1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission File Number 1-16567
AT&T WIRELESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1379052
(State of Incorporation) (IRS Employer Identification No.)
7277 -- 164TH AVENUE NE, BUILDING 1
REDMOND, WASHINGTON 98052
(Address of principal executive offices)
(425) 580-6000
(Registrant's telephone number)
Indicated by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
As of July 31, 2001, 2,530,122,522 shares of Common Stock were outstanding.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION........................................................1
Item 1. Financial Statements.................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................16
Item 3. Quantitative and Qualitative Information About Market Risk..........32
PART II - OTHER INFORMATION..........................................................33
Item 1. Legal Proceedings...................................................33
Item 2. Changes in Securities and Use of Proceeds...........................33
Item 3. Defaults Upon Senior Securities.....................................33
Item 4. Submission of Matters to a Vote of Security Holders.................33
Item 5. Other Information...................................................33
Item 6. Exhibits and Reports on Form 8-K....................................34
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
REVENUE
Services $ 3,127 $ 2,240 $ 6,058 $ 4,232
Equipment 253 237 534 443
------- ------- ------- -------
Total revenue 3,380 2,477 6,592 4,675
OPERATING EXPENSES
Costs of services (excluding depreciation of $482 and
$320 for the three months ended June 30, and $908
and $607 for the six months ended June 30,
which is included below) 989 760 1,910 1,422
Costs of equipment sales 478 445 968 836
Selling, general and administrative 1,148 763 2,232 1,513
Depreciation and amortization 636 402 1,212 771
------- ------- ------- -------
Total operating expenses 3,251 2,370 6,322 4,542
------- ------- ------- -------
OPERATING INCOME 129 107 270 133
Other income 129 217 213 241
Interest expense 135 18 182 69
------- ------- ------- -------
Income before income taxes and net equity
earnings (losses) from investments 123 306 301 305
Provision for income taxes 77 102 156 100
Net equity earnings (losses) from investments 217 (4) 118 21
------- ------- ------- -------
NET INCOME 263 200 263 226
Dividend requirements on preferred stock held by
AT&T, net 34 33 76 46
------- ------- ------- -------
NET INCOME AVAILABLE TO COMMON SHAREOWNERS $ 229 $ 167 $ 187 $ 180
======= ======= ======= =======
PRO FORMA NET INCOME PER SHARE:
Basic $ 0.09 $ 0.07 $ 0.07 $ 0.07
Diluted $ 0.09 $ 0.07 $ 0.07 $ 0.07
WEIGHTED AVERAGE SHARES USED TO COMPUTE PRO FORMA
NET INCOME PER SHARE:
Basic 2,530 2,530 2,530 2,530
Diluted 2,532 2,532 2,532 2,532
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
AT JUNE 30, AT DECEMBER 31,
2001 2000
---------- ---------------
ASSETS
Cash and cash equivalents $ 38 $ 62
Accounts receivable, less allowances of $181 and $193 1,955 1,892
Note receivable from AT&T 5,803 --
Inventories 223 335
Income tax receivable -- 118
Deferred income taxes 171 93
Prepaid expenses and other current assets 158 82
---------- ----------
TOTAL CURRENT ASSETS 8,348 2,582
Property, plant and equipment, net of accumulated
depreciation of $4,993 and $4,743 11,131 9,892
Licensing costs, net of accumulated amortization
of $1,946 and $1,761 13,443 13,627
Investments in and advances to unconsolidated subsidiaries 4,037 3,385
Goodwill, net of accumulated amortization of $306 and $241 4,860 4,696
Other assets, net of accumulated amortization of $340 and $264 1,212 1,120
---------- ----------
TOTAL ASSETS $ 43,031 $ 35,302
========== ==========
LIABILITIES
Accounts payable $ 645 $ 1,080
Payroll and benefit-related liabilities 301 432
Due on demand notes payable 98 109
Short-term debt due to AT&T -- 638
Other current liabilities 1,770 1,395
---------- ----------
TOTAL CURRENT LIABILITIES 2,814 3,654
Long-term debt due to AT&T -- 1,800
Long-term debt due to others 6,487 --
Deferred income taxes 4,780 4,659
Other long-term liabilities 297 271
---------- ----------
TOTAL LIABILITIES 14,378 10,384
COMMITMENTS AND CONTINGENCIES (NOTES (h) & (i))
MINORITY INTEREST 444 41
PREFERRED STOCK HELD BY AT&T -- 3,000
SHAREOWNERS' EQUITY
Common stock, no par value, no shares authorized, issued
or outstanding at June 30, 2001 or December 31, 2000
(2,530 shares outstanding on a pro forma basis) -- --
Shareowners' net investment 28,281 21,885
Accumulated other comprehensive loss (72) (8)
---------- ----------
TOTAL SHAREOWNERS' EQUITY 28,209 21,877
---------- ----------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 43,031 $ 35,302
========== ==========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES
IN SHAREOWNERS' EQUITY
(IN MILLIONS)
(UNAUDITED)
ACCUMULATED
SHAREOWNERS' OTHER TOTAL
COMMON NET COMPREHENSIVE SHAREOWNERS'
STOCK INVESTMENT INCOME (LOSS) EQUITY
----------- ----------- ----------- -----------
Balance at December 31, 2000 $ -- $ 21,885 $ (8) $ 21,877
Net income available to common shareowners 187 187
Proceeds attributed from DoCoMo
investment, net of costs 6,139 6,139
Proceeds from AT&T Wireless Group
tracking stock shares issued for
employee plans 54 54
Transfers from AT&T, net 16 16
Other comprehensive loss (64) (64)
----------- ----------- ----------- -----------
Balance at June 30, 2001 $ -- $ 28,281 $ (72) $ 28,209
=========== =========== =========== ===========
Balance at December 31, 1999 $ -- $ 12,971 $ 26 $ 12,997
Net income available to common shareowners 180 180
Proceeds attributed from AT&T Wireless
Group tracking stock offering 7,000 7,000
Transfers from AT&T, net 1,345 1,345
----------- ----------- ----------- -----------
Balance at June 30, 2000 $ -- $ 21,496 $ 26 $ 21,522
=========== =========== =========== ===========
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------------
2001 2000
----------- -----------
SUMMARY OF TOTAL COMPREHENSIVE INCOME:
Net income available to common shareowners $ 187 $ 180
Dividend requirements on preferred stock held by AT&T, net 76 46
----------- -----------
Net income 263 226
Net revaluation of investments (net of taxes of $7) 12 --
Net revaluation of financial instruments (net of taxes of ($43)) (74) --
Net foreign currency translation adjustment (net of taxes of ($1)) (2) --
----------- -----------
TOTAL COMPREHENSIVE INCOME $ 199 $ 226
=========== ===========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------------
2001 2000
---------- ----------
OPERATING ACTIVITIES
Net income $ 263 $ 226
Adjustments to reconcile net income to net cash provided by operating
activities:
Net gains on sale/exchange of businesses and investments -- (167)
Depreciation and amortization 1,212 771
Deferred income taxes 185 179
Net equity earnings from investments (320) (130)
Minority interests in consolidated subsidiaries (17) (8)
Provision for uncollectible receivables 261 115
Increase in accounts receivable (329) (328)
Decrease (increase) in inventories 103 (238)
Decrease in accounts payable (148) (198)
Net change in other operating assets and liabilities 263 1
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,473 223
INVESTING ACTIVITIES
Net increase in note receivable from AT&T (5,803) (3,962)
Capital expenditures and other additions (2,692) (1,879)
Net acquisitions of licenses (9) (105)
Equity investment distributions and sales 656 245
Equity investment contributions, advances, purchases and other
investing activities (670) (77)
Net acquisitions of businesses, including cash acquired -- (2,602)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (8,518) (8,380)
FINANCING ACTIVITIES
Net (decrease) increase in debt due to AT&T (2,438) 400
Proceeds from issuance of long-term debt to others,
net of issuance costs 6,345 --
Redemption of preferred stock held by AT&T (3,000) --
Proceeds attributed from DoCoMo investment, net of costs 6,139 --
Proceeds attributed from AT&T Wireless Group tracking
stock offering -- 7,000
Proceeds from AT&T Wireless Group tracking stock shares issued
for employee plans and other financing activities 51 (2)
Dividend requirements on preferred stock, net (76) (46)
Transfers from AT&T, net -- 806
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,021 8,158
---------- ----------
Net (decrease) increase in cash and cash equivalents (24) 1
Cash and cash equivalents at beginning of period 62 5
---------- ----------
Cash and cash equivalents at end of period $ 38 $ 6
========== ==========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
(a) BACKGROUND AND BASIS OF PRESENTATION
AT&T Wireless Services, Inc. is a wireless telecommunications company
which primarily provides domestic wireless voice and data services and products
in the 850 megahertz (cellular) and 1900 megahertz (personal communications
services, or PCS) markets. Additionally, AT&T Wireless Services offers wireless
local telephone and internet services to residential customers through its Fixed
Wireless business. AT&T Wireless Services also holds equity interests in various
domestic and international wireless communications ventures and partnerships.
BACKGROUND
On October 25, 2000, AT&T Corp. announced a restructuring plan, stating
its intention to create a separate company for its wireless services businesses,
named AT&T Wireless Services, Inc., termed the "split-off." AT&T Wireless
Services includes substantially the same assets and liabilities that were
represented by AT&T Wireless Group tracking stock, which AT&T created on April
27, 2000. In conjunction with the offering of AT&T Wireless Group tracking stock
in April 2000, 15.6%, or 360 million shares, of AT&T Wireless Group tracking
stock were sold at an offering price of $29.50 per share. AT&T Wireless Group
tracking stock was a class of AT&T common stock which was intended to provide
holders with financial returns based on the financial performance and economic
value of AT&T's wireless services businesses.
During May 2001, AT&T completed an exchange offer which allowed AT&T
common shareowners to exchange shares of AT&T common stock for shares of AT&T
Wireless Group tracking stock. Approximately 372.2 million shares of AT&T common
stock were tendered in exchange for approximately 437.7 million shares of AT&T
Wireless Group tracking stock, at an exchange ratio of 1.176 shares of AT&T
Wireless Group tracking stock for each validly tendered share of AT&T common
stock.
On July 9, 2001, AT&T converted all shares of AT&T Wireless Group
tracking stock into shares of AT&T Wireless Services common stock on a
one-for-one basis. In addition, AT&T completed a distribution of approximately
1.136 billion shares of AT&T Wireless Services common stock to AT&T shareholders
in the form of a stock dividend. These transactions effected the split-off of
AT&T Wireless Services from AT&T, and resulted in AT&T Wireless Services
becoming an independent, publicly-traded company.
AT&T Wireless Services was incorporated on July 7, 1987. Immediately
prior to the split-off, AT&T Wireless Services was a 100% owned direct
subsidiary of AT&T Corp. AT&T Wireless Services had authorized 500 shares of
$.01 par value common stock, of which 100 shares were outstanding and held by
AT&T Corp. prior to the split-off. These shares have not been assumed to be
outstanding for purposes of the historical financial statements presented, due
to the recapitalization which was effected with the split-off. Effective with
the split-off, AT&T Wireless Services had
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2,530 million common shares issued and outstanding. These shares have been used
for purposes of the pro forma earnings per share calculations in the financial
statements presented.
BASIS OF PRESENTATION
The consolidated condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC) and, in the opinion of management, include all adjustments necessary for a
fair statement of the consolidated results of operations, financial position and
cash flows for each period presented. The consolidated condensed financial
statements reflect the results of operations, financial position, changes in
shareowners' equity and cash flows of AT&T Wireless Services as if it were a
separate entity for all periods presented and are in conformity with accounting
principles generally accepted in the United States.
The consolidated condensed financial statements reflect the assets,
liabilities, revenue and expenses directly attributable to AT&T Wireless
Services. The assets and liabilities included represent the assets and
liabilities which have been transferred to AT&T Wireless Services in accordance
with the separation and distribution agreement between AT&T and AT&T Wireless
Services. Prior to the split-off on July 9, 2001, all of the assets and
liabilities represented by AT&T Wireless Group were transferred to AT&T Wireless
Services. AT&T Wireless Services has treated these transfers in a manner similar
to a pooling of interests and has assumed these transfers were completed in
historical periods by the legal entity AT&T Wireless Services. The consolidated
condensed financial statements include allocations deemed reasonable by
management, to present the results of operations, financial position and cash
flows of AT&T Wireless Services as a separate entity and are not necessarily
indicative of those that would be incurred on a stand-alone basis for the
periods presented. Additionally, the consolidated results for the interim
periods presented are not indicative of results for the full year. These
consolidated condensed financial statements should be read in conjunction with
AT&T Wireless Services' consolidated financial statements for the three years
ended December 31, 2000, included in the prospectus filed by AT&T Wireless
Services on July 9, 2001 pursuant to Rule 424(b)(1).
(b) SIGNIFICANT ACCOUNTING POLICIES
PROPERTY, PLANT AND EQUIPMENT
Effective January 1, 2001, AT&T Wireless Services implemented the
results of a review of the estimated service lives of certain wireless
communications equipment, primarily electronics. Lives were shortened to fully
depreciate all such equipment within seven years. Similar equipment acquired
after January 1, 2001, will have useful lives no longer than seven years. The
impact of this change for the three months ended June 30, 2001, was an increase
in depreciation expense of approximately $42 and a reduction in net income of
approximately $26. The impact of this change for the six months ended June 30,
2001, was an increase in depreciation expense of approximately $78 and a
reduction in net income of approximately $48.
LICENSING COSTS AND GOODWILL
As a result of AT&T Wireless Services' evaluation of recent changes in
the wireless telecommunications industry and the views of regulatory
authorities, AT&T Wireless Services, effective January 1, 2001, will use an
amortization period for all licensing costs and goodwill associated with newly
acquired wireless operations not to exceed 25 years. This change did not have a
material impact on AT&T Wireless Services' results of operations for the three
or six months ended
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June 30, 2001. See Note (k) for further details associated with changes in
accounting and reporting for goodwill and other intangible assets.
FINANCIAL INSTRUMENTS
In June 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" as an amendment
to SFAS No. 133. This statement provides clarification with regard to certain
implementation issues under SFAS No. 133 on specific types of hedges. The
adoption of SFAS No. 133 and 138 in January 2001, did not have a material impact
to AT&T Wireless Services' results of operations, financial position or cash
flows.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to
conform with current year presentations.
(c) DOCOMO INVESTMENT
In January 2001, NTT DoCoMo, Inc., a leading Japanese wireless
communications company, invested $9.8 billion in a security of AT&T that, like
AT&T Wireless Group tracking stock, was intended to reflect a portion of the
financial performance and economic value of AT&T Wireless Group. AT&T Wireless
Services was allocated $6.2 billion of the gross proceeds from this $9.8 billion
investment in AT&T in the form of an intercompany note receivable, which is
included in "Note receivable from AT&T" on the accompanying consolidated
condensed balance sheets. Additionally, AT&T Wireless Services was allocated $20
of costs associated with the transaction. AT&T retained the remaining $3.6
billion of the DoCoMo investment proceeds as consideration for the reduction in
AT&T's retained portion of AT&T Wireless Services' value. In conjunction with
the split-off, DoCoMo's investment was converted into 406 million shares, or
approximately 16%, of AT&T Wireless Services' common stock. As part of its
January 2001 investment, DoCoMo also received warrants with an exercise price of
$35 per AT&T Wireless Group tracking share equivalent, which, in conjunction
with the split-off, were converted into warrants to purchase AT&T Wireless
Services common stock at $35 per share. As part of this investment, AT&T
Wireless Services has entered into a strategic alliance with DoCoMo to develop
mobile multimedia services on a global-standard, high-speed wireless network.
DoCoMo may require the repurchase of its investment at DoCoMo's original
purchase price, plus interest, if AT&T Wireless Services fails to meet specified
technological milestones.
(d) EARNINGS PER SHARE
AT&T Wireless Services was a wholly-owned subsidiary of AT&T during the
periods presented. Therefore, historical earnings per share has not been
presented in the consolidated condensed financial statements. Unaudited pro
forma earnings per share has been presented to reflect the capital structure
effective with the split-off of AT&T Wireless Services from AT&T.
Pro forma basic earnings per share (EPS) for AT&T Wireless Services for
the three and six months ended June 30, 2001 and 2000, have been computed by
dividing net income available to common shareowners by the 2,530 million common
shares outstanding effective with the split-off on July 9, 2001.
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Pro forma diluted EPS for AT&T Wireless Services has been computed by
dividing net income available to common shareowners, by the 2,530 million of
common shares outstanding effective with the split-off plus the effect of
dilutive stock options as of the split-off, which totaled 2 million shares. The
effect of dilutive stock options was determined under the treasury stock method.
Assumptions used to determine the dilutive effect included (1) the 32.18%
conversion rate for the approximately 249 million of AT&T common stock options
which were converted at the split-off date into AT&T common stock and AT&T
Wireless Services stock options, (2) relative converted option prices of
1.1:1.0, which was based upon the per share market values of AT&T common stock
and AT&T Wireless Services common stock at the split-off date of July 9, 2001,
of $18.70 and $16.56, respectively, and (3) the weighted average market value of
AT&T Wireless Group tracking stock for the 2001 period through the split-off
date of $19.90. The estimated 72 million of AT&T Wireless Services common stock
options which were converted from AT&T Wireless Group tracking stock options
effective with the split-off, and the DoCoMo warrants issued in January 2001
(see Note (c)) were assumed to be anti-dilutive as of the split-off date and
therefore were not included in the determination of the pro forma diluted EPS.
(e) INVESTMENTS
On February 8, 2001, AT&T Wireless Services completed its previously
announced transaction with Dobson Communications Corporation (Dobson). AT&T
Wireless Services purchased $200 in Series AA preferred stock from Dobson, which
has a liquidation preference of $1,000 per share and is exchangeable into Series
A convertible preferred stock. If the Series AA preferred stock is exchanged
into Series A convertible preferred stock, AT&T Wireless Services will increase
its ownership interest in Dobson, on an as converted to common stock basis, from
its current ownership of 4.6% to approximately 11.6%.
On April 27, 2001, AT&T completed the sale of its entire interest in
Japan Telecom for approximately $1.35 billion in cash. AT&T attributed $.5
billion of the net after-tax proceeds from the sale to AT&T Wireless Services.
AT&T Wireless Services recognized an after-tax gain of $298 associated with the
transaction, which was recorded in net equity earnings from investments in the
second quarter of 2001.
During the first quarter of 2001, AT&T Wireless Services issued
unsecured term notes to Rogers Wireless Communications, Inc. (Rogers Wireless)
to pay for spectrum it successfully bid upon in the recently completed Canadian
spectrum auctions. In April 2001, Rogers Wireless effected a rights offering of
its equity securities in which AT&T Wireless Services' joint venture with
British Telecommunications, JVII, participated. The participation increased
JVII's ownership interest in Rogers Wireless to 34.36%. AT&T Wireless Services
funded the purchase on behalf of JVII by offsetting it against the unsecured,
interest bearing notes made by AT&T Wireless Services. This transaction resulted
in AT&T Wireless Services obtaining a controlling interest of JVII, as well as
increasing its indirect ownership percentage in Rogers Wireless. As a result of
the consolidation of JVII, which holds the equity interest in Rogers Wireless,
AT&T Wireless Services' investments in and advances to unconsolidated
subsidiaries, as well as minority interest liability, increased approximately
$407 in April 2001. See Note (l) for a subsequent transaction related to AT&T
Wireless Services' ownership in Rogers Wireless.
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(f) LONG-TERM DEBT
On March 6, 2001, AT&T Wireless Services completed a private placement
of $6.5 billion in unsecured and unsubordinated Senior Notes with maturity dates
ranging from March 1, 2006 to March 1, 2031. The notes pay interest at fixed
rates ranging from 7.350% to 8.750% per annum, payable semi-annually and include
customary covenants. The notes include registration rights, such that AT&T
Wireless Services is required to offer to exchange the notes for a new issue of
notes pursuant to a registration statement to be filed under the Securities Act
of 1933 and to be declared effective no later than 240 days after the issue
date. AT&T Wireless Services had interest expense of $138 and $176 for the three
and six months ended June 30, 2001, respectively, associated with these notes.
On March 23, 2001, AT&T Wireless Services entered into Competitive
Advance and Revolving Credit Facilities (the "Facilities") in the aggregate
amount of $2.5 billion consisting of an up to $1.25 billion 364-day Competitive
Advance and Revolving Credit Facility and an up to $1.25 billion Five-Year
Competitive Advance and Revolving Credit Facility. The Facilities are subject to
a facility fee ranging from 8 to 30 basis points, payable quarterly on the total
commitment, used or unused. The facility fees are based on the respective
agreement and will fluctuate based on AT&T Wireless Services' Senior Notes
rating. The Facilities are also subject to a utilization fee of 12.5 basis
points if borrowings exceed certain levels as defined in the agreement. The
Facilities bear interest at variable rates based upon, in various cases, (i)
LIBOR plus 32.5 to 100 basis points depending on AT&T Wireless Services' Senior
Notes rating or (ii) the greater of the prime rate or the Federal funds
effective rate plus 50 basis points. The Facilities are to be used for general
corporate purposes and are subject to customary covenants, representations,
warranties and events of default. The Facilities contain financial covenants
requiring AT&T Wireless Services to maintain certain financial ratios. In
addition, the existence of an obligation by AT&T Wireless Services to repurchase
equity interests from DoCoMo may under certain circumstances constitute an event
of default. No amounts had been borrowed under the Facilities at June 30, 2001.
During June 2001, AT&T Wireless Services finalized agreements to issue
up to $2.5 billion of private placement commercial paper notes. The notes will
be unsecured, ranking pari passu with AT&T Wireless Services' other
unsubordinated and unsecured indebtedness. Maturity of the notes will be up to
365 days from date of issue. As of June 30, 2001, AT&T Wireless Services did not
have any notes outstanding under this program.
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(g) RELATIONSHIP WITH AT&T
The consolidated condensed financial statements of AT&T Wireless
Services reflect an assumed capital structure allocated from AT&T, as well as
allocated costs associated with AT&T's common support divisions prior to the
split-off. In addition, the consolidated condensed financial statements reflect
that AT&T Wireless Services purchased various network and selling, general and
administrative services from AT&T, primarily at market-based prices.
FOR THE THREE MONTHS FOR THE SIX
ENDED JUNE 30, MONTHS ENDED JUNE 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
COSTS OF SERVICES:
Long-distance and other network related services $ 77 $ 64 $ 140 $ 116
Provision for uncollectible receivables related to bundled
customers 9 9 18 19
---------- ---------- ---------- ----------
Total costs of services $ 86 $ 73 $ 158 $ 135
SELLING, GENERAL AND ADMINISTRATIVE:
General corporate overhead allocations $ 14 $ 13 $ 29 $ 26
Sales employee, commissions and marketing support related
costs (1) -- 7 -- 67
Administrative telephone services 34 24 76 48
Remittance processing services 9 5 16 10
Billing and collection services related to bundled customers 3 9 12 20
---------- ---------- ---------- ----------
Total selling, general and administrative $ 60 $ 58 $ 133 $ 171
INTEREST INCOME ON NOTE RECEIVABLE FROM AT&T (2) 120 67 197 67
INTEREST EXPENSE 30 49 70 121
PREFERRED STOCK DIVIDENDS (3) 34 33 76 46
---------- ---------- ---------- ----------
$ 330 $ 280 $ 634 $ 540
========== ========== ========== ==========
CAPITALIZED INTEREST DEDUCTED FROM INTEREST EXPENSE $ 8 $ 34 $ 41 $ 58
========== ========== ========== ==========
(1) Effective April 1, 2000, the direct wireless business sales employees
previously employed by AT&T became employees of AT&T Wireless Services.
(2) For the three and six months ended June 30, 2001, intercompany interest
income was determined based upon the average daily balance outstanding of
the intercompany note receivable from AT&T, at a rate equal to AT&T's
average 30-day commercial paper rate reset on the first day of each month,
which was 4.2% at June 30, 2001. For the three and six months ended June
30, 2000, interest income was determined based on the average daily balance
outstanding of the intercompany note receivable from AT&T at a rate equal
to the one month London InterBank Offered Rate (LIBOR) minus six basis
points. The intercompany interest income is included within other income in
the accompanying consolidated condensed income statements.
(3) Recorded net of tax, in accordance with the tax sharing agreement between
AT&T Wireless Services and AT&T.
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RELATIONSHIP WITH AT&T AFTER THE SPLIT-OFF:
For purposes of governing certain of the ongoing relationships between
AT&T Wireless Services and AT&T at and after the split-off and to provide for an
orderly transition, AT&T Wireless Services and AT&T entered into various
agreements including:
- Separation and Distribution Agreement
- Brand License Agreement
- Master Carrier Agreement
- Agency and Referral Agreement
- Employee Benefits Agreement
- Intellectual Property Agreement
- Tax Sharing Agreement
- Services Agreement
(h) COMMITMENTS
AT&T Wireless Services has commitments to fund spectrum acquisitions and
operational funding requirements of an equity method investment which totaled
approximately $430 as of June 30, 2001.
During January 2001, AT&T closed its previously announced agreement with
DoCoMo. Pursuant to this agreement, DoCoMo may require the repurchase of its
investment at DoCoMo's original purchase price plus interest, if AT&T Wireless
Services fails to meet specified technological milestones. See Note (c) for
further discussion related to the DoCoMo investment.
AT&T Wireless Services has various purchase commitments for network
equipment as well as handsets related to the development of its next-generation
strategy. Those commitments totaled $2.2 billion as of June 30, 2001 and expire
between 2001 and 2004.
During November 2000, AT&T Wireless Services joined with others in the
formation of a venture, Alaska Native Wireless (ANW), which participated in the
Federal Communication Commission's recent auction of license spectrum in the
1900 megahertz band, which is used to provide wireless services. In January
2001, the auction was completed and ANW was the high bidder on approximately
$2.9 billion in licenses. AT&T Wireless Services has committed to fund $2.6
billion to ANW to fund ANW's purchase of licenses. As of June 30, 2001, AT&T
Wireless Services has funded approximately $309 of the commitment through a
combination of a non-controlling equity interest and debt securities of ANW. The
remaining approximately $2.3 billion of additional funding will be made when
such licenses are granted, and will take the form of non-convertible notes of
ANW. At the fifth anniversary of the first date on which licenses won in the
auction are granted to ANW, and in addition to other means by which they may
transfer their interests, the other owners of ANW have the right to require AT&T
Wireless Services to purchase their equity interests. If this right were
exercised five years after license grant, assuming the licenses are granted in
2001, the purchase price would be approximately $1 billion and would be payable,
at AT&T Wireless Services' option, in cash or marketable securities. The amount
will increase if the licenses are granted after 2001. The right to require AT&T
Wireless Services to purchase these interests may be exercised before the
five-year anniversary of the license grant if the conditions of certain FCC
regulations restricting the free transferability of certain licenses offered in
this auction are met earlier. If the right were exercised earlier, the purchase
price would be calculated in generally the same way as if exercised at five
years, except that a discount would be applied. In certain circumstances, if a
winning bid of ANW is rejected or if any license
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granted to ANW is revoked, AT&T Wireless Services would be obligated to
compensate other owners for making capital available to the venture. In June
2001, a federal appeals court ruled that the FCC had acted improperly in
repossessing the spectrum sold in the auction. If ANW is not awarded the
licenses due to this decision, AT&T Wireless Services may be obligated to
purchase the interests of other owners. Depending on when such revocation or
challenge takes place, the amount may be material but would be less than the $1
billion purchase price described above.
AT&T Wireless Services also has various other purchase commitments for
materials, supplies and other items incidental to the ordinary course of
business which are neither significant individually nor in the aggregate.
(i) CONTINGENCIES
Several lawsuits have been filed asserting claims that AT&T Wireless
Services collected charges for local government taxes from customers that were
not properly subject to those charges. AT&T Wireless Services has entered into a
settlement of one of these cases, although the settlement has been challenged on
appeal. AT&T Wireless Services has asserted in those cases that any recovery
should come from the municipalities to which the taxes were paid.
Several class action lawsuits have been filed in which claims have been
asserted that AT&T Wireless Services did not have sufficient network capacity to
support the influx of new subscribers who signed up for AT&T Digital One Rate
service beginning in May 1998 and therefore has failed to provide service of a
quality allegedly promised to subscribers. The plaintiffs in these cases have
not asserted specific claims for damages, with the exception of one case filed
in Texas in which the named plaintiffs have asserted claims for compensatory and
punitive damages totaling $100.
Several other class action or representative lawsuits have been filed
against AT&T Wireless Services that allege, depending on the case, breach of
contract, misrepresentation or unfair practice claims relating to AT&T Wireless
Services billing practices (including rounding up of partial minutes of use to
full minute increments and billing send to end), coverage, dropped calls, price
fixing and/or mistaken bills. Although the plaintiffs in these cases have not
specified alleged damages, the damages in two of the cases are alleged to exceed
$100. One of these two cases was dismissed and the dismissal was affirmed in
part on appeal. Settlement negotiations are ongoing in both cases.
Several class actions have been filed against AT&T and several wireless
phone manufacturers and carriers, asserting products liability, breach of
warranty and other claims relating to radio frequency transmissions to and from
wireless phones. The complaints seek damages for the costs of headsets for
wireless phone users as well as injunctive relief. In connection with the
split-off, AT&T Wireless Services will be allocated all of the liability, if
any, arising from such lawsuits.
AT&T Wireless Services is involved in a patent infringement action
against GTE in the U.S. District Court in Seattle, Washington. GTE claims that
the Nokia phones manufactured for AT&T Wireless Services infringe on a GTE
patent for over-the-air activation and over-the-air programming. AT&T Wireless
Services is seeking a declaratory judgment that its use of over-the-air
activation does not infringe GTE's patent. GTE has not specified amounts of
claimed damages. Settlement negotiations are ongoing.
AT&T Wireless Services is involved in an international arbitration
proceeding concerning interests in a Malaysian telecommunications joint venture,
Maxis Communications Bhd, a former MediaOne business acquired by AT&T and sold
to AT&T Wireless Services in the fourth quarter of 2000. In this arbitration
proceeding, a group of Malaysian shareholders claim that MediaOne breached
fiduciary duties and contractual obligations owed to the joint venture. The
arbitration claim asserts
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damages of $400. AT&T Wireless Services will assume a portion of the
liabilities, if any, relating to this action, subject to certain adjustments. In
March 2001, AT&T Wireless Services entered into an agreement with other
shareholders of Maxis Communications Bhd who are the claimants in this
arbitration for the sale of AT&T Wireless Services' entire interest in that
entity and the resolution of the claims asserted in the arbitration proceeding.
The parties agreed to suspend the arbitration proceeding pending closing of this
transaction, and expect to terminate the arbitration proceeding when the sale
has been completed.
Stockholders of a former competitor of AT&T Wireless Services
air-to-ground business are plaintiffs in a lawsuit filed in 1993 alleging that
AT&T Wireless Services breached a confidentiality agreement, used trade secrets
to unfairly compete and tortiously interfered with the business and potential
business of the competitor. Plaintiffs sought damages in an unspecified amount
in excess of $3.5 billion. AT&T Wireless Services obtained partial summary
judgment and then prevailed on the remainder of the claims at a trial on the
validity of a release of plaintiffs' claims. Final judgment was entered against
plaintiffs on their claims, and plaintiffs appealed. On appeal, the Appellate
Court of Illinois, Second District reversed and remanded the case for trial
indicating that certain issues decided by the judge needed to be resolved by a
jury.
Several lawsuits have been filed against AT&T, certain executives of
AT&T and AT&T Wireless Services and a group of investment banking firms seeking
class certification and asserting claims under federal securities laws. The
complaints assert claims that AT&T made material misstatements concerning
earnings and financial condition, while omitting other material information,
allegedly to maximize proceeds from the offering of AT&T Wireless Group tracking
stock in April 2000 and/or to avoid paying a cash guarantee in connection with
the MediaOne acquisition. The complaints do not specify amounts of damages
claimed, although the plaintiffs are seeking to recover for declines in stock
prices of AT&T securities, including the AT&T Wireless Group tracking stock. In
connection with the split-off, AT&T Wireless Services will be allocated a
portion of the liabilities, if any, arising out of these actions to the extent
relating to AT&T Wireless Group tracking stock.
While these matters could affect the operating results of any one
quarter when resolved in future periods, AT&T Wireless Services is unable to
ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters.
AT&T Wireless Services also is a defendant in other legal actions
involving claims incidental to the normal conduct of the running of its
business. Such matters are subject to many uncertainties and outcomes are not
predictable with assurance. Additionally, AT&T Wireless Services also makes
routine filings with the Federal Communications Commission and state regulatory
authorities. However, AT&T Wireless Services believes that the amounts that may
be paid in these actions will not be material to its financial position, or its
results of operations or cash flow.
(j) SEGMENT REPORTING
AT&T Wireless Services' results are segmented according to the way AT&T
Wireless Services manages its business: Mobility, Fixed Wireless and Corporate
and other. The Mobility segment is comprised of AT&T Wireless Services' domestic
wireless voice and data services and products in the 850 megahertz (cellular)
and 1900 megahertz (PCS) markets, the aviation division, and the earnings and
losses associated with equity investments in domestic wireless communications
ventures and partnerships. The Fixed Wireless segment includes the results
associated with AT&T Wireless Services' offering of wireless local telephone and
internet services to residential customers.
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The Corporate and other segment includes primarily the results of AT&T Wireless
Services' international equity investments.
The accounting policies of the segments are the same as those used for
the accompanying consolidated condensed financial statements. There are no
material intercompany transactions between the segments. AT&T Wireless Services'
primary measure of evaluating operating performance is based upon operating
income plus depreciation and amortization, referred to as EBITDA.
Geographic information is not presented due to the immateriality of
international revenues. Additionally, AT&T Wireless Services is not dependent
upon a single customer.
Segment information is as follows:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenue:
Mobility -- Services $ 3,123 $ 2,240 $ 6,052 $ 4,232
Mobility -- Equipment 253 237 534 443
--------- --------- --------- ---------
Total Mobility 3,376 2,477 6,586 4,675
Fixed Wireless 4 -- 6 --
Corporate and other -- -- -- --
--------- --------- --------- ---------
Total revenue $ 3,380 $ 2,477 $ 6,592 $ 4,675
========= ========= ========= =========
Reconciliation of operating income plus
depreciation and amortization (EBITDA) to income
before income taxes and net equity earnings
(losses) from investments:
Mobility $ 858 $ 550 $ 1,646 $ 981
Fixed Wireless (90) (40) (158) (74)
Corporate and other (3) (1) (6) (3)
--------- --------- --------- ---------
Total EBITDA 765 509 1,482 904
Depreciation and amortization 636 402 1,212 771
Other income 129 217 213 241
Interest expense 135 18 182 69
--------- --------- --------- ---------
Total income before income taxes and net equity
earnings (losses) from investments $ 123 $ 306 $ 301 $ 305
========= ========= ========= =========
AT AT
JUNE 30, DECEMBER 31,
2001 2000
---------- ----------
Total Assets:
Mobility $ 39,683 $ 32,428
Fixed Wireless 1,085 937
Corporate and other 2,263 1,937
---------- ----------
Total Assets $ 43,031 $ 35,302
========== ==========
Reflecting the dynamics of AT&T Wireless Services' business, AT&T
Wireless Services continually reviews its management model and structure, which
may result in adjustments to the operating segments in the future.
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(k) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations".
This statement provides accounting and reporting standards for business
combinations initiated subsequent to June 30, 2001. All business combinations in
the scope of this statement are to be accounted for under one method, the
purchase method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". This statement provides accounting and reporting standards
for intangible assets acquired individually, with a group of other assets, or as
part of a business combination. This statement addresses how acquired goodwill
and other intangible assets are recorded upon their acquisition as well as how
they are to be accounted for after they have been initially recognized in the
financial statements. Under this statement, goodwill and other intangibles with
indefinite useful lives, on a prospective basis, will no longer be amortized,
however will be tested for impairment at least annually, based on a fair value
comparison. Intangibles which have finite useful lives will continue to be
amortized over their respective useful lives. This statement also requires
expanded disclosure for goodwill and other intangible assets. AT&T Wireless
Services will be required to adopt this statement no later than January 1, 2002.
At the date of adoption, AT&T Wireless Services will be required to complete a
transitional intangible asset impairment test. Any resulting impairment loss
will be recognized as a cumulative effect of a change in accounting principle.
AT&T Wireless Services is currently assessing the impact of this statement on
its results of operations, financial position and cash flows.
(l) SUBSEQUENT EVENTS
On July 3, 2001, AT&T Wireless Services acquired British
Telecommunications' interest in JVII for approximately $380 in cash. As a result
of this acquisition, AT&T Wireless Services now owns 100% of JVII, and, through
JVII, holds a 34.36% ownership interest in Rogers Wireless.
In the third quarter 2001, AT&T Wireless Services executed an agreement
to combine the soon to be merged Birla AT&T Communications Ltd./Tata Cellular,
Ltd. entity with BPL Mobile Communications Ltd. and certain portions of BPL
Cellular Ltd. AT&T Wireless Services currently owns 49% of Birla AT&T
Communications Ltd. and 49% of BPL Cellular Ltd. The agreement is subject to a
number of conditions. If all conditions are satisfied and a combination occurs
as contemplated in the agreement, AT&T Wireless Services estimates that its
ownership will be approximately 24% in the combined entity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated condensed financial statements and accompanying notes included
elsewhere in this report. Except for the historical information, the following
discussion contains forward-looking statements that involve risks and
uncertainties, such as AT&T Wireless Services' objectives, expectations and
intentions. Actual results could differ materially from results that may be
anticipated by such forward-looking statements and discussed elsewhere in this
report. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in the section below and those discussed
elsewhere in this report and those discussed in AT&T Wireless Services'
registration statement on Form S-4 filed on August 2, 2001. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. AT&T Wireless Services undertakes no
obligation to revise any forward-looking statements in order to reflect events
or circumstances that may subsequently arise. Readers are urged to carefully
review and consider the various disclosures made in this report and in other
AT&T Wireless Services' filings made with the SEC that attempt to advise
interested parties of the risks and factors that may affect our business,
prospects and results of operations.
OVERVIEW
In April 2000, AT&T Corp. issued AT&T Wireless Group tracking stock,
which was a class of common stock that was intended to provide holders with
financial returns based on the financial performance and economic value of AT&T
wireless services businesses. On July 9, 2001, AT&T converted all shares of AT&T
Wireless Group tracking stock into shares of AT&T Wireless Services common stock
on a one-for-one basis. In addition, AT&T completed a distribution of
approximately 1.136 billion shares of AT&T Wireless Services common stock to
AT&T shareholders in the form of a stock dividend. Prior to the split-off, AT&T
transferred the assets comprising its wireless services businesses to AT&T
Wireless Services, Inc. These transactions effected the split-off of AT&T
Wireless Services from AT&T, and resulted in AT&T Wireless Services becoming an
independent, publicly-traded company.
AT&T Wireless Services is one of the largest wireless communications
service providers in the United States. AT&T Wireless Services seeks to expand
its customer base and revenue stream by providing high-quality, innovative
wireless services. As of June 30, 2001, AT&T Wireless Services had 16.4 million
consolidated subscribers. For the six months ended June 30, 2001, AT&T Wireless
Services had:
- $6.6 billion of consolidated revenues and
- $263 million of consolidated net income.
AT&T Wireless Services operates one of the largest U.S. digital wireless
networks. As of June 30, 2001, AT&T Wireless Services and its affiliates and
partners held 850 megahertz and 1900 megahertz licenses sufficient to provide
wireless services covering 98% of the U.S. population. As of that date, AT&T
Wireless Services and its affiliates and partners covered approximately 83% of
the U.S. population with at least 30 megahertz of wireless spectrum. As of the
same date, AT&T Wireless Services' networks and those of its affiliates and
partners operated in markets including over 77% of the U.S. population and in
all 50 of the largest U.S. metropolitan areas. AT&T Wireless Services
supplements its operations with roaming agreements that allow its subscribers to
use other providers' wireless services in regions where AT&T Wireless Services
does not have operations. With these roaming agreements, AT&T Wireless Services
is able to offer customers wireless services covering over 95% of the U.S.
population. AT&T Wireless Services plans to continue to increase its coverage
and the quality of its services by expanding its coverage area and the capacity
of its network.
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AT&T Wireless Services currently provides its wireless voice and data
services using time division multiple access, analog and cellular digital packet
data technologies. AT&T Wireless Services has focused on building its digital
network and on moving its customer base from analog to digital service. AT&T
Wireless Services has already upgraded its analog systems to digital in 99% of
its markets. AT&T Wireless Services believes that the move to digital services
improves capital efficiency, lowers network operating costs and allows AT&T
Wireless Services to offer higher quality services. As of June 30, 2001, over
93% of AT&T Wireless Services' consolidated subscribers use digital services and
account for over 95% of its traffic.
To accelerate the availability of enhanced data services offerings, AT&T
Wireless Services recently announced plans to adopt a technology known as the
global system for mobile communications, or GSM, for interim improvement in
wireless data capabilities. Following the adoption of GSM, AT&T Wireless
Services plans to move to third-generation technology to permit AT&T Wireless
Services to offer voice and new data services. AT&T Wireless Services expects to
install network capability using GSM technology with its current
second-generation voice network. AT&T Wireless Services' chosen third-generation
technology standard, known as universal mobile telecommunications system, or
UMTS, is the same global standard that has been selected by operators throughout
Europe, Japan and other parts of the world. Third-generation standards should
provide the speed and capacity necessary to support innovative mobile multimedia
applications, including broader and more efficient access to email systems,
high-speed web browsing, e-commerce applications, on-line games and music
downloads.
AT&T Wireless Services markets its products and services primarily under
the AT&T brand and expects to continue to do so for at least five years under
agreements that AT&T Wireless Services has entered into with AT&T in connection
with the split-off. AT&T Wireless Services believes that AT&T's widely
recognized brand increases consumer awareness of, and confidence in, its
products and services.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of AT&T
Wireless Services' consolidated results of operations for the three and six
months ended June 30, 2001, and financial condition as of June 30, 2001 and
December 31, 2000. Prior to the split-off, AT&T contributed to AT&T Wireless
Services, all of the subsidiaries, assets and liabilities that constituted AT&T
Wireless Group. Consistent with its historical financial statements, AT&T
Wireless Services has treated these contributions and related transactions in a
manner similar to a pooling of interests and has assumed these contributions and
related transactions were completed in historical periods by the legal entity
AT&T Wireless Services.
The discussion below is based upon AT&T Wireless Services and its
subsidiaries' consolidated results, as well as its segments, where material and
applicable. AT&T Wireless Services segments its results according to the way it
manages its business, including Mobility, Fixed Wireless and Corporate and
other. The Mobility segment is comprised of the domestic wireless voice and data
services and products in the 850 megahertz (cellular) and 1900 megahertz
(personal communications services, or PCS) markets, the aviation division, and
the earnings and losses associated with equity investments in domestic wireless
communications ventures and partnerships. The Fixed Wireless segment includes
the results associated with the offering of wireless local telephone and
internet services to residential customers, which began serving customers during
the first quarter of 2000. The Corporate and other segment primarily includes
the results of international equity interests. AT&T Wireless Services'
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primary measure of evaluating operating performance for its segments is based
upon operating income plus depreciation and amortization, referred to as EBITDA.
Reflecting the dynamics of its business, AT&T Wireless Services
continually reviews its management model and structure. The split-off from AT&T
will result in changes required for AT&T Wireless Services to operate as an
independent entity. Additionally, the investment by NTT DoCoMo, as well as AT&T
Wireless Services' recently announced plans to deploy third-generation
technologies, may result in adjustments to AT&T Wireless Services' operating
segments in the future.
The comparison of the 2001 results with the prior year is impacted by
several acquisitions that occurred during 2000. These included the acquisition
of Wireless One Network, L.P. and the remaining 50% partnership interest in CMT
Partners (Bay Area Properties) during the second quarter of 2000. Prior to the
acquisition of the remaining 50% interest in CMT Partners, AT&T Wireless
Services accounted for its ownership under the equity method. During the third
quarter of 2000, AT&T Wireless Services completed the acquisition of a wireless
system in San Diego. During the fourth quarter of 2000, AT&T Wireless Services
completed the acquisitions of wireless systems in Indianapolis, Houston and
several markets in the New England area. Finally, in December 2000, AT&T
Wireless Services' equity interest in AB Cellular, an entity that owned cellular
properties in Los Angeles, Houston and Galveston, Texas, was redeemed. In
consideration, AT&T Wireless Services received 100% of the net assets of the Los
Angeles market and therefore began consolidating the Los Angeles market
effective December 29, 2000. The combined acquisitions during 2000 resulted in
an approximate increase of 3 million subscribers to AT&T Wireless Services.
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001
COMPARED WITH THE THREE AND SIX MONTHS ENDED JUNE 30, 2000
REVENUE
Total revenue includes wireless voice and data services, the sale of
handsets and accessories, and revenue associated with the aviation
communications and fixed wireless operations. AT&T Wireless Services records
revenue as services are provided or when the product is sold. Services revenue
primarily includes monthly recurring charges, airtime and toll usage charges,
and roaming charges billed to subscribers for usage outside of AT&T Wireless
Services' network as well as charges billed to other wireless providers for
roaming on AT&T Wireless Services' network. The revenue and related expenses
associated with the sales of wireless handsets and accessories are recognized
when the products are delivered and accepted by the customer, as this is
considered to be a separate earnings process from the sale of wireless services.
Total revenue increased 36.5% to $3,380 million for the three months
ended June 30, 2001, and 41.0% to $6,592 million for the six months ended June
30, 2001, compared with the same periods in the prior year. Total revenue
increased 18.1% and 21.6% for the three and six months ended June 30, 2001,
respectively, compared with the same periods for 2000, when adjusted to exclude
the impact of the Bay Area Properties acquired on June 29, 2000 and the Los
Angeles market which AT&T Wireless Services began consolidating effective
December 29, 2000.
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Services revenue for the three months ended June 30, 2001, was $3,127
million, an increase of $887 million, or 39.6%, compared with the respective
period in 2000. Services revenue for the six months ended June 30, 2001, was
$6,058 million, an increase of $1,826 million, or 43.2%, compared with the
respective period in 2000. The services revenue increases for both the three and
six months ended June 30, 2001, were almost solely due to growth in services
revenue in the Mobility business. These increases were driven by strong
consolidated subscriber growth, including subscribers associated with
acquisitions which closed subsequent to the second quarter of 2000, however,
they were partially offset by a decline in the average monthly revenue per user
(ARPU). Fixed Wireless results included $4 million and $6 million of services
revenue for the three and six months ended June 30, 2001, respectively, and were
immaterial for the three and six months ended June 30, 2000.
As of June 30, 2001, the Mobility business had over 16.4 million
consolidated subscribers, an increase of 40.3%, compared with the prior year,
including approximately 1.8 million subscribers associated with acquisitions
that closed subsequent to June 30, 2000. Net consolidated subscriber additions
in the second quarter of 2001 totaled 668 thousand, a 25.6% increase over the
prior year period. Net consolidated subscriber additions for the six months
ended June 30, 2001 totaled 1,253 thousand, a 32.0% increase over the prior year
period. AT&T Wireless Services' average monthly churn rate in the second quarter
of 2001 was 2.9% compared with 2.7% in the second quarter of 2000. Churn for
AT&T Wireless Services' postpaid customers was 2.6% for both the quarters ended
June 30, 2001 and 2000. AT&T Wireless Services' average monthly churn rate in
the first half of 2001 was 2.9% compared with 2.8% in the prior year period.
AT&T Wireless Services' ARPU for its Mobility business for the three
months ended June 30, 2001, was $63.80, a decrease of $7.70, or 10.8%, compared
with the same period in 2000. ARPU for the six months ended June 30, 2001, was
$63.00, a decrease of $6.40, or 9.2%, compared with the same period in 2000. The
declines in ARPU were primarily a result of competitive pricing pressures,
expansion into a broader base of consumer segments, including prepaid wireless,
and the impact of acquisitions which closed subsequent to June 30, 2000. ARPU in
the second quarter of 2001 increased 2.6% from the first quarter of 2001 due
primarily to the seasonal impact of increased usage and product mix. Despite the
sequential increase, AT&T Wireless Services anticipates that ARPU will decline
modestly in the second half of 2001.
Equipment revenue for the three months ended June 30, 2001, was $253
million, an increase of $16 million, or 6.8%, compared with the same period in
2000. Equipment revenue for the six months ended June 30, 2001, was $534
million, an increase of $91 million, or 20.6%, compared with the same period in
2000. These increases were due to an increase in gross consolidated subscriber
additions in the Mobility business for the three and six months ended June 30,
2001, compared with the same periods in 2000. The increases were partially
offset by a decrease in equipment revenues associated with indirect distributors
as a result of their utilization of excess inventories during the first half of
2001. AT&T Wireless Services supplies a selection of handsets to its subscribers
at competitive prices, which are generally offered at or below cost.
COSTS OF SERVICES
Costs of services include the costs to place calls over the network
(including the costs to operate and maintain AT&T Wireless Services' network, as
well as roaming costs paid to other wireless providers) and the charges paid to
connect calls on other networks, including access, interconnection and toll
related charges. Additionally, costs of services include the provision for
uncollectible receivables, as well as non-income related taxes.
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Costs of services for the three months ended June 30, 2001, were $989
million, an increase of $229 million, or 30.0%, compared with the same period in
2000. Costs of services for the six months ended June 30, 2001, were $1,910
million, an increase of $488 million, or 34.3%, compared with the same period in
2000. Approximately 90% of the increases were associated with the Mobility
business with the remaining increase associated with the Fixed Wireless
business. For the second quarter, nearly 40% of the increase over the prior year
quarter was the result of an increase in the charges paid to connect calls on
other networks. Another approximately 40% of the increase for the quarter was
due to an increase in the costs to maintain AT&T Wireless Services' network. For
the six months ended June 30, 2001, approximately 40% of the increase was due to
increased charges to connect calls on other networks. The remaining
approximately 60% of the increase was due to increases in the costs to maintain
AT&T Wireless Services' network and an increase in the provision for
uncollectible receivables. These increases were driven by growth in the Mobility
business subscriber base and the related increased minutes of use, as well as by
the expansion of AT&T Wireless Services' network.
COSTS OF EQUIPMENT SALES
Costs of equipment sales include the costs of the handsets and
accessories sold to new as well as existing customers and relate entirely to the
Mobility business. Costs of equipment sales for the three months ended June 30,
2001 were $478 million, an increase of $33 million, or 7.6%, compared with the
same period in 2000. Costs of equipment sales for the six months ended June 30,
2001 were $968 million, an increase of $132 million, or 15.8%, compared with the
same period in 2000. These increases were due primarily to higher equipment
sales, as well as an increase in handset subsidies resulting from customer
retention related programs implemented during the first half of 2001.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses (SG&A) include marketing
and acquisition related costs, excluding equipment buydowns, customer care
related expenses, and administrative functions. SG&A expenses for the three
months ended June 30, 2001, were $1,148 million compared with $763 million, an
increase of 50.4%, for the three months ended June 30, 2000, and for the six
months ended June 30, 2001, were $2,232 million compared with $1,513 million for
the six months ended June 30, 2000, an increase of 47.6%. Over 90% of the
increases related to the Mobility business for both the quarter and half year
ended June 30, 2001, with the remaining increases relating to the Fixed Wireless
business. Approximately 50% of the increases for both the three and six months
ended June 30, 2001 versus the prior year periods related to increased marketing
and selling costs, including advertising, commissions and manpower related
costs. These increases resulted from a 50.3% and 52.2% increase in gross
consolidated subscriber additions in the quarter and half year ended June 30,
2001, respectively, versus the prior year periods. Cost per gross subscriber
addition, which includes the cost of handset subsidies recorded in costs of
equipment sales in the accompanying consolidated condensed income statements was
$332 for the three months ended June 30, 2001, compared with $352 for the three
months ended June 30, 2000, and was $329 for the six months ended June 30, 2001
compared with $356 for the six months ended June 30, 2000. Customer care and
billing related costs represented approximately 20% and 25% of the increases for
the three and six months ended June 30, 2001, respectively, as a result of the
growth in the subscriber base.
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses for the three months ended June
30, 2001, were $636 million, an increase of $234 million, or 58.3%, compared
with the three months ended June 30, 2000. Depreciation and amortization
expenses for the six months ended June 30, 2001, were $1,212 million, an
increase of $441 million, or 57.3%, compared with the six months ended June 30,
2000. Over 90% of the increases for both the three and six months ended June 30,
2001, related to the Mobility business, with the remaining increases relating to
the Fixed Wireless business. The increases in the Mobility business depreciation
expense for both the quarter and half year ended June 30, 2001, primarily
resulted from the growth in AT&T Wireless Services' depreciable asset base
resulting from capital expenditures and property, plant and equipment acquired
with acquisitions that closed subsequent to the first half of 2000. In addition,
effective January 1, 2001, the depreciable lives of certain Mobility business
wireless communications equipment were shortened, which resulted in
approximately $42 million and $78 million of additional depreciation expense for
the three and six months ended June 30, 2001, respectively. Total capital
expenditures were $1,099 million and $2,351 million for the three and six months
ended June 30, 2001, respectively. Mobility business capital expenditures were
$978 million and $2,100 million for the three and six months ended June 30,
2001. Fixed Wireless business capital expenditures were $121 million and $251
million for the three and six months ended June 30, 2001.
Additionally, amortization expense for the Mobility business increased
from the prior year quarter as a result of an increase in the amortization
expense of licensing costs, goodwill and other acquisition related intangibles
as a result of acquisitions that closed subsequent to the second quarter of
2000. As a result of AT&T Wireless Services' evaluation of recent changes in the
wireless telecommunications industry and the views of regulatory authorities,
effective January 1, 2001, AT&T Wireless Services has been using an amortization
period for licensing costs and goodwill associated with newly acquired wireless
operations not exceeding 25 years. This change did not have a material impact to
AT&T Wireless Services' results of operations for the three and six months ended
June 30, 2001. See Recent Accounting Pronouncements below for further details
regarding changes in accounting and reporting for intangible assets.
OTHER INCOME
Other income primarily includes gains or losses on sales or exchanges of
assets and businesses and intercompany interest income on the note receivable
from AT&T. Other income for the three and six months ended June 30, 2001, was
$129 million and $213 million compared with $217 million and $241 million for
the respective periods in 2000. The decreases in other income for both the three
and six months ended June 30, 2001 versus the prior year periods were due
primarily to gains recorded on the sale of equity method investments during the
second quarter of 2000 totaling $141 million. These gains were partially offset
by an increase in intercompany interest income in both the quarter and half year
ended June 30, 2001. Intercompany interest income on the note receivable from
AT&T was $120 million and $197 million for the three and six months ended June
30, 2001 compared with $67 million for each of the three and six months ended
June 30, 2000. The increase in interest income resulted from a higher average
note receivable balance from AT&T during the second quarter and first half of
2001, compared with the same periods in 2000, resulting from the DoCoMo
investment and the Senior Notes offering which occurred during the first quarter
of 2001.
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INTEREST EXPENSE
Interest expense consists primarily of interest on long-term debt to
others and intercompany debt due to AT&T, net of interest expense capitalized.
Interest expense for the second quarter of 2001, was $135 million, an increase
of $117 million compared with the second quarter of 2000. Interest expense for
the first half of 2001, was $182 million, an increase of $113 million, compared
with the first half of 2000. The increases in both periods related primarily to
interest expense associated with the $6.5 billion Senior Notes offering which
occurred in March 2001. The year-to-date increase was partially offset by higher
levels of capitalized interest expense. AT&T Wireless Services repaid its $1.8
billion of intercompany debt to AT&T in June 2001.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended June 30, 2001,
was $77 million compared with $102 million for the three months ended June 30,
2000, and was $156 million for the six months ended June 30, 2001 compared with
$100 million for the six months ended June 30, 2000. The decrease for the
quarter ended June 30, 2001, was due primarily to a decrease in net income
before income taxes and net equity earnings (losses) from investments. The
effective tax rates for the three and six months ended June 30, 2001 were 62.4%
and 51.8%, respectively, and were impacted by goodwill associated with
acquisitions that closed during 2000. Excluding one-time gains recorded in the
second quarter and first half of 2000, the effective tax rates for the three and
six months ended June 30, 2000 were 50.3% and 50.5%, respectively, and were also
impacted by goodwill associated with 2000 acquisitions.
NET EQUITY EARNINGS (LOSSES) FROM INVESTMENTS
Net equity earnings (losses) from investments, net of tax, were $217
million of earnings for the three months ended June 30, 2001 compared with $4
million of losses for the three months ended June 30, 2000, and earnings of $118
million for the six months ended June 30, 2001 compared with earnings of $21
million for the six months ended June 30, 2000. The quarter over quarter
increase was primarily due to a $298 million after-tax gain on the sale of Japan
Telecom recorded during the second quarter of 2001. The increase was partially
offset by a decrease from prior year equity earnings in the Mobility business
from CMT Partners and AB Cellular. AT&T Wireless Services acquired the remaining
interest in CMT Partners that it did not own in June 2000, and therefore, this
entity was consolidated subsequent to the acquisition. Additionally, AT&T
Wireless Services' equity interest in AB Cellular was redeemed in December 2000
in exchange for 100% of the net assets of the Los Angeles market. The increase
for the six months ended June 30, 2001 compared with the same period in 2000 was
primarily due to the Japan Telecom gain partially offset by equity earnings
recorded in 2000 associated with CMT Partners and AB Cellular, as well as
increased equity losses during 2001 associated with affiliate investments.
DIVIDEND REQUIREMENTS ON PREFERRED STOCK HELD BY AT&T
At December 31, 2000, AT&T Wireless Services had outstanding $3.0
billion of preferred stock held by AT&T that paid dividends at 9% per annum. In
June 2001, AT&T Wireless Services redeemed the $3.0 billion of preferred stock
held by AT&T. Dividend requirements on the preferred stock for the three and six
months ended June 30, 2001, were $34 million and $76 million, respectively,
compared with $33 million and $46 million for the respective periods in 2000,
net of amounts recorded in accordance with the tax sharing agreement. The
increase in first half of 2001 compared with the
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first half of 2000 was a result of the May 1, 2000, recapitalization of $2.0
billion of outstanding intercompany indebtedness owed to AT&T into an additional
$2.0 billion of 9% cumulative preferred stock then held by AT&T.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the split-off, financing activities for AT&T Wireless Services
and the rest of AT&T Wireless Group were managed by AT&T on a centralized basis
and were subject to the review of the AT&T Wireless Group capital stock
committee of AT&T's board of directors. Sources of funds included AT&T Wireless
Group tracking stock offering proceeds attributed from AT&T, intercompany
borrowings from AT&T, internally generated funds, capital contributions from
AT&T prior to the AT&T Wireless Group tracking stock offering, as well as
proceeds from the DoCoMo transaction. In addition, AT&T performed cash
management functions on behalf of AT&T Wireless Services. Cash balances
maintained and reported by AT&T Wireless Services prior to the split-off
primarily represented cash balances for which no right of offset existed with
AT&T. Effective with the split-off, AT&T Wireless Services performs financing
activities as a stand alone entity.
In association with the split-off, AT&T Wireless Services and AT&T
entered into a separation and distribution agreement that governed the terms of
the split-off. In June 2001, AT&T Wireless Services repaid to AT&T the $1.8
billion of long-term debt and related accrued interest and redeemed the $3.0
billion of preferred stock and related unpaid dividends held by AT&T.
Additionally, under the separation and distribution agreement, in early July
2001, prior to the split-off, AT&T Wireless Services received payment of its
note receivable from AT&T which totaled $5.3 billion. The $5.3 billion
represented funds not yet utilized associated with the DoCoMo investment and
Senior Notes offering discussed in more detail below.
On January 22, 2001, AT&T closed its transaction with DoCoMo. AT&T
attributed $6.1 billion of the approximate $9.8 billion of proceeds received
from DoCoMo to AT&T Wireless Services. AT&T Wireless Services intends to utilize
the remaining proceeds to continue executing its strategy, including capacity
and quality improvements to its existing network, as well as to create an
advanced mobile Internet and to invest in other strategic growth initiatives.
Pursuant to this agreement, DoCoMo may require the repurchase of its investment
at DoCoMo's original purchase price, plus interest, if AT&T Wireless Services
fails to meet specified technological milestones.
On March 6, 2001, AT&T Wireless Services completed a private placement
of $6.5 billion in unsecured and unsubordinated Senior Notes with maturity dates
ranging from March 1, 2006 to March 1, 2031. The notes pay interest at fixed
rates ranging from 7.350% to 8.750% per annum, payable semi-annually, and
include customary covenants. AT&T Wireless Services anticipates that it will
exchange the notes during the second half of 2001. AT&T Wireless Services had
$138 million and $176 million of interest expense for the three and six months
ended June 30, 2001, respectively, related to these notes. AT&T Wireless
Services expects to incur interest payments related to these notes of
approximately $265 million for the year ending December 31, 2001.
On March 23, 2001, AT&T Wireless Services entered into Competitive
Advance and Revolving Credit Facilities (the "Facilities") in the aggregate
amount of $2.5 billion consisting of an up to $1.25 billion 364-day Competitive
Advance and Revolving Credit Facility and an up to $1.25 billion Five-Year
Competitive Advance and Revolving Credit Facility. The Facilities are subject to
a facility fee ranging from 8 to 30 basis points, payable quarterly on the total
commitment, used or unused. The facility fees are based on the respective
agreement and will fluctuate based on AT&T Wireless
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Services' Senior Notes rating. The Facilities are also subject to a utilization
fee of 12.5 basis points if borrowings exceed certain levels as defined in the
agreement. The Facilities bear interest at variable rates based upon, in various
cases, (i) LIBOR plus 32.5 to 100 basis points depending on AT&T Wireless
Services' Senior Notes rating or (ii) the greater of the prime rate or the
Federal funds effective rate plus 50 basis points. The Facilities are to be used
for general corporate purposes and are subject to customary covenants,
representations, warranties and events of default. In addition, the Facilities
contain financial covenants requiring AT&T Wireless Services to maintain certain
financial ratios. In addition, the existence of an obligation by AT&T Wireless
Services to repurchase equity interests from DoCoMo may under certain
circumstances constitute an event of default. No amounts had been borrowed under
the Facilities at June 30, 2001.
During June 2001, AT&T Wireless Services finalized agreements to issue
up to $2.5 billion of private placement commercial paper notes. The notes will
be unsecured, ranking pari passu with AT&T Wireless Services' other
unsubordinated and unsecured indebtedness. Maturity of the notes will be up to
365 days from date of issue. As of June 30, 2001, AT&T Wireless Services did not
have any notes outstanding under this program.
The continued expansion of AT&T Wireless Services' network and
footprint, including through spectrum auctions, as well as service offerings and
the marketing and distribution of its products and services, will continue to
require substantial capital. AT&T Wireless Services believes that its current
cash and cash equivalents, credit facilities, and cash from operations, will
satisfy its expected working capital and capital expenditures for at least the
next twelve months. AT&T Wireless Services may also generate cash from the sale
of debt or equity securities, or from the sale of non-strategic assets or excess
spectrum. Additionally, AT&T Wireless Services may evaluate alternative
financing arrangements associated with its Fixed Wireless business.
AT&T Wireless Services has entered into various purchase commitments for
network equipment as well as handsets related to the development of its
next-generation strategy. Those commitments totaled $2.2 billion and expire
between 2001 and 2004.
AT&T Wireless Services has commitments to fund spectrum acquisitions and
operational funding requirements of an equity method investment which totaled
approximately $430 million as of June 30, 2001.
During November 2000, AT&T Wireless Services joined with others in the
formation of a venture, Alaska Native Wireless (ANW), which participated in the
Federal Communication Commission's recent auction of license spectrum in the
1900 megahertz band, which is used to provide wireless services. In January
2001, the auction was completed and ANW was the high bidder on approximately
$2.9 billion in licenses. AT&T Wireless Services has committed to fund $2.6
billion to ANW to fund ANW's purchase of licenses. As of June 30, 2001, AT&T
Wireless Services has funded approximately $309 million of the commitment
through a combination of a non-controlling equity interest and debt securities
of ANW. The remaining approximately $2.3 billion of additional funding will be
made when such licenses are granted, and will take the form of non-convertible
notes of ANW. At the fifth anniversary of the first date on which licenses won
in the auction are granted to ANW, and in addition to other means by which they
may transfer their interests, the other owners of ANW have the right to require
AT&T Wireless Services to purchase their equity interests. If this right were
exercised five years after license grant, assuming the licenses are granted in
2001, the purchase price would be approximately $1 billion and would be payable,
at AT&T Wireless Services' option, in cash or marketable securities. The amount
will increase if the licenses are granted after 2001. The right to require AT&T
Wireless Services to purchase these interests may be exercised
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before the five-year anniversary of the license grant if the conditions of
certain FCC regulations restricting the free transferability of certain licenses
offered in this auction are met earlier. If the right were exercised earlier,
the purchase price would be calculated in generally the same way as if exercised
at five years, except that a discount would be applied. In certain
circumstances, if a winning bid of ANW is rejected or if any license granted to
ANW is revoked, AT&T Wireless Services would be obligated to compensate other
owners for making capital available to the venture. In June 2001, a federal
appeals court ruled that the FCC had acted improperly in repossessing the
spectrum sold in the auction. If ANW is not awarded the licenses due to this
decision, AT&T Wireless Services may be obligated to purchase the interests of
other owners. Depending on when such revocation or challenge takes place, the
amount may be material but would be less than the $1 billion purchase price
described above.
Net cash provided by operating activities for the six months ended June
30, 2001, was $1,473 million compared with $223 million for the same period in
2000. Approximately 45% of the increase was due to a $578 million increase in
operating income excluding depreciation and amortization. Approximately 30% of
the increase was due to higher income taxes payable and interest payable
associated with the Senior Notes offering in March 2001. Approximately 25% of
the increase was due to lower levels of inventory purchases for the six months
ended June 30, 2001 compared to the prior year period.
Net cash used in investing activities for the six months ended June 30,
2001 was $8,518 million compared with $8,380 million for the six months ended
June 30, 2000. The increased investing activity during 2001 was due to a higher
note receivable balance from AT&T at June 30, 2001 versus the prior year period,
and higher capital expenditures of $813 million used to upgrade and improve
network capacity. These increases were offset by $2,602 million in acquisitions
during the first half of 2000 related to acquisitions of the assets of Wireless
One Network L.P. and the remaining 50% partnership interest in CMT Partners.
Net cash provided by financing activities for the six months ended June
30, 2001 was $7,021 million compared with $8,158 million for the six months
ended June 30, 2000. Sources of financing activities for the six months ended
June 30, 2001 were the $6.1 billion of DoCoMo investment proceeds attributed
from AT&T and the $6.3 billion of net proceeds associated with the Senior Notes
offering in March 2001. These sources were offset by repayment of the $2.4
billion of short- and long-term debt and $3.0 billion of preferred stock to AT&T
during the first half of 2001. Sources of financing activities for the six
months ended June 30, 2000 were the $7.0 billion in AT&T Wireless Group tracking
stock proceeds attributed from AT&T, and $0.8 billion of capital contributions
from AT&T prior to the AT&T Wireless Group tracking stock offering.
EBITDA, defined as operating income plus depreciation and amortization,
is the primary measure used by the chief operating decision-makers to measure
AT&T Wireless Services' ability to generate cash flow. EBITDA may or may not be
consistent with the calculation of EBITDA for other public companies and should
not be viewed by investors as an alternative to generally accepted accounting
principles, measures of performance or to cash flows from operating, investing
and financing activities, as a measure of liquidity.
EBITDA for the three months ended June 30, 2001, was $765 million, an
increase of 50.4%, compared with $509 million for the same period in 2000.
EBITDA for the six months ended June 30, 2001 was $1,482 million, and increase
of 63.9%, compared with $904 million for the same period in 2000. The increases
for both the three and six months ended June 30, 2001, included the results of
acquisitions that occurred during 2000 as well as a continued focus on cost
reductions. These increases were partially offset by increased customer
acquisition costs associated with the increase in
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gross consolidated subscriber additions, increased network costs attributable to
subscriber growth and the related minutes of use, and increased customer care
and billing related expenses to support growth in the subscriber base.
For the Mobility business, EBITDA for the three and six months ended
June 30, 2001, was $858 million and $1,646 million, respectively, compared with
$550 million and $981 million, respectively, for the same periods in 2000. These
increases represented growth rates of 56.1% for the quarter and 67.8% for the
year-to-date periods.
For the Fixed Wireless business, EBITDA for the three and six months
ended June 30, 2001, were deficits of $90 million and $159 million,
respectively, compared with deficits of $40 million and $74 million,
respectively, for the same periods in 2000.
EBITDA margin for the Mobility business, defined as EBITDA as a percent
of services revenue, was 27.5% for the second quarter of 2001, compared with
24.5% for the second quarter of 2000, and 27.2% for the first half of 2001,
compared with 23.2% for the first half of 2000. The improvements in EBITDA
margins for the Mobility business for both the three and six months ended June
30, 2001, were primarily due to revenue growth and lower off-network roaming
expenses. These improvements were partially offset by higher sales and marketing
expenses associated with increased gross subscriber additions and higher network
related expenses associated with growth in the subscriber base.
FINANCIAL CONDITION
Total assets were $43,031 million as of June 30, 2001, an increase of
$7,729 million, or 21.9%, compared with December 31, 2000. The increase was due
primarily to an increase in the intercompany note receivable from AT&T of $5,803
million which resulted from AT&T attributing $6.1 billion of the DoCoMo
investment net proceeds to AT&T Wireless Services, and its loan of $6.3 billion
of net proceeds from its Senior Notes to AT&T. Partially offsetting these
proceeds were the repayment of the $638 million of short-term debt due to AT&T,
the $1.8 billion of long-term debt due to AT&T, and the redemption of the $3.0
billion of preferred stock held by AT&T, and capital expenditures made during
the six months ended June 30, 2001 which resulted in an increase in property,
plant and equipment.
Total liabilities were $14,378 million as of June 30, 2001, an increase
of $3,994 million, or 38.5%, compared with December 31, 2000. The increase was
primarily due to the issuance of the $6.5 billion of Senior Notes in March 2001,
and related interest, partially offset by the repayments of $638 million of
short-term debt due to AT&T in January 2001 and the $1.8 billion of long-term
debt due to AT&T in June 2001.
Total preferred stock held by AT&T of $3.0 billion as of December 31,
2000 was redeemed in June 2001 in association with the separation and
distribution agreement between AT&T Wireless Services and AT&T. Dividends
payable on the preferred stock were paid at 9% per annum.
Total shareowners' equity was $28,209 million at June 30, 2001, an
increase of $6,332 million, or 28.9%, compared with December 31, 2000. The
increase was primarily due to increased shareowners' net investment associated
with the attribution of the $6.1 billion of net proceeds from the DoCoMo
investment to AT&T Wireless Services from AT&T.
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INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES
AT&T Wireless Services holds equity interests in various domestic and
international ventures and partnerships. These ventures and partnerships operate
primarily in the wireless telecommunications industry. AT&T Wireless Services
accounts for these investments primarily under the equity method of accounting.
The below discussion relates to significant investments or dispositions which
occurred during the six months ended June 30, 2001.
On February 8, 2001, AT&T Wireless Services purchased $200 million in
Series AA preferred stock from Dobson Communications Corporation (Dobson), which
has a liquidation preference of $1,000 per share and is exchangeable into Series
A convertible preferred stock. If the Series AA preferred stock is exchanged
into Series A convertible preferred stock, AT&T Wireless Services will increase
its ownership interest in Dobson, on an as converted to common stock basis, from
its current ownership of 4.6% to approximately 11.6%.
On April 27, 2001, AT&T completed the sale of its entire interest in
Japan Telecom for approximately $1.35 billion in cash. AT&T attributed $.5
billion of the net after-tax proceeds from the sale to AT&T Wireless Services.
AT&T Wireless Services recognized an after-tax gain of $298 million associated
with the transaction.
During the first quarter of 2001, AT&T Wireless Services issued
unsecured term notes to Rogers Wireless Communications, Inc. (Rogers Wireless)
to pay for spectrum it successfully bid upon in the recently completed Canadian
spectrum auctions. In April 2001, Rogers Wireless effected a rights offering of
its equity securities in which AT&T Wireless Services' joint venture with
British Telecommunications, JVII, participated. The participation increased
JVII's ownership interest in Rogers Wireless to 34.36%. AT&T Wireless Services
funded the purchase on behalf of JVII by offsetting it against the unsecured,
interest bearing notes made by AT&T Wireless Services. This transaction resulted
in AT&T Wireless Services obtaining a controlling interest of JVII, as well as
increasing its indirect ownership percentage in Rogers Wireless. On July 3,
2001, AT&T Wireless Services acquired British Telecommunications' interest in
JVII for approximately $380 million in cash. As a result of this acquisition,
AT&T Wireless Services now owns 100% of JVII, and, through JVII, holds a 34.36%
ownership interest in Rogers Wireless.
In the third quarter 2001, AT&T Wireless Services executed an agreement
to combine the soon to be merged Birla AT&T Communications Ltd./Tata Cellular,
Ltd. entity with BPL Mobile Communications Ltd. and certain portions of BPL
Cellular Ltd. AT&T Wireless Services currently owns 49% of Birla AT&T
Communications Ltd. and 49% of BPL Cellular Ltd. The agreement is subject to a
number of conditions. If all conditions are satisfied and a combination occurs
as contemplated in the preliminary agreement, AT&T Wireless Services estimates
that its ownership will be approximately 24% in the combined entity.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations".
This statement provides accounting and reporting standards for business
combinations initiated subsequent to June 30, 2001. All business combinations in
the scope of this statement are to be accounted for under one method, the
purchase method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". This statement provides accounting and reporting standards
for intangible assets acquired individually, with a group of other assets, or as
part of a business combination. This statement addresses how acquired goodwill
and other intangible assets are recorded upon their acquisition as well as how
they are to be accounted for after they have been initially recognized in the
financial statements. Under this
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statement, goodwill and other intangibles with indefinite useful lives, on a
prospective basis, will no longer be amortized, however will be tested for
impairment at least annually, based on a fair value comparison. Intangibles
which have finite useful lives will continue to be amortized over their
respective useful lives. This statement also requires expanded disclosure for
goodwill and other intangible assets. AT&T Wireless Services will be required to
adopt this statement no later than January 1, 2002. At the date of adoption,
AT&T Wireless Services will be required to complete a transitional intangible
asset impairment test. Any resulting impairment loss will be recognized as a
cumulative effect of a change in accounting principle. AT&T Wireless Services is
currently assessing the impact of this statement on its results of operations,
financial position and cash flows.
SUBSEQUENT EVENTS
On July 3, 2001, AT&T Wireless Services acquired British
Telecommunications' interest in JVII for approximately $380 million in cash. As
a result of this acquisition, AT&T Wireless Services now owns 100% of JVII, and,
through JVII, holds a 34.36% ownership interest in Rogers Wireless.
In the third quarter 2001, AT&T Wireless Services executed an agreement
to combine the soon to be merged Birla AT&T Communications Ltd./Tata Cellular,
Ltd. entity with BPL Mobile Communications Ltd. and certain portions of BPL
Cellular Ltd. AT&T Wireless Services currently owns 49% of Birla AT&T
Communications Ltd. and 49% of BPL Cellular Ltd. The agreement is subject to a
number of conditions. If all conditions are satisfied and a combination occurs
as contemplated in the agreement, AT&T Wireless Services estimates that its
ownership will be approximately 24% in the combined entity.
FORWARD-LOOKING STATEMENTS
This document and other documents which AT&T Wireless Services
incorporates herein by reference contain forward-looking statements with respect
to:
- AT&T Wireless Services' relationship with its former parent, AT&T
Corp., following its separation from AT&T in July 2001,
- AT&T's intention to sell, exchange or monetize the shares of AT&T
Wireless Services common stock that it holds,
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- financial condition,
- results of operations,
- cash flows,
- dividends,
- financing plans,
- business strategies,
- operating efficiencies or synergies,
- budgets,
- capital and other expenditures,
- network build out and upgrade,
- competitive positions,
- availability of capital,
- growth opportunities for existing products,
- AT&T Wireless Services' acquisition and growth strategy,
- benefits from new technologies,
- availability and deployment of new technologies,
- plans and objectives of management, and
- other matters.
Statements in this document, or that are incorporated by reference into
this document, that are not historical facts are hereby identified as
"forward-looking statements." These forward-looking statements, including,
without limitation, those relating to the future business prospects, revenues,
working capital, liquidity, capital needs, network build out, interest costs and
income, in each case, relating to AT&T Wireless Services, wherever they occur in
this document, are necessarily estimates reflecting the best judgment of senior
management and involve a number of risks and uncertainties that could cause
actual results to differ materially from those suggested by the forward-looking
statements. These forward-looking statements should, therefore, be considered in
light of various important factors, including those set forth in this document.
Important factors that could cause actual results to differ materially from
estimates or projections contained in the forward-looking statements include,
without limitation:
- the risks associated with the implementation of a third-generation
network and business strategy, including risks relating to the
operations of new systems and technologies, substantial required
expenditures and potential unanticipated costs, the need to enter
into roaming agreements with third parties, uncertainties regarding
the adequacy of suppliers on whom AT&T Wireless Services must rely
to provide both network and consumer equipment and consumer
acceptance of the products and services to be offered;
- the potential impact of DoCoMo's investment in AT&T Wireless
Services, including provisions of the agreements that restrict AT&T
Wireless Services' future operations, and provisions that may
require the repurchase of DoCoMo's investment if AT&T Wireless
Services fails to meet specified conditions;
- the risks associated with AT&T Wireless Services operating as an
independent entity as opposed to as part of an integrated
telecommunications provider with AT&T, AT&T Wireless Services'
former parent, including the inability to rely on the financial and
operational resources of the combined company and having to provide
services that were previously provided by a different part of the
combined company;
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- the impact of existing and new competitors in the markets in which
AT&T Wireless Services competes, including competitors that may
offer less expensive products and services, desirable or innovative
products, technological substitutes, or have extensive resources or
better financing;
- the introduction or popularity of new products and services,
including pre-paid phone products, which could increase churn;
- the impact of oversupply of capacity resulting from excessive
deployment of network capacity in the markets AT&T Wireless Services
serves;
- the ongoing global and domestic trend towards consolidation in the
telecommunications industry, which trend may have the effect of
making AT&T Wireless Services' competitors larger and better
financed and afford these competitors with extensive resources and
greater geographic reach, allowing them to compete more effectively;
- the effects of vigorous competition in the markets in which AT&T
Wireless Services operates and for more valuable customers, which
may decrease prices charged, increase churn and change the customer
mix, profitability and average revenue per user;
- the ability to enter into agreements to provide, and the cost of
entering new markets necessary to provide, nationwide services;
- the ability to establish a significant market presence in new
geographic and service markets;
- the availability and cost of capital and the consequences of
increased leverage;
- the impact of any unusual items resulting from ongoing evaluations
of AT&T Wireless Services' business strategies;
- the requirements imposed on AT&T Wireless Services or latitude
allowed to competitors by the FCC or state regulatory commissions
under the Telecommunications Act of 1996 or other applicable laws
and regulations;
- the risks and costs associated with the need to acquire additional
spectrum for current and future services;
- the risks associated with technological requirements, technology
substitution and changes and other technological developments;
- the results of litigation filed or to be filed against AT&T Wireless
Services, or of some types of litigation filed or to be filed
against AT&T for which AT&T Wireless Services has agreed to assume
the liability under the split-off agreements between AT&T Wireless
Services and AT&T;
- the possibility of one or more of the markets in which AT&T Wireless
Services competes being impacted by changes in political, economic
or other factors, such as monetary
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policy, legal and regulatory changes or other external factors over
which AT&T Wireless Services has no control; and
- those factors discussed in "Risk Factors" in AT&T Wireless Services'
registration statement on Form S-4 filed on August 2, 2001.
The words "estimate," "project," "intend," "expect," "believe," "plan"
and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are found at various places throughout this
document. You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this document. Moreover, in the
future, AT&T Wireless Services may make forward-looking statements about the
matters described in this document or other matters concerning AT&T Wireless
Services.
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ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Prior to the split-off, AT&T Wireless Services' market risk was managed
by AT&T, as AT&T performed cash management and other treasury related functions
on AT&T Wireless Services' behalf. Effective with the split-off, AT&T Wireless
Services is responsible for managing market risk as a separate company.
The $6.5 billion of Senior Notes issued in March 2001 were issued with
fixed rate coupons ranging from 7.350% to 8.750%. With only fixed rate debt
outstanding at this time, our interest cost will not vary with changes in
interest rates.
AT&T Wireless Services has equity price risk from outstanding AT&T
Wireless Services stock options, which were converted from AT&T Wireless Group
tracking stock options in conjunction with the split-off. Additionally, AT&T
Wireless Services has equity price risk associated with the 41.6 million
warrants held by DoCoMo to purchase AT&T Wireless Services common stock at $35
per share. Effective with the split-off, these warrants will be marked to market
through our operating results.
AT&T Wireless Services does not use financial instruments for trading or
speculative purposes. However, AT&T Wireless Services may have future market
risk related to derivative instruments that it may hold in the future.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On July 9, 2001, AT&T Wireless Services completed its split-off from
AT&T pursuant to (i) the redemption by AT&T of AT&T Wireless Group tracking
stock in exchange for shares of AT&T Wireless Services common stock in
accordance with AT&T's charter and (ii) the issuance by AT&T of shares of AT&T
Wireless Services common stock in a distribution to AT&T shareholders. In the
split-off, each outstanding share of AT&T Wireless Group tracking stock was
redeemed by AT&T in exchange for one share of AT&T Wireless Services common
stock. In addition, each holder of AT&T common stock received a distribution of
.3218 of a share of AT&T Wireless Services common stock for each share of AT&T
common stock held. The common stock of AT&T Wireless Services used in connection
with the redemption and the distribution was registered with the SEC pursuant to
a registration statement on Form S-1 originally filed on April 18, 2001, as
amended, and declared effective June 21, 2001 (Reg. No. 333-59174). For more
information about the split-off, please refer to the Form S-1, as amended,
referenced above.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
AT&T Wireless Services' next annual meeting of stockholders is currently
anticipated to be scheduled for May 15, 2002. An eligible stockholder who wishes
to have its qualifying stockholder proposal considered for inclusion in AT&T
Wireless Services' proxy materials for such meeting must send a qualifying
stockholder proposal to AT&T Wireless Services' Corporate Secretary at AT&T
Wireless Services' executive offices at the address below no later than December
5, 2001. To qualify as an eligible stockholder with regard to making a
stockholder proposal, a stockholder must, among other things, have continuously
held at least $2,000 in market value or 1%, of AT&T Wireless Services'
outstanding stock (which stock may have included the AT&T Wireless Group
Tracking Stock for that period prior to AT&T Wireless Services' split-off from
AT&T Corp.) for at least one year by the date of submission of the stockholder
proposal, and must continue to own that amount of stock through the date of the
annual meeting.
Any stockholder wishing to nominate persons for election to the Board of
Directors or to propose other business at the annual meeting pursuant to AT&T
Wireless Services' Bylaws, without inclusion of such proposal in AT&T Wireless
Services' proxy materials, is required to provide adequate notice of such
proposal to AT&T Wireless Services, in the form set out in AT&T Wireless
Services' Bylaws. AT&T Wireless Services' Bylaws provide that any nominations
for Directors or proposals relating to other business must be deemed a proper
matter for stockholder action and
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properly brought before the annual meeting. Such notice must be received by the
Corporate Secretary at AT&T Wireless Services' executive offices at the address
below no earlier than the close of business on the 120th calendar day prior to
the date of the annual meeting and no earlier than the close of business on the
90th calendar day prior to the date of the annual meeting, currently anticipated
to be January 15, 2002 and February 14, 2002, respectively. A copy of the
pertinent Bylaw provisions also is available to any stockholder upon written
request to the address below.
Corporate Secretary
General Counsel and Corporate Secretary's Department
AT&T Wireless Services, Inc.
7277 164th Avenue NE, Building 1
Redmond, WA 98052
Tel. No.: (425) 580-6000
Fax No.: (425) 580-8333
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT&T WIRELESS SERVICES, INC.
By:/s/ JOSEPH MCCABE, JR.
---------------------------------------------
Joseph McCabe, Jr.
Executive Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
Date: August 13, 2001
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