Merger had been effected on January 1 of each period presented and after giving effect to the purchase method of accounting and other merger-related adjustments described in the accompanying explanatory notes. BASIS OF PRESENTATION DESCRIPTION OF TRANSACTION On April 6, 1998 (the "Effective Date"), the Company acquired NewVector and MediaOne Group's 25% interest in PrimeCo pursuant to the Agreement and Plan of Merger dated as of January 29, 1998 among U S WEST, Inc., MediaOne Group, NewVector, U S WEST PCS Holdings, Inc. ("Holdings") and the Company (the "Agreement"), filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, Date of Report: January 29, 1998. On the Effective Date, NewVector and Holdings (the wholly owned subsidiary of MediaOne Group that held MediaOne Group's interest in PrimeCo) merged into the Company, with the Company surviving. In the Merger, the Company issued approximately 59.4 million shares of the Company's Common Stock with an approximate fair value of $2.9 billion based on the closing price of $49 on the Effective Date. The Company also issued 825,000 shares of the Company's 5.143% Class D Cumulative Preferred Stock, Series 1998, and 825,000 shares of its 5.143% Class E Cumulative Preferred Stock, Series 1998 (together, the "Preferred Stock") having an aggregate face value of approximately $1.65 billion with a liquidation amount of $1,000 per share. In the Merger, the Company assumed $1.35 billion of debt associated with the acquired businesses, which it refinanced through the issuance of commercial paper and debt issues under its shelf Registration Statement. METHOD OF ACCOUNTING The acquisition of NewVector and MediaOne Group's interest in PrimeCo is accounted for by the Company under the purchase method of accounting in accordance with APB Opinion No. 16, "Business Combinations," and the acquired PrimeCo interest is accounted for under the equity method in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." Accordingly these methods of accounting have been applied in the Pro Forma Condensed Combined Financial Statements. DETERMINATION OF PURCHASE PRICE In accordance with APB Opinion No. 16, "Business Combinations," the purchase price recorded is based on the fair value of the Common Stock and Preferred Stock issued pursuant to the Merger as of the Effective Date. Excluding the assumption of NewVector and PrimeCo debt totaling $1.35 billion and merger-related expenses, the purchase price for the acquisition of NewVector and MediaOne Group's interest in PrimeCo is summarized below (in millions of dollars): Value of Common Stock............................................... $ 2,913 Estimated value of Preferred Stock.................................. 1,650 --------- Total estimated purchase price...................................... $ 4,563 --------- ---------
49 This purchase price calculation is preliminary, is subject to the results of the appraisal of the Preferred Stock, and includes estimates for certain post closing adjustments. The appraisal of the Preferred Stock was completed in June 1998, and the appraised fair value as of the Effective Date was approximately $1.57 billion. The estimate of $1.65 billion was used for the Pro Forma Condensed Combined Financial Statements. The impact on these statements would not be material had the appraised fair value been used. The difference between aggregate face value and fair value of the Preferred Stock will be amortized over the maturity periods of the Preferred Stock, using the interest method. Additionally, certain post closing adjustments when finalized are not expected to have a materially different effect from that shown in these Pro Forma Condensed Combined Financial Statements. ALLOCATION OF PURCHASE PRICE Under the purchase method of accounting, the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values at the Effective Date. Estimates of the fair values of NewVector's assets and liabilities have been combined with recorded values of the assets and liabilities of the Company in the unaudited Pro Forma Condensed Combined Financial Statements. Under the equity method of accounting, the purchase price of MediaOne Group's interest in PrimeCo is allocated in a similar manner to the purchase method described above. Also, the Company recognizes its acquired share of the financial condition of PrimeCo, together with related identifiable intangibles and goodwill, on one line in the Pro Forma Condensed Combined Balance Sheet, and its share of operating results of PrimeCo, together with related amortization expense, on one line in the Pro Forma Condensed Combined Statements of Income. Allocation of the purchase price as reflected in the Pro Forma Condensed Combined Financial Statements is preliminary. Accordingly, changes are expected as valuations and appraisals of assets and liabilities acquired are completed, and as additional information becomes available. As a result, actual amounts will differ from those stated in the Pro Forma Condensed Combined Financial Statements. However, based on the preliminary results of the appraisal of assets acquired and liabilities assumed, such changes are not expected to be material. PRO FORMA NET INCOME PER SHARE Pro forma net income applicable to common stockholders per share is calculated based on net income after deducting total preferred dividends of $35 million (including $21 million for Preferred Stock), and $139 million (including $85 million for Preferred Stock), for the quarter ended March 31, 1998 and the year ended December 31, 1997, respectively, and on weighted average shares of 568.9 million and 563.3 million for the quarter ended March 31, 1998 and the year ended December 31, 1997, respectively. PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS These Pro Forma Condensed Combined Financial Statements are intended for informational purposes only and are not necessarily indicative of the future financial position or future results of operations of the combined company or the financial position or the results of operations of the combined company that would have actually occurred had the transaction described herein been in effect as of the dates or for the periods presented. The Pro Forma Condensed Combined Financial Statements and explanatory notes should be read in conjunction with and are qualified in their entirety by the Consolidated Financial Statements, including accompanying notes, of the Company included in its Annual Report on Form 10-K for the year ended December 31, 1997, incorporated herein by reference and of NewVector, attached as Exhibit No. 99.2 to the Company's Current Report on Form 8-K/A-1, Date of Report: April 6, 1998, File No. 1-12342; and by the Consolidated Financial Statements of the Company included in its Quarterly Report on Form 10-Q for the period ended March 31, 1998, incorporated herein by reference and of NewVector, attached as Exhibit 99.1 to the Company's Current Report on Form 8-K, Date of Report: May 28, 1998, File No. 1-12342. 50 PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 1998 UNAUDITED
AS REPORTED PRO FORMA ------------------------ PRO FORMA NEWVECTOR AIRTOUCH NEWVECTOR ADJUSTMENTS MERGER ----------- ----------- ------------- ----------- (DOLLARS IN MILLIONS) ASSETS Current assets................................................... $ 868 $ 224 $ (12)(a) $ 1,080 Property, plant, and equipment, net.............................. 2,597 999 3,596 Investments in unconsolidated wireless systems................... 2,382 10 840(a) 3,232 12(a) 4,283(a) 1,216(b) Intangible assets, net........................................... 3,279 412 (412)(a) 8,790 Deferred charges and other noncurrent assets..................... 275 275 ----------- ----------- ------ ----------- Total assets................................................... $ 9,401 $ 1,645 $ 5,927 $ 16,973 ----------- ----------- ------ ----------- ----------- ----------- ------ ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities.............................................. $ 838 $ 327 $ 1,165 Long-term debt................................................... 1,488 900 $ 450(a) 2,838 Deferred income taxes............................................ 731 1,216(b) 1,947 Deferred credits and other liabilities........................... 89 24 113 ----------- ----------- ------ ----------- Total liabilities.............................................. 3,146 1,251 1,666 6,063 ----------- ----------- ------ ----------- Minority interests in consolidated wireless systems.............. 337 92 429 ----------- ----------- ------ ----------- Redeemable preferred stocks 5.143% Class D Cumulative Preferred Stock, Series 1998......... 825(a) 825 5.143% Class E Cumulative Preferred Stock, Series 1998......... 825(a) 825 ------ ----------- 1,650 1,650 ------ ----------- Stockholders' equity: Preferred stock and additional paid-in capital 6.0% Class B Mandatorily Convertible Preferred Stock, Series 1996....................................................... 500 500 4.25% Class C Convertible Preferred Stock, Series 1996....... 541 541 Common stock and additional paid-in capital.................... 4,343 2,913(a) 7,256 Retained earnings.............................................. 568 568 Accumulated other comprehensive income......................... (6) (6) Deferred compensation.......................................... (28) (28) Stockholders' equity--NewVector................................ 302 (302)(a) ----------- ----------- ------ ----------- Total stockholders' equity..................................... 5,918 302 2,611 8,831 ----------- ----------- ------ ----------- Total liabilities and stockholders' equity................... $ 9,401 $ 1,645 $ 5,927 $ 16,973 ----------- ----------- ------ ----------- ----------- ----------- ------ -----------
See Explanatory Notes to the Pro Forma Condensed Combined Financial Statements. 51 PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE QUARTER ENDED MARCH 31, 1998 UNAUDITED
AS REPORTED PRO FORMA ------------------------- PRO FORMA NEWVECTOR AIRTOUCH NEWVECTOR ADJUSTMENTS MERGER ---------- ------------- --------------- ----------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Operating revenues.............................................. $ 958 $ 341 $ 1,299 ---------- ----- ----------- Operating expenses: Cost of revenues.............................................. 201 71 272 Selling and customer operations expenses...................... 261 69 330 General, administrative, and other expenses................... 118 63 181 Depreciation and amortization expenses........................ 144 51 $ 55(c) 250 ---------- ----- --- ----------- Total operating expenses........................................ 724 254 55 1,033 ---------- ----- --- ----------- Operating income................................................ 234 87 (55) 266 (34)(d) Equity in net income (loss) of unconsolidated wireless systems....................................................... 77 1 (2)(e) 42 Minority interests in net (income) loss of consolidated wireless systems....................................................... (42) (10) (52) Interest income................................................. 6 6 Interest expense................................................ (19) (14) (7)(f) (40) Miscellaneous income (expense).................................. (10) 7 (3) ---------- ----- --- ----------- Income before income taxes and preferred dividends.............. 246 71 (98) 219 Income tax expense (benefit).................................... 79 24 (34)(g) 69 ---------- ----- --- ----------- Income before preferred dividends............................... 167 47 (64) 150 Preferred dividends............................................. 14 21(h) 35 ---------- ----- --- ----------- Net income (loss) applicable to common stockholders............. $ 153 $ 47 $ (85) $ 115 ---------- ----- --- ----------- ---------- ----- --- ----------- Net income applicable to common stockholders--per share: Basic and diluted............................................. $ 0.30 $ 0.20 ---------- ----------- ---------- ----------- Weighted average shares outstanding (in thousands).............. 509,424 568,871 ---------- ----------- ---------- -----------
See Explanatory Notes to the Pro Forma Condensed Combined Financial Statements. 52 PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 UNAUDITED
AS REPORTED PRO FORMA ------------------- PRO FORMA NEWVECTOR AIRTOUCH NEWVECTOR ADJUSTMENTS MERGER -------- --------- ----------- ------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Operating revenues............................................... $ 3,594 $1,428 $ 5,022 -------- --------- ------------- Operating expenses: Cost of revenues............................................... 846 344 1,190 Selling and customer operations expenses....................... 990 321 1,311 General, administrative, and other expenses.................... 503 229 732 Depreciation and amortization expenses......................... 549 178 $ 219(c) 946 -------- --------- ----- ------------- Total operating expenses......................................... 2,888 1,072 219 4,179 -------- --------- ----- ------------- Operating income................................................. 706 356 (219) 843 (112) (d) Equity in net income (loss) of unconsolidated wireless systems... 200 3 (10)(e) 81 Minority interests in net (income) loss of consolidated wireless systems........................................................ (119) (42) (161) Interest income.................................................. 18 18 Interest expense................................................. (90) (6) (78)(f) (174) Miscellaneous income (expense)................................... (1) 1 -------- --------- ----- ------------- Income before income taxes and preferred dividends............... 714 312 (419) 607 Income tax expense (benefit)..................................... 266 122 (146)(g) 242 -------- --------- ----- ------------- Income before preferred dividends................................ 448 190 (273) 365 Preferred dividends.............................................. 54 85(h) 139 -------- --------- ----- ------------- Net income (loss) applicable to common stockholders.............. $ 394 $ 190 $(358) $ 226 -------- --------- ----- ------------- -------- --------- ----- ------------- Net income applicable to common stockholders--per share: Basic and diluted.............................................. $ 0.78 $ 0.40 -------- ------------- -------- ------------- Weighted average shares outstanding (in thousands)............... 503,883 563,330 -------- ------------- -------- -------------
See Explanatory Notes to the Pro Forma Condensed Combined Financial Statements. 53 EXPLANATORY NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS PRO FORMA ADJUSTMENTS (a) Records the purchase price, allocation of the excess purchase price to identifiable intangible assets and goodwill and merger-related fees. For Pro Forma Financial Statement purposes, as-reported amounts for NewVector's and PrimeCo's net assets have been estimated to approximate fair value and NewVector's as-reported intangible assets are eliminated. The entry allocates the full amount of the excess purchase price over adjusted net assets acquired of NewVector to identifiable intangible assets and goodwill (see Note (c)). The excess purchase price related to the acquired interest in PrimeCo was allocated to goodwill for purposes of determining the Company's equity in PrimeCo's results of operations (see Note (e)). In addition, this entry assumes estimated professional fees of $12 million (primarily legal, investment bankers' and accountants' fees) related to the Merger are paid from the Company's available cash. $840 million was preliminarily allocated to PrimeCo, representing $390 million related to the Company's Common and Preferred Stock, and $450 million related to the debt assumed. AGGREGATE PURCHASE PRICE
MARCH 31, 1998 ----------------------------------- NEWVECTOR PRIMECO TOTAL ----------- ----------- --------- (DOLLARS IN MILLIONS) Total estimated purchase price............................... $ 4,173 $ 390 $ 4,563 Net deficit (assets) (after adjustments and including a debt assumed)................................................... 110 (30) 80 ----------- ----- --------- Excess purchase price........................................ $ 4,283 $ 360 $ 4,643 ----------- ----- --------- ----------- ----- ---------
(b) Records the deferred tax liability related to identifiable intangible assets, and a corresponding adjustment to goodwill (see Note (c)). The Company is required by GAAP to record deferred tax liabilities for the temporary differences between the initial assigned values to the identifiable intangible assets and their tax bases. The deferred tax liabilities will be amortized as a reduction of income tax expense over the useful lives of the related identifiable intangible assets. Goodwill is considered a residual for which no related deferred tax liability is recorded. (c) Records the amortization expense for NewVector's identifiable intangible assets and goodwill. For purposes of calculating the amortization of intangibles, management has preliminarily estimated that the excess purchase price should be allocated as follows:
(DOLLARS IN MILLIONS) ------------------- Customer lists................................................................ $ 413 FCC licenses.................................................................. $ 2,574
The remaining excess purchase price of $1,296 million at March 31, 1998 was allocated to goodwill, together with $12 million related to Merger fees and $1,216 million related to deferred tax liability on identifiable intangibles. The amortization period for customer lists is four years and is forty years for FCC licenses and goodwill. (d) Records the Company's acquired 25% share of PrimeCo's net loss for the quarter ended March 31, 1998 and the year ended December 31, 1997 under the equity method of accounting. (e) Records the amortization expense on goodwill for the acquisition of MediaOne Group's 25% share of PrimeCo. 54 EXPLANATORY NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS Management has preliminarily estimated that all the excess purchase price be allocated to goodwill. PrimeCo is in its start-up phase and management preliminarily estimates that the book value of its net assets, including its licenses, approximates fair value. The amortization period for goodwill is forty years. (f) Records interest expense on $1,350 million of borrowings assumed by the Company in the Merger. The rates are based on assumed average interest rates of 6.6% for estimated fixed-rate borrowings of $800 million and 5.67% on estimated variable-rate borrowings of $550 million. Upon consummation of the Merger, the Company borrowed under its commercial paper program to refinance the debt of $1,350 million assumed in the Merger. $700 million of this commercial paper was subsequently retired with proceeds from two fixed-rate debt issuances in late April and May 1998. These debt issuances were done under the Company's prior Registration Statement on Form S-3 (Reg. No. 33-62787), and have an effective interest rate of 6.475%. The Company is about to close the sale of DEM 400 million 5.5% Notes due 2008. These Notes will bring the total fixed-rate borrowings in excess of the amount assumed for pro forma purposes. However, the combined effects of the differences in the amounts estimated for fixed-rate debt and the differences in interest rates do not materially change the Pro Forma Condensed Combined Statements of Income. The interest rate applied to the estimated variable-rate borrowings of $550 million represents the average interest rate experienced by the Company for commercial paper during 1997. The average interest rate for the first quarter of 1998 is not significantly different. The effect of a 1/8% change in interest rates on interest expense to pro forma net income of the Company is immaterial. (g) Records the income tax effects on the relevant pro forma adjustments arising from the Merger at the combined statutory rate of 40.7%. Relevant pro forma adjustments to the Condensed Combined Statements of Income include interest, amortization expenses, and equity in the losses of PrimeCo. Except for the amortization of goodwill, these adjustments were tax-effected at the statutory rate resulting in a net tax benefit of $34 million for the quarter ended March 31, 1998 and $146 million for the year ended December 31, 1997. (h) Records dividends on the Preferred Stock of $21 million for the quarter ended March 31, 1998 and $85 million for the year ended December 31, 1997. Dividends are based on a rate of 5.143%. SELLING STOCKHOLDER Pursuant to the terms of the PIES, MediaOne Group may deliver up to shares of Common Stock to the holders of the PIES at the maturity thereof. This Prospectus relates to the offer and sale by MediaOne Group of such shares of Common Stock, and up to additional shares of Common Stock with respect to the PIES that are subject to an option granted by MediaOne Group to the Underwriters in the PIES Offering solely to cover over-allotments. The PIES are being offered by MediaOne Group pursuant to the PIES Prospectus. MediaOne Group currently owns approximately 10.3% (59,313,621 shares) of the outstanding Common Stock of the Company. MediaOne Group acquired its shares of Common Stock subject to the terms of an Amended and Restated Investment Agreement (the "Investment Agreement") dated as of April 6, 1998 with the Company in connection with the Merger. The Investment Agreement provides, among other things, that, subject to certain exceptions, MediaOne Group, without the consent of the Company, shall not acquire any additional shares of capital stock of the Company which would increase MediaOne Group's ownership percentage of the voting capital stock of the Company or take other specified actions with respect to the Company, commonly the subject of standstill agreements between an issuer and a significant stockholder. 55 Pursuant to the Investment Agreement, MediaOne Group has certain registration rights with respect to the shares of Common Stock it owns and may not transfer any shares of Common Stock to any of its affiliates or any "group" (within the meaning of section 13(d) of the Exchange Act) of which such affiliate is a part. In addition, subject to certain limited exceptions, MediaOne Group may not sell or transfer any shares of Common Stock to any person or group in the event of a tender or exchange offer unless the Board of Directors of MediaOne Group, upon the advice of legal counsel and financial advisors, in good faith believes such a tender offer will result in shares being purchased and MediaOne Group first offers the shares of Common Stock to the Company. MediaOne Group may, however, under limited circumstances, make competing acquisition proposals in the event of such a tender or exchange offer or other acquisition proposals meeting certain criteria from non-affiliated MediaOne Group entities. The Investment Agreement requires that MediaOne Group vote the shares of Common Stock owned by it in favor of the individuals nominated by the Company for election to the Board of Directors of the Company. DESCRIPTION OF THE CAPITAL STOCK COMMON STOCK GENERAL Under the Company's Certificate of Incorporation (the "Certificate of Incorporation"), the Company is authorized to issue up to 1.1 billion shares of Common Stock. The Common Stock is not redeemable, does not have any conversion rights and is not subject to call. Holders of shares of Common Stock have no preemptive rights to maintain their percentage of ownership in future offerings or sales of stock of the Company. Holders of shares of Common Stock have one vote per share in all elections of directors and on all other matters submitted to a vote of stockholders of the Company. The holders of Common Stock are entitled to receive dividends, if any, as and when declared from time to time by the Board of Directors of the Company out of funds legally available therefor. Upon liquidation, dissolution or winding up of the affairs of the Company, the holders of Common Stock will be entitled to participate equally and ratably, in proportion to the number of shares held, in the net assets of the Company available for distribution to holders of Common Stock. The shares of Common Stock currently outstanding are fully paid and nonassessable. CERTAIN CERTIFICATE OF INCORPORATION PROVISIONS Certain provisions in the Company's Certificate of Incorporation and Bylaws may have the effect of delaying, deferring or preventing a change in control of the Company. These provisions require that the Company's Board of Directors be divided into three classes that are elected for staggered three-year terms; provide that stockholders may act only at annual or special meetings and may not act by written consent; do not provide for cumulative voting in the election of directors; authorize the directors of the Company to determine the size of the Board of Directors; require a vote of 66 2/3% of the shares outstanding for the amendment of any of the foregoing provisions; require that stockholder nominations for directors be made to the Nominating Committee of the Company prior to a meeting of stockholders or pursuant to timely notice; provide that special meetings of stockholders may be called only by certain officers of the Company or by the Board of Directors; and authorize the Board of Directors to establish one or more series of Preferred Stock, without any further stockholder approval, having rights, preferences, privileges and limitations that could impede or discourage the acquisition of control of the Company. The Company's Certificate of Incorporation provides that outstanding shares of the Company's stock are subject to redemption by the Company, by action of the Board of Directors, if in the judgment of the Board of Directors such action should be taken pursuant to applicable law to the extent necessary to prevent the loss or secure the reinstatement of any license or franchise issued to the Company or any subsidiary by any governmental agency to conduct any portion of the business of the Company or any subsidiary, which license or franchise is conditioned upon some or all of the holders of the Company's 56 stock possessing prescribed qualifications. The redemption price is to be equal to the fair market value of such shares. The redemption price may be paid in cash, redemption securities or any combination thereof. RIGHTS AGREEMENT The Company's Board of Directors has adopted a stockholder rights plan (the "Rights Plan") that provides for the distribution of rights ("Rights") to holders of outstanding shares of Common Stock. Except as set forth below, each Right, when exercisable, entitles the holder thereof to purchase from the Company one one-hundredth of a share of Series A Preferred Stock at a price of $80 per share, subject to adjustment. The Rights do not have voting rights. Initially, the Rights are attached to all Common Stock certificates representing shares then outstanding, and no separate Rights certificates will be distributed. The Rights will not separate from the Common Stock and will not be exercisable until the earlier of either (i) a public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of securities representing 10% or more of the outstanding shares of Common Stock (an "Acquiring Party") or (ii) 10 days following the commencement of (or a public announcement of an intention to make) a tender offer or exchange offer which would result in any person or group of affiliated persons becoming an Acquiring Party. The Rights will expire on the earliest of (x) September 19, 2004, (y) consummation of a merger transaction with a person or group acquiring Common Stock pursuant to a Permitted Offer (defined below), or (z) redemption by the Company, as described below. In the event that a person has become an Acquiring Party, proper provision will be made so that each holder of a Right (other than an Acquiring Party) will thereafter have the right (the "Subscription Right") for a 60-day period to receive, upon the exercise of the Right by the holder at the then current exercise price, that number of shares of Common Stock of the Company (or of Series A Preferred Stock or other common stock equivalents if all Common Stock has been issued) which would have a market value at the time of such transaction of two times the exercise price for each Right. This provision of the Rights Plan does not apply, however, to a tender offer or exchange offer for all outstanding shares of the Company's Common Stock at a price and on terms determined by at least a majority of the disinterested members of the Board of Directors to be in the best interests of the Company and its stockholders (a "Permitted Offer"). If, after a public announcement has been made that a person has become an Acquiring Party, either (i) the Company is involved in a merger or other business combination (other than with a person who acquired shares pursuant to a Permitted Offer) or (ii) 50% or more of the Company's assets are sold in one or a series of transactions, proper provision will be made so that each holder of a Right (other than an Acquiring Party) will thereafter have the right to receive, upon the exercise of the Right by the holder at the then current exercise price, that number of shares of Common Stock of the Company or of the acquiring company (whichever remains as the surviving corporation under the terms of the merger or consolidation) which would have a market value at the time of such transaction of two times the exercise price for each Right. The Board of Directors, at its option, may at any time after a person becomes an Acquiring Party (but not after the acquisition by such person of 50% or more of the outstanding Common Stock) exchange on behalf of the Company all or part of the then outstanding and exercisable Rights for shares of Common Stock (or Common Stock equivalents), at an exchange ratio of one share of Common Stock or equivalent for each Right. At any time prior to the earlier to occur of either (i) a person becoming an Acquiring Party or (ii) the expiration of the Rights, the Company may redeem the Rights in whole, but not in part, at a price of $0.01 per Right (the "Redemption Price"). After a person becomes an Acquiring Party, the Company may also redeem the Rights in whole, but not in part, at the Redemption Price (x) if such redemption is incidental to a merger or other business combination transaction or series of transactions involving the 57 Company but not involving an Acquiring Party or certain other related parties or (y) following an event giving rise to, and the expiration of the 60-day exercise period for, the Subscription Right if and for as long as any Acquiring Party owns less than 10% of the Company's voting securities. The Rights Plan may have the effect of delaying, deferring or preventing a change in control of the Company without further action of the stockholders and therefore could have a depressive effect on the price of the Common Stock. LISTING The Common Stock is listed on the New York Stock Exchange and the Pacific Exchange under the symbol "ATI." PLAN OF DISTRIBUTION Lehman Brothers Inc., Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co., as underwriters of the PIES Offering (the "Underwriters"), have severally agreed, subject to the terms and conditions of the underwriting agreement (the "Underwriting Agreement") among MediaOne Group, AirTouch and the Underwriters, to purchase from MediaOne Group, and MediaOne Group has agreed to sell to the Underwriters, the aggregate number of PIES set forth opposite their names below:
UNDERWRITERS NUMBER OF PIES - ------------------------------------------------------------------------------ -------------- Lehman Brothers Inc........................................................... Morgan Stanley & Co. Incorporated............................................. Goldman, Sachs & Co........................................................... Total.....................................................................
The Underwriting Agreement provides that the obligation of the Underwriters to purchase PIES is subject to certain conditions, and that, if any of the foregoing PIES are purchased by the Underwriters pursuant to the Underwriting Agreement, all the PIES agreed to be purchased by the Underwriters must be so purchased. The Company has been advised by MediaOne Group that the Underwriters propose to offer the PIES directly to the public at the public offering price set forth on the cover page of the PIES Prospectus and to certain selected dealers at such initial public offering price less a selling concession not in excess of $ per PIES. The Underwriters may allow and such dealers may reallow, a concession not in excess of $ per PIES to certain brokers and dealers. After the initial public offering, the public offering price, the concession to selected dealers and the reallowance may be changed by the Underwriters. MediaOne Group and AirTouch have agreed not to offer for sale, sell or contract to sell, or otherwise dispose of, or announce the offering of, or file or cause the filing of any registration statement under the Securities Act with respect to, without the prior written consent of Lehman Brothers Inc., any shares of Common Stock or any securities convertible into or exchangeable for, or warrants to acquire, shares of Common Stock for a period of 90 days following the date of the PIES Prospectus; provided, however, that such restriction shall not effect the ability of (i) MediaOne Group or AirTouch to take any such actions in connection with the PIES Offering or (ii) AirTouch to take any such actions in connection with any employee stock option plan, stock ownership plan or dividend reinvestment plan of AirTouch in effect at the date of the PIES Prospectus. MediaOne Group has granted to the Underwriters an option to purchase up to an additional PIES at the price to public less the aggregate underwriting discount, solely to cover over-allotments, if any. Such option may be exercised at any time up to 30 days after the date of the PIES Prospectus. To the extent that this option is exercised, each Underwriter will be committed, subject to certain conditions, to purchase 58 the same proportion of PIES as the number of PIES to be purchased and offered by such Underwriter in the above table bears to the total number of initial PIES to be purchased by the Underwriters. MediaOne Group and AirTouch have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended and to contribute to payments that the Underwriters may be required to make in respect thereof. Until the distribution of the PIES is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase PIES and Common Stock. As an exception to these rules, the Underwriters are permitted to engage in certain transactions that stabilize the price of the PIES and Common Stock. Such transactions may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the PIES and Common Stock. If the Underwriters create a short position in the PIES in connection with the PIES Offering, (i.e., if they sell more PIES than are set forth on the cover page of the PIES Prospectus), the Underwriters may reduce that short position by purchasing PIES in the open market. The Underwriters also may elect to reduce any short position by exercising all or part of the over-allotment option described herein. The Underwriters also may impose a penalty bid on certain selling group members. This means that if the Underwriters purchase PIES in the open market to reduce the Underwriters' short position or to stabilize the price of the PIES, they may reclaim the amount of the selling concession from the selling group members who sold those PIES as part of the offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might otherwise be in the absence of such purchases. The imposition of a penalty bid might have an effect on the price of a security to the extent that it were to discourage resales of the security by purchasers in the offering. In the ordinary course of their business, including without limitation in connection with their market making activities, the Underwriters and their affiliates may effect transactions for their own account or for the account of their customers, and hold long or short positions, in PIES and Common Stock. In addition, in connection with the PIES Offering, the Underwriters or their affiliates may enter into one or more hedging transactions with respect to the Common Stock. In connection with such hedging or market-making activities or with respect to proprietary or other trading activities by the Underwriters and their affiliates, the Underwriters or their affiliates may enter into transactions in the Common Stock which may affect the market price, liquidity or value of the PIES and which could be deemed to be adverse to the interests of the holders of the PIES. Lehman Brothers Inc., Morgan Stanley & Co. Incorporated and their respective affiliates have from time to time performed various investment banking and financial advisory services for AirTouch and its affiliates, for which customary compensation has been received. LEGAL MATTERS The legality of the Common Stock offered hereby will be passed upon by Margaret G. Gill, Senior Vice President Legal, External Affairs and Secretary of the Company. Pillsbury Madison & Sutro LLP has advised the Company in connection with certain legal matters. Certain legal matters will be passed upon for the Underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York. EXPERTS The consolidated financial statements of the Company and subsidiaries incorporated in this Prospectus by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 59 With respect to the unaudited consolidated financial information of the Company for the three-month periods ended March 31, 1998 and 1997, incorporated in this Prospectus by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated May 4, 1998, incorporated by reference herein, states that they did not audit and they do not express an opinion on that unaudited consolidated financial information. PricewaterhouseCoopers LLP has not carried out any significant or additional audit tests beyond those which would have been necessary if their report had not been included. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of section 11 of the Securities Act of 1933 for their report on the unaudited consolidated financial information because that report is not a "report" or a "part" of the Registration Statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of sections 7 and 11 of the Securities Act. The consolidated financial statements and schedule of Cellular Communications, Inc. incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon incorporated by reference therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of Mannesmann Mobilfunk GmbH as of December 31, 1997 and 1996, and for each of the years in the three-year period ended December 31, 1997 included in the Company's Annual Report on Form 10-K have been incorporated by reference herein in reliance upon the report of KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, independent auditors, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements of CMT Partners incorporated in this Prospectus by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, except as they relate to Kansas Combined Cellular, have been audited by PricewaterhouseCoopers LLP, independent accountants, and, insofar as they relate to Kansas Combined Cellular, by Arthur Andersen LLP, independent accountants. Such financial statements have been so incorporated in reliance on the reports of such independent accountants given on the authority of such firms as experts in auditing and accounting. The consolidated financial statements of New Par (A Partnership) incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon incorporated by reference therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The audited consolidated financial statements of U S WEST NewVector Group, Inc. and Subsidiaries as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, incorporated by reference in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. 60 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY AGENT. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. --------------------- TABLE OF CONTENTS
Page ----- CERTAIN DEFINITIONS............................ 2 AVAILABLE INFORMATION.......................... 3 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................... 3 SUMMARY........................................ 4 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS................................... 13 RISK FACTORS................................... 13 USE OF PROCEEDS................................ 16 CAPITALIZATION TABLE........................... 17 PRICE RANGE OF COMMON STOCK.................... 18 BUSINESS....................................... 19 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA......................................... 30 SELECTED HISTORICAL PROPORTIONATE DATA......... 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 37 PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS................................... 49 PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 1998............................ 51 PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE QUARTER ENDED MARCH 31, 1998......................................... 52 PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997......................................... 53 SELLING STOCKHOLDER............................ 55 DESCRIPTION OF THE CAPITAL STOCK............... 56 PLAN OF DISTRIBUTION........................... 58 LEGAL MATTERS.................................. 59 EXPERTS........................................ 59
--------------------- [LOGO] SHARES AIRTOUCH COMMUNICATIONS, INC. COMMON STOCK (PAR VALUE $.01 PER SHARE) ------------------- PROSPECTUS , 1998 --------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION, OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MEDIAONE GROUP, INC. OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF MEDIAONE GROUP SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS ARE NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ------------------------ TABLE OF CONTENTS PROSPECTUS SUPPLEMENT
PAGE ---- Summary of the Offering................................................... S-3 Risk Factors.............................................................. S-5 MediaOne Group, Inc....................................................... S-9 Recent Developments....................................................... S-9 AirTouch Communications, Inc.............................................. S-10 Relationship Between MediaOne Group and AirTouch.......................... S-10 Capitalization............................................................ S-11 Summary Financial Data.................................................... S-12 Price Range and Dividend History of AirTouch Common Stock................. S-14 Use of Proceeds........................................................... S-14 Description of the PIES................................................... S-15 United States Federal Income Tax Consequences............................. S-26 Plan of Distribution...................................................... S-30 Legal Matters............................................................. S-31 Additional Information.................................................... S-31 PROSPECTUS Available Information..................................................... 2 Incorporation of Certain Documents by Reference........................... 3 MediaOne Group, Inc....................................................... 4 Use of Proceeds........................................................... 5 Ratio of Earnings to Fixed Charges........................................ 5 Description of Debt Securities............................................ 5 Plan of Distribution...................................................... 10 Legal Opinions............................................................ 11 Experts................................................................... 11
PIES(SM) PREMIUM INCOME EXCHANGEABLE SECURITIES(SM) (AGGREGATE PRINCIPAL AMOUNT $1,500,000,000) OF [LOGO] % EXCHANGEABLE NOTES DUE AUGUST , 2001 EXCHANGEABLE INTO COMMON STOCK OF [LOGO] --------------------- PROSPECTUS SUPPLEMENT , 1998 ------------------------ LEHMAN BROTHERS MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----