Filed Pursuant to Rule424(b)(3)
Registration Number 333-81342
PROSPECTUS
(CINGULAR WIRELESS LOGO)
OFFER TO EXCHANGE
$500,000,000 5.625% SENIOR NOTES DUE 2006;
$750,000,000 6.50% SENIOR NOTES DUE 2011; AND
$750,000,000 7.125% SENIOR NOTES DUE 2031
FOR ANY AND ALL OUTSTANDING
5.625% SENIOR NOTES DUE 2006;
6.50% SENIOR NOTES DUE 2011; AND
7.125% SENIOR NOTES DUE 2031
- --------------------------------------------------------------------------------
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON AUGUST 28, 2002, UNLESS EXTENDED
BY US FOR UP TO 15 DAYS
- --------------------------------------------------------------------------------
The terms of the new notes are substantially identical to the terms of the
old notes, except that the new notes are registered under the Securities Act and
the transfer restrictions and registration rights and related additional
interest provisions currently applicable to the old notes do not apply to the
new notes.
We do not intend to apply for listing of the new notes on any securities
exchange or to arrange for them to be quoted on any automated quotation system.
We may redeem some or all of the new notes at any time at our option on the
terms set forth in this prospectus.
---------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF FACTORS YOU
SHOULD CONSIDER IN CONNECTION WITH THIS EXCHANGE OFFER.
---------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is July 26, 2002.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. YOU SHOULD ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
ACCURATE ONLY AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS. OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE
CHANGED SINCE THAT DATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE ON THE COVER OF THIS
PROSPECTUS. THIS PROSPECTUS IS AN OFFER TO EXCHANGE ONLY THE NOTES OFFERED BY
THIS PROSPECTUS, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS
LAWFUL TO DO SO.
TABLE OF CONTENTS
<Table>
Where You Can Find More Information......................... i
Prospectus Summary.......................................... 1
Risk Factors................................................ 9
Disclosure Regarding Forward-Looking Statements............. 17
Our Organizational Structure................................ 18
Use of Proceeds............................................. 20
Capitalization.............................................. 21
Ratios of Earnings to Fixed Charges......................... 21
Selected Historical Financial Information................... 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 28
Industry Overview........................................... 54
Business.................................................... 58
Management.................................................. 82
Certain Relationships and Related Party Transactions........ 92
Description of Financing Arrangements....................... 101
The Exchange Offer.......................................... 103
Description of the New Notes................................ 112
Plan of Distribution........................................ 129
Validity of the New Notes................................... 130
Experts..................................................... 130
Index to Financial Statements............................... F-1
</Table>
WHERE YOU CAN FIND MORE INFORMATION
In connection with the exchange offer, we have filed with the Securities and
Exchange Commission, or the SEC, a registration statement on Form S-4 under the
Securities Act of 1933 relating to the new notes to be issued in the exchange
offer. As permitted by SEC rules, this prospectus omits information included in
the registration statement. For a more complete understanding of this exchange
offer, you should refer to the registration statement, including its exhibits.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete and, in each instance,
if the contract or document is filed as an exhibit, we refer you to the copy of
the contract or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by that reference.
Following completion of the exchange offer, we will file annual, quarterly
and current reports and other information with the SEC. The public may read and
copy any reports or other information that we file with the SEC at the SEC's
public reference room, Room 1024 at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the public reference room by calling the SEC at 1-800-SEC-0330. These documents
are also available to the public at the web site maintained by the SEC at
http://www.sec.gov. You may also obtain a copy of the exchange offer
registration statement at no cost by writing or telephoning us at the following
address:
5565 Glenridge Connector
Atlanta, Georgia 30342
Attention: Cynthia R. Irons
Telephone: (404) 236-6202
IN ORDER TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST DOCUMENTS FROM US NO
LATER THAN AUGUST 21, 2002, WHICH IS FIVE BUSINESS DAYS BEFORE THE EXPIRATION
DATE OF THE EXCHANGE OFFER ON AUGUST 28, 2002.
i
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus
and may not contain all of the information that you should consider before
deciding to exchange your notes. We urge you to read this entire prospectus
carefully, including the "Risk Factors" section and the consolidated financial
statements and the notes thereto.
BUSINESS SUMMARY
OVERVIEW. We are the second largest provider of advanced mobile wireless
voice and data communications services in the United States, based on the number
of wireless subscribers. We were formed by the combination of the U.S. wireless
communications operations of SBC Communications Inc. and BellSouth Corporation,
two of the largest providers of voice and data services. We had:
- 21.8 million U.S. wireless subscribers in over 220 metropolitan areas as
of March 31, 2002;
- revenues of $3.5 billion for the quarter ended March 31, 2002;
- net income of $370 million for the quarter ended March 31, 2002; and
- total liabilities and members' capital of $22.3 billion as of March 31,
2002, including indebtedness of $12.5 billion of which 77% represented
subordinated indebtedness to SBC and BellSouth.
We offer advanced wireless voice and data communications services across an
extensive U.S. service territory, which we refer to as our "footprint", and
operate one of the largest digital wireless networks in the United States.
- We have access to licenses to provide cellular wireless communications
services and personal communications services, or "PCS", over networks
covering an aggregate population, which we refer to as "POPs", of
approximately 231 million, or approximately 81% of the U.S. population,
including in 45 of the 50 largest U.S. metropolitan areas. POPs in this
prospectus were determined based upon U.S. Census 2000 data by county,
mapped to FCC license area definitions.
- We provide cellular or PCS services in 42 of the 50 largest U.S.
metropolitan areas.
- 100% of our networks utilize digital technology.
- At March 31, 2002, 87% of our cellular and PCS customers were using
digital service, and in March 2002, 97% of our cellular and PCS minutes
of use were digital.
With 3.4 million active users of our data services at March 31, 2002, we
are a U.S. industry leader in providing advanced wireless data services and are
well-positioned to capitalize on the projected rapid growth in demand for
wireless data transmission, including e-mail, Internet access and interactive
messaging. We:
- provided advanced data services to approximately 765,000 customers as of
March 31, 2002, including the U.S. Congress and the Department of
Defense, over our separate "Mobitex" data network, which covers over 90%
of the U.S. metropolitan population, including the top 50 largest U.S.
metropolitan areas;
- had over 2.6 million active cellular and PCS users of our wireless
Internet, short messaging and other data services at March 31, 2002; and
- are in the process of deploying high-speed digital data General Packet
Radio Service, or "GPRS", service throughout our cellular and PCS
networks, as well as enhancing our network infrastructure in many of our
markets to provide a common voice standard across our networks.
For information on our competitive strengths and business strategy, please
refer to "Business -- Competitive Strengths" and "-- Business Strategy" below.
1
ORGANIZATIONAL STRUCTURE
CINGULAR WIRELESS LLC. Cingular Wireless LLC is a Delaware limited
liability company formed in April 2000 whose members are certain SBC and
BellSouth subsidiaries, and Cingular Wireless Corporation, our manager. In
October 2000, SBC and BellSouth contributed to us substantially all of their
U.S. wireless voice and data businesses, as further described under "Our
Organizational Structure" below. SBC received an approximate 60% and BellSouth
received an approximate 40% economic interest in us for their contributions. SBC
and BellSouth have equal representation on the board of directors of Cingular
Wireless Corporation. Substantially all important decisions are required to be
approved by a strategic review committee of its board of directors.
CINGULAR WIRELESS CORPORATION. Cingular Wireless Corporation is a Delaware
corporation formed in April 2000 that acts as our manager and controls our
management and operations. Cingular Wireless Corporation has no material assets
of its own other than a nominal limited liability company membership interest in
us. SBC and BellSouth each own one share of super-voting Class B common stock of
Cingular Wireless Corporation through which they together have the right to
control its board of directors.
The following chart outlines our organizational structure:
(CHART)
OUR SUBSIDIARIES AND VENTURES. All of our operations are conducted through
subsidiaries or ventures, and nearly all of our assets are held by them. Most of
our subsidiaries are organized in the form of partnerships or limited liability
companies.
NONE OF SBC, BELLSOUTH, OUR MANAGER OR ANY OF OUR OR THEIR SUBSIDIARIES IS
AN OBLIGOR OR GUARANTOR ON THE NEW NOTES.
OUR PRINCIPAL OWNERS.
SBC. SBC Communications Inc. provides local and long distance phone
service, data communications, paging, high-speed Internet access and messaging
and communications equipment, as well as directory advertising and publishing.
2
BellSouth. BellSouth Corporation provides domestic local and long distance
wireline and international wireless communications, as well as advertising and
directory publishing services and products. Its communications services include
data services, web design and hosting, Internet access, e-commerce and other
services to residences, businesses and institutions of all sizes.
3
THE EXCHANGE OFFER
ISSUANCE OF THE OLD
NOTES...................... The old notes were issued on December 12, 2001 in a
transaction not requiring registration under the
Securities Act.
THE EXCHANGE OFFER; NEW
NOTES...................... We are offering to exchange $2,000,000,000
aggregate principal amount of new notes that have
been registered under the Securities Act for a like
principal amount of old notes of the same tenor
that noteholders properly tender and do not
withdraw before the expiration date. The new notes
may be exchanged only in minimum denominations of
$1,000 and integral multiples thereof, although
holders of old notes in certificated form may
exchange their old notes for new notes only in
minimum denominations of $250,000 and integral
multiples of $1,000. All new notes will be
represented by global notes deposited with a
custodian for, and registered in the name of, The
Depository Trust Company, or "DTC". We will issue
the new notes on or promptly after the expiration
date. See "The Exchange Offer".
EXPIRATION DATE............ The exchange offer will expire at 5:00 p.m., New
York City time, on August 28, 2002, unless extended
by us for up to 15 days. If extended, the term
"expiration date" will mean the latest date and
time to which the exchange offer is extended. We
will accept for exchange any and all old notes
which are properly tendered in the exchange offer
and not withdrawn before 5:00 p.m., New York City
time, on the expiration date.
RESALE OF NEW NOTES........ Based on interpretive letters written by the staff
of the SEC to companies other than us, we believe
that, subject to certain exceptions, the new notes
may generally be offered for resale, resold and
otherwise transferred by you, without compliance
with the registration and prospectus delivery
provisions of the Securities Act, if you:
- acquire the new notes in the ordinary course of
your business;
- do not have an arrangement or understanding with
any person to participate in a distribution of
the new notes;
- are not an affiliate of ours within the meaning
of Rule 405 under the Securities Act; and
- are not a broker-dealer that acquired the old
notes directly from us.
If our belief is inaccurate as to any holders, such
holders of new notes who offer, resell or otherwise
transfer new notes in violation of the Securities
Act may incur liability under that Act. We will not
assume or indemnify holders against this liability.
If you are a broker-dealer that purchased old notes
for your own account as part of market-making or
trading activities, you must deliver a prospectus
when you sell new notes. We have agreed under a
registration rights agreement relating to the old
notes to allow you to use this prospectus for this
purpose for a period of 180 days after the
consummation of the exchange offer.
4
CONDITIONS TO THE EXCHANGE
OFFER...................... We may terminate the exchange offer before the
expiration date if we determine that our ability to
proceed with the exchange offer could be materially
impaired due to:
- any legal or governmental actions;
- any new law, statute, rule or regulation; or
- any interpretation by the staff of the SEC of any
existing law, statute, rule or regulation.
The exchange offer is not conditioned on the tender
of any minimum principal amount of old notes.
TENDER PROCEDURES --
BENEFICIAL OWNER........... If you are a beneficial owner of old notes and wish
to tender old notes that are registered in the name
of a broker, dealer, commercial bank, trust company
or other nominee, you should contact the registered
holder promptly and instruct the registered holder
to tender on your behalf.
You should follow the instructions received from
your broker or nominee with respect to tendering
procedures and contact your broker or nominee
directly.
TENDER PROCEDURES --
REGISTERED HOLDERS AND DTC
PARTICIPANTS............... If you are a registered holder of old notes and you
wish to participate in the exchange offer, you must
complete, sign and date the letter of transmittal
delivered with this prospectus. If you are a
participant in DTC and you wish to participate in
the exchange offer, you must instruct DTC to
transmit to the exchange agent an agent's message
indicating that you agree to be bound by the terms
of the letter of transmittal. You should mail or
otherwise transmit the letter of transmittal, or,
if you are a participant in DTC, instruct DTC to
send an agent's message, together with your old
notes in book-entry form, and any other required
documentation to Bank One Trust Company, N.A., as
exchange agent.
GUARANTEED DELIVERY
PROCEDURES................. If you are a holder of old notes and you wish to
tender them, but they are not immediately available
or you cannot deliver them or the letter of
transmittal to the exchange agent prior to the
expiration date, you must tender your old notes
according to special guaranteed delivery
procedures. See "The Exchange Offer -- Procedures
for Tendering -- Registered Holders and DTC
Participants -- Registered Holders".
WITHDRAWAL RIGHTS.......... You may withdraw tenders of old notes at any time
before 5:00 p.m., New York City time, on the
expiration date.
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF NEW NOTES...... Subject to the satisfaction or waiver of the
conditions to the exchange offer, we will accept
for exchange any and all old notes that are
properly tendered and not withdrawn before 5:00
p.m., New York City time, on the expiration date.
The new notes will be delivered promptly after the
expiration of the exchange offer.
5
EXCHANGE AGENT............. Bank One Trust Company, N.A.
EFFECT ON HOLDERS OF OLD
NOTES...................... Any old notes that remain outstanding after this
exchange offer will continue to be subject to
restrictions on their transfer. After this exchange
offer, holders of old notes will not have any
further exchange or registration rights with
respect to the old notes, with limited exceptions.
Any market for old notes that are not exchanged
could be adversely affected by the consummation of
this exchange offer.
TAX CONSEQUENCES OF
EXCHANGE OFFER............. You will not recognize any income, gain or loss for
U.S. federal income tax purposes as a result of the
exchange.
THE NEW NOTES
ISSUER..................... The new notes will be the obligations of Cingular
Wireless LLC.
THE NEW NOTES.............. - $500,000,000 of 5.625% senior notes due December
15, 2006;
- $750,000,000 of 6.50% senior notes due December
15, 2011; and
- $750,000,000 of 7.125% senior notes due December
15, 2031,
all of which have been registered under the
Securities Act.
INTEREST PAYMENT DATES..... June 15 and December 15, commencing December 15,
2002.
OPTIONAL REDEMPTION........ Like the old notes, the new notes are redeemable at
our option at any time, in whole or in part, at
redemption prices equal to their principal amount
plus any "make-whole premium" and any accrued and
unpaid interest.
RANKING.................... Like the old notes, the new notes will be our
unsecured obligations and will rank equally with
all of our unsecured and unsubordinated obligations
and senior to all subordinated debt. The new notes
will effectively rank junior to any of our secured
debt. In addition, the new notes will effectively
rank junior to all liabilities of our subsidiaries,
including secured debt and trade payables. As of
March 31, 2002:
- we and our subsidiaries had $778 million of
secured debt, including $764 million of capital
lease obligations; we were also liable for $168
million of capital lease obligations that we
contributed to our venture with VoiceStream
Wireless;
- our subsidiaries had $3.6 billion of unsecured
liabilities;
- we had $2.0 billion of unsecured unsubordinated
debt, comprised primarily of the old notes; and
- we and our subsidiaries had an aggregate of $9.7
billion of unsecured loans from SBC and
BellSouth, which are subordinated to the extent
described elsewhere in this prospectus, but which
are scheduled to mature before the new notes.
FURTHER ISSUES............. We may create and issue further 2006 notes, 2011
notes and 2031 notes ranking equally and ratably
with the new notes of that series in all respects,
so that those further notes would be consolidated
and form a single series with the new notes of that
series and would have the same terms as to status,
redemption or otherwise as the new notes of that
series.
TRUSTEE.................... Bank One Trust Company, N.A.
---------------------
The address of our principal executive office is 5565 Glenridge Connector,
Atlanta, Georgia 30342. Our phone number is (404) 236-6000.
6
SUMMARY UNAUDITED FINANCIAL AND OPERATING DATA
The following table presents summary unaudited actual consolidated
financial and operating data of Cingular Wireless LLC for the three months ended
March 31, 2002 and March 31, 2001, and for the year ended December 31, 2001
compared to summary combined historical financial and operating data for
Cingular Wireless LLC, the SBC Domestic Wireless Group and the BellSouth
Domestic Wireless Group for the year ended December 31, 2000. In combining the
historical results of Cingular Wireless LLC, the SBC Domestic Wireless Group and
the BellSouth Domestic Wireless Group, inter-group transactions have been
eliminated. The data presented in this table is derived from the financial
statements and related notes which are included elsewhere in this prospectus.
You should read "Selected Historical Financial Information" relating to Cingular
Wireless LLC for a further discussion of the financial data summarized herein.
You should also read our "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
We have included under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Summary Second Quarter Operating Results"
summary unaudited financial and operating data for the three and six months
ended June 30, 2001 and 2002.
The summary unaudited financial data for the periods ended March 31, 2002
and June 30, 2002 may not be indicative of results for the full year.
<Table>
<Caption>
THREE MONTHS THREE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
2000 2001 2001 2002
(COMBINED) (ACTUAL) (ACTUAL) (ACTUAL)
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER UNIT OPERATING DATA)
STATEMENTS OF OPERATIONS DATA:
Operating revenues:
Service revenues........................... $11,221 $13,069 $ 3,012 $ 3,316
Equipment sales............................ 988 1,039 262 227
------- ------- ------- -------
Total operating revenues........... 12,209 14,108 3,274 3,543
Cost of service and equipment sales:
Cost of service............................ 2,191 2,752 604 723
Cost of equipment sales.................... 1,573 1,652 437 404
------- ------- ------- -------
Total cost of service and equipment
sales............................ 3,764 4,404 1,041 1,127
------- ------- ------- -------
Gross margin............................... $ 8,445 $ 9,704 $ 2,233 $ 2,416
======= ======= ======= =======
OPERATING DATA:
Licensed POPs (in millions) (end of
period)(1).............................. 197 219 193 219
Cellular/PCS subscribers (in millions) (end
of period)(2)........................... 19.7 21.6 20.0 21.8
Cellular/PCS subscriber churn(3)........... 2.6% 2.9% 2.7% 2.9%
Average cellular/PCS revenue per subscriber
unit (ARPU)(4).......................... $ 53.47 $ 52.26 $ 50.82 $ 50.44
EBITDA(5).................................. -- $ 4,469 $ 962 $ 1,117
EBITDA margin(6)........................... -- 34.2% 31.9% 33.7%
Net cash provided by operating
activities.............................. -- $ 3,665 $ 529 $ 253
Net cash provided by (used in) investing
activities.............................. -- $(3,945) $ (595) $ (451)
Net cash provided by (used in) financing
activities.............................. -- $ 721 $ 54 $ (84)
</Table>
7
<Table>
<Caption>
AS OF
MARCH 31, 2002
(ACTUAL)
--------------
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 285
Property, plant and equipment, net........................ 8,769
Total assets.............................................. 22,310
Subordinated debt due to affiliates....................... 9,678
Other debt................................................ 2,815
Total members' capital.................................... 6,229
</Table>
- ---------------
(1) Licensed POPs refers to the number of people residing in areas where we
have licenses to provide cellular or PCS service. POPs for combined
operating results for the year ended December 31, 2000 also include the
POPs of those wireless businesses of SBC and BellSouth contributed to the
Company in 2001.
(2) Cellular/PCS subscribers include customers served through reseller
agreements.
(3) Cellular/PCS subscriber churn is calculated by dividing the aggregate
number of cellular/PCS subscribers who cancel service during each month in
a period by the total number of cellular/PCS subscribers at the beginning
of each month in that period.
(4) Average revenue per subscriber unit (ARPU) is defined as cellular/PCS
service revenues during the period divided by average cellular/PCS
subscribers during the period.
(5) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is not presented as an alternative measure of operating results or
cash flows from operations, as determined in accordance with generally
accepted accounting principles, but because we believe it is a widely
accepted indicator of our ability to incur and service debt and make
capital expenditures. EBITDA does not give effect to cash used for debt
service requirements and distributions and thus does not reflect funds
available for dividends, reinvestment or other discretionary uses. In
addition, EBITDA as presented herein may not be comparable to similarly
titled measures reported by other companies.
(6) EBITDA margin is defined as EBITDA divided by service revenues.
8
RISK FACTORS
You should carefully consider each of the following risks and all of the
other information in this prospectus. If any of the following risks and
uncertainties develop into actual events, our business, financial condition or
results of operations could be materially adversely affected, which could result
in a loss or a decrease in the value of your new notes.
RISKS RELATED TO OUR BUSINESS
WE FACE SUBSTANTIAL COMPETITION IN ALL ASPECTS OF OUR BUSINESS, WHICH COULD
CONTINUE TO CAUSE REDUCED PRICING AND HAVE ADVERSE EFFECTS ON OUR PROFIT
MARGINS. There is substantial and increasing competition in all aspects of the
wireless communications industry. Over the past year, competition has
intensified as wireless carriers have included more bundled services in their
offerings, including more minutes and free long distance and roaming. This
contributes to downward pressure on revenues and profit margins and we expect
this trend to continue. Our competitors are principally five other national and
a larger number of regional providers of cellular, PCS and other wireless
communications services, but we also compete with smaller companies, as well as
dispatch mobile telephone companies, resellers and wireline telephone service
providers. FCC regulations and government policy in general promote robust
competition, and future rules or changes to existing rules could increase this
trend.
Some of our competitors have substantial financial, technical, marketing,
distribution and other resources. As a response to the intensifying competition,
the need for cost reduction and the requirements for additional radio spectrum,
we believe that the industry will consolidate further in the next several years.
This may produce larger and more formidable competitors who have a greater
financial ability to continue to reduce prices. As a result, our profit margins
may decrease. For more information about the competitive environment we
encounter, see "Business -- Competition".
WE MAY ENCOUNTER OBSTACLES IN IMPLEMENTING OUR NETWORK TECHNOLOGY
MIGRATION, WHICH COULD RESULT IN A LOSS OF CUSTOMERS, SLOWER CUSTOMER GROWTH AND
LOWER PROFITABILITY. We are upgrading our networks with new technology. Our
networks are currently equipped with two digital transmission technologies, Time
Division Multiple Access technology, or "TDMA", and Global System for Mobile
Communication technology, or "GSM". We plan to add GSM equipment throughout our
TDMA markets to provide a common voice standard and to add the technologies for
data services known as General Packet Radio Services, or "GPRS", and Enhanced
Data Rates for Global Evolution, or "EDGE", across our entire network. A number
of factors beyond our control could disrupt a timely and cost-effective
transition to these technologies. We depend on suppliers to deliver the required
hardware and software on schedule and according to specifications, and on the
availability of skilled personnel to assist us in the installation work.
Furthermore, significant components we need to complete our upgrades, such as
EDGE software, are not yet commercially available and may delay our
implementation dates if not produced and delivered as anticipated. Any of these
obstacles could result in a loss of customers, slower customer growth and lower
profitability.
AS WE DEDICATE MORE RESOURCES TO NEW TECHNOLOGY, OUR TDMA OFFERINGS COULD
BECOME LESS ATTRACTIVE, RESULTING IN A LOSS OF CUSTOMERS AND REDUCED
PROFITABILITY. We expect to continue to operate substantially all of our TDMA
network, which currently serves 72% of our POPs and 82% of our customers, for
about eight to ten years. But due to our decision to overlay our TDMA network
with GSM technology, we may choose not to upgrade our TDMA network with the same
robust features that may be provided on our competitors' networks. Furthermore,
as more spectrum is dedicated to GSM, our remaining TDMA customers may
experience difficulties in using our services. In addition, as we market GSM
service, we may price GSM products and services at more attractive levels than
TDMA products and services to encourage our customers to migrate to GSM. All of
these potential developments could drive our TDMA customers to our competitors
instead of to our GSM offerings and thereby reduce profitability.
IF WE FAIL TO OBTAIN ACCESS TO ADDITIONAL RADIO SPECTRUM, WE MAY NOT BE
ABLE TO EXPAND THE GEOGRAPHIC REACH OF CINGULAR-BRANDED SERVICES, INCREASE OUR
CUSTOMER BASE IN AREAS WE CURRENTLY SERVE OR MEET THE ANTICIPATED DEMAND FOR NEW
SERVICES. We need more licensed spectrum to support high speed data and other
advanced services, to expand our geographic reach, to meet an increasing volume
of customer usage and to
9
increase our customer base. One of the ways to obtain radio spectrum is by
participating in FCC auctions. In 2000, Crowley Digital Wireless LLC and we
formed a joint venture, Salmon PCS, to bid for licenses that had been reclaimed
by the FCC from carriers that had previously won them at auction but who
subsequently defaulted on their payment obligations. The FCC reauctioned these
licenses during December 2000 and January 2001 and awarded Salmon 45 of the 79
licenses for which Salmon was the highest bidder. The two bankrupt carriers from
which many of the auctioned licenses were reclaimed have challenged the legality
of the FCC's actions. The FCC has not awarded Salmon the remaining 34 licenses
for which it was the highest bidder, awaiting the resolution of one of the
challenges that is now pending before the U.S. Supreme Court, as further
described in "Business -- Our Network -- Salmon PCS". If Salmon is not granted
these licenses, it could have a significant, adverse impact on Salmon's and our
plans to provide Cingular-branded service in key new markets and could adversely
affect the quality of service in certain existing markets if the demand for
wireless communications continues to increase. We may also seek to acquire
spectrum in the secondary market, primarily through spectrum exchanges with and
purchases from other wireless providers, acquisitions and joint ventures.
However, there can be no assurance that we will be able to obtain access to
additional spectrum from these sources on acceptable terms. Therefore, we cannot
assure you that we will be successful in obtaining access to the additional
spectrum needed to expand our geographic coverage and meet the growing needs of
our business.
HANDSETS THAT WILL OPERATE ON BOTH TDMA AND GSM NETWORKS ARE NOT YET WIDELY
AVAILABLE, MAY BE MORE EXPENSIVE THAN CURRENT HANDSETS AND MAY HAVE OPERATIONAL
INEFFICIENCIES, ALL OF WHICH COULD IMPEDE OUR GSM SERVICE OFFERINGS AND COULD
LEAD TO INCREASED CHURN. Our technology upgrade plans depend heavily on the
deployment of new dual mode TDMA/GSM handsets, referred to as "GAIT" phones.
Utilizing new technology, these phones are intended to allow our customers to
use GSM service without losing the ability to operate on our existing TDMA and
analog networks in areas where we have not overlayed GSM technology. Because the
variety of GAIT phones will be more limited than GSM phones, they may not be
readily accepted by customers and impede our efforts to migrate our customer
base from TDMA to GSM. Also, because GAIT phones will be required by only a
limited number of carriers on an interim basis to support a transition from TDMA
to GSM networks, they may not be produced in sufficient quantities when needed,
and they may not achieve significant economies of scale.
IF WE CANNOT REDUCE THE ROAMING AND LONG DISTANCE CHARGES WE PAY TO OTHER
WIRELESS CARRIERS, OUR MARGINS MAY DECLINE. Wireless system operators agree to
provide service to subscribers from other compatible wireless systems who are
temporarily located in or traveling through their service areas, in a practice
called "roaming". We believe that the ability to provide national service to our
customers is critical to maintaining our competitive position. Since our network
does not cover the entire United States, and since our subscribers cannot
currently access our entire network due to the different technologies that we
use, we have entered into roaming agreements with other providers to permit our
subscribers to use their networks. We may not be able to expand our footprint or
reduce the roaming and long distance charges that we pay to other wireless
carriers, and, as a result, our services may become less profitable or the
coverage area or pricing we offer relative to our competitors may not be as
attractive.
OUR CHOICE FOR THE NEXT GENERATION OF TECHNOLOGY, EDGE, IS A NEW TECHNOLOGY
AND COULD QUICKLY BECOME OBSOLETE AND/OR NOT COMMERCIALLY ACCEPTED, WHICH COULD
RESULT IN A DELAY IN OFFERING NEW SERVICES. Several wireless providers have
announced that they will soon introduce new third generation, or "3G", wireless
services in the United States. We expect that 3G services will combine the
attributes of faster speed, greater data capability, better portability and
greater functionality than services provided over current networks. We have
chosen EDGE, but we believe that there will be multiple, competing technological
standards, several options within each standard, vendor-proprietary variations
and rapid technological innovation. Other technologies could emerge as preferred
data networks for some services and, if those technologies are widely accepted,
we may miss the opportunity to offer those services because of our technology
decision. There is a risk that EDGE could be inadequate or become obsolete. In
addition, EDGE could receive less active support from equipment vendors and/or
be less commercially accepted by users, which could be detrimental to our
competitive position, financial condition and results of operations.
10
WE ARE COMMITTING A SUBSTANTIAL AMOUNT OF CAPITAL TO UPGRADE OUR CELLULAR
AND PCS NETWORKS TO OFFER ADVANCED DATA SERVICES, BUT THERE CAN BE NO ASSURANCE
THAT WIDESPREAD DEMAND FOR THESE SERVICES WILL DEVELOP. While demand for our
advanced data services is growing, wide market acceptability of these services
is constrained by slower network speeds in areas where we have not installed
GPRS technology, limited popular applications, and limited choice in handsets
with features and functionality desired by customers. We do not expect that
there will be widespread demand for advanced wireless data services in the near
future and there can be no assurance that this demand will develop at a level
that will allow us to earn a reasonable return on our investment. See "-- Our
business expansion and network upgrade will require substantial additional
capital and we cannot assure you that we will be able to finance them" for
additional information regarding our future capital expenditures.
WE DO NOT CONTROL SALMON -- THE COMPANY THAT BID FOR CERTAIN LICENSES IN
THE RECENT FCC AUCTIONS -- AND AS A RESULT SALMON MAY MAKE BUSINESS DECISIONS
THAT HAVE AN ADVERSE IMPACT ON OUR PLANS TO ESTABLISH CINGULAR AS A NATION-WIDE
BRAND. As of March 31, 2002, we had an approximate 80% non-controlling equity
interest in Salmon, with the balance owned by Crowley Digital. We initially
planned to conduct a material amount of our business through Salmon, but to date
Salmon has only been awarded 45 of the 79 licenses for which it was the winning
bidder. The 45 licenses granted to date represent an incremental increase in the
number of Cingular-branded POPs of about 5%; however, if the FCC ultimately
grants the remaining licenses to Salmon, the percentage incremental increase in
the number of Cingular-branded POPs would be about 11%. Despite our commitments
to provide substantial funds to Salmon, we do not have control of Salmon's
management committee, and even though Salmon has hired us to manage its network,
subject to its oversight and control, it can terminate us as manager.
Furthermore, disagreements with Crowley Digital may create delays and expense
and adversely affect our profits. See "Business -- Our Network -- Salmon PCS"
for more information on our interest in Salmon and the manner in which
management control of Salmon is exercised.
OUR NETWORK-SHARING VENTURE WITH VOICESTREAM MAY IMPEDE OUR ABILITY TO
COMPETE EFFECTIVELY IN THE COVERED TERRITORIES. We have contributed our network
infrastructure in California and Nevada to a new venture with VoiceStream. The
network in California experiences high traffic volumes. If the combined demand
for service for the joint venture far exceeds the network capacity, temporary
degradation of service and loss of customers may result until capacity is
increased. We may also experience disagreements with VoiceStream over the
operation of the venture, and VoiceStream may encounter financial difficulties,
which could jeopardize a fully-financed and smooth operation of our venture. For
more information on the venture, see "Business -- Our Network -- Transactions
with VoiceStream Wireless".
OUR BUSINESS EXPANSION AND NETWORK UPGRADE WILL REQUIRE SUBSTANTIAL
ADDITIONAL CAPITAL AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO FINANCE
THEM. The operation of our business and the upgrading and expansion of our
network will require substantial amounts of capital:
- we may require substantial capital for acquisitions of systems, spectrum
licenses, build-out of infrastructure, our network migration and upgrade
plan and network capacity expansion;
- upon Salmon's request, we will lend Salmon additional secured debt
capital to finance the build-out of its networks and operations,
including approximately $2 billion for additional licenses if they are
ultimately granted to Salmon;
- we will provide funding to our infrastructure ventures with VoiceStream
and AT&T Wireless; and
- we will be required to make significant distributions and payments to SBC
and BellSouth under our limited liability company agreement to cover
their tax liabilities arising from their interests in us.
The actual amount of capital required may vary materially from our current
estimates. Unforeseen delays, cost overruns, regulatory changes, engineering and
technological changes and other factors may also require additional funds.
As a result of the cash needs described above, we may need to incur
significant amounts of additional debt and to raise additional equity. Incurring
substantial amounts of additional debt could result in a decrease
11
in our credit ratings, which would increase our cost of borrowing. In addition,
we may not be able to obtain additional funds on satisfactory terms from the
capital markets, from other sources or from SBC or BellSouth, neither of which
has any obligation to provide us additional funding. The failure to obtain
financing could result in, among other things:
- the delay or abandonment of our business development and expansion or
network upgrade plans; or
- the failure to meet regulatory build-out requirements or to continue to
provide service in all or portions of some of our markets,
any of which could result in slower business growth and loss of competitive
position. For more information relating to our access to capital and the capital
we will require, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Capital expenditures, other investments and debt service".
OUR DATA SERVICES MAY BE A RELATIVELY SMALL PART OF OUR TOTAL BUSINESS FOR
SOME TIME. Our data services are growing at a higher rate than our voice
services, but because they are currently such a small component of our total
business it may be many years before they comprise a substantial portion of our
operations. The data services we offer through our Mobitex data network differ
from advanced data services provided over cellular and PCS networks. Therefore,
our experience with this data service may not provide us with any marketing or
operational advantages over our competitors, some of whom have provided Internet
access and other data applications over their cellular and PCS networks earlier
than we have. We expect robust competition to develop among multiple carriers
offering high-speed packet-switched data services using various technologies,
including cellular and PCS.
ACQUISITIONS MAY BE COSTLY AND TIME-CONSUMING TO INTEGRATE. One element of
our strategy is to expand the geographic coverage of our network, which we may
achieve by obtaining access to additional spectrum through FCC auctions,
spectrum exchanges with or purchases from other wireless providers, acquiring
wireless carriers or forming joint ventures or alliances with the existing
businesses of other wireless providers. These efforts may require substantial
additional financing. In addition, we may encounter difficulties in integrating
existing operations that we may acquire into our own operations because of
different technologies, services or service offerings. These transactions could
prove costly or time-consuming and could divert our management's attention from
operating our business.
FAILURE OF CERTAIN OF OUR KEY SUPPLIERS TO DELIVER EQUIPMENT AND SERVICES
COULD ADVERSELY AFFECT OUR ABILITY TO OPERATE OUR BUSINESS. We depend upon
various key suppliers to provide us with equipment and services that we need to
continue our network upgrade and operate our business. Some of these suppliers
are experiencing financial and business difficulties, and if these suppliers
fail to provide equipment or service to us on a timely basis, we may be unable
to provide services to our customers in a competitive manner. If we are unable
to obtain the hardware and software we need to build out licensed territories,
our licenses may be at risk of termination for failure to satisfy the
requirements contained in our FCC licenses regarding the construction of our
networks. We are particularly vulnerable in the case of our TDMA switch and cell
site equipment infrastructure vendors, who are Ericsson, Lucent and Nortel,
because a given TDMA market can only use cell site equipment provided by the
supplier of the switch serving that particular market. As a result, in the short
term, our existing TDMA suppliers can exercise considerable market power and
pose financial and operational risks to us.
DIFFICULTIES IN COMPLETING THE INTEGRATION OF THE COMPANIES THAT FORM OUR
BUSINESS COULD ADVERSELY AFFECT US IN MANY WAYS. Prior to our formation, the
domestic wireless units of SBC and BellSouth had their own management teams,
wireless networks, operational and technical groups, marketing and distribution
channels and information, billing and other systems. We have accomplished a
significant level of integration, but more remains to be done. The continuing
integration of network, information, customer care, billing and financial
systems of our predecessor units is critical to achieving our financial goals.
This involves considerable effort, and there is a risk that the process could be
more costly and time-consuming than planned and could delay the introduction of
productivity enhancements and measurement tools. In addition, we may not be able
to maximize cost savings and the quality of our customer care and other
operations may
12
be negatively impacted during the transition, all of which could have a material
adverse effect on our operating results and financial condition.
THE POTENTIAL IMPACT OF UNIONIZATION AND ORGANIZING ACTIVITIES, WHICH WE
EXPECT TO INCREASE, COULD ADVERSELY AFFECT OUR COSTS AND RESULTS OF OPERATIONS.
All of our businesses, excluding ventures, are subject to various agreements
with the Communications Workers of America. These agreements contain provisions
requiring us to maintain neutrality if the union conducts an organizing campaign
and requiring us to allow employees to vote to unionize by presenting
authorization cards rather than participating in a more difficult secret ballot
process conducted by the National Labor Relations Board. In an effort to gain
recognition in the areas not already covered by a contract, union activity may
increase. We believe that no other national wireless provider currently employs
a unionized workforce to any significant extent. At the expiration of the
agreements, a work stoppage could prevent us from providing service to our
customers in the area covered by the expired contract and possibly result in
customer loss and a reduction in revenue. For more information on
employment-related matters, see "Business -- Employees" and "Management" below.
THE HISTORICAL FINANCIAL INFORMATION INCLUDED IN THIS PROSPECTUS MAY BE OF
LIMITED RELEVANCE. As a recently formed joint venture, we have limited
historical financial information to present to you. The historical financial
information for periods prior to January 1, 2001 included in this prospectus
includes the results of operations of the wireless operations of SBC and
BellSouth prior to October 2, 2000 and of us thereafter. The combined financial
data for 2000 and 1999 do not purport to be indicative of what our results of
operations would actually have been if we had been formed at the beginning of
the applicable period. The SBC and BellSouth Domestic Wireless Groups were
managed separately prior to their contribution to us on October 2, 2000, and the
combined financial data for 2000 and 1999 are not intended to show what the
combined financial results would have been had the companies actually been
managed together.
EXCHANGES BY OUR MEMBERS OF THEIR RESPECTIVE INTERESTS IN US FOR THE CLASS
A COMMON STOCK OF OUR MANAGER MAY CAUSE US TO DISTRIBUTE MORE CASH TO OUR
MEMBERS TO COVER THEIR TAX LIABILITIES, WHICH WOULD OTHERWISE BE AVAILABLE FOR
OTHER BUSINESS USES. Each of SBC and BellSouth has the right to exchange some or
all of its interests in us for the Class A common stock of our manager. If 50%
or more of the units in us are exchanged for stock or otherwise transferred
within a 12-month period, we will be deemed to terminate for federal income tax
purposes. This deemed termination would defer our tax depreciation and
amortization deductions and thus accelerate our allocations of taxable income to
our members. Because we are required to distribute cash to our members to cover
taxes due on their taxable income from us, a deemed termination would increase
the tax distributions required to be made by us and thus reduce the cash
available to us for other needs, including capital expenditures and operating
cash needs. This reduction in available cash could have an adverse impact on our
business.
RISKS RELATED TO OUR INDUSTRY
WE MAY BE ADVERSELY AFFECTED BY THE SIGNIFICANT CHANGES THAT WE EXPECT THE
WIRELESS COMMUNICATIONS INDUSTRY TO UNDERGO. The wireless communications
industry is experiencing significant changes. These include the continuation of
digital upgrades in existing analog wireless systems, evolving industry
standards, ongoing improvements in the capacity and quality of digital
technology, shorter development cycles for new services, evolution to 3G
standards and changes in end-user needs and preferences. Also, alternative
technologies may develop for the provision of services to customers that may
provide wireless communications services or alternative services superior to
those available from us. Accordingly, there can be no assurance that
technological changes will not materially adversely affect us.
A HIGH RATE OF CHURN WOULD NEGATIVELY IMPACT OUR BUSINESS. Wireless
communications services providers, including us, experience varying rates of
lost customers, referred to as "churn". We believe that customers change
wireless providers for the following reasons: service offerings, price, call
quality, coverage area and customer service. A high rate of churn would
adversely affect our results of operations because of loss of revenue and
because the cost of adding a new subscriber, which generally includes a
commission expense and/or a handset subsidy, is a significant factor in income
and profitability for participants in the wireless industry. We intend to incur
significant expenses to improve subscriber retention and reduce churn.
13
We may also be required to subsidize product upgrades and/or reduce pricing to
match competitors' initiatives and to retain customers.
OUR INDUSTRY WILL CONTINUE TO BE ADVERSELY AFFECTED IF THE ECONOMIC
SLOWDOWN PERSISTS. The economies of the United States and many other nations are
suffering from a significant economic slowdown, and wireless companies,
including us, have experienced lower net subscriber additions. There can be no
assurance that such a slowdown will not continue to adversely affect the
industry.
NEW SPECTRUM AVAILABLE THROUGH GOVERNMENT AUCTIONS WILL LIKELY BE IN A
FREQUENCY BAND DIFFERENT FROM OUR CURRENT FREQUENCY BANDS, AND IF WE ACQUIRE
SPECTRUM IN A NEW FREQUENCY BAND, GREATER INEFFICIENCIES AND COSTS MAY RESULT.
Our network currently consists of infrastructure that provides communications
over cellular and PCS frequencies. Our Mobitex data network is operated over
separate frequencies. It is likely that new spectrum available through
government auctions will be in yet another frequency band. Handsets that utilize
spectrum in multiple frequencies are currently under development but they may
cost more than currently available handsets. Also, there are operational
inefficiencies and added costs required to accommodate such disparate spectrum,
and we may lose customers if we must upgrade them to new handsets to permit
seamless roaming over new multi-frequency networks.
CONCERN ABOUT ALLEGED HEALTH RISKS RELATING TO RADIO FREQUENCY ENERGY MAY
HARM OUR PROSPECTS. A number of studies have been conducted to examine the
health effects of wireless phone use, and some persons have construed some of
the studies as indicating that wireless phone use causes adverse health effects.
Some media reports have also suggested that radio frequency energy from wireless
handsets, accessories and cell sites may be associated with various health
problems, including cancer. In addition, lawsuits have been filed against us and
other participants in the wireless industry alleging actual and potential
adverse health consequences as a result of wireless phone usage. Some of these
lawsuits allege other related claims, including negligence, strict liability,
conspiracy and the misrepresentation of or failure to disclose these alleged
health risks. If consumers' health concerns over radio frequency energy
increase, they may be discouraged from using wireless handsets, and regulators
may impose restrictions on the location and operation of cell sites. These
concerns could have an adverse effect on the wireless communications industry
and expose wireless providers to further litigation, which, even if not
successful, can be costly to defend. Additional studies of radio frequency
energy are ongoing and new studies are anticipated. Any negative findings in
these studies could increase the risks described above. In addition, an adverse
outcome or settlement in the existing and/or any further litigation against us
or any other provider of wireless services could have a material adverse effect
on our results of operations, financial condition and/or prospects. See
"Business -- Legal Proceedings".
STATE AND LOCAL LEGISLATION REGARDING WIRELESS PHONE USE WHILE DRIVING MAY
ADVERSELY AFFECT US. Many states and municipalities have proposed, and several,
including New York state, have enacted, legislation that requires the use of a
hands-free accessory while driving an automobile, which may discourage use and
could decrease our revenues from customers who now use their phones when
driving. Such legislation, if adopted and enforced in the areas we serve, may
reduce, in the short term, sales, usage and revenues. In addition, allegations
that using wireless phones while driving may impair drivers' attention in
certain circumstances may lead to potential litigation relating to traffic
accidents, which could adversely affect our results of operations.
OUR OPERATIONS ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION, WHICH CAN
SIGNIFICANTLY INCREASE OUR COSTS AND INCREASE CHURN. Many aspects of our
business are regulated to varying degrees by the FCC and some state and local
regulatory agencies. The adoption or change of regulations could significantly
increase our costs and increase churn.
For example, the FCC, together with the Federal Aviation Administration,
regulates tower marking and lighting. In addition, the FCC and the states are
increasingly looking to the wireless industry to fund various initiatives,
including universal service programs, telephone number portability services for
the hearing-impaired and emergency 911 networks. Furthermore, many states have
imposed significant taxes on the wireless industry and are regulating customer
billing matters. We are also subject to environmental protection and health and
safety regulation, including limits on radio frequency energy from wireless
handsets and
14
towers. The failure to comply with any of these regulations, even if hardware
and software solutions are not readily available from manufacturers and
suppliers, can result in significant penalties and repercussions.
For more information about the regulatory environment and about recent
government regulation that we are subject to, see "Business -- Regulatory
Environment -- Recent Regulatory Developments".
A NUMBER OF OUR FCC LICENSES TO PROVIDE WIRELESS SERVICES ARE SUBJECT TO
RENEWAL AND POTENTIAL REVOCATION IN THE EVENT THAT WE VIOLATE APPLICABLE LAWS. A
number of our licenses are subject to renewal, generally some each year, upon
the expiration of the 10-year period for which they are granted, and we cannot
assure you that the FCC will renew them. In addition, FCC rules require all
wireless licensees to meet specified build-out requirements, and failure to
comply with these and other requirements in a given license area could result in
termination or cancellation of our license for that license area or the
imposition of fines by the FCC. If any of our licenses are forfeited or revoked,
we would not be able to provide service in that area unless we contract to
resell wireless services of another provider or enter into roaming agreements.
EQUIPMENT FAILURE AND DISASTERS MAY ADVERSELY AFFECT OUR OPERATIONS. A
major equipment failure or a disaster that affects our mobile telephone
switching offices, microwave links, third-party owned local and long distance
networks on which we rely, our cell sites or other equipment or the networks of
other providers on which our subscribers roam could have a material adverse
effect on our operations. While we have insurance coverage for some of these
events, our inability to operate our wireless system even for a limited time
period may result in a loss of subscribers or impair our ability to attract new
subscribers, which would have a material adverse effect on our business, results
of operations and financial condition.
THE RESTRICTED SUPPLY OF NEW TELEPHONE NUMBERS COULD LIMIT OR DELAY OUR
GROWTH. The supply of new telephone numbers in some areas of the United States
is near exhaustion due, in large part, to competitive wireline carriers having
obtained large blocks of numbers and rapidly growing customer demand for
additional numbers for wireless handsets and pagers as well as for second voice
lines, Internet access and private branch exchange systems, or private telephone
networks used within enterprises. Many states have imposed restrictions on
carriers' access to additional numbers, creating shortages and delay in
obtaining needed number resources. If we are unable to obtain a sufficient
supply of new telephone numbers, our ability to increase our subscriber base
would be adversely affected.
RISKS RELATED TO OUR ARRANGEMENTS WITH SBC AND BELLSOUTH
SBC AND BELLSOUTH MAY TRANSFER THEIR CONTROLLING INTERESTS IN US AND CEASE
TO BE SUBJECT TO CERTAIN OBLIGATIONS THAT BENEFIT US, INCLUDING EXCLUSIVITY
PROVISIONS. Under our limited liability company agreement and the stockholders'
agreement among our manager, SBC and BellSouth, each of SBC and BellSouth will
cease to be subject to many of the restrictions imposed on it in the limited
liability company agreement that benefit and protect us, such as restrictions on
competition and acquisitions of other wireless businesses, once its ownership
interest falls below 10%. Although both SBC and BellSouth are subject to a
number of transfer restrictions, as described under "Certain Relationships and
Related Party Transactions -- Our Limited Liability Company
Agreement -- Transfers of LLC Units and Common Stock", each of them may, under
the circumstances described in our limited liability company agreement, sell its
interests in us and its common stock in our manager to third parties, subject to
a right of first refusal of the respective other party, or spin-off or split-off
its interests in us or its stock in our manager to its shareholders. In
addition, we may lose any competitive advantage we currently gain from our
resale and agency relationships with SBC and BellSouth.
SBC AND BELLSOUTH MAY COMPETE WITH US IN THE AREAS OF FIXED WIRELESS VOICE
AND DATA SERVICES, AND MAY RESELL OUR SERVICES UNDER THEIR OWN BRAND NAMES
INSIDE THEIR SERVICE TERRITORIES AFTER SPECIFIED FUTURE DATES. SBC and BellSouth
have agreed in our limited liability company agreement to engage in the
provision of U.S. mobile wireless voice and data services only through us and
our subsidiaries, but the agreement is subject to significant exceptions,
including an exception that permits them to market and sell fixed wireless voice
and fixed wireless data services and to market and sell wireless services in
areas in which we, our subsidiaries or Salmon are not providing services
pursuant to FCC licenses. SBC and BellSouth are permitted to resell our services
under their own brand names outside their service territories. In addition, if
BellSouth or SBC terminates its wireless agency agreement on or after October 2,
2003, it may resell our wireless
15
services in its respective service territories. See "Certain Relationships and
Related Party Transactions -- Resale Agreements" and "-- Wireless Agency
Agreements".
THE ARRANGEMENTS THAT WE HAVE WITH SBC AND BELLSOUTH WERE ESTABLISHED BY
SBC AND BELLSOUTH, AND MAY NOT BE AS ADVANTAGEOUS AS SIMILAR AGREEMENTS
NEGOTIATED WITH UNAFFILIATED THIRD PARTIES. We have entered into various
agreements with SBC and BellSouth and their respective affiliates that are
material to the conduct of our business, and we may enter into additional
agreements with them in the future. For example, we have entered into resale and
agency agreements with SBC and BellSouth that include pricing and other terms.
Although we believe that these agreements, as a whole, are as advantageous to us
as those that could otherwise be obtained, we have no independent verification
that these agreements are as advantageous as similar agreements negotiated with
unaffiliated third parties. See "Certain Relationships and Related Party
Transactions".
UNDER THE TERMS OF AGREEMENTS WITH SBC AND BELLSOUTH, THE SCOPE OF OUR
POTENTIAL BUSINESS IS LIMITED, WHICH COULD HURT THE GROWTH OF OUR BUSINESS. We
have agreed with SBC and BellSouth that, without their consent, we may not enter
into any business other than the U.S. mobile wireless voice and data business.
These restrictions could limit our ability to grow our business through
initiatives such as expansion into international markets and acquisitions of
wireless providers that are also engaged in other businesses outside of our
permitted activities. These restrictions may also preclude us from pursuing
other attractive related or unrelated business opportunities. See "Certain
Relationships and Related Party Transactions -- Our Limited Liability Company
Agreement".
SBC AND BELLSOUTH CONTROL ALL IMPORTANT DECISIONS AFFECTING OUR GOVERNANCE
AND OUR OPERATIONS AND MAY FAIL TO AGREE ON IMPORTANT MATTERS. Under the terms
of our limited liability company agreement, our management is exclusively vested
in our manager. Both the board of directors and the strategic review committee
of our manager are currently comprised of four directors: two elected by SBC and
two elected by BellSouth. Substantially all important decisions of our manager
must be approved by its strategic review committee. It is possible that the
committee may be deadlocked regarding matters that are very important to us.
Although deadlocks are to be resolved by the chief executive officers of SBC and
BellSouth, if they cannot agree, inaction may result, which could, among other
things, result in us losing important opportunities. For more information on our
governance, including the strategic review committee, you should read "Our
Organizational Structure -- Cingular Wireless Corporation and Cingular Wireless
LLC".
SBC AND BELLSOUTH MAY HAVE CONFLICTS OF INTEREST WITH US. Conflicts of
interest may arise between us and SBC and BellSouth when we are faced with
decisions that could have different implications for us and SBC or BellSouth,
including technology decisions, financial budgets, repayment of member loans
from SBC and BellSouth, the payment of distributions by us and other matters.
Because SBC and BellSouth control us, these conflicts could be resolved in a
manner adverse to us. Therefore, we may not always be able to use our resources
in the best interest of advancing our business. In addition, circumstances may
occur in which the interests of SBC and BellSouth could be in conflict with your
interests as a noteholder. In particular, SBC and BellSouth may have an interest
in pursuing transactions that, in their judgment, enhance the value of their
equity investment even though such transactions may involve risks to you as
noteholders.
RISKS RELATED TO THE EXCHANGE OFFER AND TO THE NEW NOTES
IF YOU FAIL TO EXCHANGE OLD NOTES, THEY WILL REMAIN SUBJECT TO TRANSFER
RESTRICTIONS. Any old notes that remain outstanding after this exchange offer
will continue to be subject to restrictions on their transfer. After this
exchange offer, holders of old notes will, except in very limited circumstances,
not have any further rights to have their old notes exchanged for new notes or
registered under the Securities Act. The liquidity of the market for old notes
that are not exchanged could be adversely affected by the conclusion of this
exchange offer and you may be unable to sell your old notes.
LATE DELIVERIES OF OLD NOTES AND OTHER REQUIRED DOCUMENTS COULD PREVENT A
HOLDER FROM EXCHANGING ITS OLD NOTES. Noteholders are responsible for complying
with all exchange offer procedures. The issuance of new notes in exchange for
old notes will only occur upon completion of the procedures described in this
prospectus under "The Exchange Offer". Therefore, holders of old notes who wish
to exchange them for
16
new notes should allow sufficient time for timely completion of the exchange
procedure. Neither we nor the exchange agent are obligated to extend the offer
or notify you of any failure to follow the proper procedure.
IF YOU ARE A BROKER-DEALER, YOUR ABILITY TO TRANSFER THE NEW NOTES MAY BE
RESTRICTED. A broker-dealer that purchased old notes for its own account as part
of market-making or trading activities must deliver a prospectus when it sells
the new notes. Our obligation to make this prospectus available to
broker-dealers is limited. Consequently, we cannot guarantee that a proper
prospectus will be available to broker-dealers wishing to resell their new
notes.
THERE HAS NOT BEEN, AND THERE MAY NOT BE, A PUBLIC MARKET FOR THE NEW
NOTES. There has been no market for the new notes prior to this offering. There
can be no assurance as to the development of any market or the liquidity of any
market that may develop for the new notes. The liquidity of, and trading markets
for, the new notes may also be adversely affected by general economic conditions
and by our financial performance.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" including, in
particular, the statements about our plans, strategies and prospects under the
headings "Prospectus Summary", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business". Although we
believe that our plans, intentions and expectations reflected in or suggested by
these forward-looking statements are reasonable, we cannot assure you that these
plans, intentions or expectations will be achieved. Important factors that could
cause actual results to differ materially from the forward-looking statements we
make in this prospectus are set forth in this prospectus, including under the
headings "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business". All forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements and risk factors
contained throughout this prospectus. We expressly disclaim any obligation, and
do not intend, to update any of the forward-looking statements contained in this
prospectus.
17
OUR ORGANIZATIONAL STRUCTURE
FORMATION OF THE JOINT VENTURE
Our full legal name is Cingular Wireless LLC. We are a Delaware limited
liability company formed in April 2000 by SBC and BellSouth as the operating
company for their U.S. wireless communications joint venture. The parties formed
the joint venture in April 2000 and agreed to contribute their U.S. wireless
communications businesses to us. In October 2000, SBC and BellSouth contributed
substantially all of their U.S. wireless assets in exchange for an approximate
60% and 40% ownership interest in us, or "units", respectively, as well as for
one share of our manager's Class B common stock each. SBC and BellSouth have
joint voting control of our operations by virtue of the stockholders' agreement
with respect to Cingular Wireless Corporation, our manager, and their ownership
of high-vote Class B common stock. In January 2001, we began doing business
under the "Cingular" brand name. Our members are certain SBC and BellSouth
entities and our manager.
BACKGROUND
Our formation has brought together the operations of the well-recognized
U.S. wireless businesses conducted by SBC and BellSouth -- BellSouth Mobility,
BellSouth Mobility DCS, Cellular One*, Houston Cellular, BellSouth Wireless
Data, Southwestern Bell Wireless, Pacific Bell Wireless, Nevada Bell Wireless,
Ameritech Wireless, SNET Wireless and SBC Wireless. As a result of the
combination of these carriers, we are the second largest wireless communications
service provider in the United States, serving nearly 21.8 million customers in
37 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands as
of March 31, 2002.
CINGULAR WIRELESS CORPORATION AND CINGULAR WIRELESS LLC
MANAGEMENT AND GOVERNANCE. Cingular Wireless Corporation is a holding
company with no material assets of its own other than two units representing a
0.0000001% interest in us. Its main purpose is to act as our manager and thereby
control our management and operations. Our officers are appointed by its board
of directors. All of our principal officers must be the same individuals as our
manager's corresponding officers.
Our manager has two classes of common stock:
- the Class A common stock, par value $0.01 per share, which will entitle
the holder to one vote per share and will generally have voting rights
identical to those of holders of Class B common stock, except for the
low-vote structure and the differences in the right to vote for directors
described below; and
- the Class B common stock, par value $0.01 per share, which entitles its
holder to ten votes for each underlying unit in us.
Of the two outstanding shares of Class B common stock, one share is held by
SBC and the other share is held by BellSouth. Our manager also has six billion
shares of Class A common stock authorized, none of which are currently
outstanding. In addition, our manager has one billion authorized shares of
preferred stock, issuable in one or more series. However, no series has been
designated and no shares are currently outstanding.
Our manager has two classes of directors corresponding to its two classes
of common stock. Each class of stock votes separately as a class for the
election of directors. Currently Class B stockholders are entitled to elect four
directors, of which two are nominated by SBC and two are nominated by BellSouth.
Class B stockholders vote together as a class to elect their directors and have
agreed to act unanimously in electing directors. If there is an initial public
offering of Class A common stock, Class A stockholders will be entitled to elect
three independent directors. Pursuant to the stockholders' agreement, SBC,
BellSouth and our
- ---------------
* The Cellular One trademark and name were not exclusively used by SBC, and
other wireless operators also used, and continue to use, this brand.
18
manager have agreed that one of the independent directors shall be nominated by
SBC and one by BellSouth. Within 12 months following the closing of such
offering, a third independent director will be nominated by our manager's board
of directors. At all times, as long as any shares of Class B common stock remain
outstanding, the Class B common stockholders will be entitled to control the
manager's board of directors, even if only one of SBC or BellSouth holds Class B
common stock. Our manager is required to contribute to us the net proceeds from
any sales of Class A common stock, including in an initial public offering,
which will increase its ownership interests in us.
STRATEGIC REVIEW COMMITTEE. Substantially all important decisions made by
our manager are subject to the affirmative vote of at least two-thirds of the
strategic review committee of its board of directors, as well as a majority of
its board of directors. These decisions include approval of a business plan,
appointment of executive officers, capital calls, declaration of dividends,
purchases of new technology, public stock offerings, changes to the manager's
certificate of incorporation and by-laws and many others. The committee is
composed of two directors elected by each of SBC and BellSouth for so long as
each remains a holder of Class B common stock of the manager and holds 10% or
more of the sum of
(1) the total number of our units outstanding (excluding units owned by our
manager); and
(2) shares of our manager's Class A and Class B common stock outstanding
(excluding any treasury shares).
At present, the committee is composed of the individuals who constitute our
manager's board of directors. Deadlocks between the Class B directors of SBC and
those of BellSouth will be resolved by the chief executive officers of SBC and
BellSouth. Upon an underwritten public offering of shares of Class A common
stock, our manager's board will appoint one Class A director as an additional
member of the strategic review committee. SBC and BellSouth have agreed in a
stockholders' agreement to vote their Class B common stock in favor of any
matter approved by the strategic review committee.
LIMITED LIABILITY COMPANY AGREEMENT. SBC, BellSouth and our manager are
parties to a limited liability company agreement, which governs us and certain
relationships among SBC, BellSouth and our manager. The limited liability
company agreement provides that neither SBC nor BellSouth will, for as long as
it holds at least 10% of our total equity securities and holds any Class B
common stock of our manager, engage in the wireless business in which we or
Salmon is engaged in the United States, including the U.S. Virgin Islands and
Puerto Rico, except through us, with limited exceptions as described in more
detail under "Certain Relationships and Related Party Transactions -- Our
Limited Liability Company Agreement". In addition, we have agreed that, in the
markets in which SBC or BellSouth is the incumbent local exchange carrier, we
will generally use and, when we sell bundled services including wireline
communications services, sell only the communications services of SBC or
BellSouth, as the case may be, or their controlled subsidiaries. The limited
liability company agreement also provides that neither SBC nor BellSouth is
permitted to transfer its interests in us, subject to limited exceptions,
including transfers in widely distributed public sales or other distributions.
CONVERSION OF CLASS B COMMON STOCK AND EXCHANGE OF UNITS. The shares of
our manager's Class B common stock are convertible into shares of our manager's
Class A common stock, at the option of the holder, at any time on a one-for-one
basis. In addition, units in us will be exchangeable, at the option of the
holder, for an equal number of shares of our manager's Class A common stock, at
any time. In the event that either SBC or BellSouth wants to transfer its shares
of Class B common stock, it would be required to convert its shares into Class A
common stock, including in the event that SBC or BellSouth wants to sell its
shares in a public offering, except for certain of the transfers permitted under
the transfer restriction exceptions in the limited liability company agreement.
In the event that either SBC's or BellSouth's, or their permitted transferees',
total outstanding equity interests in us and our manager become less than 10% of
the sum of
(1) the total number of units outstanding (excluding units owned by our
manager); and
(2) shares of our manager's common stock outstanding (excluding any
treasury shares),
19
then that party must convert its remaining shares of Class B common stock into
shares of Class A common stock and its Class B directors must resign from our
manager's board of directors and the strategic review committee. You should read
"Risk Factors -- Risks Related to Our Arrangements with SBC and BellSouth" and
"Certain Relationships and Related Party Transactions" for additional
information about our structure and the risks posed by the structure and for
more information on permitted transfers and conversion and exchange rights.
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the
registration rights agreement pertaining to the old notes. We will not receive
any cash proceeds from the issuance of the new notes in the exchange offer. In
exchange for issuing the new notes as described in this prospectus, we will
receive an equal principal amount of old notes, which will be canceled.
The net proceeds from the sale of the old notes, after deducting offering
commissions and expenses, of approximately $1,967 million were used primarily to
repay obligations under our commercial paper program, and the balance was used
for general corporate purposes.
20
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2002. The
capitalization table should be read in conjunction with our financial statements
and the related notes included elsewhere in this prospectus.
<Table>
<Caption>
(IN MILLIONS)
Cash and cash equivalents................................... $ 285
========
Short-term debt, excluding current portion of long-term
debt:
Commercial paper borrowings(1)............................ $ --
Other short-term debt..................................... --
--------
Total short-term debt............................. --
--------
Long-term debt, including current portion:
Old notes, net of discount................................ 1,988
Subordinated member loans(2).............................. 9,678
Other long-term debt...................................... 827
--------
Total long-term debt.............................. 12,493
--------
Members' capital............................................ 6,229
--------
Total capitalization.............................. $ 18,722
========
</Table>
- ---------------
(1) No commercial paper borrowings were outstanding as of May 31, 2002. We have
entered into a $3 billion unsecured 364-day revolving bank credit facility
to support repayment of our commercial paper borrowings. The facility
expires on November 18, 2002. No borrowings under the facility are
outstanding at the date of this prospectus. For more information concerning
our credit facility, you should read "Description of Financing
Arrangements -- Bank Credit Facility".
(2) Subordinated member loans represent amounts owed by us and our operating
entities to SBC, BellSouth and their subsidiaries. These lenders have agreed
that their rights to receive payments from us following a default on senior
debt are subordinate to the rights of senior debt. However, the subordinated
member loans are scheduled to mature before the old notes and the new notes
offered in the exchange offer. Senior debt consists of these notes, our
commercial paper notes and any outstanding debt under our bank credit
facility. It also includes any additional debt we may designate as senior in
the future, subject to the approval of SBC and BellSouth. We may prepay the
subordinated loans or refinance them with senior debt (other than with
proceeds from our bank credit facility or senior loans from SBC or
BellSouth) at any time if we are not in default under senior debt. See
"Description of Financing Arrangements -- Financing Arrangements with
Members -- Member Loans".
RATIOS OF EARNINGS TO FIXED CHARGES
The following table shows our ratio of earnings to fixed charges for the
periods indicated:
<Table>
<Caption>
PERIOD FROM YEAR
APRIL 24, 2000 -- ENDED THREE MONTHS ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001 MARCH 31, 2002
- ----------------- ------------------ ------------------
1.49 2.73 2.36
</Table>
For the purpose of calculating these ratios, earnings consist of income
before income taxes, extraordinary gain (loss), cumulative effect of accounting
changes and fixed charges. Fixed charges include interest expense, capitalized
interest and the portion of rent expense representing interest.
21
SELECTED HISTORICAL FINANCIAL INFORMATION
CINGULAR WIRELESS LLC
The following table presents selected historical consolidated financial and
operating data of Cingular Wireless LLC from the date of its formation, April
24, 2000. The data presented in this table is derived from the historical
financial statements and related notes which are included elsewhere in this
prospectus. The results for the period April 24, 2000 to December 31, 2000
presented below include the contributed SBC and BellSouth Domestic Wireless
Groups' wireless operations from October 2, 2000; there were no meaningful
results of operations prior to that date. You should read those statements for a
further explanation of the selected financial data set forth below. You should
also read our "Management's Discussion and Analysis of Financial Condition and
Results of Operations". The selected historical financial data as of and for the
three months ended March 31, 2002 have been derived from our unaudited
consolidated financial statements that, in the opinion of management, include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. The selected historical financial data for the three months
ended March 31, 2002 may not be indicative of results for the full year.
<Table>
<Caption>
PERIOD FROM
APRIL 24, 2000 THREE MONTHS THREE MONTHS
(INCEPTION) TO YEAR ENDED ENDED ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001 MARCH 31, 2001 MARCH 31, 2002
----------------- ------------------ -------------- --------------
(DOLLARS IN MILLIONS, EXCEPT OTHER OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Service revenues...................... $ 2,814 $13,069 $ 3,012 $ 3,316
Equipment sales....................... 241 1,039 262 227
------- ------- ------- -------
Total operating revenues....... 3,055 14,108 3,274 3,543
Operating expenses:
Cost of service (excluding
depreciation of $293, $1,291, $309
and $331, which is included
below).............................. 581 2,752 604 723
Cost of equipment sales............... 393 1,652 437 404
Selling, general and administrative... 1,279 5,235 1,271 1,299
Depreciation and amortization......... 421 1,921 451 450
------- ------- ------- -------
Total operating expenses....... 2,674 11,560 2,763 2,876
------- ------- ------- -------
Operating income........................ 381 2,548 511 667
Other income (expenses):
Interest expense...................... (231) (822) (198) (225)
Minority interest in net income of
consolidated partnerships........... (32) (122) (35) (31)
Equity in net income (loss) of
affiliates, net..................... 3 (68) (6) (58)
Other, net............................ 7 164 89 19
------- ------- ------- -------
Total other income
(expenses)................... (253) (848) (150) (295)
------- ------- ------- -------
Income before provision for income
taxes................................. 128 1,700 361 372
Provision for income taxes.............. 1 8 2 2
------- ------- ------- -------
Net income..................... $ 127 $ 1,692 $ 359 $ 370
======= ======= ======= =======
CASH FLOW DATA:
Net cash provided by operating
activities.......................... $ 1,062 $ 3,665 $ 529 $ 253
Net cash provided by (used in)
investing activities................ (1,218) (3,945) (595) (451)
Net cash provided by (used in)
financing activities................ 282 721 54 (84)
Capital expenditures.................. 959 3,156 387 346
OTHER OPERATING DATA:
Licensed POPs (in millions) (end of
period)(1).......................... 189 219 193 219
Cellular/PCS subscribers (in millions)
(end of period)(2).................. 18.6 21.6 20.0 21.8
Cellular/PCS subscriber churn(3)...... 2.8% 2.9% 2.7% 2.9%
Average cellular/PCS revenue per
subscriber unit (ARPU)(4)........... $ 51.14 $ 52.26 $ 50.82 $ 50.44
EBITDA (in millions)(5)............... $ 802 $ 4,469 $ 962 $ 1,117
EBITDA margin(6)...................... 28.5% 34.2% 31.9% 33.7%
Ratio of earnings to fixed
charges(7).......................... 1.49 2.73 2.54 2.36
</Table>
22
- ---------------
(1) Licensed POPs refers to the number of people residing in areas where we
have licenses to provide cellular or PCS service.
(2) Cellular/PCS subscribers include customers served through reseller
agreements.
(3) Cellular/PCS subscriber churn is calculated by dividing the aggregate
number of cellular/PCS subscribers who cancel service during each month in
a period by the total number of cellular/PCS subscribers at the beginning
of each month in that period.
(4) Average revenue per subscriber unit (ARPU) is defined as cellular/PCS
service revenues during the period divided by average cellular/PCS
subscribers during the period.
(5) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is not presented as an alternative measure of operating results or
cash flows from operations, as determined in accordance with generally
accepted accounting principles, but because we believe it is a widely
accepted indicator of our ability to incur and service debt and make
capital expenditures. EBITDA does not give effect to cash used for debt
service requirements and distributions and thus does not reflect funds
available for dividends, reinvestment or other discretionary uses. In
addition, EBITDA as presented herein may not be comparable to similarly
titled measures reported by other companies.
(6) EBITDA margin is defined as EBITDA divided by service revenues.
(7) See "Ratios of Earnings to Fixed Charges" above for a discussion of the
calculation of this ratio.
23
SELECTED HISTORICAL FINANCIAL INFORMATION
SBC DOMESTIC WIRELESS GROUP
The following table presents selected historical consolidated financial and
operating data of the SBC Domestic Wireless Group. The statement of operations
and cash flow data for the years ended December 31, 1998 and 1999 and the period
ended October 2, 2000 is derived from the audited financial statements of the
SBC Domestic Wireless Group included elsewhere in this prospectus. We derived
the remaining financial data from the SBC Domestic Wireless Group's unaudited
financial statements. You should read those statements for a further explanation
of the selected financial data set forth below. You should also read our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
The historical financial information includes the results of operations and
cash flows for the SBC Domestic Wireless Group for all periods, retroactively
restated to reflect the mergers of SBC with the wireless businesses of Pacific
Telesis Group (PAC), Southern New England Telecommunications Corporation (SNET)
and Ameritech Corporation (Ameritech) as poolings of interests. Historical
financial information also includes the results of operations and cash flows for
acquisitions from their date of acquisition and includes the results of
operations and cash flows from various disposed assets until their date of
disposition. You should also read our "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Presentation of Financial
Information".
<Table>
<Caption>
PERIOD
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------ OCTOBER 2,
1996 1997 1998 1999 2000
------- ---------- ------ ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT OTHER OPERATING DATA)
STATEMENTS OF OPERATIONS DATA:
Operating revenues:
Service revenues.......................................... $ 4,619 $ 5,396 $5,961 $ 6,787 $ 5,582
Equipment sales........................................... 309 481 546 589 518
------- ------- ------ ------- -------
Total operating revenues............................ 4,928 5,877 6,507 7,376 6,100
Operating expenses:
Cost of service and equipment sales....................... 1,315 1,852 1,923 2,214 1,739
Selling, general and administrative....................... 2,102 2,530 2,689 2,870 2,238
Depreciation and amortization............................. 589 754 816 990 835
------- ------- ------ ------- -------
Total operating expenses............................ 4,006 5,136 5,428 6,074 4,812
------- ------- ------ ------- -------
Operating income............................................ 922 741 1,079 1,302 1,288
Other income (expense):
Interest expense.......................................... (121) (175) (208) (218) (267)
Minority interest......................................... (138) (156) (210) (207) (133)
Equity in net income of affiliates........................ 22 9 25 42 7
Other, net................................................ (4) 13 (23) 10 22
------- ------- ------ ------- -------
Total other income (expense)........................ (241) (309) (416) (373) (371)
------- ------- ------ ------- -------
Income before provision for income taxes, extraordinary gain
and cumulative effect of accounting changes............... 681 432 663 929 917
Provision for income taxes.................................. 269 169 275 373 367
------- ------- ------ ------- -------
Income before extraordinary gain and cumulative effect of
accounting changes........................................ 412 263 388 556 550
Extraordinary gain on disposal, net of tax(1)(2)............ -- -- -- 1,379 36
Cumulative effect of accounting changes, net of tax(3)...... -- (106) -- (14) --
------- ------- ------ ------- -------
Net income.......................................... $ 412 $ 157 $ 388 $ 1,921 $ 586
======= ======= ====== ======= =======
CASH FLOW DATA:
Net cash provided by operating activities(4).............. $ 1,342 $ 1,340 $1,762 $ 1,861 $ 620
Net cash provided by (used in) investing activities....... (1,486) (1,047) (978) 1,268 (2,528)
Net cash provided by (used in) financing activities....... 143 (277) (755) (3,083) 1,965
Capital expenditures...................................... 1,184 1,066 978 988 704
OTHER OPERATING DATA:
Cellular/PCS subscribers (in millions)(5)................. 7.3 9.1 10.4 11.2 13.2
Cellular/PCS subscriber churn(6).......................... NA 1.9% 2.1% 2.4% 2.6%
Average revenue per subscriber unit (ARPU)(7)............. $ 58.99 $ 54.73 $51.11 $ 50.37 $ 51.23
EBITDA (in millions)(8)................................... 1,511 1,495 1,895 2,292 2,123
EBITDA margin(9).......................................... 32.7% 27.7% 31.8% 33.8% 38.0%
</Table>
24
- ---------------
(1) In October 1999, SBC completed the required disposition, as a condition of
the Ameritech merger, of 20 Midwestern cellular properties, including the
competing cellular licenses in Chicago, Illinois, and St. Louis, Missouri
and other markets. The SBC Domestic Wireless Group recorded an
extraordinary gain of $1,379 on this sale, net of taxes of $960.
(2) In September 2000, adjustments related to calculations of the 1999 gain on
the required disposition of the 20 Midwestern cellular properties following
the Ameritech merger referred to in note (1) above resulted in an
additional extraordinary gain of $36, net of taxes of $24.
(3) The SBC Domestic Wireless Group's results in 1999 include the effect of
conforming the adoption date for postretirement accounting between SBC and
Ameritech. This change was recorded in the third quarter of 1999,
retroactive to January 1, 1999, as a cumulative effect of accounting change
of $14, net of taxes of $9. Results in 1997 include the effect of
conforming the accounting for sales commissions between SBC and PAC. This
change was recorded in the second quarter of 1997, retroactive to January
1, 1997, as a cumulative effect of accounting change of $106, net of taxes
of $66.
(4) Net cash provided by operating activities for the period ended October 2,
2000 reflects a tax payment of $1,102 associated with the sale of the 20
Midwestern cellular properties referenced in note 1.
(5) Subscribers include customers served through reseller agreements.
(6) Cellular/PCS subscriber churn is calculated by dividing the aggregate
number of cellular/PCS subscribers who cancel service during each month in
a period by the total number of cellular/PCS subscribers at the beginning
of each month in that period.
(7) Average revenue per subscriber unit (ARPU) is defined as cellular/PCS
service revenues during the period divided by average cellular/PCS
subscribers during the period.
(8) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is not presented as an alternative measure of operating results or
cash flows from operations, as determined in accordance with generally
accepted accounting principles, but because we believe it is a widely
accepted indicator of our ability to incur and service debt and make
capital expenditures. EBITDA does not give effect to cash used for debt
service requirements and distributions and thus does not reflect funds
available for dividends, reinvestment or other discretionary uses. In
addition, EBITDA as presented herein may not be comparable to similarly
titled measures reported by other companies.
(9) EBITDA margin is defined as EBITDA divided by service revenues. When
adjusted for a $220 million charge recorded in 1999 by SBC in connection
with the sale/leaseback of certain network assets, the EBITDA margin for
1999 would have been 37.0%.
25
SELECTED HISTORICAL FINANCIAL INFORMATION --
BELLSOUTH DOMESTIC WIRELESS GROUP
The following table presents summary historical consolidated financial and
operating data of the BellSouth Domestic Wireless Group. The statement of
operations and cash flow data for the years ended December 31, 1998 and 1999 and
the period ended October 2, 2000 is derived from the audited financial
statements of the BellSouth Domestic Wireless Group included elsewhere in this
prospectus. We derived the remaining financial data from the BellSouth Domestic
Wireless Group's unaudited financial statements. You should read those
statements for a further explanation of the selected financial data set forth
below. You should also read our "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The historical financial information for the BellSouth Domestic Wireless
Group includes the results of operations and cash flows for various significant
acquisitions from their date of acquisition and includes the results of
operations and cash flows from various disposed assets until their date of
disposition. You should also read our "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Presentation of Financial
Information".
<Table>
<Caption>
PERIOD
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------- OCTOBER 2,
1996 1997 1998 1999 2000
------- -------- ------- ------- -------------
(DOLLARS IN MILLIONS, EXCEPT OTHER OPERATING DATA)
STATEMENTS OF OPERATIONS DATA:
Operating revenues:
Service revenues.......................................... $2,359 $ 2,607 $2,839 $3,284 $ 2,873
Equipment sales........................................... 144 228 214 289 229
------ ------- ------ ------ -------
Total operating revenues............................ 2,503 2,835 3,053 3,573 3,102
Operating expenses:
Cost of service and equipment sales....................... 753 845 992 1,237 1,094
Selling, general and administrative....................... 921 1,105 1,256 1,446 1,138
Depreciation and amortization............................. 326 457 560 677 491
Provision for asset impairment(1)......................... -- -- -- 320 --
------ ------- ------ ------ -------
Total operating expenses............................ 2,000 2,407 2,808 3,680 2,723
------ ------- ------ ------ -------
Operating income (loss)..................................... 503 428 245 (107) 379
Other income (expense):
Interest expense.......................................... (49) (46) (343) (345) (291)
Minority interest......................................... (66) (10) 15 41 (8)
Equity in net income of affiliates........................ 124 50 168 145 123
Other, net................................................ 22 48 25 134 (9)
------ ------- ------ ------ -------
Total other income (expense)........................ 31 42 (135) (25) (185)
------ ------- ------ ------ -------
Income (loss) before provision for income taxes............. 534 470 110 (132) 194
Provision (benefit) for income taxes........................ 224 190 64 (45) 80
------ ------- ------ ------ -------
Net income (loss)................................... $ 310 $ 280 $ 46 $ (87) $ 114
====== ======= ====== ====== =======
CASH FLOW DATA:
Net cash provided by operating activities................. $ 658 $ 840 $ 691 $ 545 $ 826
Net cash used in investing activities..................... (632) (1,038) (750) (322) (1,347)
Net cash provided by (used in) financing activities....... 31 189 125 (295) 553
Capital expenditures...................................... 738 816 705 590 461
OTHER OPERATING DATA:
Cellular/PCS subscribers (in millions)(2)................. 3.2 3.7 4.5 4.9 5.7
Cellular/PCS subscriber churn(3).......................... 1.9% 2.2% 2.3% 2.9% 2.5%
Average revenue per subscriber unit (ARPU)(4)............. $69.42 $ 61.79 $58.42 $58.08 $ 58.47
EBITDA (in millions)(5)................................... $ 829 $ 885 $ 805 $ 570 $ 870
EBITDA margin(6).......................................... 35.1% 33.9% 28.4% 17.4% 30.3%
</Table>
- ---------------
(1) Provision for asset impairment represents non-cash charges associated with
disposals of infrastructure equipment in 14 wireless markets in the
southeastern United States. This charge was recorded to write down these
assets to their fair market value, as required under SFAS 121, and was
estimated by
26
discounting the expected future cash flows of these assets through the date
of disposal. This equipment was replaced with new equipment.
(2) Subscribers include customers served through reseller agreements.
(3) Cellular/PCS subscriber churn is calculated by dividing the aggregate number
of cellular/PCS subscribers who cancel service during each month in a period
by the total number of cellular/PCS subscribers at the beginning of each
month in that period.
(4) Average revenue per subscriber unit (ARPU) is defined as cellular/PCS
service revenues during the period divided by average cellular/PCS
subscribers during the period.
(5) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is not presented as an alternative measure of operating results or
cash flows from operations, as determined in accordance with generally
accepted accounting principles, but because we believe it is a widely
accepted indicator of our ability to incur and service debt and make capital
expenditures. EBITDA does not give effect to cash used for debt service
requirements and distributions and thus does not reflect funds available for
dividends, reinvestment or other discretionary uses. In addition, EBITDA as
presented herein may not be comparable to similarly titled measures reported
by other companies.
(6) EBITDA margin is defined as EBITDA divided by service revenues. When
adjusted for the provision for asset impairment described in note (1), the
EBITDA margin for 1999 would have been 27.1%.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a Delaware limited liability company formed on April 24, 2000, whose
members are SBC, BellSouth, certain of their subsidiaries and partnerships and
Cingular Wireless Corporation -- our manager. On October 2, 2000, SBC and
BellSouth contributed to us substantially all of their U.S. wireless voice and
data businesses.
We are the second largest provider of advanced wireless voice and data
communications services in the United States based on the number of wireless
subscribers. We offer advanced wireless voice and data communications services
across an extensive U.S. service territory, which we refer to as our
"footprint", and operate one of the largest digital wireless networks in the
United States.
Our goal is to become the premier nationwide provider of advanced wireless
and data services in the United States. See "Business -- Competitive Strengths"
below.
ACQUISITIONS AND DISPOSITIONS
Our financial statements for 2001 reflect the following acquisitions.
Acquisitions in 2001
- - In August 1999, the SBC Domestic Wireless Group acquired Cellular
Communications of Puerto Rico, Inc., or CCPR, in what we refer to as the
"Puerto Rico Transaction", valued at $827 million, including the assumption of
approximately $370 million in debt. In October 1999, following approval by the
FCC, the SBC Domestic Wireless Group sold 50% of its investment in CCPR to
Telefonos de Mexico. Subsequent to this, the SBC Domestic Wireless Group
retained a controlling 50% interest in CCPR. The SBC Domestic Wireless Group's
investment in CCPR was accounted for as a purchase. The results of operations
were included in the SBC Domestic Wireless Group financial statements from the
date of acquisition. However, the Puerto Rico wireless business was not
contributed to us until September 2001.
- - In May 2001, SBC purchased a 10% indirect minority interest in the
Washington/Baltimore wireless business currently held by affiliates of Vivendi
Universal ("Vivendi") for $151 million, which it contributed to us, together
with a small minority interest in our Washington/Baltimore operations
previously held by an SBC affiliate, in what we refer to as the "Vivendi
Transaction". Simultaneous with this transaction, we reimbursed SBC the $151
million that SBC paid to Vivendi in the Vivendi Transaction. As a result of
this transaction, we hold a 100% interest in the Washington/Baltimore
metropolitan statistical area.
Our financial statements for 2000 reflect the following acquisitions and
dispositions.
Acquisitions in 2000
- - In August 2000, the SBC Domestic Wireless Group acquired GTE's wireless
interests in various Washington and Texas markets for approximately $1.348
billion. The specific interests acquired include:
- 100% of the Seattle, Spokane and Yakima, Washington wireless businesses;
- 61.7% of the Austin, Texas wireless business;
- 17% of the Dallas, Texas wireless business;
- 30% of the San Antonio, Texas wireless business;
- 100% of the Victoria, Texas wireless business; and
- controlling and non-controlling interests in other Texas wireless
businesses.
28
Prior to this transaction, the SBC Domestic Wireless Group held majority
interests in the Dallas and San Antonio wireless businesses. The acquisitions
were accounted for under the purchase method of accounting.
- - In September 2000, the BellSouth Domestic Wireless Group acquired the
remaining 44.2% minority interest in the BellSouth Carolinas PCS partnership
for approximately $887 million, bringing its ownership to 100% in a
transaction accounted for as a purchase in what we refer to as the "DCS
Transaction".
Dispositions in 2000
- - In accordance with FCC conditions to approve the formation of our company,
certain overlapping wireless operations in Indianapolis, Indiana and New
Orleans and Baton Rouge, Louisiana were divested in October 2000.
OPERATING REVENUES
Our operating revenues consist of revenues from the provision of wireless
voice and data services and revenues from the sale of handsets and accessories.
Service revenues, which we record when services are provided, include revenues
from:
- recurring monthly access charges;
- airtime usage, including prepaid service;
- long distance charges;
- charges for optional features and services such as voice mail, unlimited
mobile-to-mobile calling, roadside assistance, caller ID and data
services;
- roaming charges we bill to our customers for their use of our and other
carriers' networks; and
- roaming charges we bill to other wireless service providers whose
subscribers use our network.
Equipment sales include revenues from the sale of handsets and accessories to
new and existing customers and to agents and other third-party distributors.
In total, service revenues have increased each year as our customer base
has grown. Over the same period, average cellular/PCS revenue per subscriber
unit, or "ARPU", has declined slightly. The shift to digital rate plans from
analog plans has resulted in an increase in access fees, which have offset lower
airtime usage revenues. The greater value to customers from lower per-minute
prices has been a major contributor to subscriber and revenue growth.
Furthermore, by migrating customers to digital services, we are able to offer
more features and data services, such as "My Wireless Window(sm)" messaging and
Internet services, which we believe will increase revenues over time. The
increase in local subscriber revenues that we have experienced has been and
will, we believe, continue to be partially offset by a number of factors,
including slower growth of our customer base and the loss of roaming and long
distance revenues from national calling plans, which have higher access rates
but include free roaming and long distance calls. Additional factors slowing our
roaming revenue growth are lower negotiated roaming rates and the ongoing
network build-out of other carriers, which reduces the need of their customers
to roam on our network. We also expect revenues from reseller customers to
decrease and churn for this segment of the customer base to increase as a result
of WorldCom's financial and business circumstances and its exiting the reseller
business.
We have recently experienced lower subscriber growth due to a slowing
economy and increased wireless penetration and competition in the United States.
As these factors reduce the pool of prospective wireless subscribers, our
customer growth is increasingly dependent on reducing our churn and attracting
customers who churn from other carriers. We expect this trend to continue.
Revenues from data services has not been material in any of the periods
presented. We expect that revenues from wireless data services will increasingly
contribute to operating revenues as a result of the availability of GPRS across
our network and the introduction of new data applications for business and
consumer use, including access to e-mail, Internet content, mobile commerce and
location-based services.
29
OPERATING EXPENSES
Our operating expenses include:
- cost of service and equipment sales;
- selling, general and administrative expenses; and
- depreciation and amortization.
Cost of service includes the cost of carrying calls and maintaining our
network, internal and contract labor, expenses to monitor, maintain and service
our network and landline facilities expense. Cost of service also includes
roaming charges and long distance expense for services provided by other
telecommunications carriers, which are increasing as a result of increased usage
stimulated by national rate plans' inclusion of free roaming and long distance
services.
Cost of equipment sales includes the cost of handsets and accessories. Some
of our third party distributors purchase handsets and accessories from us,
usually above cost. However, we generally sell handsets below cost to customers
who purchase through direct sales channels, such as our company stores, as an
inducement to customers who agree to one- or two-year subscription contracts or
in connection with other promotions. As a result, revenues from equipment sales
are more than offset by the related cost of equipment sales, resulting in a net
subsidy to customers. In addition, we have actively focused on selling services
to new customers and upgrading existing customers to digital handsets and
service, which increase network capacity and lower our operating cost per
minute. When first introduced, digital handsets were more expensive than analog
phones, contributing to an increase in cost of equipment. As we expand our
distribution channels and continue to grow, the number of handsets sold will
continue to increase, which will result in a higher aggregate cost of equipment
sales. However, the cost of handsets has declined, and, as one of the largest
purchasers of handsets in the United States, we believe we will be able to
purchase handsets at attractive volume-discounted rates.
Selling, general and administrative expenses include all operating costs
and expenses not included in the other operating cost and expense categories,
such as:
- distribution expenses, including the costs to maintain retail locations
and the commissions paid to our own sales force as well as agents and
other third party distributors;
- compensation expenses for some of our leased employees, including salary
and benefits; and
- sales and marketing costs, including the costs of advertising and
promotions; in 2001 this includes non-recurring costs related to our
January 2001 brand launch; and in 2002 this will include the costs of
initiating service in New York City.
Pre-paid and reseller customer additions are declining as percentages of gross
customer additions. Because the cost to acquire these customers is less than for
direct, post-paid customers, our customer acquisition costs have increased as
our customer base continues to grow, and we expect this trend to continue.
Depreciation and amortization expense includes expenses relating to the
depreciation of property, plant and equipment and the amortization of goodwill
and other intangibles, such as licenses and customer lists. Our depreciation and
amortization expense has been generally increasing as a result of our capital
expenditures and we expect this expense to continue to increase in the
foreseeable future as we make capital expenditures to build out and upgrade our
network and make other investments. See "-- Liquidity and Capital Resources"
below for a discussion of our capital expenditures and other investments.
The integration of our predecessor operations provides opportunities for
cost savings. Prior to our formation as a joint venture, the SBC and BellSouth
Domestic Wireless Groups had their own management teams, wireless networks,
operational and technical groups, marketing and distribution channels, and
information, customer care, billing and other systems. We believe that our
formation and the resulting
30
combination of these businesses has generated significant synergies, which will
increase revenues and lower our overall cost structure on a recurring basis.
We must increasingly seek to reduce expense growth in order to protect
profit margins. As a combined entity, we eliminated roaming costs between our
two predecessor entities and we believe that we can spread our fixed costs over
a larger subscriber base, resulting in higher EBITDA and operating income. We
also believe that our industry position enables us to negotiate roaming, long
distance and local network connection fees and handset and network
infrastructure purchase arrangements on favorable terms. In addition, as our
network coverage area increases through spectrum license acquisitions and joint
venture arrangements and as our customers use handsets capable of using both
TDMA and GSM network technology, we believe that our roaming expenses as a
percentage of revenue will decline.
INTEREST EXPENSE
We expect our interest expense to increase in 2002, as compared to 2001, as
a result of the issuance of our senior notes in December 2001 and borrowings, if
any, that may be required to fund our capital expenditures, which would increase
our average debt balances.
OTHER INCOME (EXPENSES)
Minority interest. Minority interest reflects the share of operating
income belonging to members or partners in our subsidiaries.
Equity in net income (loss) of affiliates. In addition to the subsidiaries
that we control and include in our consolidated financial statements, we have
non-controlling equity investments in various entities:
- In November 2000, we made an equity investment, and as of March 31, 2002
had a non-controlling equity interest, in Salmon. Because we do not
control Salmon, we account for this investment using the equity method
and record profits or losses in our income statement as equity in net
income (loss) of affiliates. Crowley Digital LLC, the other member of
Salmon, is not committed to provide equity funding in excess of its
initial capital contribution of $50 million. As a result, we will
recognize 100% of Salmon's losses at such time as Crowley's capital
contribution has been eliminated due to it being charged with its
proportionate share of Salmon's losses. Until Salmon's networks are built
out and it has acquired a significant number of subscribers, it is
expected to generate significant operating losses.
- In November 2001, we formed a jointly-controlled infrastructure venture
with VoiceStream Wireless. The venture with VoiceStream is expected to
commence operations in the middle of 2002. Because we do not
independently control our venture with VoiceStream, we also account for
this investment using the equity method. Our venture with VoiceStream is
structured to generate operating losses equal to the depreciation and
amortization on the assets that have been contributed to it.
- In January 2002, we entered into an agreement with AT&T Wireless to form
a similar jointly-controlled infrastructure venture. The venture with
AT&T Wireless is expected to commence operations in the first quarter of
2003. Because we do not independently control our venture with AT&T
Wireless, we account for this investment using the equity method.
We expect to record a significant equity in loss of affiliates over the next
several years relating to our investment in Salmon and our venture with
VoiceStream once this infrastructure venture has commenced operations.
INCOME TAXES
We are a limited liability company and therefore generally do not pay
income taxes on our income. Instead, income taxes are generally the
responsibility of our members. In addition, we have corporate subsidiaries that
are taxpayers and will record income tax expense. We do not expect that this
expense will be material in the future.
31
SUMMARY SECOND QUARTER OPERATING RESULTS
Our unaudited operating results for the three and six months ended June 30,
2002 and 2001, are summarized below:
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- -----------------
2001 2002 2001 2002
------ ------ ------- -------
(DOLLARS IN MILLIONS EXCEPT
PER UNIT OPERATING DATA)
Total operating revenues......................... $3,536 $3,748 $ 6,810 $ 7,291
Total operating expenses......................... 2,778 3,026 5,541 5,902
Net Income....................................... 522 395 881 733
Cellular/PCS subscribers (in millions) (end of
period)(1)..................................... 20.6 22.2
Cellular/PCS subscriber churn(2)................. 2.5% 2.7% 2.6% 2.8%
Average cellular/PCS revenue per subscriber unit
(ARPU)(3)...................................... $52.87 $52.11 $ 51.87 $ 51.28
EBITDA(4)........................................ $1,233 $1,177 $ 2,195 $ 2,294
EBITDA margin(5)................................. 37.6% 33.7% 34.9% 33.7%
Net cash provided by operating activities........ $ 865 $ 772 $ 1,118 $ 1,025
Net cash used in investing activities............ $ (864) $ (553) $(1,315) $(1,004)
Net cash provided by (used in) financing
activities..................................... $ 234 $ (18) $ (150) $ (102)
</Table>
- ---------------
(1) Cellular/PCS subscribers include customers served through reseller
agreements.
(2) Cellular/PCS subscriber churn is calculated by dividing the aggregate number
of cellular/PCS subscribers who cancel service during each month in a period
by the total number of cellular/PCS subscribers at the beginning of each
month in that period.
(3) Average revenue per subscriber unit (ARPU) is defined as cellular/PCS
service revenues during the period divided by average cellular/PCS
subscribers during the period.
(4) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is not presented as an alternative measure of operating results or
cash flows from operations, as determined in accordance with generally
accepted accounting principles, but because we believe it is a widely
accepted indicator of our ability to incur and service debt and make capital
expenditures. EBITDA does not give effect to cash used for debt service
requirements and distributions and thus does not reflect funds available for
dividends, reinvestment or other discretionary uses. In addition, EBITDA as
presented herein may not be comparable to similarly titled measures reported
by other companies.
(5) EBITDA margin is defined as EBITDA divided by service revenues.
PRESENTATION OF FINANCIAL INFORMATION
We were formed in 2000 and have limited historical results of operation
prior to the contribution of the SBC and BellSouth Domestic Wireless Groups'
assets on October 2, 2000. Therefore, for periods prior to October 2000 we
present the historical results of operations of the SBC Domestic Wireless Group
and the BellSouth Domestic Wireless Group and discuss the results of operations
of those businesses on a historical basis.
We present and discuss:
- our financial results for the three months ended March 31, 2002 compared
to the three months ended March 31, 2001;
- certain components of our historical consolidated financial results for
the year ended December 31, 2001 compared to the comparative components
of unaudited combined historical results for the SBC Domestic Wireless
Group and the BellSouth Domestic Wireless Group for the nine months ended
32
September 30, 2000, combined with our historical consolidated financial
results for the period April 24, 2000 (inception) through December 31,
2000; and
- certain components of our historical consolidated financial results for
the period April 24, 2000 (inception) through December 31, 2000
(recognizing that we did not conduct any business operations until
October 2, 2000) compared to comparative components of the unaudited
combined historical results for the SBC Domestic Wireless Group and the
BellSouth Domestic Wireless Group for the quarter ended December 31,
1999.
The combined financial data below was prepared by aggregating for the periods
indicated the historical financial statements of Cingular, the SBC Domestic
Wireless Group and the BellSouth Domestic Wireless Group, as applicable, and
eliminating any inter-company transactions. The combined operating data for 2000
and 1999 does not purport to be indicative of what our results of operations
would actually have been if we had been formed at the beginning of the
applicable period. The SBC and BellSouth Domestic Wireless Groups were managed
separately prior to their contribution to us on October 2, 2000; and the
combined financial data for 2000 and 1999 is not intended to show what the
combined financial results would have been had the companies actually been
managed together. We present the combined operating data because management
evaluates our business by comparing our results from one period against results
from prior periods and believes that these comparisons provide a reasonable
basis for measuring changes in our operating results.
The SBC Domestic Wireless Group and the BellSouth Domestic Wireless Group
ceased operating as separate entities when their assets were contributed to us
on October 2, 2000. As a result, their 2000 financial data presents
approximately nine months of results of operations. The table presented for
discussion of each Group's operations displays results for the nine-month period
ended September 30, 1999 to facilitate a comparison of results of operations for
2000 that cover the same time period.
The combined operating data should be read in conjunction with our audited
financial statements and the audited financial statements of the SBC Domestic
Wireless Group and the BellSouth Domestic Wireless Group and other financial and
operating information appearing elsewhere in this prospectus.
33
CINGULAR WIRELESS LLC
CONSOLIDATED THREE MONTHS ENDED MARCH 31, 2002 OPERATING DATA COMPARED TO
CONSOLIDATED THREE MONTHS ENDED MARCH 31, 2001 OPERATING DATA (UNAUDITED)
The historical consolidated financial results for Cingular Wireless LLC for
the quarters ended March 31, 2002 and March 31, 2001 are included below.
<Table>
<Caption>
THREE MONTHS THREE MONTHS
ENDED ENDED %
MARCH 31, 2001 MARCH 31, 2002 CHANGE
----------------- ----------------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER UNIT OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Service revenues.................................. $3,012 $3,316 10.1
Equipment sales................................... 262 227 (13.4)
------ ------
Total operating revenues..................... 3,274 3,543 8.2
Operating expenses:
Cost of services (excluding depreciation of $309
and $331)....................................... 604 723 19.7
Cost of equipment sales........................... 437 404 (7.6)
Selling, general and administrative............... 1,271 1,299 2.2
Depreciation and amortization..................... 451 450 (0.2)
------ ------
Total operating expenses..................... 2,763 2,876 4.1
------ ------
Operating income....................................... 511 667 30.5
Other income (expenses):
Interest expense.................................. (198) (225) 13.6
Minority interest in net income of consolidated
partnerships.................................... (35) (31) (11.4)
Equity in net income (loss) of affiliates, net.... (6) (58) 866.7
Other, net........................................ 89 19 (78.7)
------ ------
Total other income (expenses)................ (150) (295) 96.7
------ ------
Income before provision for income taxes............... 361 372 3.0
Provision for income taxes............................. 2 2 0.0
------ ------
Net income................................. $ 359 $ 370 3.1
====== ======
OPERATING DATA:
EBITDA................................................. $ 962 $1,117 16.1
Net cash provided by operating activities.............. $ 529 $ 253 (52.2)
Net cash used in investing activities.................. $ (595) $ (451) 24.2
Net cash provided by (used in) financing activities.... $ 54 $ (84) NA
Cellular/PCS subscribers (in millions) (end of
period)(1)........................................... 20.0 21.8 9.0
Average cellular/PCS revenue per subscriber unit
(ARPU)(2)............................................ $50.82 $50.44 (0.7)
</Table>
- ---------------
(1) Cellular/PCS subscribers include customers served through reseller
agreements.
(2) Average revenue per subscriber unit (ARPU) is defined as cellular/PCS
service revenues during the period divided by average cellular/PCS
subscribers during the period.
CUSTOMER GROWTH
Cellular/PCS subscribers totaled 21.8 million at the end of the quarter
ended March 31, 2002, an increase of 9.0% from the 20.0 million subscribers at
March 31, 2001. Our customer base at March 31, 2001 does not include over
500,000 customers from our Puerto Rico operation, which was contributed by SBC
to us in September 2001. Net subscriber additions for the quarter ended March
31, 2002 reflects a 10.4% decline in gross subscriber additions, primarily due
to lower prepaid and reseller additions, and higher cellular/PCS customer churn,
which increased to 2.9% for the quarter ended March 31, 2002, compared to
34
2.7% for the same period in 2001. Higher reseller and prepaid churn have
contributed to the increase in the churn rate in recent quarters.
The slower rate of growth for the 2002 period reflects the continued
economic slowdown, higher penetration levels and increasing competition. Our
efforts to migrate customers to digital service and improve the profitability of
prepaid service also contributed to the slower rate of growth as pricing was
increased for some postpaid analog customers and handset prices were raised for
prepaid customers.
In addition to our cellular and PCS licenses, we own licenses to provide
data services over a separate frequency band. Our network at this band utilizes
a different technology called "Mobitex". Our Mobitex data network customers
increased to approximately 765,000 at March 31, 2002, a 16.4% increase from
657,000 customers at March 31, 2001. The rate of growth slowed during 2002 as
net customer additions for the quarter ended March 31, 2002 of 31,000 declined
63.1% from 84,000 for the comparable 2001 period. Most of these customers are
business customers, and the decline in net additions reflects primarily the
continued economic slowdown and removal of inactive customers from our customer
base. We had approximately 2.6 million active users of our cellular and PCS data
services at March 31, 2002. Most of these customers began subscribing to these
services during 2001.
OPERATING REVENUES
Total operating revenues for the quarter ended March 31, 2002 were $3,543
million, an increase of $269 million, or 8.2%, from $3,274 million for the
quarter ended March 31, 2001. The components of the change in operating revenues
are described below.
Service revenues. Service revenues for the quarter ended March 31, 2002
were $3,316 million, an increase of $304 million, or 10.1%, compared to $3,012
million for the quarter ended March 31, 2001. The increase was primarily driven
by the 11.0% increase in average cellular/PCS subscribers versus the same period
one year earlier and increases in local service revenue per customer, offset by
a decline in revenues we received from other wireless carriers for roaming by
their subscribers on our network. Revenues of $33 million from the provision of
handset insurance to customers through our new insurance subsidiary also
generated an increase over the prior year. Roaming revenues are trending
downward as other carriers build out their networks and as roaming rates
decline. Long distance revenues and the revenue we collect from our customers to
cover the costs we incur when our customers roam outside our network also
decreased slightly as a result of our introduction of more competitive regional
and national calling plans, which have the effect of converting minutes of use
from roaming revenues to local service revenues. We expect this trend to
continue. Local service revenues for the quarter ended March 31, 2002 increased
15.8% over the quarter ended March 31, 2001, driven by a 38% increase in local
minutes of use per customer, partially offset by lower per minute pricing. ARPU
declined by $0.38 to $50.44, or 0.7%, from $50.82 in the quarter ended March 31,
2001 largely due to decreases in the revenues we received from other wireless
carriers for the roaming of their customers on our network, although the decline
was tempered by increases in local service revenues from promotional
initiatives. Also contributing to the decline in ARPU is the consolidation of
Puerto Rico operating results in our financial statements in the first quarter
of 2002, which lowered ARPU as a result of the heavy concentration of prepaid
subscribers in Puerto Rico.
Equipment sales. Equipment sales for the quarter ended March 31, 2002 were
$227 million, a decrease of $35 million, or 13.4%, from $262 million for the
quarter ended March 31, 2001. The decline was primarily attributable to the
decrease in gross additions versus the same period one year earlier.
OPERATING EXPENSES
Cost of service. Cost of service for the quarter ended March 31, 2002 was
$723 million, an increase of $119 million, or 19.7%, compared to $604 million
for the quarter ended March 31, 2001. This increase was largely attributable to
the 11.0% increase in average number of subscribers and a 53% increase in system
minutes of use, fueled by higher usage from digital rate plans including a
larger number of minutes and included roaming and long distance calling. In
addition, $16 million of the increase in costs was attributable to the provision
of handset insurance through the new captive insurance subsidiary. The cost
associated with
35
the increase in network traffic volume was partly offset by lower
interconnection costs and efficiencies attributable to digital networks.
Cost of equipment sales. Cost of equipment for the quarter ended March 31,
2002 was $404 million, a decrease of $33 million, or 7.6%, compared to $437
million for the quarter ended March 31, 2001. The decrease was primarily due to
lower gross customer additions in the current period, as well as a shift in
handset sales towards lower cost handsets.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the quarter ended March 31, 2002 were $1,299
million, an increase of $28 million, or 2.2%, compared to $1,271 million for the
quarter ended March 31, 2001. The modest increase over the prior year was
attributable to higher residual and upgrade commissions and higher billing and
system development costs, offset by lower selling expenses associated with lower
gross customer additions and a reduction in branding expenses, which were
substantially higher in the first quarter of 2001 following the Cingular brand
launch.
Depreciation and amortization. Depreciation and amortization for the
quarter ended March 31, 2002 was $450 million, a decrease of $1 million,
compared to $451 million for the quarter ended March 31, 2001. Although there
have been significant capital expenditures in recent quarters, the associated
depreciation was offset by a $64 million reduction in amortization expense upon
adoption of SFAS No. 142, effective January 1, 2002, for goodwill and other
indefinite lived intangible assets and a $48 million decrease in depreciation
expense associated with assets contributed to our jointly controlled network
infrastructure venture with VoiceStream, now recorded as equity in net income
(loss) of affiliates.
INTEREST EXPENSE
Interest expense for the quarter ended March 31, 2002 was $225 million, an
increase of $27 million, or 13.6%, compared to $198 million for the quarter
ended March 31, 2001. The increase in interest expense primarily resulted from
the issuance in December 2001 of $2 billion in fixed rate senior notes to
refinance lower interest-bearing commercial paper.
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED PARTNERSHIPS
Minority interest in consolidated partnerships for the quarter ended March
31, 2002 was ($31) million, a decrease of $4 million, compared to ($35) million
for the quarter ended March 31, 2001.
EQUITY IN NET INCOME (LOSS) OF AFFILIATES, NET
Equity in net income of affiliates, net, for the quarter ended March 31,
2002 was ($58) million, a decrease of $52 million, compared to ($6) million for
the quarter ended March 31, 2001. The decrease primarily reflects $47 million in
equity losses associated with our investment in our venture with VoiceStream,
and a $4 million increase in equity losses associated with Salmon.
OTHER, NET
Other, net, for the quarter ended March 31, 2002 was $19 million, a
decrease of $70 million, compared to $89 million for the quarter ended March 31,
2001. Prior year results include a $76 million gain associated with the
distribution of assets to us at fair value following a partnership dissolution.
CINGULAR WIRELESS LLC
CONSOLIDATED YEAR ENDED DECEMBER 31, 2001 OPERATING DATA COMPARED TO COMBINED
YEAR ENDED DECEMBER 31, 2000 OPERATING DATA (UNAUDITED)
The historical consolidated operating revenues, cost of service and
equipment sales and gross margin for Cingular Wireless LLC are shown for the
year ended December 31, 2001. For the year ended December 31, 2000, the combined
historical consolidated operating revenues, cost of service and equipment sales
and gross margin for the period April 24, 2000 (inception) to December 31, 2000,
combined with the operating
36
revenues, cost of service and equipment sales and gross margin for the SBC
Domestic Wireless Group and the BellSouth Domestic Wireless Group for the period
ended October 2, 2000, are included below. In combining the historical results
of the SBC Domestic Wireless Group and the BellSouth Domestic Wireless Group,
inter-group transactions have been eliminated. For 2001, the first full year of
operations for Cingular Wireless LLC, we have also included below a discussion
of 2001's selling, general and administrative expenses, depreciation and
amortization, interest expense, minority interest in net income of consolidated
partnerships, equity in net income (loss) of affiliates, net and other, net.
Because of the various transactions that occurred during 2001 and 2000,
which are described above under "-- Acquisitions and Dispositions", the
comparisons between the two periods described below may not be meaningful.
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001 %
(COMBINED) (ACTUAL) CHANGE
----------------- ----------------- ------
(DOLLARS IN MILLIONS, EXCEPT OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Service revenues................................. $11,221 $13,069 16.5
Equipment sales.................................. 988 1,039 5.2
------- -------
Total operating revenues.................... 12,209 14,108 15.6
Cost of service and equipment sales:
Cost of service.................................. 2,191 2,752 25.6
Cost of equipment sales.......................... 1,573 1,652 5.0
------- -------
Total cost of service and equipment sales... 3,764 4,404 17.0
------- -------
Gross margin(1).................................. $ 8,445 $ 9,704 14.9
======= =======
OPERATING DATA:
Cellular/PCS subscribers (in millions) (end of
period)(2)..................................... 18.6 21.6 16.1
Average cellular/PCS revenue per subscriber unit
(ARPU)(3)...................................... $ 53.47 $ 52.26 (2.3)
</Table>
- ---------------
(1) Gross margin excludes depreciation expense.
(2) Cellular/PCS subscribers include customers served through reseller
agreements.
(3) Average revenue per subscriber unit (ARPU) is defined as cellular/PCS
service revenues during the period divided by average cellular/PCS
subscribers during the period.
CUSTOMER GROWTH
Cellular and PCS customers grew to 21.6 million for the year ended December
31, 2001, an increase of 16.1% from the 18.6 million customers at December 31,
2000. In comparison, the increase in the customer base for the year ended
December 31, 2000 was 20.0%. The slower rate of growth for the 2001 period
reflects the economic slowdown, higher penetration levels and increasing
competition in all of our markets. In addition, the rate of customer growth
reflects a cellular/PCS customer churn rate of 2.9% for the year ended December
31, 2001, compared to 2.6% in 2000. Our net cellular/PCS customer additions,
excluding net additions that occurred prior to the contribution date of those
businesses contributed to us in 2001, declined 36.7% from 3.0 million for the
year ended December 31, 2000 to 1.9 million in 2001. This decrease was mainly
attributable to third and fourth quarter 2001 net customer additions of 417,000,
a 71.6% decline from 1,470,000 in the third and fourth quarters of 2000.
Additional factors contributing to these results include the following:
- increasing pricing for postpaid analog customers;
- reducing the subsidy for handsets sold to prepaid customers;
37
- shortening the expiration date of new prepaid cards to 90 days from 180
days from the date of issue; and
- removing from our count of resale customers those customers who were
inactive for 60 days or longer.
These practices were implemented by us to migrate analog customers to digital
service and improve the profitability of prepaid services.
In addition to our cellular and PCS licenses, we own licenses to provide
data services over a separate frequency band. Our network at this band utilizes
a different technology called "Mobitex". Our Mobitex data network customers
increased to approximately 733,000 at December 31, 2001, a 27.9% increase from
approximately 573,000 customers at December 31, 2000. The rate of growth slowed
during 2001 as net customer additions of approximately 160,000 for the year
ended December 31, 2001 declined from just over 350,000 for the comparable 2000
period. Most of these customers are business customers, and the decline in net
additions reflects primarily the economic slowdown, as well as removal of
inactive customers from our customer base. This had a significant impact in the
third and fourth quarters of 2001 with nearly 45,000 net additions, compared to
approximately 191,000 in the third and fourth quarters of 2000. We had
approximately 1.7 million active users of our cellular and PCS data services as
of December 31, 2001. Most of these customers began subscribing to these
services during 2001.
Revenue from data services has not been material in any of the periods
presented. We believe that growth in our data services revenue and customers
demonstrates customer acceptance of these services, which we expect over time
will increasingly contribute to operating revenue.
OPERATING REVENUES
Total operating revenues for the year ended December 31, 2001 were $14,108
million, an increase of $1,899 million, or 15.6%, from $12,209 million for the
year ended December 31, 2000. The components of the change in operating revenues
are described below.
Service revenues. Service revenues for the year ended December 31, 2001
were $13,069 million, an increase of $1,848 million, or 16.5%, compared to
$11,221 million for the year ended December 31, 2000. The increase was primarily
driven by the 21.2% increase in average cellular/PCS subscribers versus the same
period one year earlier, offset by a decline in revenues we received from other
wireless carriers for roaming by their subscribers on our network. Roaming
revenues are trending downward as other carriers build out their networks and as
roaming rates decline. Long distance revenue and the revenue we collect from our
customers to cover the costs we incur when our customers roam on the networks of
other wireless carriers also decreased slightly as a result of our introduction
of more competitive regional and national calling plans, which have the effect
of converting minutes of use from long distance and roaming revenues to local
service revenues. Local service revenues for the year ended December 31, 2001
increased 24.6% over the year ended December 31, 2000. ARPU decreased by $1.21
to $52.26, or 2.3%, from $53.47 in the year ended December 31, 2000 largely due
to a 37.3% increase in local minutes of use per customer, offset by lower per
minute pricing.
Equipment sales. Equipment sales for the year ended December 31, 2001 were
$1,039 million, an increase of $51 million, or 5.2%, from $988 million for the
year ended December 31, 2000. The growth was primarily attributable to an
increase in gross customer additions, offset by declining retail prices for
digital handsets.
COST OF SERVICE AND EQUIPMENT SALES
Total cost of service and equipment sales for the year ended December 31,
2001 was $4,404 million, an increase of $640 million, or 17.0%, from $3,764
million for the year ended December 31, 2000. The components of the change in
cost of service and equipment sales are described below.
Cost of service. Cost of service for the year ended December 31, 2001 was
$2,752 million, an increase of $561 million, or 25.6%, compared to $2,191
million for the year ended December 31, 2000. This increase
38
was largely attributable to a 61.0% increase in system minutes of use, fueled by
a 18.7% increase in average cellular/PCS subscribers and higher usage from
digital rate plans with larger numbers of included minutes. The cost associated
with the increase in network traffic volume was partly offset by lower
interconnection costs and efficiencies attributable to digital networks.
Cost of equipment sales. Cost of equipment sales for the year ended
December 31, 2001 was $1,652 million, an increase of $79 million, or 5.0%,
compared to $1,573 million for the year ended December 31, 2000. The increase
was primarily due to an increase in handset sales in order to accommodate
subscriber growth and upgrades, coupled with a shift toward higher priced
handsets.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December
31, 2001 were $5,235 million, or approximately 37% of total revenues. Our
integration efforts are expected to yield some savings in distribution and
customer care costs, with additional savings realized from the consolidation of
call centers, billing systems and other functions.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the year ended December 31, 2001 was
$1,921 million. We expect depreciation costs to increase as larger capital
expenditures will be required for new technologies and services, network
enhancements and product offerings.
INTEREST EXPENSE
Interest expense for the year ended December 31, 2001 was $822 million. The
issuance of $2 billion in senior notes in December 2001 will lead to higher
interest expense in future periods.
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED PARTNERSHIPS
Minority interest in net income of consolidated partnerships for the year
ended December 31, 2001 was ($122) million. Partnership operating results and
potential changes in ownership will drive the change in minority interest in net
income of consolidated partnerships.
EQUITY IN NET INCOME (LOSS) OF AFFILIATES, NET
Equity in net income (loss) of affiliates, net, for the year ended December
31, 2001 was a $68 million loss. The loss primarily reflects $32 million in
equity losses associated with our investment in our jointly controlled venture
with VoiceStream and $43 million in equity losses associated with Salmon PCS.
OTHER, NET
Other, net, for the year ended December 31, 2001 was $164 million, which
primarily reflects a $76 million gain associated with the distribution of assets
to us at fair value following a partnership dissolution, $24 million in gains
from the sale of partitioned properties and $43 million in interest income on
advances to Salmon PCS LLC.
CINGULAR WIRELESS LLC
CONSOLIDATED PERIOD ENDED DECEMBER 31, 2000 OPERATING DATA COMPARED TO COMBINED
QUARTER ENDED DECEMBER 31, 1999 OPERATING DATA (UNAUDITED)
The historical consolidated operating revenues, cost of service and
equipment sales and gross margin for Cingular Wireless LLC for the period April
24, 2000 (inception) through December 31, 2000 and the unaudited combined
historical consolidated operating revenues, cost of service and equipment sales
and gross margins for the SBC Domestic Wireless Group and the BellSouth Domestic
Wireless Group for the quarter
39
ended December 31, 1999 are included below. In combining the historical results
of the SBC Domestic Wireless Group and the BellSouth Domestic Wireless Group,
inter-group transactions have been eliminated.
The period April 24, 2000 through December 31, 2000 is essentially a
three-month period because, even though we were formed on April 24, 2000, we had
no operations until SBC and BellSouth contributed their wireless assets to us on
October 2, 2000. Accordingly, the discussion is based upon a comparison to the
unaudited combined financial results for the quarter ended December 31, 1999.
For the period ended December 31, 2000, the first period of operations for
Cingular Wireless LLC, we have also included below a discussion of the period's
selling, general and administrative expenses, depreciation and amortization,
interest expense, minority interest in net income of consolidated partnerships,
equity in net income of affiliates, net and other, net.
Because of various transactions that occurred during 2000 and that are
described above under "-- Acquisitions and Dispositions", the comparisons
between the two periods described below may not be meaningful.
<Table>
<Caption>
THREE MONTHS PERIOD
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1999 2000 %
(COMBINED) (ACTUAL) CHANGE
-------------- -------------- ----------
(DOLLARS IN MILLIONS, EXCEPT OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Service revenues...................................... $2,608 $2,814 7.9
Equipment sales....................................... 221 241 9.0
------ ------
Total operating revenues......................... 2,829 3,055 8.0
Cost of service and equipment sales:
Cost of service....................................... 792 581 (26.6)
Cost of equipment sales............................... 367 393 7.1
------ ------
Total cost of service and equipment sales........ 1,159 974 (16.0)
------ ------
Gross margin(1)....................................... $1,670 $2,081 24.6
====== ======
OPERATING DATA:
Cellular/PCS subscribers (in millions) (end of
period)(2).......................................... 15.5 18.6 20.0
Average cellular/PCS revenue per subscriber unit
(ARPU)(3)........................................... $54.75 $51.14 (6.6)
</Table>
- ---------------
(1) Gross margin excludes depreciation expense.
(2) Cellular/PCS subscribers include customers served through reseller
agreements.
(3) Average revenue per subscriber unit (ARPU) is defined as cellular/PCS
service revenues during the period divided by average cellular/PCS
subscriber during the period.
OPERATING REVENUES
Total operating revenues for the period ended December 31, 2000 were $3,055
million, an increase of $226 million, or 8.0%, from $2,829 million for the
quarter ended December 31, 1999. The components of the change in operating
revenues are described below.
Service revenues. Service revenues for the period ended December 31, 2000
were $2,814 million, an increase of $206 million, or 7.9%, compared to $2,608
million for the quarter ended December 31, 1999. The increase was primarily
driven by the 19.6% increase in average cellular/PCS subscribers versus the same
period one year earlier, offset by a decline in revenues we received from other
wireless carriers for roaming by their subscribers on our network. Long distance
revenues and the revenue we collect from our customers to cover the costs we
incur when our customers roam on the networks of other wireless carriers also
decreased slightly as a result of the introduction of regional and national
calling plans, which have the effect
40
of converting minutes of use from long distance and roaming revenues to local
service revenues. Local service revenues for the period ended December 31, 2000
increased 21.0% over the quarter ended December 31, 1999, driven by a 35.6%
increase in local minutes of use per customer, partially offset by lower per
minute pricing. ARPU declined by $3.61, or 6.6%, to $51.14 from $54.75 in the
quarter ended December 31, 1999 largely due to decreases in the revenues we
received from other wireless carriers for their customers roaming on our
network.
Equipment sales. Equipment sales for the period ended December 31, 2000
were $241 million, an increase of $20 million, or 9.0%, from $221 million for
the quarter ended December 31, 1999. The growth was primarily attributable to
the increase in gross customer additions, offset by declining retail prices for
digital handsets.
COST OF SERVICE AND EQUIPMENT SALES
Total cost of service and equipment sales for the period ended December 31,
2000 was $974 million, a decrease of $185 million, or 16.0%, from $1,159 million
for the quarter ended December 31, 1999. The components of the change in cost of
service and equipment sales are described below.
Cost of service. Cost of service for the period ended December 31, 2000 was
$581 million, a decrease of $211 million, or 26.6%, compared to $792 million for
the quarter ended December 31, 1999. This decrease was largely attributable to a
$220 million expense associated with the sale and leaseback of network assets
recorded in the fourth quarter of 1999, offset by a 35.6% increase in system
minutes of use, which was fueled by a 19.6% increase in average number of
cellular/PCS subscribers and higher usage from digital rate plans with larger
numbers of included minutes. The cost associated with the increase in network
traffic volume was partly offset by lower interconnection costs and efficiencies
attributable to digital networks.
Cost of equipment sales. Cost of equipment sales for the period ended
December 31, 2000 was $393 million, an increase of $26 million, or 7.1%,
compared to $367 million for the quarter ended December 31, 1999. The increase
was primarily due to an increase in handset purchases in order to accommodate
subscriber growth and upgrades, coupled with a shift toward higher priced
handsets.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the period ended December
31, 2000 were $1,279 million, or 41.9% of total revenues. Our integration
efforts are expected to yield some savings in distribution and customer care
costs, with additional savings realized from the consolidation of call centers,
billing systems and other functions.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the period ended December 31, 2000 was
$421 million. We expect depreciation costs to increase as larger capital
expenditures will be required for new technologies and services, network
enhancements and product offerings.
INTEREST EXPENSE
Interest expense for the period ended December 31, 2000 was $231 million.
Interest expense primarily related to the debt due to affiliates.
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED PARTNERSHIPS
Minority interest for the period ended December 31, 2000 was $(32) million.
Partnership operating results and potential changes in ownership will drive the
change in minority interest in consolidated partnerships.
41
EQUITY IN NET INCOME OF AFFILIATES, NET
Equity in net income of affiliates, net, for the period ended December 31,
2000 was $3 million.
OTHER, NET
Other, net, for the period ended December 31, 2000 was $7 million.
SBC DOMESTIC WIRELESS GROUP
PERIOD ENDED OCTOBER 2, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999
The historical financial results for the SBC Domestic Wireless Group for
the period ended October 2, 2000 and the nine months ended September 30, 1999
are included below.
The period ended October 2, 2000 is essentially a nine-month period and,
accordingly, the discussion below is based upon a comparison to the unaudited
financial results for the nine months ended September 30, 1999.
Because of the various transactions described above under "-- Acquisitions
and Dispositions", the comparisons between the two periods described below may
not be meaningful.
<Table>
<Caption>
UNAUDITED PERIOD ENDED
NINE MONTHS ENDED OCTOBER 2, %
SEPTEMBER 30, 1999 2000 CHANGE
------------------ ------------ ------
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Service revenues.......................................... $5,107 $ 5,582 9.3
Equipment sales........................................... 437 518 18.5
------ -------
Total operating revenues............................ 5,544 6,100 10.0
Operating expenses:
Cost of service........................................... 869 1,037 19.3
Cost of equipment sales................................... 601 702 16.8
Selling, general and administrative....................... 2,111 2,238 6.0
Depreciation and amortization............................. 702 835 18.9
------ -------
Total operating expenses............................ 4,283 4,812 12.4
------ -------
Operating income.................................... 1,261 1,288 2.1
Other income (expense):
Interest expense.......................................... (163) (267) 63.8
Minority interest......................................... (180) (133) (26.1)
Other, net................................................ 34 29 (14.7)
------ -------
Total other income (expense)........................ (309) (371) 20.1
------ -------
Income before provision for income taxes, extraordinary
gain and cumulative effect of accounting changes........ 952 917 (3.7)
Provision for income taxes.................................. 377 367 (2.7)
------ -------
Income before extraordinary gain and cumulative effect of
accounting changes...................................... 575 550 (4.3)
Extraordinary gain on disposal, net of tax.................. -- 36 NA
Cumulative effect of accounting changes, net of tax......... (14) -- NA
------ -------
Net Income.......................................... $ 561 $ 586 4.4
====== =======
OPERATING DATA:
EBITDA...................................................... 1,963 $ 2,123 8.2
Net cash provided by operating activities................... 1,420 $ 620 (56.3)
Net cash provided by (used in) investing activities......... (1,868) $(2,528) 35.3
Net cash provided by financing activities................... 506 $ 1,965 288.3
Cellular/PCS subscribers (in millions) (end of period)(1)... 12.5 13.2 5.6
ARPU (cellular/PCS) (in actual dollars)(2).................. $50.44 $ 51.23 1.6
</Table>
- ---------------
(1) Cellular/PCS subscribers include customers served through reseller
agreements.
(2) Average revenue per subscriber unit (ARPU) is defined as cellular/PCS
service revenues during the period divided by average cellular/PCS
subscribers during the period.
42
OPERATING REVENUES
Total operating revenues for the period ended October 2, 2000 were $6,100
million, an increase of $556 million, or 10.0%, compared to $5,544 million of
operating revenues for the nine months ended September 30, 1999. The components
of the change in operating revenues are described below.
Service revenues. Service revenues for the period ended October 2, 2000
were $5,582 million, an increase of $475 million, or 9.3%, compared to $5,107
million of service revenues for the nine months ended September 30, 1999 as a
result of an increase in average subscribers of 0.9 million, or 8.0%, and an
increase in ARPU of $.79. The growth rates of both revenues and average
customers are affected by various acquisitions and dispositions. The ARPU
increase from $50.44 in 1999 to $51.23 in 2000 is due, in part, to the addition
of customers acquired in the Comcast Transaction and disposition of customers in
overlapping Ameritech properties, who, on average, had lower ARPU than the
acquired Comcast customers. In addition, higher ARPU PCS customers represented a
greater proportion of the customer base in 2000 compared to 1999.
Equipment sales. Equipment sales for the period ended October 2, 2000 were
$518 million, an increase of $81 million, or 18.5%, compared to $437 million for
the nine months ended September 30, 1999. This increase was primarily
attributable to the 33.7% increase in gross customer additions.
OPERATING EXPENSES
Cost of service and equipment sales. Cost of service and equipment sales
for the period ended October 2, 2000 was $1,739 million, an increase of $269
million, or 18.3%, compared to $1,470 million for the nine months ended
September 30, 1999.
Cost of service of $1,037 million increased $168 million from $869 million
for the nine months ended September 30, 1999, mainly due to an increase in local
network, roaming and long distance costs. These costs increased 19.3% primarily
due to higher average usage per customer and also due to growth in our customer
base.
For the same period, cost of equipment sales was $702 million, an increase
of $101 million, or 16.8%, compared to $601 million for the nine months ended
September 30, 1999. The increase in equipment purchases supported the 33.7%
increase in gross customer additions and corresponding increase in equipment
sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the period ended October 2, 2000 were $2,238
million, an increase of $127 million, or 6.0%, compared to $2,111 million for
the nine months ended September 30, 1999. The increase was mainly due to the
increase in commissions related to the 33.7% increase in gross customer
additions. The volume-related increases were partially offset by declining
commission rates.
Depreciation and amortization. Depreciation and amortization for the period
ended October 2, 2000 was $835 million, an increase of $133 million, or 18.9%,
compared to $702 million for the nine months ended September 30, 1999. This
increase is primarily due to an increase in amortization of intangibles,
including goodwill, resulting from the acquisition of the Philadelphia area
properties in July 1999 and the acquisition of the Puerto Rico properties in
August 1999.
INTEREST EXPENSE
Interest expense for the period ended October 2, 2000 was $267 million, an
increase of $104 million, or 63.8%, compared to $163 million for the nine months
ended September 30, 1999. The increase in interest expense primarily resulted
from an increase in the average interest rate charged on affiliate loans, which
increased to 9.5% in 2000 from less than 6.7% for the nine months ended
September 30, 1999, combined with an increase in affiliate debt during 2000.
43
MINORITY INTEREST
Minority interest for the period ended October 2, 2000 was $133 million, a
decrease of $47 million, or 26.1%, compared to $180 million for the nine months
ended September 30, 1999. This decrease resulted primarily from the required
October 1999 sale of properties with minority interests in Chicago, St. Louis
and other areas, and the buyout of minority partners in other properties.
PROVISION FOR INCOME TAXES
The income tax provision for the period ended October 2, 2000 was $367
million, a decrease of $10 million, or 2.7%, compared to $377 million for the
nine months ended September 30, 1999, as a result of lower income, mainly from
the increase in interest expense.
44
BELLSOUTH DOMESTIC WIRELESS GROUP
PERIOD ENDED OCTOBER 2, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999
The historical financial results for the BellSouth Domestic Wireless Group
for the period ended October 2, 2000 and the nine months ended September 30,
1999 are included below.
The period ended October 2, 2000 is essentially a nine-month period and,
accordingly, the discussion below is based upon a comparison to the unaudited
financial results for the nine months ended September 30, 1999.
Because of the various transactions described above under "-- Acquisitions
and Dispositions", the comparisons between the two periods described below may
not be meaningful.
<Table>
<Caption>
UNAUDITED
NINE MONTHS
ENDED PERIOD ENDED
SEPTEMBER 30, OCTOBER 2, %
1999 2000 CHANGE
------------- ------------ ------
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Service revenues.......................................... $2,346 $ 2,873 22.5
Equipment sales........................................... 220 229 4.1
------ -------
Total operating revenues.......................... 2,566 3,102 20.9
Operating expenses:
Cost of service........................................... 472 656 39.0
Cost of equipment sales................................... 340 438 28.8
Selling, general and administrative....................... 1,049 1,138 8.5
Depreciation and amortization............................. 483 491 1.7
Provision for asset impairment............................ 320 -- NA
------ -------
Total operating expenses.......................... 2,664 2,723 2.2
------ -------
Operating income.................................. (98) 379 NA
Other income (expense):
Interest expense.......................................... (258) (291) 12.8
Minority interest......................................... 16 (8) NA
Other, net................................................ 261 114 (56.3)
------ -------
Total other income (expense)...................... 19 (185) NA
------ -------
Income before provision for (benefit from) income taxes... (79) 194 NA
Provision for (benefit from) income taxes................. (25) 80 NA
------ -------
Net income (loss)......................................... $ (54) $ 114 NA
====== =======
OPERATING DATA:
EBITDA...................................................... NA $ 870 NA
Net cash provided by operating activities................... NA $ 826 NA
Net cash used in investing activities....................... NA $(1,347) NA
Net cash provided by financing activities................... NA $ 553 NA
Cellular/PCS subscribers (in millions) (end of period)(1)... 4.7 5.7 21.3
ARPU (cellular/PCS) (in actual dollars)(2).................. $57.55 $ 58.47 1.6
</Table>
- ---------------
(1) Cellular/PCS subscribers include customers served through reseller
agreements.
(2) Average revenue per subscriber unit (ARPU) is defined as cellular/PCS
service revenues during the period divided by average cellular/PCS
subscribers during the period.
45
OPERATING REVENUES
Total operating revenues for the period ended October 2, 2000 were $3,102
million, an increase of $536 million, or 20.9%, compared to $2,566 million of
operating revenues for the nine months ended September 30, 1999. The components
of the change in operating revenues are described below.
Service revenues. Service revenues for the period ended October 2, 2000 of
$2,873 million increased $527 million, or 22.5%, compared to $2,346 million for
the nine months ended September 30, 1999. The increase was mainly due to the
growth in the customer base, as average subscribers rose 15.2%, and a 34.5%
increase in average minutes of use per subscriber for the period ended October
2, 2000 compared to the nine months ended September 30, 1999. Higher usage per
customer, partly offset by lower average per minute pricing, also contributed to
an increase in ARPU to $58.47 for the period ended October 2, 2000, up $.92, or
1.6%, from the nine months ended September 30, 1999.
Equipment sales. Equipment sales for the period ended October 2, 2000 were
$229 million, an increase of $9 million, or 4.1%, compared to $220 million for
the nine months ended September 30, 1999. The increase in equipment sales
resulted from a 24.5% increase in gross cellular/PCS customer additions, offset
by aggressive price discounts on a per unit basis.
OPERATING EXPENSES
Cost of service and equipment sales. Cost of service and equipment sales
for the period ended October 2, 2000 was $1,094 million, an increase of $282
million, or 34.7%, compared to $812 million for the nine months ended September
30, 1999.
Cost of service for the period ended October 2, 2000 was $656 million, an
increase of $184 million, or 39.0%, compared to $472 million for the nine months
ended September 30, 1999. The increase in usage as well as growing popularity of
nationwide calling plans were the major contributors to increases in local
network, roaming and long distance costs. These increases were partially offset
by reduced roaming rates negotiated with other carriers.
Cost of equipment sales for the period ended October 2, 2000 was $438
million, an increase of $98 million, or 28.8%, over $340 million for the nine
months ended September 30, 1999. The increase was partly due to the higher
volume of gross sales. In addition, discounting of equipment pricing was used as
an inducement to retain existing customers and migrate their service to digital
from analog in order to lower future network costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the period ended October 2, 2000 were $1,138
million, an increase of $89 million, or 8.5%, compared to $1,049 million for the
nine months ended September 30, 1999. The increase was mainly due to sales and
marketing costs associated with higher gross customer additions and increased
customer care and billing costs to service a larger customer base.
Depreciation and amortization. Depreciation and amortization for the period
ended October 2, 2000 was $491 million, an increase of $8 million, or 1.7%,
compared to $483 million for the nine months ended September 30, 1999. This
increase was due to increased asset levels, partly offset by accelerated
depreciation in 1999 related to the asset impairment.
Provision for asset impairment. The $320 million provision for asset
impairment was recorded by the BellSouth Domestic Wireless Group in 1999 in
connection with the disposals of infrastructure equipment which was replaced by
new infrastructure equipment in the southeastern United States.
INTEREST EXPENSE
Interest expense for the period ended October 2, 2000 was $291 million, an
increase of $33 million, or 12.8%, compared to $258 million for the nine months
ended September 30, 1999. The increase in interest expense resulted primarily
from a combination of increases in rates and debt levels.
46
OTHER, NET
Other, net for the period ended October 2, 2000 was $114 million, a
decrease of $147 million, or 56.3%, compared to $261 million for the nine months
ended September 30, 1999, primarily as a result of $162 million in gains during
1999 from the disposal of interests in Richmond, Virginia; Bakersfield,
California; Honolulu, Hawaii; and Dothan, Alabama.
PROVISION FOR INCOME TAXES
The income tax provision for the period ended October 2, 2000 was $80
million, an increase of $105 million from adjusted 1999, as a result of higher
reported income.
LIQUIDITY AND CAPITAL RESOURCES
We expect to have significant cash needs over the next several years, as
described below.
CAPITAL EXPENDITURES, OTHER INVESTMENTS AND DEBT SERVICE
Network upgrades and expansion. The operation, upgrade and expansion of
our networks will require substantial amounts of capital over the next several
years. Capital expenditures totaled about $3.2 billion for 2001 primarily for
the upgrade of our networks to provide additional capacity, coverage, and
services, including GPRS services over our existing GSM networks. In addition,
we have contributed approximately $200 million through December 31, 2001 to the
jointly controlled network infrastructure venture with VoiceStream for capital
expenditures. During 2002, we expect to spend approximately $4.2 to $4.6 billion
for our ongoing capital expenditures and equity investments, including the cost
to begin upgrading our TDMA systems with GSM voice and GPRS/EDGE data technology
and equity contributions and/or secured loans to Salmon PCS and our network
sharing ventures with VoiceStream and AT&T Wireless, which are discussed below.
We expect to operate substantially all of our existing TDMA network for about
eight to ten years. As a result, we believe that the useful lives that we have
established for depreciation of our TDMA equipment will generally not need to be
revised. We estimate that the aggregate capital cost of our network upgrade will
be approximately $2.6 to $2.8 billion, or about $18 to $19 per POP, through 2004
when the upgrade project is expected to conclude. Of the $2.6 to $2.8 billion,
$1.2 to $1.3 billion is expected to be spent in 2002. We are negotiating vendor
contracts for the acquisition of handsets relating to, and have signed vendor
contracts for the acquisition and installation of infrastructure for, our
GSM/GPRS overlay. Under these agreements, we have made good faith capital
expenditure commitments over a three-year period. However, there is no penalty
for not achieving the contemplated levels of expenditures under these vendor
agreements, and we are not contractually obligated to spend these amounts.
Expansion of our current network in future years will continue to require
large outlays of funds because:
- we expect network usage by wireless customers will continue to rise as we
reduce prices;
- customer demand for new services is expected to increase substantially;
- wireless subscriber growth is expected to continue; and
- additional capacity is necessary to support wireless data services.
We may also require substantial additional capital for, among other uses,
access to additional spectrum, build-out of infrastructure in newly licensed
areas, additional system development and network technology changes, as well as
development and implementation of 3G technologies and services. Unforeseen
delays, cost overruns, regulatory changes, engineering and technological factors
may also increase our funding requirements. See "Risk Factors -- Risks Related
to Our Business -- Our business expansion and network upgrade will require
substantial additional capital and we cannot assure you that we will be able to
finance them" for a discussion of the risks associated with our future capital
requirements.
47
Investment in Salmon. We and Crowley Digital Wireless, LLC formed Salmon to
bid for PCS licenses in an FCC auction that ended in January 2001. Salmon
submitted winning bids totaling $2.3 billion for 79 licenses covering more than
80 million POPs. See "Business -- Our Network -- Salmon PCS".
Our investment in Salmon is accounted for as an equity investment because
we have a non-controlling equity interest in Salmon. We currently recognize our
portion of Salmon's losses in our consolidated statement of operations as equity
in net income (loss) of affiliate because of our equity interest in Salmon.
Until Salmon's networks are built out and it has acquired a significant number
of subscribers, it is expected to generate significant operating losses. Crowley
Digital LLC, the other member of Salmon, is not committed to provide equity
funding in excess of its initial capital contribution of $50 million. As a
result, we will recognize 100% of Salmon's losses at such time as Crowley's
capital contribution has been eliminated due to it being charged its
proportionate share of Salmon's losses.
We provided Salmon with approximately $192 million in equity and $487
million in secured loans (including accrued interest) as of March 31, 2002 that
it used for auction deposits and to make full payment for the 45 licenses that
the FCC granted to Salmon. Of Salmon's outstanding loan balance as of March 31,
2002, $421.5 million represents the down payment to the FCC for the 34 licenses
for which it was the winning bidder that are now subject to challenge. In April
2002, the FCC refunded 85% of the auction deposits pertaining to those licenses.
Accordingly, Salmon received about $358 million of its deposits, which it
applied to repay a like principal amount of loans from us. We have agreed that,
upon Salmon's request, we will provide, through additional secured loans and
equity contributions, substantially all of the funding that Salmon will require
to make full payment on the remaining 34 licenses, if they are awarded, and to
build out and operate its systems and to fund operating losses. The grant of
these licenses to Salmon is subject to resolution of challenges to the FCC's
auction, including litigation now pending before the U.S. Supreme Court.
Although there is significant uncertainty with respect to the award of the
remaining licenses, we could be required to provide to Salmon about $2 billion
to acquire those licenses as early as the second quarter of 2003. This amount
would be payable 10 days after the licenses are granted to Salmon. See "Risk
Factors -- Risks Related to Our Business -- If we fail to obtain access to
additional radio spectrum, we may not be able to expand the geographic reach of
Cingular-branded services, increase our customer base in areas we currently
serve or meet the anticipated demand for new services" for a discussion of the
risks associated with the remaining licenses.
Investment in venture with VoiceStream Wireless Corporation. In November
2001, we and VoiceStream formed a jointly-controlled venture to allow the
companies to share network infrastructures in the California, Nevada and New
York City markets. We and VoiceStream will buy network services from the venture
but each of us has retained ownership and control of our own licenses. Although
the networks we contributed to the venture are constructed and operational, we
will be required to invest additional capital, pro rata based on traffic, to
modify and expand the network and to fund cash operating expenses. During the
three months ended March 31, 2002, we made contributions to the venture
amounting to $183 million. We owned approximately 75% of this jointly-controlled
venture as of March 31, 2002.
Investment in venture with AT&T Wireless. In January 2002, we entered into
an agreement with AT&T Wireless to form a jointly-controlled venture to build
out a GSM/GPRS/EDGE network along major interstate highways in predominantly
mid-western and western states in order to reduce roaming expenses we pay to
other carriers when our customers travel on those highways. We and AT&T Wireless
will buy network services from the venture and provide service under our own
brand names. We expect this venture to be formed before year-end 2002. Upon
formation we are obligated to contribute cash or assets in the amount equal to
the cash and assets contributed by AT&T Wireless, up to a maximum of $85
million. The new network is expected to begin operations in the first quarter of
2003.
Debt service. As of March 31, 2002, we had approximately $12.5 billion of
indebtedness and capitalized lease obligations. This debt includes an aggregate
of $9.7 billion in unsecured, subordinated member loans from SBC and BellSouth.
Interest on the loans is payable at a rate of 7.5% per year.
48
As described in "Description of Financing Arrangements -- Financing
Arrangements With Members -- Member Loans", member loans are subordinated to
senior debt, including any outstanding commercial paper notes, any debt
outstanding under our bank credit facility, the old notes until exchanged for
new notes, the new notes exchanged for old notes hereunder and any future debt
we designate as senior debt with the approval of SBC and BellSouth. Although the
subordinated loans are scheduled to mature on March 31, 2004, we may prepay the
subordinated loans or refinance them with senior debt (other than with the
proceeds from our bank credit facility or senior loans from SBC or BellSouth) at
any time if we are not in default under our senior debt.
As long as our manager, Cingular Wireless Corporation, is controlled by SBC
and BellSouth, they can require us to prepay the subordinated member loans at
any time when permissible under our senior indebtedness, and we expect to prepay
these loans from time to time to the extent we have funds (from operations,
sales of assets or debt or equity financing activities) in excess of amounts we
project we will require over the succeeding fiscal year for capital and
operating purposes.
Because of our cash requirements described above, we do not believe we will
have excess cash to enable us to pay the subordinated member loans on or prior
to the maturity date and will be required to refinance the loans by incurring
additional debt and/or repay the loans from the proceeds of issuing equity. If
and when those options are attractive, we expect that SBC and BellSouth will
determine for us to raise capital from those sources and apply the proceeds to
reduce or retire the subordinated member loans. We do not expect SBC and
BellSouth to require any repayment of the loans if it would impair our debt
ratings. If at maturity the markets are not attractive, we expect that SBC and
BellSouth will prefer to restructure the subordinated member loans.
DISTRIBUTIONS
We are required to make periodic distributions to our members on a pro rata
basis in accordance with each member's percentage interests in us in amounts
sufficient to permit our members to pay the tax liabilities resulting from
allocations of tax items from us. In addition, we are required to distribute to
our members at the end of a fiscal year, on a pro rata basis in accordance with
each member's percentage interest in us, the excess cash determined by a
formula. See "Certain Relationships and Related Party Transactions -- Our
Limited Liability Company Agreement -- Distributions". Through March 31, 2002,
we have distributed $47 million related to 2000 tax liabilities and $592 million
related to 2001 tax liabilities. We do not anticipate making distributions of
"excess cash" under the formula over the next few years and, subject to the
approval of our manager's strategic review committee and the approval of our
members, we intend to reinvest the undistributed portion to support growth in
our business.
CAPITAL RESOURCES
We expect to rely on a combination of cash provided by operations and
external funds to fund continued development and expansion, distributions and
debt service needs. Other sources of external funding may include equity
issuances, issuance of commercial paper and other debt, and borrowings from SBC
or BellSouth, which may not be subordinated in the same manner as the
subordinated member loans described above. Neither SBC nor BellSouth is
obligated to provide additional financing to us.
In order to maintain short-term liquidity, our manager's board has
authorized us to issue up to $6 billion of commercial paper through selected
dealers. Our commercial paper program is supplemented by a $3 billion revolving
credit facility, which we do not anticipate using unless we are unable to issue
commercial paper. The facility is not, however, restricted to that use. Having
such a committed credit facility provides another source of funds to pay our
maturing commercial paper when it becomes due if we are unable to access the
commercial paper market because of market conditions or other factors. As of
March 31, 2002, we had no commercial paper outstanding. The revolving credit
facility includes an option to convert revolving loans, if any, outstanding on
the November 18, 2002 maturity date into one-year term loans. The credit
facility contains customary events of default and covenants, including a
limitation on mergers and sale of all or substantially all of our assets and a
negative pledge. The credit facility also contains a leverage ratio covenant
49
requiring us to maintain a consolidated debt to trailing four quarters
consolidated EBITDA ratio of 4 to 1 or less, such debt excluding the
subordinated loans of SBC and BellSouth. As of March 31, 2002, our leverage
ratio was 0.62 to 1 (and 2.8 to 1 including the subordinated loans in
consolidated debt). We are in compliance with the covenants under our credit
facility, and there are no other material covenants that we are subject to under
other agreements. See "Description of Financing Arrangements -- Bank Credit
Facility" for a description of these events of default and covenants. We believe
we will have sufficient internal cash flow to enable us to meet the leverage
ratio maintenance covenant in the credit facility. As of the date of this
prospectus, there are no borrowings outstanding or contemplated under this
facility.
We believe that internally generated funding, together with commercial
paper issuances and other external financing, will be sufficient to fund capital
expenditures, make distributions and pay interest on our outstanding debt for
the foreseeable future. We plan to rely on commercial paper issuances when
internally generated funds are insufficient. We intend to periodically refinance
outstanding commercial paper with long-term debt or equity when advantageous. We
may need to secure additional financing to make loans and equity contributions
to Salmon, to fund equity contributions to our infrastructure ventures with
VoiceStream and AT&T Wireless, to acquire licenses or other wireless providers
and to repay debt.
CONTRACTUAL COMMITMENTS
Although we expect to require additional substantial amounts of capital as
described above, we are contractually committed for the following amounts for
the next three years (excluding any commercial paper that we may issue from time
to time):
<Table>
<Caption>
ESTIMATED PAYMENTS DUE BY YEAR
(DOLLARS IN MILLIONS)
-----------------------------------
CONTRACTUAL OBLIGATIONS AND DEBT REPAYMENT 2002 2003 2004 TOTAL
- ------------------------------------------ ------ ------ ------- -------
Investment in Salmon(1).......................... $ 30 $ 30 $ 30 $ 90
Investment in VoiceStream venture................ 225 225 -- 450
Capital lease obligations(2)..................... 35 38 37 110
Senior notes..................................... -- -- -- --
Debt due to affiliates(3)........................ -- -- 9,678 9,678
Other long-term debt............................. 3 3 50 56
Interest payments................................ 909 912 366 2,187
------ ------ ------- -------
Total............................................ $1,202 $1,208 $10,161 $12,571
</Table>
- ---------------
(1) If Salmon is awarded all the licenses for which it was the high bidder in
the FCC's January 2001 auction, we may additionally be required to lend
approximately $2 billion to Salmon in 2003.
(2) See note 8 to our unaudited consolidated financial statements for the three
months ended March 31, 2001 and 2002.
(3) We do not expect SBC and BellSouth to require any repayment if it would
impair our debt ratings or impair our working capital or if we cannot
advantageously raise debt or equity proceeds from external financing
sources. See "-- Liquidity and Capital Resources -- Capital expenditures,
other investments and debt service -- Debt service".
Many wireless providers have been able to secure financing by entering into
sale/leaseback transactions for their towers. However, contractual restrictions
imposed by SBC and BellSouth prevent us from realizing any proceeds of any such
sale/leaseback or other monetization transactions.
See "Risk Factors -- Risks Related to Our Business -- Our business
expansion and network upgrade will require substantial additional capital and we
cannot assure you that we will be able to finance them" for additional
information regarding our capital requirements.
50
OTHER FACTORS THAT MAY AFFECT OUR BUSINESS
RESELLER REVENUES. WorldCom has announced that it is exiting the business
of reselling wireless voice communications services. Additionally, on July 21,
2002, WorldCom and certain of its subsidiaries filed voluntary petitions for
bankruptcy protection under chapter 11 of title 11 of the United States Code.
WorldCom's customers accounted for less than 2% of our revenues in each of the
three month periods ended March 31, 2002 and June 30, 2002. Subsequent to June
30, 2002, revenues from services provided to WorldCom's customers will be
recognized only to the extent of cash received. We do not believe that these
developments will have a material adverse impact on our financial position or
results of operations.
MARKET RISK. We are exposed to various types of market risk in the ordinary
course of our business, including interest rate changes. On a limited basis we
use derivative financial instruments, including interest rate and cross-currency
swaps, to manage these risks. We do not use financial instruments for trading or
speculative purposes, and all financial instruments are used in accordance with
board-approved policies. As of March 31, 2002, we had $62 million of floating
rate borrowings and approximately $12.4 billion of fixed rate borrowings. A
change in interest rates of 100 basis points would change our interest expense
on floating rate debt balances as of March 31, 2002 by less than $1 million per
annum. In addition, as of March 31, 2002 we had no commercial paper outstanding
at a fixed rate.
SEASONALITY. Participants in the wireless communications industry,
including us, have generally experienced a trend of generating a higher number
of customer additions and handset sales in the fourth quarter of each year as
compared to the other three quarters. A number of factors contribute to this
trend, including the year-end holiday shopping season, the timing of new product
and service announcements and introductions, competitive pricing pressures and
aggressive marketing and promotions. While the holiday season is important to us
for customer additions, service revenues from these holiday season additions are
not fully realized until the following year, and margins and cash flow are
usually lower in December due to higher expenses for marketing and equipment
subsidies. This industry is becoming less seasonal, and we expect this trend to
continue, primarily as a result of increasing wireless penetration, general
economic conditions and competition.
See "Risk Factors" for a description of certain other risks, including
risks related to competition and changing technology, that may affect our
business.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). SFAS No. 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives. SFAS No. 142 requires that these
assets be reviewed for impairment at least annually. Intangible assets with
finite lives will continue to be amortized over their estimated useful lives.
Additionally, SFAS No. 142 requires that goodwill included in the carrying value
of equity method investments no longer be amortized. As a result of adopting
SFAS No. 142, amortization expense for the three months ended March 31, 2002 was
reduced by $64 million.
In conjunction with the adoption of SFAS No. 142, we reassessed the useful
lives of previously recognized intangible assets. A significant portion of our
intangible assets are FCC licenses that provide our wireless operations with the
exclusive right to utilize certain radio frequency spectrum to provide cellular
communication services. While FCC licenses are issued for only a fixed time,
generally ten years, such licenses are subject to renewal by the FCC. Renewals
of FCC licenses have occurred routinely and at nominal cost. Moreover, we have
determined that there are currently no legal, regulatory, contractual,
competitive, economic or other factors that limit the useful life of our FCC
licenses. As a result, the FCC licenses will be treated as an indefinite-lived
intangible asset under the provisions of SFAS No. 142 and will not be amortized
but rather will be tested for impairment. We will reevaluate the useful life
determination for wireless licenses each reporting period to determine whether
events and circumstances continue to support an indefinite useful life.
51
We have begun to apply the provisions of SFAS No. 142 in the first quarter
of 2002, which includes testing goodwill for impairment using a two-step
process. The first step is a screen for potential impairment, while the second
step measures the amount of the impairment, if any. We completed in the first
quarter of 2002 the first of the required impairment tests of goodwill as of
January 1, 2002. Based on the results of the first step, it is likely that all
or a portion of the goodwill related to our Mobitex data network, with a
carrying value of $32 million, will be impaired; however, we have not yet
determined the amount of any potential impairment loss. For goodwill related to
our cellular/PCS business, the results of the first step of the impairment test
indicated no impairment in value. Any impairment that is required to be
recognized when adopting SFAS No. 142 will be reflected as the cumulative effect
of a change in accounting principle in the first quarter of 2002. We plan to
complete the measurement of the impairment loss in the second quarter of 2002.
We have completed the impairment test of our indefinite lived intangible
assets as of March 31, 2002, and no impairment exists. This impairment test was
performed on an aggregate basis, consistent with our management of the business
on a national scope, and utilized a fair value approach, using primarily
discounted cash flows, to complete the test. This approach determines the fair
value of the FCC licenses and accordingly incorporates cash flow assumptions
regarding the investment in a network, the development of distribution channels,
and other inputs for making the business operational. As these inputs are
included in determining free cash flows of the business, the present value of
the free cash flows is attributable to the licenses.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). SFAS No. 143 requires entities to
recognize the fair value of any legal obligation associated with the retirement
of long-lived assets and to capitalize an asset retirement cost over the
carrying amount of the related long-lived asset by the same amount as the
liability. This statement is effective for financial statements for fiscal years
beginning after June 15, 2002. We will adopt the standard effective January 1,
2003. We are currently evaluating the impact of this statement on our results of
operations, financial position and cash flows.
In the first quarter, we adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS No. 144). The statement supersedes SFAS Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", however, it retains the fundamental provisions of that
statement related to the recognition and measurement of the impairment of
long-lived assets to be "held and used". The statement provides more guidance on
estimating cash flows when performing a recoverability test, requires that a
long-lived asset or asset group to be disposed of other than by sale (e.g.,
abandoned) be classified as "held and used" until it is disposed of, requires
revision of the depreciable life of a long-lived asset to be abandoned, and
establishes more restrictive criteria to classify an asset or asset group as
"held for sale". The statement is effective for fiscal years beginning after
December 15, 2001. SFAS No. 144 did not have an impact on our results of
operations, financial position or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. We base our estimates on historical
experience, where applicable, and other assumptions that we believe are
reasonable under the circumstances. Actual results could differ from those
estimates under different assumptions or conditions. The various policies that
are important to the portrayal of our financial condition and results of
operations include:
- We depreciate our wireless communications equipment using the
straight-line method over estimated useful lives. We periodically review
changes in our technology and industry conditions, asset retirement
activity and cost of removal and salvage to determine adjustments to
estimated remaining useful lives and depreciation rates.
52
- We review long-lived assets, consisting primarily of property, plant and
equipment and intangibles, for impairment as described in the notes to
our consolidated financial statements. In analyzing potential
impairments, we use projections of future cash flows from the assets.
These projections are based on our views of growth rates for the related
business and anticipated future economic conditions and the appropriate
discount rates relative to risk and estimates of residual values. If
changes in growth rates, future economic conditions or discount rates and
estimates of terminal values were to occur, long-lived assets may become
impaired.
- We recognize service revenues based upon minutes of use processed and
contracted fees, net of credits and adjustments for service discounts. As
a result of our billing cycle cut-off times, we are required to make
estimates for services revenue earned but not yet billed at the end of
each quarter. These estimates are based primarily upon historical minutes
of use processed.
- We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments.
We base our estimates on the aging of our accounts receivable balances
and our historical write-off experience, net of recoveries. If the
financial condition of our customers were to deteriorate, additional
allowances may be required.
- We maintain inventory valuation reserves for obsolescence and lower of
cost or market. Reserves for obsolescence are determined based on
analysis of inventory agings. Lower of cost or market reserves are
determined based on analysis of current market prices. Changes in
technology may require us to provide additional reserves.
- We hold non-controlling investments in several entities for which we
apply the equity or cost method of accounting. We record impairments
associated with these investments when we determine that the decline in
market value of the investment below our net book value is deemed to be
other than temporary. Volatility in market prices of these investments or
poor operating performance of these entities could result in future
values of these investments declining below our carrying value.
- We calculate the costs of providing retiree benefits under the provisions
of SFAS 87 and SFAS 106. The key assumptions used in making these
calculations are disclosed in the notes to our consolidated financial
statements. The most significant of these assumptions are the discount
rate used to value the future obligation, expected return on plan assets
and health care cost trend rates. We select discount rates commensurate
with current market interest rates on high-quality, fixed-rate debt
securities. The expected return on assets is based on our current view of
the long-term returns on assets held by the plans, which is influenced by
historical averages. The medical cost trend rate is based on our actual
medical claims and future projections of medical cost trends.
53
INDUSTRY OVERVIEW
GENERAL
Wireless communications systems use different ranges of radio frequencies,
commonly referred to as spectrum, to transmit voice and data. Broadly defined,
the wireless communications industry includes one-way radio applications, such
as one-way paging services, and two-way radio applications, such as cellular
telephone service, enhanced specialized mobile radio services, PCS, one-way and
two-way messaging services that utilize relatively narrow bandwidths and
interactive data services. The FCC licenses the radio frequencies used to
provide each of these applications.
INDUSTRY GROWTH AND OUTLOOK
Since the introduction of cellular service in the United States in 1983,
wireless service has grown significantly. As illustrated by the following table,
domestic cellular, enhanced specialized mobile radio and PCS providers
experienced combined compound annual growth rates of 32% in total subscribers
and 25% in total service revenues over the seven-year period from 1993 to 2000.
U.S. WIRELESS INDUSTRY STATISTICS*
<Table>
<Caption>
1993 1994 1995 1996 1997 1998 1999 2000
----- ----- ----- ----- ----- ----- ----- ------
Total service revenues (in billions)... $10.9 $14.2 $19.1 $23.6 $27.5 $33.1 $40.0 $ 52.5
Ending subscribers (in millions)....... 16.0 24.1 33.8 44.0 55.3 69.2 86.0 110.0
Subscriber growth...................... 45.1% 50.8% 40.0% 30.4% 25.6% 25.1% 24.3% 27.9%
Ending penetration..................... 6.1% 9.1% 12.6% 16.3% 20.2% 25.1% 30.9% 39.1%
</Table>
- ---------------
* Source: Cellular Telecommunications and Internet Association and Paul Kagan
Associates, Inc.
RECENT INDUSTRY TRENDS
Growth in the wireless communications industry has resulted from a number
of trends, which we expect to continue, including:
- ONGOING GROWTH IN MARKET PENETRATION DUE TO GREATER DEMAND FOR WIRELESS
SERVICES. The U.S. wireless communications industry has experienced a
significant increase in subscriber additions and penetration levels. For
example, from 1999 to 2000 the number of subscribers increased
approximately 28%, resulting in estimated penetration of 39% at the end
of 2000. This growth has been fueled in part by lower costs of providing
services, which led to lower prices and increased demand for services.
We believe that growth in penetration is likely to continue, but at lower
rates than the industry has experienced, as prices continue to decline
and as wireless services become more attractive to the mass consumer
market. Wireless penetration in other developed nations, particularly
western Europe, is currently substantially higher than in the United
States. Although there are significant differences between the United
States and the western European markets, including the per-minute pricing
and quality and availability of wireline services, we believe the western
European experience demonstrates that significant opportunities for
increased penetration remain in the United States.
- LARGER "BUNDLES" OF INCLUDED MINUTES IN PRICING PLANS RESULTING IN LOWER
PER-MINUTE PRICES, MASS MARKET ADOPTION AND INCREASED USAGE OF WIRELESS
SERVICES. As the cost of wireless service for the consumer has declined
and an increasing number of minutes has been included in pricing plans
without additional charge, wireless service has become more attractive to
the mass consumer market. We believe that the higher number of included
minutes offered by these plans encourages greater usage as subscribers
have become less concerned with the need to pay for calls on a per-minute
basis or to pay for received calls, which previously inhibited usage of
wireless services. We believe that this widespread usage will in turn
cause even more people to choose wireless services and to substitute
wireless for landline phone service.
54
- GROWING POPULARITY OF NATIONAL AND REGIONAL PRICING PLANS, WHICH SIMPLIFY
CUSTOMER CHOICE AND ELIMINATE ROAMING AND LONG-DISTANCE CHARGES. The
wireless industry offers single rate pricing, such as our Cingular
Home(sm), Cingular Region(sm) and Cingular Nation(sm) rate plans, which
simplifies customer choice and seeks to attract high-usage subscribers by
eliminating roaming and long distance charges. We believe that these
plans have increased wireless telephone penetration and usage in the
United States, and that the introduction of other simplified, targeted
rate plans will continue to increase wireless telephone penetration.
- PREDOMINANT USE OF DIGITAL SERVICE, WHICH OFFERS EXTENDED BATTERY LIFE,
IMPROVED VOICE QUALITY, GREATER CALL SECURITY, LOWER PER-MINUTE COSTS AND
ADDITIONAL VALUE-ADDED SERVICES. Over the past several years, as more
digital networks have come on-line, the percentage of subscribers using
digital services has increased substantially. At March 31, 2002, 87% of
our cellular and PCS customers were using digital service, and in March
2002, 97% of our cellular and PCS minutes of use were digital. Digital
service significantly increases penetration and subscriber usage for
several reasons. First, digital handsets have longer battery life
relative to analog handsets, allowing mobile users to make more extensive
use of their handsets without recharging. Second, digital service results
in improved reception and greater security, which makes wireless service
more comparable to wireline service. Third, digital networks offer
service providers greater capacity, in turn allowing service providers to
lower prices and offer bundled minutes of service, thereby promoting
greater usage by subscribers. Finally, digital service allows providers
to sell value-added services such as interactive messaging, wireless
Internet and caller-ID, among others.
- INCREASING USE OF WIRELESS DATA APPLICATIONS SUCH AS SHORT MESSAGING
SERVICE, E-MAIL AND INTERNET ACCESS. With the advent of widespread use of
the Internet, wireless data technology has expanded the services and
utility that providers can offer to customers. We believe currently
available applications, including wireless portals and web services, and
access to e-mail, news, sports, weather, travel services, financial
information and comparison shopping, introduce businesses and consumers
to wireless data services and create a foundation for future growth. In
addition, we believe that increased capacity, higher data transmission
speed and lower costs associated with 3G wireless networks will further
drive the growth of wireless data services and applications. Providers
who can cost-effectively migrate their networks to these technologies on
a timely basis will likely have a competitive advantage in seizing
emerging data opportunities.
- THE EVOLUTION OF DATA TECHNOLOGIES, SUCH AS TDMA, CODE DIVISION MULTIPLE
ACCESS, OR "CDMA", AND GSM, TO THE 3G TECHNOLOGIES EDGE, UNIVERSAL MOBILE
TELECOMMUNICATIONS SYSTEM, OR "UMTS", AND THE FASTER VERSION OF
CDMA -- "CDMA-2000". The wireless industry is moving towards the
development and implementation of new technologies for the transmission
of data communications that will allow for faster transmission, more
sophisticated applications and increased network capacity. We plan to
upgrade our networks to EDGE, and eventually to UMTS, technology. See
"Business -- Digital Technology -- Technology Upgrade Strategy".
55
WIRELESS TECHNOLOGY
In the U.S. wireless telecommunications industry, there are two principal
frequency bands currently licensed by the FCC for transmitting two-way voice and
data signals -- the 800-900 MHz band and the 1900 MHz band. The services
provided over these two frequency bands are commonly referred to as cellular and
PCS, respectively. Because the two services use different frequencies, PCS
infrastructure is characterized by shorter transmission distances and closer
spacing of cells and towers than in a cellular network to accommodate the
different characteristics of the PCS radio signals. However, PCS service does
not differ functionally to the user from digital cellular service. The following
illustrations identify the wireless services allocated to each band, as well as
the access technologies employed by each service.
CELLULAR SERVICES
800 - 900 MHZ BAND
(CHART)
PERSONAL COMMUNICATIONS SERVICES
1900 MHZ BAND
(CHART)
Cellular systems initially provided service solely by means of analog
transmissions and, because of differing digital standards, the FCC continues to
require that cellular radio licensees offer analog service. This
56
allows cellular subscribers who are equipped with handsets that can be switched
to analog service the technical capability to "roam" on systems throughout the
United States. PCS systems have been constructed using only digital technology
and are not required by the FCC to offer analog service.
Digital systems convert voice or data signals into a stream of digits that
is compressed before transmission, thereby enabling a single radio channel to
carry multiple simultaneous transmissions. Digital technology provides clear
benefits over analog technology such as extended battery life, improved voice
quality, greater call security and lower per-minute costs. Digital service also
enables enhanced features and services, such as interactive messaging, or short
messaging service, or "SMS", facsimile, e-mail and wireless connections to
computer/data networks and the Internet.
Because of the advantages of digital technology, cellular operators have
been adding digital communications equipment to their systems for some time and
are expected to increase both the footprint and the spectrum dedicated to
digital service.
Currently wireless communications providers use one or more of the
following principal technologies:
- TDMA;
- CDMA; or
- GSM.
TDMA and GSM technologies work by dividing a single radio frequency into
multiple time slots so it can support multiple calls. TDMA allows for up to
three calls per frequency while GSM allows for up to eight. CDMA technology
works by encoding individual conversations into a series of digits and then
spreading the transmission of the sequence over available spectrum.
These three technologies are not currently compatible with each other.
However, the GSM/ANSI-136 Interoperability Team, or "GAIT", has developed
standards promoting the ability to use one phone for both GSM and TDMA voice and
data service. Although different frequencies are used for GSM service in the
United States and Europe, GSM technology is compatible between the two. GSM
phones that operate on the appropriate frequencies are required for
international roaming.
We currently utilize TDMA and GSM technologies in our network and have
begun to add GSM technology across our TDMA network, which we plan to complete
in 2004. We believe that GSM technology offers significant advantages over other
technologies -- it is the dominant global wireless standard, thus providing
international roaming capabilities, greater handset variety and better network
infrastructure and handset pricing.
Third generation wireless communications standards, such as EDGE, CDMA-2000
and UMTS, are being developed in response to the expected consumer demand for
high-speed data services. EDGE is a faster version of GPRS technology and
CDMA-2000 introduces packet-switched data technology to CDMA technology. UMTS is
a GSM-based technology which will use a wider band of radio frequency to
transmit voice and data, thereby allowing more information to be transmitted in
a given amount of bandwidth. 3G technologies will allow high speed wireless
packet-switched data services and ultimately voice services using Internet
protocol, thereby providing customers with greater connectivity and
communications capabilities. Packet-switched technology allows for data to be
sent and received in bursts, instead of requiring continuous transmission over
the network for a duration of the communication, thereby providing the user
"always on" connectivity. The introduction of packet-switched technology allows
for devices that support simultaneous voice and data communications, e.g.,
receive voice calls while browsing the Internet. In addition, billing can be
based on the quantity of data transmitted, not on the duration of the
transmission. 3G technology will also allow more robust features for voice
communications and increased network capacity.
We are using GPRS for the transmission of data as an interim step until
EDGE technology is fully developed.
Our Mobitex data network already uses packet-switched technology. We are
currently the only U.S. operator of a Mobitex data network.
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BUSINESS
OVERVIEW
We are the second largest provider of advanced mobile wireless voice and
data communications services in the United States, based on number of wireless
subscribers. We were formed by the combination of the U.S. wireless
communications operations of SBC and BellSouth. We had:
- 21.8 million U.S. wireless subscribers in over 220 metropolitan areas as
of March 31, 2002;
- revenues of $3.5 billion for the quarter ended March 31, 2002;
- net income of $370 million for the quarter ended March 31, 2002; and
- total liabilities and members' capital of $22.3 billion as of March 31,
2002, including indebtedness of $12.5 billion of which 77% represented
subordinated indebtedness to SBC and BellSouth.
We offer advanced wireless voice and data communications services across an
extensive U.S. footprint and operate one of the largest digital wireless
networks in the United States.
- We have access to licenses to provide cellular and PCS wireless
communications services over networks covering an aggregate of
approximately 231 million POPs, or approximately 81% of the U.S.
population, including in 45 of the 50 largest U.S. metropolitan areas.
- We provide cellular or PCS services in 42 of the 50 largest U.S.
metropolitan areas.
- 100% of our networks utilize digital technology.
- At March 31, 2002, 87% of our cellular and PCS customers were using
digital service, and in March 2002, 97% of our cellular and PCS minutes
of use were digital.
With 3.4 million active users of our data services at March 31, 2002, we
are a U.S. industry leader in providing advanced wireless data services and are
well-positioned to capitalize on the projected rapid growth in demand for
wireless data transmissions, including e-mail, Internet access and interactive
messaging. We:
- provided advanced data services to approximately 765,000 customers as of
March 31, 2002, including the U.S. Congress and the Department of
Defense, over our separate "Mobitex" data network, which covers over 90%
of the U.S. metropolitan population, including the top 50 largest U.S.
metropolitan areas;
- had over 2.6 million active cellular and PCS users of our wireless
Internet, short messaging and other data services at March 31, 2002; and
- are in the process of deploying high-speed digital data GPRS service
throughout our cellular and PCS networks, as well as enhancing our
network infrastructure in many of our markets to provide a common voice
standard across our networks.
COMPETITIVE STRENGTHS
We believe we have the following competitive strengths:
A LARGE SCALE AND NATIONAL SCOPE, WHICH ALLOWS US TO REALIZE SUBSTANTIAL
ECONOMIES AND TO COMPETE EFFECTIVELY. As the second largest nationwide provider
of wireless communications services in the United States, we are able to offer
our customers a comprehensive set of wireless voice and data communications
services on a national basis. We believe that our national scope provides us
with several marketing advantages. With our extensive footprint, we can offer
consistent, reliable and advanced services across the United States. We also
believe that the large size of our operations provides us with substantial
economies of scale, as we can spread our fixed costs over a large base of
subscribers, on-network traffic and revenues. Additionally, we expect to achieve
further economies of scale as we capitalize on our enhanced buying power to
realize better pricing arrangements with key suppliers.
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EXTENSIVE DISTRIBUTION CHANNELS WHICH INCLUDE NEARLY 1,200 COMPANY-OPERATED
STORES AND KIOSKS, APPROXIMATELY 6,500 AUTHORIZED AGENT LOCATIONS, ABOUT 30,000
NATIONAL RETAIL POINTS OF DISTRIBUTION, INCLUDING DISTRIBUTION FOR PREPAID
SERVICES, AND APPROXIMATELY 2,400 DIRECT BUSINESS-TO-BUSINESS SALESPEOPLE, AS
WELL AS OUR ACCESS TO THE DISTRIBUTION CAPABILITIES OF SBC AND BELLSOUTH. Our
extensive distribution channels allow us to effectively sell our products and
services. We have streamlined our internal organization to allow us to maintain
our local competitive edge while seeking to increase sales through our national
distribution strategy. We are focusing on the top U.S. and multinational
corporate accounts as well as on small and mid-size companies through the
targeted sales efforts of our 2,400 business-to-business sales force. These
salespeople include roughly 2,100 regionally-focused salespeople and 300
global-accounts sales representatives dedicated to serving the largest
businesses and institutions in the United States on a coordinated national
basis. In addition, we are strengthening our relationships with national
retailers to reach the growing number of businesses and consumers that shop for
wireless services through national retailers. SBC and BellSouth can distribute
our services based upon our agency and resale arrangements with them, and these
arrangements offer us the unique opportunity of having our services sold
together with our parents' own service offerings.
A LEADING POSITION IN THE WIRELESS DATA SERVICES BUSINESS, WHICH WE BELIEVE
WILL HELP US CAPITALIZE ON THE ANTICIPATED GROWTH IN DEMAND FOR ADVANCED
VALUE-ADDED WIRELESS DATA SERVICES. At March 31, 2002, we had over 3.4 million
active users of our data services. Approximately 765,000 of these customers use
the interactive services we offer over our advanced, nationwide Mobitex data
network, which provides coverage in all of the 50 largest U.S. metropolitan
areas. We currently offer several leading, innovative data services over various
mobile products, including Research in Motion's Blackberry(TM) and other
wireless enabled handheld devices. Our available services include wireless data
transmission, wireless e-mail, wireless Internet access and interactive
messaging. By creating and/or managing these operations, we have developed
expertise in wireless data technology, applications, marketing and operations.
We have introduced data services on our cellular and PCS systems, and, at March
31, 2002, had over 2.6 million active users of wireless Internet access and
interactive messaging. We believe that our experience in providing data services
will assist us in developing advanced value-added data services in the future
across all of our service platforms. We have integrated the operations of all
our data services to achieve cost synergies and to better enable sales personnel
to offer the data services and products that best meet our customers' needs.
A PROVEN MANAGEMENT TEAM, WHICH HAS EXTENSIVE OPERATIONAL EXPERIENCE IN THE
COMMUNICATIONS INDUSTRY. Our management team combines some of the leading senior
executive talent of SBC, BellSouth and other major communications companies and
has a proven record of successful execution. With an average of 21 years of
communications industry experience, our senior management team brings with it
extensive skill, expertise and leadership in many aspects of the communications
business. In addition, members of our senior management team have been directly
involved in integrating the wireless businesses of Pacific Telesis, Ameritech,
SNET and Comcast Cellular, among other businesses, with SBC's operations.
A UNIQUE ACCESS TO THE LARGEST OVERLAP BETWEEN AFFILIATED WIRELESS AND
WIRELINE SERVICE AREAS AND THE ABILITY TO OFFER CUSTOMERS BUNDLED COMMUNICATIONS
SERVICES DUE TO OUR RELATIONSHIPS WITH SBC AND BELLSOUTH. Because of our
affiliation with SBC and BellSouth, we possess a unique overlap of a wireless
service area with the service areas of two affiliated, incumbent local service
providers. We have entered into arrangements with SBC and BellSouth that permit
us to resell their services to our customers. This allows us to offer our
customers a full array of bundled wireless and wireline voice and data services
throughout the SBC and BellSouth service areas. As a result, we believe we are
well positioned to attract customers with multiple communications needs by
serving as a single source for those needs.
A STRONG CREDIT PROFILE, WHICH WE BELIEVE WILL PROVIDE US ACCESS TO THE
CAPITAL MARKETS. We intend to maintain financial strength and flexibility and a
strong credit profile through a prudent capital structure and strong financial
results, which we believe will provide us with ongoing access to capital.
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BUSINESS STRATEGY
Our goal is to be the premier national provider of advanced wireless voice
and data services in the United States. To accomplish this goal, we intend to:
- CONTINUE TO PROMOTE THE CINGULAR BRAND, TO EXPAND AND TAKE ADVANTAGE OF
OUR EXISTING DISTRIBUTION CAPABILITIES AND TO CROSS-SELL OUR PRODUCTS AND
SERVICES. Recent surveys indicate that we have firmly established our
brand, showing approximately 72% brand awareness at December 31, 2001,
similar to the brand recognition of competitors who have been in the
marketplace with their brand substantially longer than we have. We
believe that use of a national brand name allows us to offer clear and
easy-to-understand service offerings on a national level. We also believe
that we have valuable opportunities to further expand and leverage our
extensive distribution capabilities. We plan to open more company-
operated stores and kiosks, grow our sales force, expand our roster of
national retailers and authorized agents, utilize the distribution
strength of SBC and BellSouth and explore new, creative channels of
distribution. We also intend to better utilize our existing channels by
applying the best practices of SBC and BellSouth across our combined
operations and by capitalizing on our national branding campaign. In
addition, we intend to include all of our data services in the array of
services sold by our direct distribution channels.
- CAPTURE ECONOMIES THROUGH OUR LARGE SCALE AND NATIONAL SCOPE, ALLOWING US
TO FURTHER REALIZE THE SIGNIFICANT REVENUE AND COST SYNERGIES OFFERED BY
THE FORMATION OF OUR COMPANY. We believe that our national scope and
brand will provide us with marketing benefits, permit us to offer
simplified national pricing plans and allow us to increase our
penetration of national accounts. Through consolidating and streamlining,
we plan to continue to integrate our cellular and PCS operations in order
to realize economies of scale and scope. Since our formation, we have
made substantial progress in realizing significant cost savings,
including lowering of equipment costs resulting from our combined
purchasing power, integration of support and billing systems, reduction
of roaming costs and consolidation of customer care facilities, call
centers, headquarter offices and distribution centers. We are also
undertaking a number of initiatives to lower the cost of attracting and
retaining new subscribers, for example, by relying more on direct
distribution channels, such as company-operated stores and the Internet.
- CAPITALIZE ON OUR EXPERTISE IN WIRELESS DATA TECHNOLOGY, APPLICATIONS,
MARKETING AND OPERATIONS TO DRIVE THE DEVELOPMENT AND USE OF ADVANCED
WIRELESS DATA APPLICATIONS OVER MULTIPLE COMMUNICATIONS DEVICES. We plan
to continue to develop and expand our data businesses. BellSouth began
offering wireless data services over its Mobitex data network in 1992 and
our current offerings over this network have been part of BellSouth's
operations since 1998. We have established relationships with leading
data services, equipment and Internet companies. By growing our advanced,
value-added wireless data applications, we expect to drive revenue
growth, reduce churn rates and expand our subscriber base. As an early
leader in the wireless data sector, we plan to leverage our expertise to
further expand our advanced wireless data services over all networks to
our extensive voice customer base. By acting as the initial provider of
quality services to data customers and by regularly updating and
upgrading our applications offerings, we believe we are poised to
maintain and expand our relationships with this important customer
segment.
- INCREASE THE CAPACITY, SPEED AND FUNCTIONALITY OF OUR CELLULAR AND PCS
NETWORKS BY ENABLING OUR ENTIRE NETWORK TO USE A UNIFORM VOICE
TECHNOLOGY, GSM, ADDING GPRS DATA TECHNOLOGY AND UPGRADING OUR GPRS DATA
NETWORK TO EDGE. We believe that EDGE, a 3G technology, will allow us to
deliver powerful and exciting multimedia services and increase our
capabilities by providing higher-speed packet data transmission, thereby
enabling us to realize the increased revenue stream that 3G applications
are expected to generate. As part of our transition to EDGE, we have
deployed high-speed GPRS packet data technology in our existing GSM
markets. We are also adding GSM and GPRS technology throughout our TDMA
markets and then plan to enhance our GPRS data networks with EDGE,
primarily through a software upgrade, beginning in early 2003. We expect
all these network upgrade projects to be completed in 2004. Subject to
availability of spectrum, technology, cost,
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applications, consumer demand and other factors, we expect to further
migrate our networks beyond EDGE to UMTS technology. This technology is
expected to become commercially available around the middle part of this
decade.
- EXPAND OUR EXISTING FOOTPRINT AND OUR NETWORK CAPACITY BY OBTAINING
ACCESS TO ADDITIONAL SPECTRUM, PRIMARILY THROUGH FCC AUCTIONS, SPECTRUM
EXCHANGES AND PURCHASES, MERGERS AND ACQUISITIONS, JOINT VENTURES AND
ALLIANCES. We plan to further expand our digital network in an effort to
provide seamless and superior coverage throughout the United States so
that our subscribers can enjoy consistent features and high-quality
service, regardless of their location. We intend to pursue access to
additional spectrum through spectrum license auctions, exchanging
spectrum licenses with or purchasing them from other carriers, making
selective acquisitions and forming ventures. Over the long term, we have
two principal objectives for expanding our footprint and network
capacity. First, we intend to obtain access to additional spectrum in
markets where we have large existing customer bases. Second, we plan to
obtain access to spectrum in the remaining major markets in which we do
not operate in order to expand our Cingular-branded offerings. In January
2001, the FCC auctioned spectrum licenses. Salmon, with which we are
affiliated through a non-controlling equity ownership interest, was
announced the winning bidder of 79 auctioned licenses spread across 77
markets in the United States, covering more than 80 million POPs. It has
acquired 45 of those licenses and may receive the remaining licenses if
the U.S. Supreme Court rules in favor of the FCC regarding the legality
of the auction. Salmon has elected to provide its services under the
Cingular brand name and to have us manage its network. In May 2001, we
exchanged spectrum with VoiceStream in order to gain access to over 20
million additional potential customers in the New York major trading
area, or "MTA", and subsequently entered into an agreement with
VoiceStream to form a venture that will allow the companies to share
network infrastructures in the California, Nevada and New York City
markets. In November 2001, we acquired from Leap Wireless and certain of
its affiliates two licenses covering two million POPs in the Salt Lake
City and Provo basic trading areas, or "BTAs". In January 2002, we and
AT&T Wireless entered into a network-sharing agreement similar to the one
with VoiceStream that covers corridors along major interstate highways in
predominantly mid-western and western states. See "-- Our Network".
WIRELESS SERVICES
As the second largest U.S. wireless communications provider, we offer a
comprehensive suite of high-quality wireless voice and data communications
services. We offer basic wireless voice service, along with enhanced services
and features, as well as wireless data service. We offer our services in a
variety of pricing plans, including national, regional and local rate plans as
well as prepaid service plans. We tailor our voice and data offerings to meet
the communications needs of targeted customer segments, including youth, family,
active professionals, local or regional businesses and major national corporate
accounts. The marketing and distribution plans for our services are further
targeted to the specific geographic and demographic characteristics of each of
our markets.
VOICE SERVICES
Basic Services and Enhanced Features. Besides basic wireless voice
telephony services, we offer many enhanced features at no additional cost on
many of our pricing plans. These features include caller ID, call waiting, call
forwarding, three-way calling, no answer/busy transfer, text messaging and voice
mail. In some markets, we also offer complementary services for a monthly fee,
such as unlimited mobile-to-mobile calling, road-side assistance and handset
insurance. In addition, we offer our customers a variety of packages that
include specific sets of features, which simplifies the sales process and
promotes the adoption of enhanced features. We are developing enhanced features
that facilitate communications among our subscribers, thereby attracting new
subscribers and capitalizing on our large customer base. Generally, these
enhanced features generate additional revenues through monthly subscription fees
or increased wireless usage through utilization of the features.
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Pricing Plans. We offer a variety of competitive service packages that are
designed to meet the needs of various consumer and business user segments at the
local, regional and national levels. These plans have great diversity in price,
minutes, calling scope and features. See "-- Marketing". Our goal is to create
rate plans that are easily understood by our customers, as well as to maximize
advertising efficiencies and take advantage of our national brand. However,
while we set national pricing guidelines, the number of minutes and other
features included in each package may vary based on local customer demand and
competitive conditions.
Prepaid. We also offer prepaid service as an alternative to post-pay
subscriptions. As of March 31, 2002, prepaid users represented less than 10% of
our total subscribers. Our predecessor companies have had extensive experience
in the prepaid market. We believe that our prepaid service offering will benefit
from being part of a national brand, particularly with regard to distribution.
We are marketing our prepaid service to distinct consumer segments such as the
expanding youth market, families, and small business customers and other
consumers who prefer to pay in advance. We have also increased our focus on
repeat business from these customers through renewal incentives and improved
distribution.
Consistent with the industry, we experience higher churn rates and lower
revenue per customer with prepaid customers than other customers; however, these
impacts are generally offset by the lower cost of acquiring new prepaid
customers, by the higher revenue per minute they provide and by the absence of
payment defaults. Our strategy in seeking prepaid customers focuses on
increasing the profitability of this customer segment. Our prepaid cards now
expire 90 days after issuance instead of 180 days as did our prior cards. We
believe this will result in greater usage and more renewals. We are also working
on several ways to improve prepaid retention. First, we are working to ensure
that our products provide the value-added services that customers want most,
including long distance, short messaging services, voicemail and caller ID.
Second, we are increasing the distribution of our prepaid offering to include
the Internet, automated replenishment services, and strategic partners that will
allow our prepaid service to truly be a product of convenience. Third, we are
working on improving our network infrastructure so we can provide customers
ubiquitous service and the latest technology (e.g., games and icons).
DATA SERVICES
We are a leader in wireless data services and plan to take advantage of the
expected growth in this sector. We had 3.4 million customers actively using our
data services at March 31, 2002, approximately 765,000 of which we served with
advanced applications over our separate Mobitex data network, with the rest
using services we offer over our cellular and PCS networks. Our Mobitex
customers include the U.S. Congress and the Department of Defense. Our data
businesses were previously operated separately. In an effort to increase
operating efficiency, we have recently combined our data operations.
Wireless Data Services Offered over our Mobitex Data Network.
We offer value-added wireless data applications to businesses and
individuals who have a need for timely data communications to maintain a
competitive advantage or increase personal productivity. We are a leader in
providing end-to-end wireless data services for complex businesses such as
transportation, telecommunications, utilities and other businesses. Our Mobitex
data network covers over 90% of the U.S. metropolitan population and provides
coverage in all 50 of the largest metropolitan areas.
We provide wireless access to corporate business applications via our
Intelligent Wireless Networks service for our business customers who have mobile
professionals or dispersed field personnel. Such customers include field
technicians of IBM and General Electric Consumer Services, various professionals
at Accenture, couriers of Federal Express, home service technicians of Sears,
law enforcement agents and truck drivers. For example, our wireless solutions
allow sales managers to access corporate e-mail when away from the office and
technicians to solve problems and access corporate databases from the field.
These same businesses can also perform remote monitoring of devices as well as
temporary or permanent wireless point-of-sale transaction processing.
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We also provide individuals and mobile professionals with the ability to
access information from web sites, conduct mobile commerce transactions (e.g.,
trade stocks, check bank statements and buy products) and send and receive
Internet e-mail, all through a hand-held, wireless device.
Examples of the services we or others offer over our network include:
- our Interactive Messaging PLUS(SM) service, which allows users to
compose, receive and reply to messages, to send faxes and text-to-voice
messages and to send and receive Internet e-mail;
- Fidelity's InstantBroker(SM) service, which allows users to receive
personalized investment information such as account balances, position
valuations, stock alerts and execution notifications; and
- wireless data consulting services, including analysis, design and
implementation of wireless data applications as well as ongoing support
and capacity necessary to support growth and project management.
We sell or lease our customers terminal equipment, such as Blackberry(TM)
hand-held pagers, and specialized devices for use in field/sales force
automation, delivery truck and fixed location applications. In addition to
collecting equipment fees, we enter into customer contracts with flat or
usage-based fees.
Wireless Data Services Offered through our Cellular and PCS Networks.
We currently offer wireless e-mail services and short messaging and other
data services throughout our cellular and PCS networks. We have over 8.3 million
users with wireless Internet and SMS short messaging data services that have
been enabled as part of their wireless service. An example of these services is
XpressMail(SM) service, which allows businesses to access their Microsoft
Exchange Server(TM) or Lotus Notes(TM) corporate e-mail and other desktop
applications in real time from Internet-enabled mobile phones. We also offer
wireless Internet access for use on our digital cellular and PCS networks,
including a streamlined mobile Internet portal service called "My Wireless
Window(SM)". At December 31, 2001, approximately 58% of the handsets deployed in
our customer base are SMS-capable and about 11% are wireless Internet-capable.
Most of the handsets we are now selling to customers are Internet- and
SMS-capable.
Our wireless Internet service gives customers access to timely,
personalized information such as news, weather, sports, stocks, directions,
restaurant reviews, movie show times, yellow and white pages directories, games
and graphics through their wireless handsets. In addition, it allows customers
to shop on-line and check e-mail from anywhere at any time. We are currently
developing a wide range of more advanced data applications for use over our
cellular and PCS networks and plan to offer wireless Internet access services
using other devices, such as personal digital assistants and personal computers.
Our goal is to provide an array of high quality, productivity-enhancing wireless
data services across our packet-switched data cellular and PCS networks through
the use of GPRS and EDGE technologies, similar to those we currently offer
across our Mobitex data network.
We offer GPRS wireless data services in our GSM markets in Washington
state, Las Vegas, eastern Tennessee, coastal Georgia, the Carolinas and
California. As we add GSM voice technology to our TDMA networks, we intend to
deploy GPRS data technology at the same time. We seek to be a leader of the U.S.
wireless data communications market by providing innovative, value-added
services for businesses and consumers.
APPLICATIONS DEVELOPMENT
We develop value-added applications that we expect will drive demand for
our services. We believe that this will give us an important means of
differentiating ourselves from competitors by furthering our image as a leader
in advanced wireless data applications, attracting new subscribers, retaining
customers and increasing per subscriber activity. These applications include:
- customer interface development;
- portal personalization;
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- two-way messaging;
- messaging and on-demand alerts (e.g., automatic and requested
notifications of stock prices, news, sports scores, etc.);
- Internet connectivity;
- entertainment (e.g., games); and
- security infrastructure for both information transfer and e-commerce.
In customer interface development, we now provide customers the ability to
incorporate charges for a third party's services on our bill so that they only
have one bill to pay. In addition, we currently offer online activation of
handsets purchased through our Internet-based stores and for our interactive
messaging service. Another important area we are developing is portal
personalization. Today, we provide customers with the ability to customize the
Internet applications that appear on their handsets and to download ringtones
for a small fee. We will seek to develop applications that facilitate
mobile-commerce, such as wireless shopping, trading, banking and others.
Wireless access to the Internet and to corporate intranets is expected to be an
important part of our offerings.
We are working to create an environment in which applications can operate
across all of our different networks. For instance, text-messaging is expected
to take place between handsets over the Internet using wireless application
protocol, or WAP, technology. This technology utilizes an international open
standard that enables wireless subscribers to access the Internet using their
wireless phones. With WAP, the content on Internet web pages is translated into
text, without its accompanying graphics, and delivered to the wireless phone via
a built-in microbrowser. This technology is currently available in all of our
markets except Kauai. We will seek to insure availability of additional
value-added business and consumer-oriented data solutions as our network
technologies are enhanced to offer advanced, integrated voice and data services.
See "-- Digital Technology -- Technology Upgrade Strategy".
MARKETING
We focus our marketing strategy on promoting the Cingular brand, providing
compelling products and services, delivering high-quality service and customer
care, leveraging our extensive distribution network and cross-marketing with SBC
and BellSouth. With nearly 21.8 million customers at March 31, 2002, we also
have the opportunity to provide value-added services to a large customer base.
Our advertising and other promotional efforts are focused on a coordinated
program of television, print, radio, outdoor signage, Internet and point of sale
media. The purpose of our media efforts is two-fold: to promote our brand and to
drive sales to our distribution points. Our brand positioning of "self
expression" is designed to differentiate us as the service that facilitates
personal communication and expression in a wireless market that is increasingly
characterized by customer confusion about the differences between wireless
companies and the similarities among those companies in technology, product
offerings and pricing. This positioning is resonating well with our customers
and prospective customers, achieving approximately 72% brand recognition at
December 31, 2001. This message is complemented with promotions designed to
bring prospective customers to retail outlets and our website.
Our strategy is to aggressively market our voice services based on three
basic calling plan structures offered throughout our service areas: our Cingular
Home(SM), Cingular Region(SM) and Cingular Nation(SM) rate plans. The plans
differ in terms of the geographic areas that are included as the local calling
area. The costs and terms of each of these plans may depend on a subscriber's
location and the plan selected, but the overall structure of the rate plans is
uniform and simplifies the marketing effort for our services. In addition, we
have plans targeted to specific segments: Family Talk(R), a shared minutes plan
aimed at families; prepaid, for those preferring or needing to pay as they use;
and a portfolio of plans targeted to the various segments of the
business-to-business market. Overall, our pricing options, equipment and
enhanced features are designed to appeal to a wide range of consumer and
business segments.
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Our marketing plans also address the growing communications needs of our
large base of existing customers, thereby increasing customer retention. We
target specific customer segments with tailored services and offer them a range
of high-quality handsets and enhanced features, including wireless data
services, additional wireless phones, accessories and new products. In addition,
customers in good standing are automatically eligible to upgrade their handsets
every two years at a low cost and can switch to a different service plan that
better meets their needs at any time.
With respect to our data offering, our strategy is to leverage the
marketing and operational experience that we have gained as a leader in wireless
data services to match our customers' needs with the best data solutions from
the services we currently offer or to customize a solution for them. While
traditionally our business data offerings have been marketed to larger
organizations, such as the Fortune 1000 companies, we intend also to focus on
small and medium-size businesses. For example, we introduced Wireless Internet
Express(SM) in our GPRS markets and Xpress Mail(SM) (corporate e-mail)
throughout our markets.
We seek to develop and market value-added applications to specific consumer
groups. For example, we were the first wireless carrier in the United States to
launch an Hispanic wireless portal, and we recently deployed specialized portals
established for youths, launched downloadable ringtones, graphics and games and
introduced intercarrier short messaging service. We believe that a key element
in differentiating ourselves from our competitors is the way in which we provide
an interface to the network and an open application development environment,
which makes it easy for developers to write applications to be used across all
our operating networks.
SALES AND DISTRIBUTION
Our sales and distribution strategy seeks to tailor the mix of direct,
indirect and resale distribution channels in order to increase customer growth
and satisfaction while reducing customer acquisition and retention costs. In
addition, we plan to substantially increase our direct-sales capabilities while
simultaneously strengthening indirect channels in order to maintain a widespread
network that reaches the largest number of people. To achieve this goal, we
intend to open more company-operated stores, grow our national accounts sales
force, selectively increase the number of authorized agents and national
retailers offering our services, expand our telemarketing efforts, increase our
focus on Internet sales channels and capitalize on the distribution capabilities
of SBC and BellSouth. We also intend to incorporate the best practices of each
of our predecessor companies in our sales and distribution practices. Programs
are also in place to train sales representatives of indirect sales channels and
to offer dedicated account services to third-party retailers.
NATIONAL ACCOUNTS SALES FORCE. Because we recognize that the needs of
large, global business accounts differ from those of our retail customers, we
have a dedicated sales force of approximately 300 representatives to address
this strategic market segment. This specialized sales force focuses on providing
a complete bundle of communications solutions to the top global/corporate
accounts in the United States. Although this area of the market is very
competitive, we believe that this is an area in which we can grow and in which
we will compete successfully based principally on customized business solutions
and customer service. We have developed competitively priced plans and enhanced
services specific to large corporate users and expect wireless data services to
appeal strongly to this segment. We intend to develop a support organization
focused on complex applications such as wireless office, wireless
Internet-enabled solutions and other complex data applications that will
eventually utilize 3G technologies.
REGIONAL BUSINESS-TO-BUSINESS SALES FORCE. In addition to our national
account sales force, we have approximately 2,100 corporate/direct sales
representatives dedicated to regional business-to-business sales. The sales and
technical team for the wireless data services offered over our Mobitex data
network have been integrated into our direct sales force as data subject matter
experts.
COMPANY-OPERATED AND AUTHORIZED AGENT LOCATIONS. Company-operated stores
and kiosks, as well as authorized agent locations, are key components of our
distribution strategy. We believe that company-operated stores are among the
most efficient and effective of our distribution channels and intend to expand
this channel significantly, especially in territories covered by SBC, which
historically made less use of this channel. Our stores sell a broad array of
services, handsets and accessories. We operate nearly 1,200
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company-operated stores and kiosks. Many stores include personnel dedicated to
customer service. We also sell our services through approximately 6,500
authorized agent locations, the majority of which exclusively sell our company's
services. We generally require standard signage and provide service guidelines
to clearly identify our brand and promote a consistent customer experience.
NATIONAL RETAILERS. Recognizing that well-known third-party retailers can
be a highly effective channel for the distribution of our services, we have
entered into distribution arrangements with national retailers, such as
Wal-Mart, Circuit City, Staples, Sam's Club, Best Buy, Barnes and Noble College
Bookstores, Radio Shack and Sears. As of December 31, 2001, we had arrangements
with 35 national retailers, of which 24 sell prepaid products and 11 sell
primarily postpaid products, which have resulted in our services being offered
in about 30,000 locations across the country. We also have arrangements with
three Internet retailers: Inphonic, Inc., LetsTalk.com and Buy.com.
AGENCY AND RESALE ARRANGEMENTS WITH SBC AND BELLSOUTH. SBC and BellSouth
have extensive distribution capabilities, and we believe that our relationship
with them provides us with a potentially significant distribution advantage over
our competitors. As incumbent local wireline service providers, SBC and
BellSouth combined had over 84 million customer access lines as of March 31,
2002. SBC and BellSouth can market wireless services to their consumer and
business customers through their direct sales forces and their customer care
representatives. Their customer care representatives can offer our products and
services to customers calling to initiate local wireline service. We have
entered into agency agreements with SBC and BellSouth, pursuant to which they
will act as our agents in their respective service territories and exclusively
sell our wireless services both separately and packaged with their own
communication services. We remain free to use other agents, retailers and
distributors in our parents' service territories.
Under the resale agreements, each of SBC, BellSouth and their affiliates
can resell our services to customers outside of their current service
territories. In addition, SBC and BellSouth can elect to resell our wireless
services to their respective national accounts. If after October 2, 2003, SBC or
BellSouth elects to terminate its respective agency agreement and become solely
a reseller, then it may resell our services within its own territory. For more
information on these arrangements, you should read "Certain Relationships and
Related Party Transactions -- Wireless Agency Agreements" and "-- Resale
Agreements".
THIRD-PARTY RESALE. Historically, resale has represented a low-cost
distribution channel that expanded our market reach by utilizing the specialized
applications development, distribution and/or marketing skills of resellers. We
receive less revenue per resale subscriber than we do for our own subscribers
due to reseller discounts and the higher proportion of prepaid customers. Resale
subscribers are customers of the reseller and, as a result, have no customer
relationship with or loyalty to us. However, we incur minimal direct subscriber
acquisition costs or customer care costs related to these customers.
We sell wholesale wireless voice capacity to WorldCom and ToppTelecom.
Their customers accounted for approximately 5% of our total cellular and PCS
customer base at March 31, 2002 and approximately 3% of our revenues during the
quarter then ended. WorldCom has announced that it plans to discontinue
reselling wireless voice communications services at some point in the near
future.
Some resellers of our data services provide their own domain name to
customers through which customers access and use our services. These resellers
include Palm and Research in Motion, among others. Other resellers offer
Cingular-branded services directly from our Internet address. Reseller sales
accounted for a substantial portion of our new data customers during 2001, but
for a less significant portion of our data revenues for the same period. Despite
some advantages of reseller distribution of these data services, we believe our
business will benefit in the long run by establishing direct relationships with
the customers of our services. Therefore, we are integrating distribution of our
business data services with the direct distribution channels for our other
business services.
CUSTOMER CARE
Thorough and comprehensive customer care, retention efforts and,
ultimately, customers' satisfaction are important to our success. The cost of
adding new subscribers is one of the most significant cost elements in
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the wireless industry. Therefore, satisfying and retaining existing customers
are critical to the financial performance of wireless operators. The goal of our
customer care, retention and satisfaction programs is to ensure customer
convenience and ease of use and to cultivate long-term relationships with our
customers. We offer our customers a full range of choices and options for making
requests and inquiries to maximize convenience. We also offer complete customer
care during extended business hours and emergency service after business hours,
as well as a number of other services designed to enhance our relationship with
our customers. To provide more consistent and higher service quality and to
achieve cost savings, about 60 call centers previously operated by the wireless
businesses of SBC and BellSouth have been centralized into approximately 20
large call centers.
To enhance customer satisfaction, we have begun to deploy dedicated teams
to handle specialized market segments. These teams are currently in place in
select centers and are expected to be fully implemented by 2004. For our major
corporate accounts, we will continue to have dedicated response teams that
operate in specialty call centers. By providing customers with specialized
resources, we seek to enhance the customer care experience by providing access
to more knowledgeable representatives. We seek to capitalize on these resources
through technologies such as intelligent call-routing which directs inquiries to
specialized customer care representatives. All of our centers are being equipped
for intelligent call routing and it is operational in those centers where we
have deployed dedicated teams.
We are working to ensure that we apply the best practices of our
predecessor companies across all of our markets. The different approaches taken
by our predecessor companies offer us the unique opportunity to evaluate and
implement combined best practices to help us achieve the highest levels of
customer care and satisfaction.
OUR NETWORK
LICENSES. We have access to licenses for wireless services in areas that
cover approximately 81% of the U.S. population. We provide both analog and
digital cellular services over the 850 MHz band and digital services over the
1900 MHz band. We also have 900 MHz licenses to provide data services in areas
that include over 90% of the U.S. metropolitan population, including coverage in
all of the 50 largest U.S. metropolitan areas. We obtained access to spectrum
through application lotteries, mergers, acquisitions, exchanges, ventures, FCC
auctions and uncontested application grants of cellular licenses.
COVERAGE. We have access to wireless licenses in 45 of the 50 largest U.S.
metropolitan areas and have cellular or PCS networks that cover 42 of the 50 top
wireless markets across the country. In addition, we have signed numerous
roaming agreements to ensure our customers can receive wireless service in
virtually all areas in the United States where cellular or PCS wireless service
is available. Our cellular and PCS networks, other than those recently acquired,
are substantially built-out.
See "Risk Factors -- Risks Related to Our Industry -- Our operations are
subject to substantial government regulation, which can significantly increase
our costs and increase churn" and "-- Regulatory Environment" for FCC build-out
requirements.
ANALOG AND DIGITAL SERVICE. We offer analog and digital service in our
cellular markets and digital service in our PCS markets. We monitor our network
performance by measuring the percentage of ineffective call attempts, lost calls
and call quality. In addition, we collect data on individual calls to monitor
the customer experience. We believe that digital technology offers many
advantages over analog technology, including substantially increased network
capacity, lower operating costs per unit, reduced susceptibility to fraud and
the opportunity to provide improved data transmissions. Digital service also
provides clear benefits to our customers, including extended battery life,
improved voice quality, greater call security and lower per-minute costs.
Digital service also enables enhanced features and services, such as interactive
messaging, facsimile, e-mail and wireless connections to computer/data networks
and the Internet. A majority of our analog subscribers have migrated from analog
to digital service, which benefits both us and our customers. For the month of
March 2002, digital usage accounted for 97% of our total usage based on minutes.
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All of our networks utilize digital technology. Approximately 28% of our
POPs are covered by networks that use GSM technology while the remainder of our
POPs are covered by networks that use TDMA technology. Including our
infrastructure venture with VoiceStream, the percentage of our POPs covered by
GSM technology is about 36%. See "-- Digital Technology" below.
SPECTRUM CAPACITY. We currently own licenses for spectrum in the 850 MHz
and 1900 MHz bands. We expect that the demand for our wireless services will
grow over the next several years as the demand for both traditional wireless
voice services and wireless data and Internet services increases significantly.
See "Industry Overview". On a weighted average basis, we have access to 29 MHz
of spectrum throughout our licensed MSA territory, with 34 MHz of spectrum in
our top ten metropolitan markets (39 MHz if Salmon were to acquire the pending
challenged properties in the FCC spectrum auctions). As is the case with other
wireless providers, we anticipate that we will need access to additional
spectrum, particularly in our most densely populated markets, to meet expected
demand for existing services and throughout our network to provide full 3G
services beyond EDGE. We will seek to obtain access to additional spectrum in a
variety of ways.
We may participate in future FCC auctions, which will likely include other
radio frequency bands. In addition to the auction process, our primary means for
acquiring access to additional spectrum are expected to be spectrum exchanges
with and purchases from other wireless carriers, mergers and acquisitions, joint
ventures and alliances. See "-- Regulatory Environment" and "Risk
Factors -- Risks Related to Our Business -- If we fail to obtain access to
additional radio spectrum, we may not be able to expand the geographic reach of
Cingular-branded services, increase our customer base in areas we currently
serve or meet the anticipated demand for new services".
We also license spectrum in the 900 MHz band that we use in our Mobitex
data network. There are no FCC auctions for additional 900 MHz spectrum
currently planned; therefore any additional spectrum we access will be through
acquisitions or joint ventures with private parties.
SALMON PCS. In November 2000, we and Crowley Digital Wireless, LLC formed
Salmon to bid as a favored entity under the FCC's rules for PCS licenses in part
reclaimed from bankrupt carriers and reauctioned by the FCC in January 2001. As
of March 31, 2002, we had an approximately 80% non-controlling equity interest
in Salmon, with the balance owned by Crowley Digital. Salmon is controlled by
Crowley Digital, which in turn is controlled by George D. Crowley, Jr. Mr.
Crowley is the chairman and chief executive officer of Crowley Digital and the
chairman and chief executive officer of Salmon. Salmon was the successful bidder
for 79 auctioned licenses covering more than 80 million POPs, including 52
million POPs where we already have coverage and 28 million POPs where we do not.
The FCC has granted to Salmon 45 auctioned licenses, which cover over 11 million
POPs, as a result of which we have access to licenses covering approximately 231
million POPs, including in 45 of the 50 and 87 of the 100 largest U.S.
metropolitan areas. The remaining 34 licenses for which Salmon was the
successful bidder have not been granted to Salmon due to ongoing litigation. The
U.S. Court of Appeals for the District of Columbia overturned a decision by the
FCC that it could reclaim the bankrupt companies' licenses and reauction them.
The FCC has appealed that decision to the U.S. Supreme Court, and the Court is
expected to issue a decision in the case during the first half of 2003. See
"Risk Factors -- Risks Related to Our Business -- If we fail to obtain access to
additional radio spectrum, we may not be able to expand the geographic reach of
Cingular-branded products and services, increase our customer base in areas we
currently serve or meet the anticipated demand for new services". These pending
licenses cover approximately 16 million POPs where we do not have coverage,
including Minneapolis, Denver, Norfolk and Pittsburgh, and would also provide
access to additional spectrum in markets in which we currently operate,
including Los Angeles, Boston, Washington, D.C., Houston, Dallas, Baltimore and
Atlanta. If Salmon is successful in acquiring the 34 pending licenses, we would
have access to licenses covering over 247 million POPs, or 87% of the U.S.
population, which we believe would result in Cingular-branded services being
offered in 49 of the 50 largest U.S. metropolitan areas.
Management control of Salmon is vested in Crowley Digital under the terms
of Salmon's limited liability company agreement. Crowley Digital appoints three
of the five members of Salmon's management
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committee. Actions by the management committee require a majority vote, except
certain material business decisions of Salmon, including certain business
transactions that are not in the ordinary course of Salmon's business,
fundamental changes in Salmon's structure, business, major expenditures and
changes to the budget, which require the concurrence of the two management
committee members appointed by us. See "Risk Factors -- Risks Related to Our
Business -- We do not control Salmon -- the company that bid for certain
licenses in the recent FCC auctions -- and as a result Salmon may make business
decisions that have an adverse impact on our plans to establish Cingular as a
nation-wide brand".
Salmon has entered into a management agreement for a term of eight years,
under which it has hired us to act as the manager of its PCS systems, subject to
its oversight and control. For our services as manager, we will be paid, in
addition to our direct costs, a fee, subject to adjustment based on the results
of the spectrum license auction, of $10,000,000 for the first year, 5% of
Salmon's gross revenues thereafter until Salmon's EBITDA is positive for two
consecutive quarters and 7% of Salmon's gross revenues thereafter. In addition,
pursuant to a trademark license agreement, Salmon has elected to use our
trademarks in its business to offer Cingular-branded services, and we will
receive 5% of its gross revenues as a licensing fee. Although termination would
result in a 5% increase in the interest rates on its borrowings from us, Salmon
can terminate the management agreement at any time with one year's notice.
In addition, under the limited liability agreement between us and Crowley
Digital, for five years following the last grant of a license to Salmon in the
auction or, if earlier, eight years after the first license grant, Crowley
Digital and any entities owning interests in Crowley Digital can only sell or
transfer more than 5% of their voting securities in Crowley Digital with our
written consent, which cannot be unreasonably withheld. However, we can withhold
consent to a sale of 50% or more of their Crowley Digital voting securities for
any reason. With respect to ownership in Salmon, neither we nor Crowley may
transfer our respective interests in Salmon to an outside party during that
period without prior approval of the other party, except that we may transfer
our interest at any time following Salmon's completion of the build-out of its
systems. After the expiration of such period, any material transfers by Crowley
Digital are subject to a right of first refusal by us. Moreover, the transfer of
any interests in Salmon by either Crowley Digital or us may be subject to FCC
consent. Crowley Digital has the right to put its interest in Salmon to us at a
price equal to its initial investment plus a specified rate of return, which put
can be exercised at certain times beginning with the completion of Salmon's
build-out in a manner that satisfies FCC rules and ending six months before the
seventh anniversary of the date on which the last license is granted to Salmon.
We estimated that the present value of this put obligation was approximately
$110 million and included this amount in "Investments in and advances to equity
affiliates" on our consolidated balance sheet.
We have entered into a credit agreement with Salmon under which we will
provide, upon Salmon's request, through secured loans, substantially all of the
capital Salmon will require to pay for the licenses, to build out its system and
for working capital, subject to limits on the amount of these loans.
Specifically, as of March 31, 2002, we had made secured loans aggregating
approximately $487 million (including accrued interest) and will provide up to
an additional approximately $2 billion in the form of secured loans after Salmon
expends its capital if the FCC grants the additional auctioned licenses to
Salmon. Salmon prepaid approximately $358 million of our secured loans to them
in April 2002 after the FCC refunded 85% of its auction deposits. Our commitment
to make such loans to Salmon under the credit agreement ends no later than
November 6, 2006. Our loans are repayable no later than May 6, 2008, with
interest at a rate of 9% per annum or 14% per annum if the management agreement
or trademark agreement is terminated. Interest is not payable in cash until two
years after the substantial completion of the build-out of the Salmon system in
a manner that satisfies FCC rules, or beginning on the date when the management
or trademark license agreement has been terminated. For up to the first three
years thereafter, only portions of the interest are payable in cash. There is no
scheduled amortization of the loans prior to the maturity date.
See "Risk Factors -- Risks Related to Our Business -- If we fail to obtain
access to additional radio spectrum, we may not be able to expand the geographic
reach of Cingular-branded services, increase our customer base in areas we
currently serve or meet the anticipated demand for new services" for a
discussion of challenges to auctioned licenses and risks regarding our
relationship with Salmon.
69
TRANSACTIONS WITH VOICESTREAM WIRELESS. In May 2001, we and VoiceStream
Wireless exchanged FCC licenses covering approximately 36 million POPs each. We
received licenses covering 10 MHz of spectrum for the New York MTA and in each
of the St. Louis and Detroit BTAs. The New York MTA covers all five boroughs of
New York City, all of Long Island as well as parts of upstate New York,
northeast Pennsylvania and most of Vermont, New Jersey and Connecticut. In
exchange, we transferred to VoiceStream Wireless licenses covering 10 MHz of
spectrum out of the 30 MHz of spectrum that we had in the California and Nevada
markets. As a result of the spectrum exchange, we gained access to a license
covering over 20 million additional POPs in the New York MTA.
Subsequently, we and VoiceStream formed a jointly-controlled venture to
allow the companies to share network infrastructures in the California, Nevada
and New York City markets. Our and VoiceStream's existing networks in these
markets, which use GSM technology and cover approximately 56 million POPs, have
been contributed to the venture. We and VoiceStream will have access to the
venture's network infrastructure, and pursuant to the terms of the venture's
commercial arrangements, we and VoiceStream will be able to provide our
respective customers access to a weighted average spectrum depth of 39 MHz in
these markets. We and VoiceStream will buy network services from the venture but
each of us has retained ownership and control of our own licenses. Funding for
capital investments and cash operating expenses of the venture will generally be
made by us and VoiceStream on a pro rata basis based on network traffic. We will
also independently market our unique services to customers using our own brand
name and utilizing our own sales, marketing, billing and customer care
operations. This venture will allow us to enter the New York City market by the
middle of 2002. In addition to earlier entry into the New York City market, our
participation in this venture gives our customers access to more spectrum and is
expected to result in more robust networks and lower operating expenses and
capital expenditures than if we had constructed our own network.
JOINT VENTURE WITH AT&T WIRELESS. In January 2002, we entered into an
agreement with AT&T Wireless to form a similar jointly-controlled venture to
build out a GSM/GPRS/EDGE network along major interstate highways in
predominantly mid-western and western states in order to reduce roaming expenses
we pay to other carriers when our customers travel on those highways. We expect
this venture to be formed before year-end 2002. Upon formation, we are obligated
to contribute cash or assets in the amount equal to the cash and assets
contributed by AT&T Wireless, up to a maximum of $85 million. The new network is
expected to begin operations in the first quarter of 2003. We and AT&T Wireless
will buy network services from the venture and provide services under our own
brand names.
ACQUISITION OF LICENSES FOR SALT LAKE CITY AND PROVO. In November 2001, we
acquired two licenses from Leap Wireless covering two million POPs in the Salt
Lake City and Provo BTAs for $140 million in cash. We intend to construct and
operate an all-digital GSM/GPRS/EDGE network in these markets that will support
advanced wireless voice and data services.
DIGITAL TECHNOLOGY
CURRENT TECHNOLOGY. We use TDMA technology in our cellular and in some
contiguous PCS markets, covering 142 million POPs, and we use GSM technology in
our other PCS markets, covering 55 million POPs. These amounts do not include
POPs attributable to licenses acquired in 2001. TDMA and GSM technologies work
by dividing a single radio frequency into multiple time slots so it can support
multiple calls. These digital technologies allow for numerous advantages over
analog service. These advantages include extended battery life, improved voice
quality, greater call security and lower per-minute costs. Digital service also
enables enhanced features and services, such as interactive messaging,
facsimile, e-mail and wireless connections to computer/data networks and the
Internet. Of the two, GSM offers three to four times the capacity of TDMA
technology and provides economies of scale due to its predominant global use.
There were estimated to be about 660 million GSM customers worldwide as of
the end of February 2002, and 82 million TDMA customers as of November 2001,
according to the GSM Association and the Universal Wireless Communications
Consortium, respectively. GSM is the predominant digital standard in Europe and
Asia and, according to the GSM Association, was used by approximately 70% of the
world's digital subscribers as of the end of February 2002. International
roaming with a single GSM phone is possible if it has the capability of roaming
over different frequencies. As a result, we believe that these
70
technologies offer attractive total capital costs and roaming opportunities for
our customers. Additionally, new handsets, referred to as GAIT phones, will be
available soon that will operate over TDMA and GSM networks. Although
technologically more complex, we do not believe these phones will be priced
substantially higher than current commercial handsets of similar form, features
and performance. The first GAIT phones are expected to become available
beginning in the second quarter of 2002, with additional models expected to
become available throughout the remainder of 2002.
Furthermore, UMTS, an advanced 3G data technology expected to offer one of
the highest transmission rates and capacity utilization of any wireless
technologies under development, is the 3G technology that is expected to
ultimately be offered by providers using EDGE. See "Risk Factors -- Risks
Related to Our Business -- We may encounter obstacles in implementing our
network technology migration, which could result in a loss of customers, slower
customer growth and lower profitability" for a discussion of the risks
associated with these two technologies.
We are the only wireless operator in the United States utilizing Mobitex
technology, a radio cellular packet-switched network operating at high speeds.
Mobitex:
- allows users to access the network almost instantly and allows billing on
a usage or per packet basis -- not connection time; and
- is an open international standard, which permits the creation of
off-the-shelf applications by independent applications developers.
TECHNOLOGY UPGRADE STRATEGY. In October 2001, we announced our plan to
upgrade our data network to EDGE, our choice for 3G wireless technology. EDGE, a
faster version of GSM technology, is expected to provide our customers with
greater connectivity and communications capabilities, including faster speeds
for accessing the wireless Internet. As an interim step, we have launched GPRS
technology in California, Washington state, Las Vegas, eastern Tennessee,
coastal Georgia and the Carolinas, where GSM networks were already in place. GSM
voice and GPRS data technology will be overlayed on our existing TDMA network
beginning in early 2002. The use of GAIT handsets is expected to allow for GSM
and TDMA customers to roam anywhere on our network when they travel. When
software is available in early 2003, we intend to upgrade our GPRS markets to
EDGE. We expect to complete our deployment of this technology in 2004. We also
plan to deploy GSM/GPRS and, when available, EDGE technology in all of our newly
licensed areas. We expect the network upgrade will provide advanced data
capabilities and greater spectrum capacity for voice and data communications and
cost efficiencies from operating the leading global technology standard
throughout our network.
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TECHNOLOGY UPGRADE PATH FOR DATA SERVICES
(CHART)
NOTE: THESE SPEEDS ARE MAXIMUM SPEEDS UNDER OPTIMAL CONDITIONS. ACTUAL SPEEDS
MAY BE SIGNIFICANTLY SLOWER AND WILL VARY, DEPENDING ON VARIOUS
CONDITIONS, SUCH AS INTERFERENCE, MOVEMENT OF THE USER AND VOLUME OF
NETWORK USAGE.
GPRS and EDGE are Internet Protocol-based. As new handsets that use EDGE
technology become available, we expect that all the applications developed and
deployed today for GPRS and circuit-switched data will migrate to EDGE network
services. With EDGE, applications are expected to operate at higher speeds than
GPRS.
Depending on spectrum availability, network hardware and software,
applications for very high speed 3G services, compatible handsets and other
devices and commercial demand for such services, we expect to eventually migrate
from EDGE to UMTS. This technology is expected to offer very high speed
multimedia services at access speeds of up to 2 megabits per second under
optimal conditions, i.e., when stationary. The higher data speeds that are
expected to be offered by this technology are expected to require a wide radio
frequency spectrum, which we do not currently possess. See "Risk
Factors -- Risks Related to Our Business -- We may encounter obstacles in
implementing our network technology migration, which could result in a loss of
customers, slower customer growth and lower profitability" and "-- If we fail to
obtain access to additional radio spectrum, we may not be able to expand the
geographic reach of Cingular-branded services, increase our customer base in
areas we currently serve or meet the anticipated demand for new services" for
additional information relating to the availability of additional spectrum.
INFORMATION SYSTEMS
Our information systems are comprised of systems from our predecessor
companies. These systems include billing, point of sale, provisioning, customer
care, data warehouse, fraud prevention and financial, supply chain management
and human resource systems. For example, we currently use six major billing
systems and many other systems that are keyed to the customer's geographic
location. We have developed plans to integrate and consolidate these systems,
initially into two major billing systems and 20 other systems. We believe that
this will help us achieve significant cost savings and further streamline our
business processes and operations.
We began integration of systems in January 2001. We anticipate that the
full implementation of these plans will take approximately three years and will
contribute to a reduction in our ongoing operating costs and expenses as a
percentage of revenues during each stage of the implementation. We employ
experienced professionals as well as consultants who have in the past
successfully consolidated billing systems during their tenure at our predecessor
companies. Because of our past experience, we understand the complexities of
consolidating these various systems. However, we may encounter difficulties that
cause disruptions in some of our markets while we integrate the systems. See
"Risk Factors -- Risks Related to Our Business --
72
Difficulties in completing the integration of the companies that form our
business could adversely affect us in many ways".
COMPETITION
There is substantial and increasing competition in all aspects of the
wireless communications industry. We compete for customers based principally on
our service offering, price, call quality, coverage area and customer service.
Our competitors are principally large providers of cellular, PCS and other
wireless communications services, but we also compete with smaller companies, as
well as dispatch mobile telephone companies, resellers and wireline telephone
service providers. Some of our competitors may have greater financial,
technical, marketing, distribution and other resources than we do. In addition,
some of the other large providers have more extensive coverage areas than we do.
Some of the indirect retailers who sell our services also sell our competitors'
services. Moreover, we may experience significant competition from companies
that provide similar services using other communications technologies and
services. While some of these technologies and services are now operational,
others are being developed or may be developed in the future. For instance, one-
or two-way paging services that feature voice messaging and data display as well
as tone-only service may be adequate for potential subscribers who do not need
to speak to the caller.
Consolidation, alliances and business ventures may increase
competition. Consolidation and the formation of alliances and business ventures
within the wireless communications industry have accelerated. We expect that
this trend will continue, especially with the scheduled elimination of FCC rules
capping the amount of aggregate spectrum carriers may own. We have an average of
four to five other competing wireless providers in our markets. This
consolidation trend may create larger, better-capitalized competitors with
substantial financial, technical, marketing, distribution and other resources to
compete with our product and service offerings. Competitors with more complete
nationwide footprints may be able to offer nationwide services and plans more
economically due to less dependence on roaming arrangements. In addition, global
combinations of wireless carriers -- such as the alliance between AT&T Wireless
and NTT DoCoMo Inc. of Japan, the joint venture between Sprint and Virgin Group,
Verizon Wireless, which is a joint venture between Verizon and Vodafone plc, and
mergers and acquisitions, such as the acquisition of VoiceStream Wireless by
Deutsche Telekom -- give domestic competitors better access to international
technologies, marketing expertise and strategies, and diversified sources of
capital. Other large, national wireless carriers have affiliations with a number
of smaller, regional wireless carriers that offer wireless services under the
same national brand, thereby expanding the national carrier's perceived national
scope. In addition, we have created a venture with VoiceStream to share network
infrastructure to offer our respective branded services. This venture will allow
us to enter the New York City market by the middle of 2002, more quickly than if
we constructed our own network. The venture will also allow VoiceStream to enter
the California and Nevada markets more quickly as our competitor.
FCC regulations promote robust competition. Under current FCC rules, six
or more PCS licensees, two cellular licensees and one or more enhanced
specialized mobile radio, or "ESMR", licensees may operate in each geographic
area. This structure has resulted in the presence of multiple competitors in our
markets and makes it challenging for us to attract new customers and retain
existing ones. In addition, specialized mobile radio, or "SMR", dispatch system
operators have constructed two-way ESMR digital mobile communications systems on
existing SMR frequencies in many cities throughout the United States, including
most of the markets in which we operate. As a result, we experience robust
competition for cellular and PCS customers in the markets we serve, which are 42
of the 50 largest U.S. metropolitan areas. Future rules, changes to existing
rules, such as the recently announced phasing-out of spectrum caps, and spectrum
allocations or re-allocations may result in consolidations of carriers into
larger, national carriers with better competitive resources. The transition from
regional to national provider and the creation of a nationwide footprint
provides companies, such as us, with the scale and scope necessary to compete
effectively on a national level by maximizing cost efficiencies and offering
consumers the most attractive pricing, thereby enhancing subscriber growth,
reducing churn and expanding market share.
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Our ability to compete successfully will depend in part on our marketing
efforts and on our ability to anticipate and respond to various competitive
factors affecting the industry, including new services and technologies, changes
in consumer preferences, demographic trends, economic conditions and pricing
strategies of competitors. As a result of competition, we have in the past and
may in the future be required to:
- reduce prices for our services and products;
- restructure our service packages to provide more services without
increasing prices;
- further upgrade our network infrastructure and the handsets we offer;
- increase our advertising, promotional spending, commissions and other
customer acquisition costs; and
- increase our spending to retain customers.
Our ability to compete successfully will depend in part on our marketing efforts
and strategic mix of marketing programs and on our ability to anticipate and
respond to various competitive factors affecting the industry, including new
services and technologies, changes in consumer preferences, demographic trends,
economic conditions and pricing strategies by competitors and to take advantage
of the overlap of our network with those of SBC and BellSouth. See "Risk
Factors -- Risks Related to Our Business -- We face substantial competition in
all aspects of our business, which could continue to cause reduced pricing and
have adverse effects on our profit margins".
PROPERTIES
We maintain our corporate headquarters in Atlanta, Georgia. We also
maintain administrative and sales offices, customer care call centers, retail
sales locations, switching centers, cell tower sites, data centers and
distribution centers throughout the United States. Most locations are generally
leased to provide maximum flexibility. Switching centers and data centers are
frequently owned due to their critical role in our operations and high set-up
and relocation costs.
As of December 31, 2001, we operated a direct distribution channel
comprised of approximately 1,200 company-operated stores and kiosks. We had 30
warehouses for storage of network infrastructure equipment. At that date,
network properties included approximately 130 switches and 18,000 cell sites. We
believe that our facilities are suitable for their purposes and that additional
facilities can be secured for our anticipated growth requirements.
We lease or pay a monthly fee for the maintenance of the tower or the use
of the tower space on which many of our antennas are located. See "Certain
Relationships and Related Party Transactions -- Our Limited Liability Company
Agreement -- Tower Transactions". We lease our retail stores.
We generally have good relations with our landlords, most of our leases are
at market rates and we have historically been able to secure suitable leased
property at market rates when needed.
ENVIRONMENTAL MATTERS
We are subject to various federal, state and local environmental protection
and health and safety laws and regulations, and we incur costs to comply with
those laws. Environmental laws hold current or previous owners or operators of
businesses and real property potentially liable for contamination on that
property, even if they did not know of and were not responsible for the
contamination. Environmental laws may also impose liability on any person who
disposes or arranges for the disposal of hazardous substances for contamination
at the disposal site, regardless of whether the disposal site is owned or
operated by such person. Although we do not currently anticipate that the costs
of complying with environmental laws, including costs for remediating
contaminated properties, if any, will materially adversely affect us, we cannot
ensure that we will not incur material costs or liabilities in the future due to
the discovery of new facts or conditions, the occurrence of new releases of
hazardous materials or a change in environmental laws.
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EMPLOYEES
As of March 31, 2002, we had approximately 36,000 employees.
Approximately 13,000 of our employees are represented by the Communications
Workers of America, with contracts expiring on various dates between September
2002 and February 2005. Approximately 2% of our employees are covered by
agreements that expire within one year. Most of the contracts contain no-strike
clauses. We are contractually required to maintain a position of neutrality and
to allow card-check procedures with respect to unionization and will support the
determination of our employees. In those areas where our employees are
unionized, we have in place contracts that we believe provide us with the
flexibility to run our business in an increasingly competitive environment.
We consider our relationship with our employees and the Communications
Workers of America to be very good.
INTELLECTUAL PROPERTY
We own the rights to the "Cingular" brand name. We rely on a combination of
copyright, patent, trademark, trade secret and other intellectual property
rights, together with confidentiality and/or license agreements with our
employees, customers and others to protect our proprietary rights. For more
information on licenses granted by our parent companies to us and licenses we
grant to them, read "Certain Relationships and Related Party Transactions".
LEGAL PROCEEDINGS
From time to time we are a party to various legal actions relating to
matters that are incidental to the conduct of our business.
Cingular and various affiliated entities are subject to state government
inquiries over marketing practices in the cellular industry, and are defendants
in a number of purported class actions brought on behalf of subscribers
throughout the country, regarding common law and statutory claims of
misrepresentation, inadequate disclosure, unfair trade practices or breach of
contract related to our advertising, promotions, sales, billing and collection
practices. These include claims relating to the practice or alleged practice,
and alleged nondisclosure, of rounding up of partial minutes of airtime usage to
full minute increments, send-to-end billing, negative options, ring time
billing, first incoming minute free feature, monthly charges for bundled
minutes, below cost sales, early disconnection charges, charges for local and
toll calls, price discrimination and other practices and charges, as well as the
adequacy of our wireless coverage and the quality of service. The actions are in
various stages of the investigation and litigation processes. Plaintiffs in most
of these putative class actions have not specified the alleged damages they
seek. We are not currently able to assess the impact, if any, of these inquiries
and actions on our financial position or results of operations.
Cingular and various affiliated entities are also defendants in a lawsuit
alleging patent infringement. On March 30, 2000, Freedom Wireless, Inc. filed
suit in U.S. District Court for the Northern District of California against
various entities, alleging that the defendants were infringing or contributing
to the infringement of a patent held by plaintiff related to prepaid wireless
service technology. The case has been transferred to the U.S. District Court for
the District of Massachusetts. Plaintiff has amended its complaint to add
another patent to the action. The plaintiff seeks unspecified monetary damages
as well as injunctive relief. This case is at a preliminary stage, and we are
not currently able to assess the impact, if any, of this action on our financial
position or results of operations.
Cingular and various affiliated entities are defendants in a number of
cases in various courts involving claims by former agents and resellers who
allege that we breached our contracts with those agents and resellers, have
tortiously interfered with their contractual relationships with others by
terminating our relationships with them and have engaged in unfair competition.
Some of the complaints have further alleged that we are a franchisor under
applicable state franchise law and have violated franchise laws in our
relationship with them. State franchise laws often provide for treble damages
for violations. We believe that
75
we are not a franchisor under state law in these cases. We are not currently
able to assess the impact, if any, of these actions on our financial position or
results of operations.
According to the U.S. Food and Drug Administration's Center for Devices and
Radiological Health (FDA), while more research needs to be conducted and is
being conducted on the subject, the research conducted to date does not
demonstrate that use of a wireless phone has any adverse health effects. The FDA
stated in July 2001: "The available scientific evidence does not show that any
health problems are associated with using wireless phones. There is no proof,
however, that wireless phones are absolutely safe." The FDA shares regulatory
responsibility for wireless phones with the FCC. The FCC relies on the FDA and
other health agencies for safety questions about wireless phones. The FDA is
party to the Cooperative Research and Development Agreement with the Cellular
Telecommunications and Internet Association, of which we and other wireless
companies are members. Pursuant to this agreement, the parties have agreed to
support research regarding wireless phone safety. Cingular and various
affiliated entities are defendants in lawsuits alleging personal injuries,
including brain cancer, from wireless phone use. Cingular and various affiliated
entities are also defendants in purported class actions that allege adverse
health effects caused by wireless phone use and also allege fraudulent conduct,
participation in conspiracies and other wrongful conduct by wireless phone
manufacturers, service providers and others. Plaintiffs seek various forms of
relief, including compensatory and punitive damages, and/or injunctive and
equitable relief. See "Risk Factors -- Risks Related to Our Industry -- Concern
about alleged health risks relating to radio frequency energy may harm our
prospects" for a discussion of how this litigation could adversely affect our
business operations.
We are also a defendant in other legal actions involving claims incidental
to the normal conduct of our business, including actions by customers, vendors
and employees and former employees. We believe that these other actions will not
be material to our financial position or results of operations.
REGULATORY ENVIRONMENT
The FCC regulates the licensing, construction, operation, acquisition and
transfer of wireless systems in the United States pursuant to the Communications
Act of 1934 and its associated rules, regulations and policies.
To obtain the authority to have the exclusive use of radio frequency
spectrum in an area within the United States, wireless communications systems
must be licensed by the FCC to operate the wireless network and mobile devices
in assigned spectrum segments and must comply with the rules and policies
governing the use of the spectrum as adopted by the FCC. These rules and
policies, among other things, (1) regulate our ability to acquire and hold radio
spectrum licenses, (2) impose technical obligations on the operation of our
network, (3) impose requirements on the ways we provide service to and
communicate with our customers, (4) regulate the interconnection of our network
with the networks of other carriers, (5) obligate us to permit resale of our
services by resellers and to serve roaming customers of other wireless carriers
and (6) impose a variety of fees and charges on our business that are used to
finance numerous regulatory programs and a substantial part of the FCC's budget.
Licenses are issued for only a fixed period of time, typically 10 years.
Consequently, we must periodically seek renewal of those licenses. The FCC will
award a renewal expectancy to a wireless licensee that has provided substantial
service during its past license term and has substantially complied with
applicable FCC rules and policies and the Communications Act. The FCC has
routinely renewed wireless licenses in the past. However, the Communications Act
provides that licenses may be revoked for cause and license renewal applications
denied if the FCC determines that a renewal would not serve the public interest.
Violations of FCC rules may also result in monetary penalties or other
sanctions. FCC rules provide that applications competing with a license renewal
application may be considered in comparative hearings and establish the
qualifications for competing applications and the standards to be applied in
hearings.
Wireless systems are subject to Federal Aviation Administration and FCC
regulations governing the location, lighting and construction of transmitter
towers and antennas and are subject to regulation under federal environmental
laws and the FCC's environmental regulations, including limits on radio
frequency
76
radiation from mobile handsets and towers. Zoning and land use regulations,
including compliance with historic preservation requirements, also apply to
tower siting and construction activities.
TWO-WAY VOICE AND DATA SERVICES. We hold geographic service area licenses
granted by the FCC to provide cellular and PCS services. A cellular system
operates on one of two 25 MHz frequency blocks in the 850 MHz band that the FCC
allocates for cellular radio service. Cellular systems principally are used for
two-way mobile voice applications, although they may be used for data
applications and fixed wireless services as well. Cellular licenses are issued
for either metropolitan statistical areas or rural service areas, two in each
area. At present, no entity may hold overlapping cellular licenses in the same
rural service area.
A broadband PCS system operates on one or more of six frequency blocks in
the 1900 MHz band. PCS systems generally are used for two-way voice
applications, although they may carry two-way data communications and fixed
wireless services as well. For the purpose of awarding PCS licenses, the FCC has
divided the United States into 51 large regions called major trading areas, or
"MTAs", which are comprised of 493 smaller regions called basic trading areas,
or "BTAs". The FCC awarded two PCS licenses for each major trading area, known
as the "A" and "B" blocks, and four licenses for each BTA known as the "C", "D",
"E" and "F" blocks. Thus, generally, six PCS licenses are authorized in each
area, together with two cellular licenses. The two MTA licenses authorize the
use of 30 MHz of PCS spectrum. One of the basic trading area licenses is for 30
MHz of spectrum (the "C" block), and the other three are for 10 MHz each. The
FCC permits a licensee to split its license and assign a portion, on either a
geographic or frequency basis or both, to another party or parties.
We must satisfy a range of FCC-specified coverage requirements. For
example, a cellular licensee was permitted five years following the grant of its
license to provide service to its desired coverage area. The area it served with
a specified minimum signal strength became its licensed service area. Failure to
provide that coverage to the boundaries of its initially licensed service area
resulted in reduction of the relevant license area by the FCC. All 30 MHz PCS
licensees must construct facilities that offer coverage to one-third of the
population of the service area within five years of the original license grants
and to two-thirds of the population within 10 years. All 15 MHz and 10 MHz PCS
licensees must construct facilities that offer coverage to one-fourth of the
population of the licensed area or "make a showing of substantial service in
their license area" within five years of the original license grants. A licensee
that fails to meet the coverage requirements may be subject to forfeiture of its
license.
We use common carrier point-to-point microwave facilities and dedicated
facilities leased from communications companies or other common carriers to
connect our wireless cell sites and to link them to the main switching office.
The FCC licenses point-to-point microwave facilities separately and they are
subject to regulation as to technical parameters and service. Microwave licenses
must also be renewed every 10 years.
MOBITEX WIRELESS DATA SERVICES. In 1996, the FCC commenced auctioning
market area licenses for the 900 MHz spectrum that we use to provide most of our
business data services. The market area licensee is required to protect the
incumbent licensee from interference from the new market area license, but the
market area licensee did not have any relocation obligation. We were awarded
market area licenses for primarily the same geographic areas where we were the
incumbent, or per transmitter, licensee, although we did not obtain market area
licenses for all of our per transmitter licenses. In order to keep these market
area licenses, we are obligated to either (1) provide service to 66% of the
population in the market area by December 31, 2002 or (2) demonstrate by
December 31, 2002 that we have made a "substantial service" showing in those
market areas. With respect to nearly half of our Mobitex licenses, we have
provided service to at least 66% of the population in those areas. The FCC
recently declared that we can satisfy the "substantial service" requirement by
December 31, 2002, if we meet our projected build-out in six markets to cover at
least 30% of the population in each market and at least maintain our population
coverage percentage in our other markets in which we cover 30% to 65% of the
population. We expect to meet the "substantial service" requirement in these
markets. See "Risk Factors -- Risks Related to Our Industry -- Our operations
are subject to substantial governmental regulation, which can significantly
increase our costs and increase churn" for additional information relating to
the regulation of our operations.
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TRANSFERS AND ASSIGNMENTS OF WIRELESS LICENSES. The Communications Act of
1934 and the FCC rules require the FCC's prior approval of the assignment or
transfer of control of a license for a wireless system. Before we can complete
any such purchase or sale, we must file appropriate applications with the FCC,
and the public is by law granted a period of time, typically 30 days, to oppose
or comment on them. In addition, the FCC has established transfer disclosure
requirements that require licensees who assign or transfer control of a license
acquired through an auction within the first three years of their license terms
to file associated sale contracts, option agreements, management agreements or
other documents disclosing the total consideration that the licensee would
receive in return for the transfer or assignment of its license. Non-
controlling minority interests in an entity that holds an FCC license generally
may be bought or sold without FCC approval, subject to the FCC's spectrum
aggregation (and attribution) limits. However, notification and expiration or
earlier termination of the applicable waiting period under Section 7A of the
Clayton Act by either the Federal Trade Commission or the Department of Justice
may be required, as well as approval by, or notification of, state or local
regulatory authorities having competent jurisdiction, if we sell or acquire
wireless systems.
FOREIGN OWNERSHIP. Under existing law, no more than 20% of an FCC
licensee's capital stock may be owned, directly or indirectly, or voted by
non-U.S. citizens or their representatives, by a foreign government or its
representatives or by a foreign corporation. If an FCC licensee is controlled by
another entity, as is the case with our ownership structure, up to 25% of that
entity's capital stock may be owned or voted by non-U.S. citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation.
Foreign ownership above the 25% level may be allowed should the FCC find
such higher levels not inconsistent with the public interest. The FCC has ruled
that higher levels of foreign ownership, even up to 100%, are presumptively
consistent with the public interest with respect to investors from certain
nations, which are countries that are signatories to the World Trade
Organization Agreement on Basic Telecommunications Services. However, the FCC,
in adopting that strong presumption, did note the possibility exists that entry
by a foreign carrier could be so detrimental as to require the imposition of
conditions on entry by such a carrier or even a denial of entry. In addition,
the FCC stated it would accord deference to legitimate national security, law
enforcement, foreign policy and trade concerns raised by other federal agencies
as part of the FCC's analysis of whether to grant a particular authorization.
The FCC has done that in certain cases where the Department of Justice and the
Federal Bureau of Investigation have raised concerns, requiring the carrier to
configure its network(s) to be capable of complying with lawful U.S. process and
to make available in the United States certain call and subscriber data. Foreign
ownership by entities from countries other than World Trade Organization member
countries must meet a more stringent standard, and there is no assurance that
the FCC would find a grant of such an application to be in the public interest.
If our foreign ownership were to exceed the permitted level (through foreign
ownership of our owners, their transfers of ownership in us or issuances of
Class A common stock by our manager), the FCC could revoke our FCC licenses,
although we could seek a declaratory ruling from the FCC allowing the foreign
ownership or take other actions to reduce our foreign ownership percentage in
order to avoid the loss of our licenses. We have no knowledge of any present
foreign ownership that exceeds these limitations.
SPECTRUM ACQUISITIONS. Two of the ways by which we can attempt to meet our
needs for additional spectrum are by acquiring spectrum licenses held by others
or by accessing new spectrum being auctioned and licensed by the FCC. The
Communications Act requires the FCC to award new licenses for commercial
wireless services to applicants through a competitive bidding process.
Therefore, if we need additional spectrum, we plan to acquire the spectrum,
indirectly through joint arrangements, or directly in an auction for any new
licenses that may become available or by purchasing existing licensed facilities
and incorporating them into our system, provided that we are permitted to do so
under the spectrum cap (which is scheduled to expire on January 1, 2003) and
other FCC rules.
The FCC has announced that it will auction spectrum in the 700 MHz band.
There are numerous television operators that currently occupy UHF television
channels 52-69 in this band. Although these stations have been awarded a second
channel to establish digital service, they also have the right to continue
operation on the current channel through at least 2006, and potentially longer
if various conditions are not met. Absent
78
adoption of new federal legislation or rules that lead to "clearing" of the 700
MHz band earlier than current law requires, or the development of band-clearing
mechanisms by these operators for relocation, this spectrum would be of limited
use in the short-term for mobile services. We do not plan to bid for this
spectrum. There are additional spectrum bands that may be suitable for our
business, but this spectrum has not been allocated nor are auctions of this
spectrum imminent.
RECENT REGULATORY DEVELOPMENTS. The FCC does not specify the rates we may
charge for our services nor does it require us to file tariffs for our U.S.
wireless operations. However, the Communications Act states that an entity, such
as us, that provides commercial mobile radio services is a common carrier, and
is thus subject to the requirements of the Act that it not charge unjust or
unreasonable rates, nor engage in unreasonable discrimination. The FCC may
invoke these provisions to regulate the rates, terms and conditions under which
we provide service. In addition, the Act defines a commercial mobile radio
service provider as a telecommunications carrier, which makes it subject to a
number of other regulatory requirements in its dealings with other carriers and
subscribers. The following requirements impose restrictions on our business and
increase our costs as well as the costs of other wireless carriers:
- The FCC has voted to amend its rules specifying spectrum cap aggregation
limits affecting wireless licensees. As amended, the rules would provide
that no entity may hold licenses and/or attributable interests, which are
generally 20% or more of the equity of, or an officer or director
position with, the licensee, in licenses aggregating more than 55 MHz of
PCS, cellular and various SMR services, excluding our wireless data
spectrum in the 900 MHz band, where there is significant overlap in any
geographic area. Significant overlap will occur when at least 10% of the
population of the PCS licensed service area is within the cellular and/or
SMR service area(s). This limit would be eliminated entirely by January
2003 and will be replaced by rules or guidelines setting forth how the
FCC will review carriers' spectrum aggregations. The FCC also voted to
eliminate the prohibition on ownership of both cellular licenses by a
single entity in metropolitan markets. Certain acquisitions of spectrum
would remain subject to approval of the U.S. Department of Justice.
- The FCC has imposed rules for making emergency 911 services available by
cellular, PCS and other commercial mobile radio service providers,
including enhanced 911 services that provide the caller's communications
number and location. These rules require us to make significant
investments in our network and to reach agreements both with vendors of
911 equipment and state and local public safety dispatch agencies.
Commercial mobile radio service providers are required to take actions
enabling them to relay a caller's automatic number identification and
cell site if requested to do so by a public safety dispatch agency, if
necessary at the provider's own cost. Rules effective in October 2001
require providers to transmit the geographic coordinates of the
customer's location, either by means of network-based or handset-based
technologies. Providers may not demand cost recovery as a condition of
doing so, although they are permitted to negotiate cost recovery. Because
of the unavailability of vendor equipment that could reasonably be relied
upon to comply with the FCC's location accuracy rules or to be deployed
in time to meet the FCC's timeline, we filed requests for waivers from
these rules with the FCC, as have other wireless carriers. With respect
to our analog cellular and TDMA networks, we recently entered into a
consent decree with the FCC which sets forth certain deployment
benchmarks for our network-based location solution. We agreed to make
certain contributions to the U.S. Treasury, starting at $300,000 for the
failure to meet a benchmark contained in the consent decree, up to a
maximum of $1.2 million for successive failures. In addition, we have
agreed to submit quarterly progress updates. The FCC issued an order in
early October 2001 granting our waiver request for our GSM networks. We
intend to deploy a handset-based location solution in those markets as
soon as vendors' infrastructure components and handsets are available and
satisfactorily tested. The FCC set a timetable for compliance that we
have not met and cannot meet, given the status of equipment availability
from vendors. We have asked the FCC to reconsider that decision. There
may be penalties levied for our non-compliance, absent reconsideration by
the FCC.
- The FCC has established federal universal service requirements that
affect commercial mobile radio service operators. Under the FCC's rules,
commercial mobile radio service providers are potentially eligible to
receive universal service subsidies for the first time; however, they are
also required to
79
contribute to the federal universal service fund and may be required to
contribute to state universal service funds. Contributions into the
federal fund are based on the interstate and international revenues
generated by the properties owned by a commercial mobile radio service
provider. For 2001, we paid into the federal universal service fund
approximately $109 million. Because the amount that we are required to
pay into the fund is based on revenues generated by our properties, we
anticipate that this amount should continue to increase over time. We
recover most of this expense from our customers. Many states also are
moving forward to develop state universal service fund programs. A number
of these state funds require contributions, varying greatly from state to
state, from commercial mobile radio service providers. If these programs
expand they will impose a correspondingly growing expense on our
business.
- The FCC has adopted rules regulating the use of telephone numbers by
wireless and other providers as part of an effort to achieve more
efficient number utilization. Wireless carriers must be able to
participate in this "number pooling" beginning in November 2002. In
addition, it adopted rules on number portability that will enable
customers to keep their wireline number when switching to another
carrier. These rules require wireless carriers to offer number
portability to their customers, beginning in November 2003.
- The FCC has adopted rules requiring wireless providers to provide
functions to facilitate electronic surveillance by law enforcement
officials pursuant to the Communications Assistance for Law Enforcement
Act of 1995 (CALEA). These obligations are likely to result in
significant costs to us for the purchase, installation and the
maintenance of the network software and other equipment needed.
- The Communications Act and the FCC's rules grant various rights and
impose various obligations on commercial mobile radio service providers
when they interconnect with the facilities of local exchange carriers.
Generally, commercial mobile radio service providers are entitled to
"reciprocal compensation", in which they are entitled to collect the same
charges for terminating wireline-to-wireless traffic on their system
similar to the charges that the local exchange carriers levy for
terminating wireless-to-wireline calls. Interconnection agreements are
typically negotiated by carriers, but in the event of a dispute, state
public utility commissions, courts and the FCC all have a role in
enforcing the interconnection provisions of the Act. Although we have
local exchange carrier interconnection agreements in place in our service
areas, those agreements are subject to modification, expiration or
termination in accordance with their terms. As we expand our coverage
footprint, we will be required to negotiate interconnection arrangements
with other wireline carriers.
- In August 2000, the FCC addressed the extent to which the Communications
Act limits plaintiffs in class action lawsuits against commercial mobile
radio service providers to recover damages and obtain other remedies
based on alleged violations of state consumer protection statutes and
common law. It held that the Act did preempt state rate regulation as a
matter of law, but that whether a specific damage award is prohibited
would depend on the facts of a particular case. A request for
reconsideration of the ruling was recently denied by the FCC. This ruling
might promote the filing of additional class actions against the industry
and increase the potential for damages awards by courts.
- In 1997, the FCC determined that commercial mobile radio service
providers are subject to the interstate, interexchange rate averaging and
integration provisions of the Communications Act. The FCC also delayed
the requirement to integrate commercial mobile radio service long
distance rates among commercial mobile radio service affiliates. In July
2000, a Federal appeals court invalidated the FCC's application of rate
integration to commercial mobile radio services and remanded the matter
to the agency. The FCC has not yet decided whether it will pursue this
matter by seeking to reinstate a wireless rate integration rule. To the
extent that we offer services subject to any ultimate rate integration
requirements, these requirements generally reduce our pricing
flexibility.
- In 1999, the FCC adopted rules to govern customer billing by carriers. It
adopted additional detailed billing rules for landline telecommunications
service providers and is considering whether to extend these rules to
commercial mobile radio services providers. The FCC may require that more
billing
80
detail be provided to consumers, which could add to the expense of the
billing process as systems are modified to conform to any new
requirements. The FCC also is considering whether carriers that decide to
pass through their mandatory universal service contributions to their
customers should be required to provide a full explanation of the
program, and whether to ensure that the carriers that pass through their
contribution do not recover amounts greater than their mandatory
contributions from their customers. Adoption of some of the FCC's
proposals could increase the complexity of our billing processes and
restrict our ability to efficiently bill customers for services.
- In 1999, the FCC adopted an order that determines the obligations of
telecommunications carriers to make their services accessible to
individuals with disabilities. The order requires wireless and other
providers to offer equipment and services that are accessible to and
useable by persons with disabilities. While the rules exempt
telecommunications carriers from meeting general disability access
requirements if these results are not readily achievable, it is not clear
how the FCC will construe this exemption. Accordingly, the rules may
require us to make material changes to our network, product line or
services at our expense.
STATE REGULATION AND LOCAL APPROVALS. With the rapid growth and
penetration of wireless services has come a commensurate surge of interest on
the part of state legislatures and state public utility commissions and local
governmental authorities in regulating our industry. This interest has taken the
form of efforts to regulate customer billing, termination of service
arrangements, advertising, filing of "informational" tariffs, certification of
operation, use of handsets when driving and many other areas. We anticipate that
this trend will continue. It will require us to devote legal and other resources
to working with the states to respond to their concerns while minimizing any new
regulation that could increase our costs of doing business.
While the Communications Act generally preempts state and local governments
from regulating entry of, or the rates charged by, wireless carriers, it also
permits a state to petition the FCC to allow it to impose commercial mobile
radio service rate regulation. No state currently has such a petition on file.
In addition, the Act does not preempt the states from regulating the "terms and
conditions" of wireless service.
Several states have invoked this language to impose or propose various
consumer protection regulations on the wireless industry. States also may impose
their own universal service support requirements on wireless and other
communications carriers, similar to the requirements that have been established
by the FCC. At the local level, wireless facilities typically are subject to
zoning and land use regulation. Neither local nor state governments may
categorically prohibit the construction of wireless facilities in any community
or take actions, such as indefinite moratoria, which have the effect of
prohibiting construction. Nonetheless, securing state and local government
approvals for new tower sites has been and is likely to continue to be
difficult, lengthy and costly.
In addition, state commissions have become increasingly aggressive in their
efforts to conserve telephone numbering resources. These efforts may impact
wireless service providers disproportionately by imposing additional costs or
limiting access to numbering resources. Examples of state conservation methods
include number pooling, number rationing and code sharing. In many markets, the
supply of new numbers is inadequate to meet growing customer demands, but states
have been and continue to be reluctant to deploy new area codes.
Further, states have become more active in imposing fees on wireless
carriers for items such as the use of public rights of way. These fees are
generally passed through to our customers and result in higher costs to our
subscribers.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table presents information regarding our manager's directors
and our and our manager's executive officers.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
Ronald M. Dykes............................ 55 Class B Director
Gary D. Forsee............................. 52 Chairman of the Board and Class B Director
Stanley T. Sigman.......................... 55 Class B Director
Randall L. Stephenson...................... 42 Class B Director
Stephen M. Carter.......................... 48 President and Chief Executive Officer
Mark L. Feidler............................ 45 Chief Operating Officer
Richard G. Lindner......................... 47 Chief Financial Officer
F. Thaddeus Arroyo......................... 38 Chief Information Officer
Francis C. Boyer, Jr....................... 53 Vice President -- Supply Chain
Rickford D. Bradley........................ 50 Senior Vice President -- Human Resources
Joaquin R. Carbonell, III.................. 50 Senior Vice President and General
Counsel -- Legal and Regulatory
William E. Clift........................... 49 Chief Technical Officer
Kathleen L. Dowling........................ 46 Senior Vice President -- Customer Care
Sean Foley................................. 43 Vice President -- Treasurer
Stephen A. McGaw........................... 40 Executive Vice President -- Corporate
Development
Edgar L. Reynolds.......................... 55 President -- Network Operations
Robert W. Shaner........................... 54 President -- Wireless Operations
Carol L. Tacker............................ 53 Vice President and Assistant General
Counsel, Corporate Secretary and Chief
Compliance Officer
Virginia L. Vann........................... 48 Chief Marketing Officer
</Table>
DIRECTORS
Ronald M. Dykes, CLASS B DIRECTOR, CINGULAR WIRELESS CORPORATION. Ronald
Dykes is chief financial officer of BellSouth and has served in various
positions with BellSouth since 1971. He was elected to the board of directors of
Cingular Wireless Corporation in October 2000. Mr. Dykes is also a director of
St. Joseph's Hospital Atlanta.
Gary D. Forsee, CHAIRMAN OF THE BOARD AND CLASS B DIRECTOR, CINGULAR
WIRELESS CORPORATION. Gary Forsee is vice chairman of BellSouth -- domestic
operations and has served in various positions with BellSouth since 1999. Before
he joined BellSouth, Mr. Forsee spent 27 years with SBC, AT&T, Sprint, and
Global One, a global joint venture among Sprint, Deutsche Telekom and France
Telecom. Mr. Forsee was elected to the board of directors of Cingular Wireless
Corporation in October 2000.
Stanley T. Sigman, CLASS B DIRECTOR, CINGULAR WIRELESS CORPORATION. Stanley
Sigman has been group president and chief operating officer of SBC since April
2001. Previously, he was president and chief executive officer of Southwestern
Bell Telephone Company and has served as group president of SBC National
Operations since 1999. He has held high level managerial positions with SBC or
its subsidiaries for more than the past five years. He was elected to the board
of directors of Cingular Wireless Corporation in October 2000.
Randall L. Stephenson, CLASS B DIRECTOR, CINGULAR WIRELESS CORPORATION.
Randall Stephenson is senior executive vice president and chief financial
officer of SBC and has served SBC in high level managerial
82
positions for more than the past five years, most recently as senior vice
president of finance since May 2001. He was elected to the board of directors of
Cingular Wireless Corporation in July 2001.
EXECUTIVE OFFICERS
Executive officers are elected by the board of directors of our manager and
serve until their successors have been duly elected and qualified or until their
resignation or removal. Our executive officers also constitute the executive
officers of our manager, each holding the same office with both entities.
Stephen M. Carter, PRESIDENT AND CHIEF EXECUTIVE OFFICER. Stephen Carter
brings significant and relevant leadership experience to the management of
Cingular, with 16 years of experience in the communications sector and a proven
track record in the industry. Before assuming this position in August 2000, Mr.
Carter was president and chief executive officer of SBC Wireless, where he was
responsible for all of SBC's domestic wireless operations from 1999 until
assuming his current position. Previously, he led two start-up operations for
SBC: the company's national expansion of local wireline service into 30 U.S.
markets outside its traditional wireline territory; and SBC's long-distance
business.
Mark L. Feidler, CHIEF OPERATING OFFICER. Mark Feidler comes to Cingular
from BellSouth Cellular Corp. where, as president, he was responsible for all of
BellSouth's domestic wireless operations, including wireless data and cellular
in 11 states. Prior to that he served as president of BellSouth Mobility in
1998. He also served as president of BellSouth's interconnection services from
1996 to 1997 and as vice president of corporate development from 1993 to 1996.
He joined BellSouth in 1991.
Richard G. Lindner, CHIEF FINANCIAL OFFICER. Richard Lindner comes to
Cingular from SBC Wireless, where he served as senior vice president and chief
operating officer, responsible for the headquarters operations of SBC's domestic
wireless business until August 2000. Prior to that he served as president and
chief executive officer of Southwestern Bell Wireless, where he was in charge of
all wireless operations in five states. Mr. Lindner held a variety of senior
management positions since joining SBC in 1986, including vice president and
chief financial officer for Southwestern Bell Telephone Company in 1996.
F. Thaddeus Arroyo, CHIEF INFORMATION OFFICER. Thaddeus Arroyo comes to
Cingular from Sabre Corporation, where he served as senior vice president of
product marketing and development since June 2000. He also served as senior vice
president of information technology services in 1999, vice president of global
outsourcing from 1997 to 1999, vice president of strategic infrastructure and in
a number of other positions for Sabre from 1992 to 1997. Prior to joining Sabre,
Mr. Arroyo worked in Southwestern Bell's information technology organization.
Francis C. Boyer, Jr., VICE PRESIDENT -- SUPPLY CHAIN. Francis Boyer comes
to Cingular from SBC Wireless, where he served as vice president of national
sales and services and led the national retail and global account teams since
1997. He joined Southwestern Bell Wireless on February 1, 1991 as vice president
and general manager in St. Louis. Prior to that, Mr. Boyer held a number of
management positions over a period of 20 years with Southwestern Bell Telephone
Company.
Rickford D. Bradley, SENIOR VICE PRESIDENT -- HUMAN RESOURCES. Rickford
Bradley comes to Cingular from SBC Telecommunications, Inc., where he most
recently served as president of interconnection services. He has held a variety
of senior and executive positions in sales, network services and corporate
development. He also served as president of public communications in 1999 for
SBC. Prior to SBC's merger with Pacific Telesis in 1997, Mr. Bradley served as
vice president and general manager of operator services at Pacific Bell.
Joaquin R. Carbonell III, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL -- LEGAL AND REGULATORY. Joaquin Carbonell comes to Cingular from
BellSouth Enterprises, Inc., where he served as vice president and group counsel
and was responsible for the legal operations of wireless services since 1997.
Prior to that, he held positions as president of BellSouth International for
Latin America from 1992 to 1994 and then as president of BellSouth Europe from
1994 to 1997, overseeing operations in those regions. He joined BellSouth in
1980 as an attorney with the Southern Bell Telephone & Telegraph Company.
83
William E. Clift, CHIEF TECHNICAL OFFICER. William Clift comes to Cingular
from BellSouth Cellular, where he served as president of BellSouth's American
Cellular Communications Corporation subsidiary and BellSouth Mobility DCS since
January 2000. Prior to that, he served as regional vice president and general
manager for American Cellular's Indiana markets in 1998 and general manager for
Central Louisiana in 1996. Mr. Clift joined BellSouth Mobility in 1991.
Kathleen L. Dowling, SENIOR VICE PRESIDENT -- CUSTOMER CARE. Kathleen
Dowling comes to Cingular from SBC Wireless, where she served as regional
president for Cellular One and SNET Wireless for the northeast region of the
United States from 1998 to July 2000. Prior to that, Ms. Dowling served as
managing director of investor relations and shareowner services for SBC during
1997, where she oversaw all aspects of SBC's national and international investor
relations program. She has also held a variety of assignments with Southwestern
Bell Telephone Company, AT&T, Southwestern Bell Wireless and Cellular One from
1978 to 1996. She served as executive vice president of merger integration of
Cingular from its formation until November 2001.
Sean Foley, VICE PRESIDENT -- TREASURER. Sean Foley comes to Cingular from
Qwest where he served as treasurer during the merger with US WEST in 2000. In
this capacity he led the corporate finance integration of these two companies.
Prior to that, Mr. Foley served as vice president -- treasurer for US WEST where
he led the company's capital raising activities, played a key role in mergers
and acquisitions, and served in a variety of other finance positions from 1995
to 2000.
Stephen A. McGaw, EXECUTIVE VICE PRESIDENT -- CORPORATE DEVELOPMENT.
Stephen McGaw comes to Cingular from SBC, where he held a variety of positions,
including managing director of corporate development from 1999 to 2000, and vice
president of business marketing from 1997 to 1998, and has held a variety of
sales, international and technology planning positions. He also held a number of
positions at the AT&T Bell Labs.
Edgar L. Reynolds, PRESIDENT -- NETWORK OPERATIONS. Edgar Reynolds comes to
Cingular from BellSouth Mobility, where he served as president since January
2000. Prior to that, Mr. Reynolds served as president of BellSouth Mobility DCS
in 1999, and American Cellular Communications Corporation in 1998. Mr. Reynolds
also served as executive vice president of BellSouth Cellular in 1997 and
president of BellSouth Wireless, Inc. from 1995 until 1997. Mr. Reynolds is also
a director of SpectraSite Holdings, Inc.
Robert W. Shaner, PRESIDENT -- WIRELESS OPERATIONS. Robert Shaner comes to
Cingular from SBC Wireless, where he served as regional president since 1999.
Prior to that, Mr. Shaner served as president and chief executive officer of
Pacific Bell Wireless in 1998, president of SBCI Europe and Middle East for SBC
International, Inc. in 1997 and as president and chief executive officer of SBC
International Wireless in France in 1995. Mr. Shaner began working for
Southwestern Bell Telephone Company in 1970. Mr. Shaner is a director of
Spectrian, Inc., a NASDAQ-listed company that is a leading supplier of advanced
radio frequency amplifiers to the wireless communications industry.
Carol L. Tacker, VICE PRESIDENT AND ASSISTANT GENERAL COUNSEL, CORPORATE
SECRETARY AND CHIEF COMPLIANCE OFFICER. Carol Tacker comes to Cingular from SBC
Wireless where she served as vice president -- general counsel since 1996. Prior
to that, Ms. Tacker served in several positions of increasing responsibility,
including general attorney of Southwestern Bell Yellow Pages, and general
attorney of Southwestern Bell Mobile Systems. Ms. Tacker joined SBC in 1984 as
an attorney with Southwestern Bell Telephone Company.
Virginia L. Vann, CHIEF MARKETING OFFICER. Virginia Vann comes to Cingular
from SBC Wireless where she served as vice president of strategic marketing
since 1999. Prior to that, she held a variety of positions with SBC, including
president of SBC Long Distance in 1997, executive vice president of consumer
marketing in 1996 and managing director of business development in 1995. Before
joining SBC in 1989, she held various marketing positions at Citicorp and
Northwest Airlines.
There are no family relationships among any of the above-named directors of
our manager or executive officers of our manager and us, or any arrangement or
understanding between any of these directors and executive officers and any
other person pursuant to which such director or officer was selected. See
"Certain
84
Relationships and Related Party Transactions -- Stockholders' Agreement" for
more information regarding the agreement between the stockholders of our manager
with respect to the election of the directors of our manager.
EXECUTIVE COMPENSATION
We were formed on April 4, 2000 but conducted no independent business
operations until October 2, 2000, when SBC and BellSouth contributed
substantially all of their U.S. wireless assets to us in exchange for 60% and
40% economic interests in us, respectively. We refer to our president and chief
executive officer and our four most highly compensated executive officers other
than our president and chief executive officer as our "named executive
officers".
Prior to October 28, 2001, in the case of Stephen Carter, Richard Lindner
and Robert Shaner, our named executive officers who were previously employed by
SBC's Domestic Wireless Group and whom we refer to as the "SBC named executive
officers", and prior to December 23, 2001, in the case of Mark Feidler and
Joaquin Carbonell, our named executive officers who were previously employed by
BellSouth's Domestic Wireless Group and whom we refer to as the "BellSouth named
executive officers", our named executive officers were paid for the services
they provided to us by employee leasing company subsidiaries of SBC or
BellSouth. In October and December of 2001, SBC and BellSouth contributed their
respective employee leasing companies to us. As a result, all of our named
executive officers are now our employees and receive their salary and bonus from
us. We have reimbursed SBC and BellSouth for the payments made to employees,
including our named executive officers, by the employee leasing companies from
October 2, 2000 to the date of the respective contributions of these companies
for services rendered to us during that time.
Since the respective contribution dates of the employee leasing companies
by SBC and BellSouth, all of our named executive officers have participated in
our benefit plans. In addition, certain of the named executive officers will
continue to have interests in selected compensation and benefit plans of SBC or
BellSouth in which they participated prior to the contribution of the leasing
companies to us.
SUMMARY OF CASH AND OTHER COMPENSATION
As further described in the summary compensation table below, the
compensation structure for the named executive officers consists of:
- salary;
- short-term performance-based incentives paid in cash; and
- long-term incentives in the form of stock options to purchase common
stock of SBC or BellSouth and performance-based incentives, as
applicable.
SBC and BellSouth have stated that they do not intend to grant stock
options or awards to our officers or employees in the future and that our
officers and employees will no longer participate in their long-term incentive
plans, except to the extent of future payments for past performance periods. We
have developed a long-term incentive plan in which our named executive officers
will participate for 2002 and beyond. See "-- Long-Term Incentive Plans".
Salary. Salaries listed in the table below indicate the total annual
salary for 2001, including:
- the salary paid to each named executive officer by the applicable
predecessor company and leasing company; and
- the salary paid to each named executive officer by us.
85
Short-term incentives. Bonuses listed in the table below indicate the
amount of each named executive officer's incentive compensation paid pursuant to
our short-term incentive plan for the year 2001.
Award values under our short-term incentive plan are based on the
achievement of company financial goals and quality and strategic objectives.
Long-term incentives. Long-term compensation awarded in the table below
consists primarily of the annual target grant of stock options for each named
executive officer pursuant to the applicable SBC or BellSouth long-term
incentive plan. Payout amounts reflected below were paid from the respective
predecessor company long-term incentive plan.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------- -----------------------
AWARDS PAYOUTS
OTHER ------------ --------
ANNUAL SECURITIES ALL OTHER
COMPEN- UNDERLYING LTIP COMPEN-
NAME AND SALARY BONUS SATION OPTIONS/SARS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($) ($)
------------------ ---- -------- -------- ------- ------------ -------- ----------
Stephen M. Carter(A).................... 2001 $684,600 $521,250 $89,008 143,132 $126,787 $ 864,927
President and Chief Executive
Officer
Mark L. Feidler(B)...................... 2001 $524,000 $391,300 $15,074 160,700 $215,040 $ 80,800
Chief Operating Officer
Richard G. Lindner(C)................... 2001 $366,267 $222,705 $25,629 62,305 $ 89,804 $ 573,872
Chief Financial Officer
Robert W. Shaner(D)..................... 2001 $336,433 $147,735 $18,929 36,621 $ 73,967 $ 56,724
President -- Wireless
Operations
Joaquin R. Carbonell III(E)............. 2001 $276,200 $148,200 $13,607 37,100 $122,752 $ 39,600
Senior Vice President and
General Counsel -- Legal and
Regulatory
</Table>
- ---------------
(A) Mr. Carter's Long-Term Incentive Plan payout was made by SBC under SBC's
1996 Stock and Incentive Plan and is for the 1998-2000 performance period.
Mr. Carter's "All Other Compensation" includes (a) employer matching
contributions made to employee benefit plans of $32,400; (b) relocation
expenses of $43,165; and (c) a special performance and retention award for
achievements from 1996 through 1999 of $115,000. Also included in "All Other
Compensation" is $674,362 relating to the value on the date of vesting in
2001 of AMDOCS stock units. These units represented a special retention
award by SBC to Mr. Carter and other key SBC officers in 1998. We are a
customer of AMDOCS, as discussed under "Certain Relationships and Related
Party Transactions -- Information Systems Development and Support". Mr.
Carter's base pay as of April 1, 2002 is $710,000 annually.
(B) Mr. Feidler's Long-Term Incentive Plan payout was made by BellSouth under
the BellSouth Shareholder Return Cash Plan. This payment represents the
final payment under this plan and is for the 1998-2000 performance period.
Mr. Feidler's "All Other Compensation" includes (a) above-market interest on
voluntary salary deferrals under the BellSouth nonqualified deferred
compensation plans of $37,900; (b) the value of company-paid life insurance
premiums of $4,900; (c) the value of benefits from company-paid premiums for
split-dollar life insurance of $4,700; (d) employer matching contributions
to certain employee benefit plans of $13,000; and (e) benefits substantially
equal to employer matching contributions that could not be provided under
employee savings plans because of IRS limitations or on amounts deferred
from compensation of $20,300. Mr. Feidler's base pay as of April 1, 2002 is
$542,500 annually.
(C) Mr. Lindner's Long-Term Incentive Plan payout was made by SBC under SBC's
1996 Stock and Incentive Plan and is for the 1998-2000 performance period.
Mr. Lindner's "All Other Compensation"
86
includes (a) above-market interest on voluntary salary deferrals under the
SBC nonqualified deferred compensation plans of $15,999; (b) the value of
company-paid life insurance premiums of $1,274; and (c) employer matching
contributions made to employee benefit plans of $17,121. Also included in
"All Other Compensation" is $539,478 relating to the value on the date of
vesting in 2001 of AMDOCS stock units. These units represented a special
retention award by SBC to Mr. Lindner and other key SBC officers in 1998. We
are a customer of AMDOCS, as discussed under "Certain Relationships and
Related Party Transactions -- Information Systems Development and Support".
Mr. Lindner's base pay as of April 1, 2002 is $374,500 annually.
(D) Mr. Shaner's Long-Term Incentive Plan payout was made by SBC under SBC's
1996 Stock and Incentive Plan and is for the 1998-2000 performance period.
Mr. Shaner's "All Other Compensation" includes (a) above-market interest on
voluntary salary deferrals under the SBC nonqualified deferred compensation
plans of $40,729; and (b) employer matching contributions made to employee
benefit plans of $15,893. Mr. Shaner's base pay as of April 1, 2002 is
$342,000 annually.
(E) Mr. Carbonell's Long-Term Incentive Plan payout was made by BellSouth under
the BellSouth Shareholder Return Cash Plan. This payment represents the
final payment under this plan and is for the 1998-2000 performance period.
Mr. Carbonell's "All Other Compensation" includes (a) above-market interest
on voluntary salary deferrals under the BellSouth nonqualified deferred
compensation plans of $13,500; (b) the value of company-paid life insurance
premiums of $1,500; (c) the value of benefits from company-paid premiums for
split-dollar life insurance of $5,100; (d) employer matching contributions
to certain employee benefit plans of $12,000; and (e) benefits substantially
equal to employer matching contributions that could not be provided under
employee savings plans because of IRS limitations or on amounts deferred
from compensation of $7,500. Mr. Carbonell's base pay as of April 1, 2002 is
$298,200 annually.
YEAR 2001 GRANTS OF STOCK OPTIONS
The following tables describe grants of stock options to each of our named
executive officers for the year ended December 31, 2001.
2001 SBC STOCK OPTION GRANTS
Non-qualified stock options to purchase SBC common stock were granted to
Messrs. Carter, Lindner and Shaner pursuant to the SBC 1996 Stock and Incentive
Plan. The table below contains the estimated present values of stock options
granted in 2001, as of their grant dates. Each option provides for each named
executive officer to purchase SBC common stock at a price equal to the fair
market value of the stock on the date of the grant. Option grants B and C were
issued under an SBC stock purchase plan based on the number of SBC shares
purchased by the respective named executive officers listed below. All options
under grants A, B and C were exercisable as of December 31, 2001.
<Table>
<Caption>
GRANT DATE
INDIVIDUAL GRANTS VALUE
------------------------------------------------------------------------- ----------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS GRANT
UNDERLYING GRANTED TO EXERCISE OR DATE
OPTIONS/SARS EMPLOYEES BASE PRICE EXPIRATION PRESENT
NAME GRANT GRANTED (#) IN FISCAL YEAR (I) ($/SH) DATE VALUE ($)
- ---------------------- ----- ---------------- ------------------ ----------- ---------- ----------
Stephen M. Carter..... A 140,625 0.18% $46.69 1/26/11 $2,482,031
B 1,472 0.00% $50.55 2/1/11 $ 29,602
C 1,035 0.00% $42.05 6/1/11 $ 16,653
Richard G. Lindner.... A 50,000 0.07% $46.69 1/26/11 $ 882,500
B 2,119 0.00% $50.55 2/1/11 $ 42,613
C 10,186 0.01% $42.05 6/1/11 $ 163,893
Robert W. Shaner...... A 26,250 0.03% $46.69 1/26/11 $ 463,313
B 1,960 0.00% $50.55 2/1/11 $ 39,416
C 8,411 0.01% $42.05 6/1/11 $ 135,333
</Table>
- ---------------
(i) Percentages are based on 76,224,511 options granted to SBC employees in
2001.
87
The option values in the table represent the estimated present values of
the options as of their grant date. These values were determined by a nationally
recognized compensation and benefits consulting firm utilizing the Black-Scholes
option valuation model. The significant assumptions incorporated into the
Black-Scholes model in estimating the value of the options include the
following:
- Each option was issued with an exercise price equal to the fair market
value of SBC common stock on the date of grant. The term of each option
is 10 years (unless otherwise shortened or forfeited due to termination
of employment).
- The model assumed an interest rate of 5.16% in calculating the value of
each option in grant A, 5.10% for grant B and 5.28% for grant C. These
interest rates represent the interest rates on U.S. Treasury securities
on the date of grant with a maturity date corresponding to that of the
option term. Volatility was calculated using daily SBC common stock
prices for the three-year period prior to the grant date, resulting in
volatility of 38.65% for grant A, 38.75% for grant B and 39.44% for grant
C. The model reflected an annual dividend yield on SBC common stock at
the date of issuance of 2.18% for grant A, 2.01% for grant B and 2.44%
for grant C.
- To reflect the probability of a shortened option term due to termination
of employment prior to the option expiration date, present values of the
grants were reduced as follows: 12.83% for grant A, 10.32% for grant B
and 10.08% for grant C.
The ultimate value of each option will depend on the future market price of
SBC's common stock, which cannot be forecast with reasonable accuracy. The
actual value, if any, an optionee will realize upon exercise of an option,
before taxes, will depend on the excess of the market value of SBC's common
stock over the exercise price on the date the option is exercised.
2001 BELLSOUTH STOCK OPTION GRANTS
Non-qualified stock options to purchase BellSouth common stock were granted
to Messrs. Feidler and Carbonell pursuant to the BellSouth Corporation Stock
Plan. The table below contains the estimated present values of stock options
granted in 2001, as of their grant dates. Each grant below provides for each
named executive officer to purchase BellSouth common stock at a price equal to
the fair market value of the stock on the date of the grant. These options were
exercisable as of December 31, 2001.
<Table>
<Caption>
GRANT DATE
INDIVIDUAL GRANTS VALUE
------------------------------------------------------------ ----------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS/SARS EMPLOYEES BASE PRICE EXPIRATION PRESENT
NAME GRANTED (#) IN FISCAL YEAR (I) ($/SH) DATE VALUE ($)
- -------------------------------- ------------ ------------------ ----------- ---------- ----------
Mark L. Feidler................. 160,700 0.98% $42.25 2/1/11 $1,775,124
Joaquin R. Carbonell III........ 37,100 0.23% $42.25 2/1/11 $ 409,814
</Table>
- ---------------
(i) Percentages are based on 16,361,471 options granted to BellSouth employees
in 2001.
The option values in the table represent the estimated present values of
the options as of their grant date. These values were determined utilizing the
Black-Scholes option valuation model. The significant assumptions incorporated
into the Black-Scholes model in estimating the value of the options include the
following:
- Each option was issued with an exercise price equal to the fair market
value of BellSouth common stock on the date of grant. The term of each
option is 10 years (unless otherwise shortened or forfeited due to
termination of employment). The expected term used for valuation purposes
was five years.
- The model assumed an interest rate of 4.75% in calculating the value of
each option. The interest rate represents the interest rate on U.S.
Treasury securities on the date of grant with a maturity date
corresponding to that of the option term. Volatility was calculated using
daily stock prices for the five-
88
year period prior to the grant date, resulting in volatility of 26.0%.
The model reflected an annual dividend yield of 1.80%.
The ultimate value of each option will depend on the future market price of
BellSouth's common stock, which cannot be forecast with reasonable accuracy. The
actual value, if any, an optionee will realize upon exercise of an option,
before taxes, will depend on the excess of the market value of BellSouth's
common stock over the exercise price on the date the option is exercised.
2001 OPTION/SAR EXERCISES AND HOLDINGS
The following table provides information for the named executive officers
regarding exercises of SBC and BellSouth options during 2001. Additionally, the
table provides the values of unexercised options held on December 31, 2001 that
are based on the fair market value of the shares of common stock of SBC and
BellSouth.
AGGREGATED OPTION/SAR EXERCISES IN 2001
AND FISCAL YEAR-END OPTION/SAR VALUES
<Table>
<Caption>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS
SHARES VALUE YEAR-END (#) AT FISCAL YEAR-END ($)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ------------ -------- ----------- ------------- ----------- -------------
Stephen M. Carter(A)...... 31,618 $768,399 305,091 0 $1,113,109 $ 0
Mark L. Feidler(B)........ 0 $ 0 657,755 0 $3,509,842 $ 0
Richard G. Lindner(A)..... 15,258 $395,027 238,914 0 $1,266,414 $ 0
Robert W. Shaner(A)....... 4,182 $ 96,455 167,918 0 $ 845,725 $ 0
Joaquin R. Carbonell
III(B).................. 4,200 $117,327 293,756 0 $2,909,351 $ 0
</Table>
- ---------------
(A) Represents SBC options. "Value of Unexercised In-the-Money Options" figures
are based on the December 31, 2001 SBC common stock price per share of
$39.17.
(B) Represents BellSouth options. "Value of Unexercised In-the-Money Options"
figures are based on the December 31, 2001 BellSouth common stock price per
share of $38.50.
LONG-TERM INCENTIVE PLANS
The table below lists performance shares granted in 2001 to the named
executive officers during the last fiscal year, applicable to the performance
periods indicated.
<Table>
<Caption>
PERFORMANCE OR
NUMBER OF SHARES, OTHER PERIOD UNTIL
UNITS OR OTHER MATURATION OR
NAME RIGHTS (#) PAYOUT
- ------------------------------------------------------------ ----------------- ------------------
Stephen M. Carter(A)........................................ 14,808 2001-2003
Mark L. Feidler(B).......................................... 17,400 2001-2003
Richard G. Lindner(A)....................................... 8,885 2001-2003
Robert W. Shaner(A)......................................... 4,738 2001-2003
Joaquin R. Carbonell III(B)................................. 4,000 2001-2003
</Table>
- ---------------
(A) Each performance share is equivalent in value to one share of SBC common
stock. At the end of a performance period, a percentage of the performance
shares is converted into cash and/or SBC common stock, based upon the
achievement of certain SBC objectives. The performance levels are set on a
yearly
89
basis, and the extent to which a performance level is met or exceeded is
expressed as a percentage. The annual percentages are then averaged over the
term of each performance period to determine the percentage of performance
shares that may be converted and paid out. The actual number of performance
shares that can be earned at the end of a performance period ranges from 0
to 200% of the performance share award.
(B) Each performance share is equivalent in value to one share of BellSouth
common stock. The determination of the actual number of performance shares
earned is based on BellSouth's annualized Total Shareholder Return ("TSR")
over a three-year performance period, and may be adjusted based on a
comparison of BellSouth's TSR with the TSR of a peer group of
telecommunications companies. The actual number of performance shares that
can be earned ranges from 0 to 150% of a participant's performance share
award. For each performance share earned, participants receive a cash
payment equal to the fair market value of a share of BellSouth stock on the
last day of the performance period. The cash payment is made in two equal
installments: the first installment is paid after the end of the performance
period and the second installment is paid six months later. In addition,
after the end of the performance period, participants receive a cash payment
equal to the amount of cash dividends paid on one share of BellSouth stock
during the performance period multiplied by the number of performance shares
earned.
In 2002, we adopted a long-term incentive plan that provides incentive
compensation based upon the achievement of certain performance objectives over
performance periods that are two years or longer. For 2002, a targeted number of
performance units, valued at $50 each, were granted to certain employees,
including the five named executive officers. The determination of the actual
award earned is based on the achievement of certain company objectives regarding
revenue growth and return on capital during the three-year performance period
from 2002-2004. The actual number of performance units that can be earned at the
end of the performance period ranges from 0 to 200% of a participant's
performance unit award.
PENSION AND OTHER RETIREMENT BENEFITS
We adopted a non-contributory pension plan that covers all employees not
covered by a collective bargaining agreement and a limited group of employees
covered by such an agreement, known as the Cingular Wireless Pension Plan.
Beginning November 1, 2001, participants, including the named executive
officers, are entitled to receive monthly service credits of 5% of base pay and
interest credits, compounded monthly, determined by reference to 30-year
Treasury rates. The Cingular Wireless Pension Plan provides for certain
transition benefits which are intended to transition current employees from the
SBC or BellSouth benefit levels to our ongoing benefit level over a period of
five years or less.
In addition to the Cingular Wireless Pension Plan, each of the named
executive officers participates in certain non-qualified supplemental pension
plans that provide benefits in excess of amounts permitted in qualified benefit
plans by certain Internal Revenue Code provisions. For the SBC named executive
officers, we adopted a supplemental retirement income plan ("Cingular Mirror
SRIP") that mirrors the substantive terms of the SBC Supplemental Retirement
Income Plan ("SBC SRIP"). The Cingular Mirror SRIP establishes a target annual
retirement benefit for certain officers, stated as a percentage of their annual
salaries and annual incentive bonuses averaged over a specified period, offset
by our pension plan and any other Cingular nonqualified plan, if adopted. The
Cingular Mirror SRIP will provide benefits identical to those of the SBC SRIP
but with the accrual of benefits freezing on and as of December 31, 2006. For
the BellSouth named executive officers, BellSouth will maintain existing
accounts and remain liable for accrued benefits under the BellSouth Supplemental
Executive Retirement plan ("SERP"), along with certain other senior managers
transferred to Cingular. BellSouth will continue to accrue benefits under the
SERP to eligible participants through December 31, 2006. The net SERP benefit
payable from BellSouth will equal the gross benefit amount determined by the
SERP formula, offset by Cingular's qualified pension plan and social security,
and further offset by any Cingular nonqualified plan, if adopted.
At their current pay and service levels, the total estimated annual
combined pension amounts that will be paid commencing at age 65 from qualified
and non-qualified plans to Messrs. Carter, Feidler, Lindner, Shaner, and
Carbonell would be $362,712, $138,124, $208,767, $293,973 and $150,757,
respectively.
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AGREEMENTS WITH MANAGEMENT
In connection with his joining our company, Mr. Feidler and BellSouth
entered into an agreement providing certain retention incentives and making
modifications to certain benefits to which he was entitled as a BellSouth
executive officer. The agreement provides for:
- the payment by BellSouth to him of a special bonus in the amount of
$800,000 in respect of his performance for the transition period during
which BellSouth's wireless interests were being transferred to Cingular;
- the payment by BellSouth to him of $2,000,000 in the event of voluntary
or involuntary termination of employment with Cingular on or prior to
December 31, 2003 if BellSouth does not offer him a comparable position
at BellSouth to which to return;
- vesting of executive benefits in the event of voluntary or involuntary
termination of employment with Cingular or change of control of BellSouth
or a substantial diminution of BellSouth's interest in Cingular;
- the payment by BellSouth to him of an amount representing the approximate
value he would have received if he exercised BellSouth options granted
prior to June 9, 2000 at a market price of $60 per share, less what value
he actually received from exercising those options, in the event of a
voluntary or involuntary termination of employment with Cingular, death
or disability, change of control of BellSouth or a substantial diminution
of BellSouth's interest in Cingular; and
- the payment by BellSouth to him of an amount representing the prorated
short-term bonus award, as applicable to him under a comparable Cingular
short-term bonus plan, in the event of a voluntary or involuntary
termination of employment with Cingular (we would not be required to pay
him any amount under our plan).
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We have provided below a summary of the significant agreements that we have
executed with SBC or BellSouth, or one of their respective subsidiaries, or that
relate to our formation. These descriptions are not complete and only summarize
the material terms of the agreements.
OUR LIMITED LIABILITY COMPANY AGREEMENT
Our limited liability company agreement governs our management and
operations. Its parties are certain SBC and BellSouth entities and Cingular
Wireless Corporation -- our manager. Their economic interests in us are
represented by units.
Our structure gives SBC and BellSouth equal control of our management and
ownership interests of approximately 60% and 40%, respectively. It also gives us
the flexibility to raise equity in the capital markets. If we wish to raise new
equity, our manager would need to obtain the consent of its strategic review
committee, then sell shares of its Class A common stock and contribute the net
proceeds to us in return for units. Our parents may only sell their equity
interests as described in "-- Transfers of LLC Units and Common Stock" below.
OUR MANAGEMENT. Our management is exclusively vested in Cingular Wireless
Corporation, whose powers are limited by the terms of its amended and restated
certificate of incorporation, which we refer to as the "manager's charter". As
our manager, that corporation has control over all of our affairs and decision
making and is responsible for all operational and administrative decisions and
the day-to-day management of our affairs. None of its actions in connection
therewith require the prior approval of our members. Substantially all important
decisions of our manager must be approved by its strategic review committee,
which is currently comprised of all of its Class B directors. Although our
manager will not receive any compensation for services rendered to us, we are
required to pay the manager for all of its out-of-pocket costs and expenses
required in connection with managing our business and incurred in connection
with making filings and reports under the Securities Act and the Exchange Act.
For more information on our governance, including the strategic review
committee, you should read "Our Organizational Structure -- Cingular Wireless
Corporation and Cingular Wireless LLC" above.
Cingular Wireless Corporation cannot be removed as manager without the
consent of all of our other members. If Cingular Wireless Corporation were to
cease participating in our management, its equity interest in us could be
considered an "investment security", and Cingular Wireless Corporation could be
subject to regulation under the Investment Company Act of 1940. Although we
believe it is highly unlikely that SBC and BellSouth would terminate Cingular
Wireless Corporation as manager, if anything were to happen that would cause our
manager to be deemed an investment company under the Investment Company Act, the
restrictions imposed by that Act, including limitations on our manager's capital
structure and our manager's ability to transact with affiliates, could make it
impractical for Cingular Wireless Corporation to continue its business as
currently structured.
SCOPE OF OUR BUSINESS. The limited liability company agreement and our
manager's charter generally limit our business to the domestic provision of
mobile wireless voice and data services that use radio frequencies licensed by
the FCC for the provision of cellular service, PCS service, wireless data
service, satellite services and related services. "Domestic" means the 50 states
of the United States, the District of Columbia, the U.S. Virgin Islands and
Puerto Rico, but excludes other U.S. territories and possessions. In Puerto Rico
and the U.S. Virgin Islands, we may also conduct paging services.
EXCLUSIVITY. When we or our subsidiaries require network services of
wireline carriers to provide service in the incumbent service territories of SBC
and BellSouth, we and our subsidiaries must use exclusively their network
services, except where we and our subsidiaries would be materially disadvantaged
to do so. For purposes of the limited liability company agreement, the incumbent
service territory of SBC consists of the states of California, Nevada,
Connecticut, Texas, Missouri, Arkansas, Oklahoma, Kansas, Illinois, Indiana,
Ohio, Michigan and Wisconsin, and the incumbent service territory of BellSouth
consists of the states of
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Georgia, Florida, South Carolina, North Carolina, Alabama, Mississippi,
Kentucky, Louisiana and Tennessee, together with any additional service
territories that may be acquired by either party, as described below.
In addition, SBC and BellSouth may not market or sell wireless products
and/or services other than ours. However, this does not prevent them from:
- continuing to market and sell wireless services other than ours to
customers who were joint billing customers as of October 2, 2000;
- allowing our competitors to bundle and sell SBC's and BellSouth's
products and services together with such competitors' wireless services;
- marketing and selling fixed wireless voice and data products other than
ours; and
- marketing and selling wireless services other than ours in geographic
areas designated by the FCC, which include the entire United States,
except for PCS service offered in the Gulf of Mexico, in which
- neither we nor our subsidiaries provide wireless services pursuant to
FCC licenses; or
- Salmon PCS does not provide wireless services pursuant to FCC
licenses.
COMPETITION. SBC and BellSouth are generally not permitted to compete with
us regarding wireless products and/or services, as described under the
"exclusivity" provisions above. However, SBC and BellSouth may compete with each
other and us to the extent described above and with respect to resale and
packaging of wireless services. SBC and BellSouth may also act as our agents,
and may resell our services, as described below under "-- Wireless Agency
Agreements" and "-- Resale Agreements".
VOLUME DISCOUNTS. We are required to offer to SBC and BellSouth any vendor
volume discounts available to us, and SBC and BellSouth are required to offer to
us or to our subsidiaries or Salmon, any vendor or volume discounts available to
them.
CHANGE OF CONTROL. If a company with a wireless business acquires control
of SBC or BellSouth and a regulatory conflict results, that company must dispose
of any resulting overlapping properties, which may include its interest in us,
and we would have no obligation to make a disposition of any of our properties
or to take any other action to eliminate any resulting overlaps or regulatory
conflicts. A change of control, as defined, of SBC or BellSouth would occur if
any person becomes the beneficial owner of voting securities of that company
resulting in the acquiring person having the power to cast at least 50% of the
votes for the election of directors of that company.
DIVESTITURE OF WIRELESS BUSINESSES. In general, SBC, BellSouth and their
subsidiaries must divest any domestic wireless businesses they own, other than
wireless interests that, because of insubstantial economic or passive management
interests, are considered de minimis.
Divestitures would be carried out as follows:
- if SBC or BellSouth owns and controls a wireless business and has the
power to control its disposition, it would be required to offer the
wireless business to us before selling to a third party.
- if SBC or BellSouth owns a wireless business but cannot offer it to us
because it cannot control its disposition, it would be required to
dispose of the wireless business or reduce its ownership and/or
management interest therein, such that the wireless business becomes a de
minimis interest.
- if the ownership of the wireless business requires a disposition of
licenses under the FCC's overlap laws that would be material to SBC or
BellSouth, then that company may, but is not required to, sell the
wireless business to us but may instead transfer all of its units and our
manager's Class A common stock through a spin-off or split-off or sale to
third parties in accordance with the procedures described under
"-- Transfers of LLC Units and Common Stock" below.
DISTRIBUTIONS. Except as described below, distributions by us require the
consent of all of our members and no member is entitled to withdraw any portion
of its capital account without the consent of the other members. We will make
periodic distributions to our members on a pro rata basis in an amount equal to
the
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greatest of each member's taxes (calculated using the highest corporate marginal
tax rate as if we were a corporation for U.S. federal, state and local income
tax purposes) as a result of our operations due for the fiscal quarter for which
estimated income tax payments are due, divided by the member's percentage
interests in us. In addition, we will distribute to our members at the end of a
fiscal year, on a pro rata basis in accordance with each member's percentage
interest in us, an amount equal to the excess of the greater of:
- 50% of our "excess cash", and
- the greatest of each members' taxes (calculated using the highest
corporate marginal tax rate as if we were a corporation for U.S. federal,
state and local income tax purposes) resulting from allocations of tax
items from us for the preceding fiscal year, divided by the member's
percentage interest in us
over the amount of tax distributions made with respect to that fiscal year.
"Excess cash" means, with respect to any fiscal year, the excess, if any, of:
(A) the sum of (x) the amount of all cash received by us (including
any amounts allocated to our subsidiaries) during such fiscal year and (y)
any cash and cash equivalents held by us at the start of such fiscal year
over
(B) the sum of (x) all cash amounts paid or payable (without
duplication) in such fiscal year incurred by us (including any amounts
allocated to our subsidiaries) and (y) the net amount of cash needs for us
set forth in our budget for the following fiscal year.
The amount of the tax distributions to be made regarding the federal
estimated income tax payment on September 15 of a year will be adjusted for the
amount by which the total of the quarterly tax distributions for the prior
fiscal year was less than or exceeded the amount that would have been
distributed had our members' taxes been calculated using our final results for
the prior fiscal year, as opposed to using estimates.
Our manager intends to reinvest any funds distributed in excess of those it
needs to pay taxes. The limited liability company agreement does not provide a
mechanism for additional capital contributions by our manager, other than
capital calls for pro rata contributions by all of our members. Accordingly, a
reinvestment of distributions that our manager receives from us in exchange for
an increased interest in us will require the approval of all of our members, in
addition to the approval of our manager's strategic review committee.
EXCHANGE OF LLC UNITS AND TRANSFER AND CONVERSION OF SHARES OF CLASS B
COMMON STOCK. Each of our members may exchange any or all of its units for our
manager's Class A common stock on a one-for-one basis. Our manager is required
to acquire a number of our units corresponding to any shares of Class A common
stock it issues.
If either SBC or BellSouth wishes to transfer its shares of our manager's
Class B common stock, except for permitted transfers described under
"-- Transfers of LLC Units and Common Stock" below, it is required to convert
those shares of Class B common stock into shares of our manager's Class A common
stock. Shares of Class B common stock may be converted into shares of Class A
common stock at any time. If either SBC or BellSouth reduces its total ownership
to less than 10% of the "total outstanding shares", that party must convert its
remaining shares of Class B common stock into Class A common stock, and it loses
its Class B directors on our manager's board and strategic review committee.
Because of the economic equivalence with units, the limited liability company
agreement bases several of its provisions on the concept of "total outstanding
shares", which means the sum of the total number of shares of our manager's
Class A and Class B common stock issued and outstanding and the total number of
our units outstanding, excluding units owned by our manager.
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TRANSFERS OF LLC UNITS AND COMMON STOCK. The limited liability company
agreement generally prohibits transfers of units or common stock of our manager
(collectively referred to as "securities"), except transfers with the consent of
each member owning more than 10% of the total outstanding shares. However, there
are several exceptions to this general rule for transfers by SBC and BellSouth,
including:
- transfers of our manager's Class A common stock in a broad public
offering of Class A common stock underwritten on a firm commitment basis,
including transfers in any offering;
- each member may transfer our manager's Class A common stock or the stock
of a company that owns units or the stock of a company that owns Class A
common stock in our manager in up to two spin-offs or split-offs. A
"spin-off" would be a wide, SEC-registered distribution of units or Class
A common stock of our manager or of all of the equity securities of a
subsidiary of a member that owns units or Class A common stock of our
manager to all of the common stockholders of a series or class of the
member or its ultimate parent. In a "split-off", each such common
stockholder would be offered the right to exchange common stock of our
members or their ultimate parent entities for our manager's Class A
common stock or the stock of a subsidiary of the member that owns units
or our manager's Class A common stock, which exchange offer would also be
widely distributed and registered with the SEC. Spin-offs and split-offs
can involve the sale of all or a portion of a member's interest; and
- a sale of all, but not less than all, of a member's units and any of our
manager's common stock to third parties, subject to, among other things,
a right of first refusal and a requirement that the third-party or its
ultimate parent become a party to the limited liability company agreement
and the stockholders' agreement in the place of the selling party.
Upon any transfer of all of SBC's or BellSouth's units, the transferring
member will have no continuing rights or obligations under the limited liability
company agreement, but will remain bound by the terms of any ancillary operating
agreements it entered into in accordance with the terms of those agreements.
WITHDRAWAL OF A MEMBER. A member automatically ceases to be a member of us
in three events:
- when it no longer owns any units;
- if its percentage of the total outstanding shares becomes less than 10%;
or
- if it no longer owns any shares of Class B common stock.
PREEMPTIVE RIGHTS. If our manager issues shares of its Class A common stock
solely for cash, except for issuances in a public offering underwritten on a
firm commitment basis or pursuant to the exercise of options granted under
employee benefit plans, each member has the right to purchase from us a number
of units such that its percentage ownership in us will not be reduced.
INCENTIVE PLANS. If our manager issues any Class A common stock pursuant to
any employee benefit plan of our manager, we will issue one unit to our manager
for each share issued by it and we will receive the net proceeds for the shares
that were received by our manager.
TOWER TRANSACTIONS. We lease or pay a monthly fee for the maintenance of
the tower or the use of the tower space on which many of our antennas are
located, including the antennas, microwave dishes and other wireless equipment,
together with the land surrounding the tower, instead of owning or controlling
the tower. Before contributing their wireless properties to us, SBC and
BellSouth each entered into separate transactions with different tower
management companies to sell or lease on a long-term basis many of their
communications towers and related assets. In connection with these transactions,
SBC and BellSouth entered into master leases to sublease portions of their
towers in exchange for a monthly rental or site maintenance payment and/or
reserved antenna space on the towers. Crown Castle is generally required to
build, manage, maintain and remarket, including to competitors, the remaining
space on future towers on which our antennas will be located. With respect to
the towers to be built in the markets where SpectraSite is managing sites, we
plan to hire different tower companies to perform these functions.
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STOCKHOLDERS' AGREEMENT
SBC and BellSouth have entered into a stockholders' agreement. Under this
agreement, each of them has agreed to vote shares beneficially owned by it for:
- the election of the Class B directors nominated by each of SBC and
BellSouth, for so long as each such party is then entitled to have its
nominees elected as Class B directors;
- following any such issuance of Class A common stock of our manager, the
election of one independent director to our manager's board of directors
selected by SBC and the election of one independent director selected by
BellSouth, for so long as each such party is then entitled to have its
nominees elected as Class B directors;
- the removal of any Class B director as determined by the stockholder who
nominated that director;
- the appointment of a new Class B director upon any vacancy of a Class B
directorship on the board or any committee of our manager's board, as
determined by the stockholder who nominated the Class B director whose
departure caused the vacancy; and
- approval of any matter submitted to the stockholders of our manager that
has been previously approved by the strategic review committee of our
manager.
Following the issuance of Class A common stock of our manager, each of SBC
and BellSouth shall be entitled to nominate one person to serve as an
independent director. Our manager, which is also a party to the agreement, has
agreed that it will use its best efforts to cause the holders of Class A common
stock to vote in favor of the nomination as independent directors on the board
of the nominees of SBC and BellSouth. In addition, SBC and BellSouth have agreed
that the chairman of our manager's board shall, for so long as SBC and BellSouth
together hold at least 50% of the total voting power, other than for the
election of directors, be elected from among the Class B directors nominated by
SBC and BellSouth.
The agreement contains transfer restrictions with respect to the transfer
of a stockholder's Class A and Class B common stock substantially similar to
those set forth above under "-- Our Limited Liability Company
Agreement -- Transfers of LLC Units and Common Stock". Conversions of Class B
common stock into Class A common stock are not considered transfers. In the
event of a transfer, the stockholders have agreed that the party to whom the
shares are transferred will become a party to the stockholders' agreement. In
addition, no stockholder may transfer any of its Class B common stock unless it
transfers all of the shares it holds to the same person.
MARKETING, NEW PRODUCTS AND SERVICES, MARKS AND INTELLECTUAL PROPERTY
As specified in more detail under separate agreements that are described
below, our limited liability company agreement sets out the following
principles:
- we have primary responsibility for marketing our products and services;
- SBC and BellSouth may market our products and services as agents and
resellers, as further specified in the agency and resale agreements that
are described below;
- with respect to intellectual property other than the SBC and BellSouth
marks, consisting of patents, trade secrets, copyrights, technology and
know-how, we have entered into intellectual property agreements with SBC
and BellSouth and certain of their subsidiaries;
- we may create new products and services and associated intellectual
property rights; and
- we have agreed that we may in our sole discretion grant each of SBC and
BellSouth licenses in the intellectual property that we are developing or
that we acquire after October 2, 2000.
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TRANSITION SERVICES AGREEMENTS
SBC AND BELLSOUTH TRANSITION SERVICES AGREEMENTS. On October 2, 2000, we
entered into a transition services agreement with each of SBC and BellSouth,
pursuant to which SBC and BellSouth each provides transition services and
products for a limited period of time. The services provided by both SBC and
BellSouth include government and regulatory affairs, finance, compensation and
benefit accounting, human resources, internal audit, risk management, legal,
security and tax. Each of these services will be provided until the earlier of
90 days after we have given notice that we want to discontinue the services or
until the agreements terminate on December 31, 2002. The fees are determined
based upon the costs of providing the level of services expected to be provided
at the time we entered into the agreements. For services rendered under these
agreements we paid $153 million for the year ended December 31, 2000 and $267
million for the year ended December 31, 2001. We have terminated most of these
services and assumed them internally and thereby reduced reliance on SBC and
BellSouth.
AMERITECH PAGING TRANSITION SERVICES AGREEMENT. We also entered into a
transition services agreement to continue for up to eighteen months from October
2, 2000 to provide services to Ameritech Wireless Holdings, Inc., which operates
a paging business that was not contributed to us but that has been managed by a
subsidiary that was contributed to us. This agreement expired on April 1, 2002
except with respect to real estate and information technology services, which
were extended for 90 days.
EMPLOYEE LEASING AGREEMENTS. SBC and BellSouth have each transferred their
respective wireless employees and related obligations and liabilities to one or
more subsidiaries that are called the "leasing companies". In the employee
leasing agreements, the leasing companies leased all of their current employees
and any employees hired after October 2, 2000 to us until the leasing companies
were contributed to us. We reimbursed the leasing companies for their expenses
on a monthly basis in cash, including payroll costs, social security and
unemployment taxes, benefits payments and costs of relocation. The leasing
companies and related employee benefit assets and liabilities were contributed
to us in October and December of 2001.
INTELLECTUAL PROPERTY AGREEMENTS. We have granted SBC and BellSouth
perpetual, royalty-free, non-exclusive licenses to use certain technology the
ownership of which was transferred by BellSouth and SBC to us at the
contribution closing, and to sell any products that are covered by that
technology and certain other rights necessary for our parents to utilize the
technology they transferred to us in order to continue their business without
interruption.
Similarly, SBC and BellSouth have each granted us a perpetual,
royalty-free, non-exclusive license to certain copyrights, technology and
know-how, which were not transferred to us at the contribution closing but are
used in the operation of our business, as well as patents and patent
applications.
WIRELESS AGENCY AGREEMENTS
Under our wireless agency agreements with subsidiaries of SBC and
BellSouth, such subsidiaries and any of their affiliates that make an election
to do so will act as authorized agents exclusively on our behalf for the sale of
wireless services to subscribers in SBC's and BellSouth's respective incumbent
service territories. We are free to contract with other agents for wireless
services in both of our parents' incumbent service territories, including
retailers and other distributors. All subscribers contracted through SBC and
BellSouth agents are our own customers, except where the agents sell packages,
in which case a subscriber is a customer of one of the agents for all portions
of the package other than our wireless services. All affiliates of SBC and
BellSouth may act as agents for us and, when electing to act as agents, will be
bound by one of the wireless agency agreements. Each agent has agreed that it
will not, directly or indirectly, offer or promote wireless services of our
competitors in the agent's service territory; however, services typically
referred to as "reflex paging", which is a two-way messaging service that adds a
response channel to traditional pager devices, is not considered a competing
service for these purposes.
Each agent may elect to cease acting solely as our agent and begin to act
as a reseller under a resale agreement, as described below. The election has to
be made for all package subscribers, but does not affect an agent's right to act
as our agent in selling wireless services that are not included in a package.
Package
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subscribers are those subscribers that buy combinations of wireless services and
other communications services offered by our parents. In addition, the agent has
a corresponding right to choose to cease acting as agent with respect to
national accounts.
Each agent has a unilateral right of termination after October 2, 2003. We
may terminate the agreement with respect to any type of wireless service in the
event of a change in the law relating to that type of wireless service that
materially and adversely impacts our ability to conduct our business in an
agent's service territory. We may also terminate with respect to a specific
wireless service if we do not get regulatory approval to sell that service in an
agent's service territory. Each wireless agency agreement also terminates upon
breach, mutual agreement of the parties or on December 31, 2050. Once the
agreement terminates, a former agent still has the rights under the resale
agreement described below and may sell within its service territory wireless
services that are not part of a package. In addition, in the event an agent
terminates the agreement because we are in breach, the former agent would have
the right to offer competing service purchased from third parties as an agent or
reseller for those third parties. Upon termination, we may offer any
communications services of the types that were previously exclusively offered
through our parents, network services or other services bought from one of the
agents or from third parties.
The wireless agency agreements provide that the agents receive a commission
from us for each new subscriber enrolled by the agent its service territory,
which varies depending on the average three-month churn rate. Where we, instead
of the agents, provide handsets and other equipment, we only pay a partial
commission. In addition, the fees may be different were we participate in the
sales process. Furthermore, we pay residual compensation supplementing the
commissions equal to a percentage rate multiplied by monthly charges to the
customer from accessing and using our network, but only where a customer has
completed a minimum of 180 days of service. Pursuant to the agency agreements,
we paid $9 million for the year ended December 31, 2000 and $33 million for the
year ended December 31, 2001.
RESALE AGREEMENTS
We agreed to sell to SBC and BellSouth and their affiliates, as resellers,
both existing and future wireless services and features providing access to our
wireless systems or any wireless services to which we have access under roaming
agreements. The resellers will resell those services to their customers, both
separately and packaged with other communications services. The reseller may
sell any new service offerings that we develop both in its own service
territories and outside of that service territory. We are not required to
provide any customer service or billing services to the resellers' users.
Generally, the resellers may only sell our wireless services outside their
own service territory. However, if the reseller terminates its wireless agency
agreement on or after October 2, 2003, as described above under "-- Wireless
Agency Agreements", it may resell our wireless services in its respective
service territories. Each agreement terminates on October 2, 2050 or upon mutual
agreement of the parties.
Under the resale agreements, we charge the resellers a fixed monthly charge
per wireless customer. In addition, the resellers also pay charges based on
usage of our network and separate charges for roaming and a number of other
services. We had no revenues from these agreements in 2000 and 2001.
CONTRIBUTION AND FORMATION AGREEMENT
We have entered into an amended and restated contribution and formation
agreement with SBC and BellSouth dated as of April 4, 2000, governing the
contributions that were made to us on October 2, 2000 and some other
contributions that were scheduled to be made later.
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We, our subsidiaries and other affiliates and our and their directors,
officers, employees, shareholders and agents may seek indemnification for
breaches of representations and warranties made by SBC or BellSouth in the
contribution agreement, subject to certain thresholds and deductibles. The
indemnification is subject to the following limitations:
- any indemnifiable losses are subject to a minimum threshold of $2 million
for individual losses, and only the amount in excess of that amount will
be deemed a loss;
- any breaches that relate to matters set forth on the respective party's
disclosure schedule shall not be deemed a loss until the amount of loss
exceeds $4 million;
- a party will not be liable for an indemnifiable loss until the total
amount of the losses exceeds $250 million. For the purpose of calculating
this deductible, our losses and those of SBC and BellSouth may not be
counted twice for the same breach. A party is only liable for the amount
of an indemnifiable loss in excess of the $250 million deductible; and
- the maximum that SBC or BellSouth must pay for indemnifiable losses is $3
billion. Breaches of the representations on capitalization, subsidiaries,
financial statements, taxes, brokers and finders and after-acquired
properties are not subject to this limitation.
Each party's representations generally expired on April 2, 2002, except those
representations relating to:
- tax matters, which survive until the expiration of the applicable statute
of limitations;
- environmental matters, which survive until October 2, 2003; and
- organization, good standing and qualification; capitalization;
subsidiaries; corporate authority and approval; brokers and finders;
after acquired properties; and BellSouth's representations relating to
the value of certain credits granted to BellSouth by Ericsson, which have
no expiration date.
REGISTRATION RIGHTS AGREEMENT
Our manager has granted registration rights to SBC and BellSouth through
which they may require our manager to register under the Securities Act shares
of its Class A common stock issued or issuable to them. These registration
rights expire one year after a holder ceases to hold at least 10% of the total
outstanding shares.
Under the registration rights agreement, our manager is required to use its
best reasonable efforts to register any of the shares of its common stock for
sale in accordance with the intended method of disposition, subject to customary
deferral rights. Each of SBC and BellSouth will have the right to demand two
registrations in any calendar year, but no demand may be made unless the shares
to be registered (1) constitute at least 1% of our manager's Class A common
stock outstanding, or (2) have a market value on the demand date of at least
$250 million. In addition, SBC and BellSouth have the right to include their
shares in other registrations of our manager's equity securities other than an
initial public offering and offerings on Form S-4 or S-8 and other than in
connection with rights offerings or dividend reinvestment plans, subject to
customary cutback provisions. However, SBC and BellSouth are cut back only after
all other holders, including holders exercising their own demand rights, are cut
back. SBC and BellSouth may also piggyback on the demand registration of another
holder, but will be subject to the cutback provisions applicable to demand
registrations, pursuant to which the securities to be registered by the demand
holders will be considered first, then the securities to be registered by our
manager and last, the securities of the holder piggybacking on the demand
registration.
Once our manager is eligible to file a shelf registration statement on Form
S-3, it is required to file a shelf registration statement if so requested by
SBC or BellSouth and to use its reasonable best efforts to have it declared
effective and to keep it effective until the earlier of the date on which the
registering holder no longer holds any of our common stock or the date on which
its common stock may be sold under Rule 144(k). As long as our manager has a
shelf registration statement outstanding, it is not required to file
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additional demand registration statements, provided that the number of
securities to be registered can be sold under the shelf.
In addition, the agreement provides that our manager is required to pay all
registration expenses, including all filing fees and our fees and expenses,
other than underwriting discounts and commissions and any transfer taxes
incurred by the holders. Customary indemnification and contribution provisions
would be applicable to any registered sale.
INFORMATION SYSTEMS DEVELOPMENT AND SUPPORT
We receive ongoing information systems development and support services
pursuant to a contract between a subsidiary of SBC and AMDOCS, a software
company the outstanding share capital of which SBC owned 13.3% at February 28,
2002. See "Management -- Summary Compensation Table" for interests in AMDOCS
granted to Messrs. Carter and Lindner. AMDOCS' development and support services
for the year ended December 31, 2001 resulted in charges of $63 million.
INTERCONNECTION AND LONG DISTANCE AGREEMENTS
We are also a party to local interconnect and long distance agreements with
subsidiaries of SBC and BellSouth. Pursuant to these agreements, we incurred
expenses of $103 million for the year ended December 31, 2000 and $385 million
for the year ended December 31, 2001.
SNET DIVERSIFIED GROUP NAME DELIVERY SERVICE AGREEMENT
We and SNET Diversified Group (SNET DG), an affiliate of SBC, entered into
an agreement in October 2001 to provide Calling Name Delivery (CNAM) service and
to receive a share of the fees generated by the provision of this service. CNAM
service allows Local Exchange Carrier (LEC) subscribers with caller ID to view
the name of a Cingular subscriber calling an LEC subscriber. LECs pay a fee to
SNET DG each time a subscriber uses this service, which SNET DG will share with
us on a percentage basis, beginning at 50% of revenues, and increasing to a
maximum of 65%, with the addition of subscribers and/or additional markets
adding CNAM service. For the year ended December 31, 2001, we recorded
approximately $192,000 in revenue from SNET DG under this agreement. We estimate
this agreement will generate over $28 million in revenues in 2002 and increase
thereafter with commensurate growth in subscribers and/or additional markets
adding CNAM service.
SERVICE LEVEL AGREEMENT
We entered into a service level agreement with BellSouth Affiliate Services
Corporation (BASC), an affiliate of BellSouth, pursuant to which BASC provides
us with various lockbox services including processing and depositing customer
payments, payment inquiry services, processing and distributing customer
correspondence and monthly performance monitoring reports. The service level
agreement provides for fixed fees based on the type of payment processed.
Pursuant to this agreement, we paid BASC $646,000 for the year ended December
31, 2000 and $2,825,000 for the year ended December 31, 2001.
---------------------
Although we believe that the operating agreements described above are as
advantageous to us as agreements that could otherwise be obtained from unrelated
third parties, we have no independent verification that they are as advantageous
as similar agreements negotiated with unaffiliated third parties.
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DESCRIPTION OF FINANCING ARRANGEMENTS
BANK CREDIT FACILITY
We have a $3 billion 364-day revolving bank credit facility with a
syndicate of lenders. This facility is intended primarily to supplement our
commercial paper program and serve as a source of funds to pay our maturing
commercial paper when it becomes due, if we are unable to access the commercial
paper market because of market conditions or other factors. At the date of this
prospectus, there are no borrowings outstanding or contemplated under this
facility.
Each borrowing would bear interest, at our option, at one of the following
rates:
- a rate equal to the London InterBank Offered Rate (LIBOR) plus a margin
of between 0.15% and 0.375%;
- the base rate, which is the higher of JPMorgan Chase Bank's prime rate or
the federal funds rate plus 0.50%; or
- a rate determined by competitive bidding either on the basis of a fixed
rate or at a margin over LIBOR.
We would be required to repay the loans under the revolving bank credit
facility as they mature, subject to the right, upon satisfaction of customary
conditions, to refinance outstanding loans with new loans under the facility
until the expiration of the facility on November 18, 2002. The facility also
gives us the option to convert revolving loans outstanding on the maturity date
to one-year term loans, in which case 0.375% will be added to the LIBOR rate.
The facility contains customary events of default and customary covenants,
including:
- limits on mergers and sales of all or substantially all of our assets;
- a negative pledge;
- a leverage ratio requiring that at the end of each fiscal quarter our
consolidated debt, which excludes all unsecured, subordinated member
loans we owe to SBC, BellSouth and certain of their subsidiaries, be no
greater than 400% of our consolidated EBITDA for the most recent four
fiscal quarters; and
- limits on transactions with affiliates that are not approved by our
manager's strategic review committee or otherwise contemplated by the
limited liability company agreement, the contribution agreement and our
manager's restated certificate of incorporation.
The revolving bank credit facility also provides that each lender will have
the option to terminate its commitment to make additional loans and declare all
outstanding amounts to be due and payable upon a change of control of Cingular
Wireless Corporation.
FINANCING ARRANGEMENTS WITH MEMBERS
MEMBER LOANS. SBC and BellSouth primarily financed the operations of our
subsidiaries prior to our formation by making loans to them. At March 31, 2002,
the aggregate principal amount of these loans was $9.7 billion and interest
accrues and is payable on those loans at an annual rate of 7.5%. Although the
subordinated loans mature on March 31, 2004, we may prepay them at any time,
subject to the provisions described below and we are required by our limited
liability company agreement to use commercially reasonable best efforts to repay
these subordinated loans as soon as reasonably possible. See "Management's
Discussion and Analysis of Financial Condition and Operating
Results -- Liquidity and Capital Resources -- Capital Expenditures, other
investments and debt service -- Debt Service".
SBC and BellSouth have agreed, to the extent described below, to
subordinate their repayment rights applicable to the member loans to the
repayment rights of senior debt. Senior debt includes our commercial paper
notes, any debt outstanding under our bank credit facility, the old notes until
they are exchanged for new notes, the new notes exchanged for old notes
hereunder, and any additional debt we may designate as
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senior in the future, subject to the approval of SBC and BellSouth. The payment
of principal and interest on the subordinated loans by us is prohibited during a
bankruptcy or senior debt payment default, or in the event of an acceleration of
the subordinated debt upon its default, until the senior debt has been repaid in
full. Our payment of principal and interest on the subordinated loans is also
prohibited during a covenant or other non-payment default under the credit
facility (unless waived by the banks) but may continue during a non-payment
default on the old and new notes or other senior debt.
The subordination arrangements in favor of our senior debt do not restrict
the ability of SBC, BellSouth or their subsidiaries to extend to us, our
manager, or our subsidiaries new loans on an unsubordinated basis, whether or
not we have repaid the existing subordinated loans. They also do not restrict
our ability to repay or prepay these subordinated loans at any time if we are
not in default on our senior debt, but we may not refinance these subordinated
loans with proceeds from our bank credit facility or senior loans from SBC or
BellSouth.
These subordination arrangements have been implemented through one
agreement for the benefit of the credit facility banks and a separate agreement
for the benefit of our commercial paper notes and other capital markets debt
that may be designated as senior debt from time to time. Both the old notes and
the new notes exchanged for old notes hereunder have been designated as senior
capital markets debt. However, the subordinated parent loans are scheduled to
mature before the old notes and the new notes exchanged for old notes hereunder.
The capital markets debt subordination agreement may not be terminated or
modified in a manner materially adverse to the holder of senior debt without
that holder's consent, except to make a modification parallel to one made in the
credit facility subordination agreement. If the subordinated lenders furnish
more favorable subordination benefits to the credit facility banks or other
creditors of us, our manager or its subsidiaries, the subordinated lenders must
make those same terms available to the senior debt. However, the senior debt is
not required to have the benefit of any provision that blocks subordinated debt
payments during non-payment defaults on senior debt or of any provision that
establishes a minimum maturity for the subordinated loans. The subordination
provisions expire when either the senior debt or the subordinated debt has been
paid in full.
PAYMENT OF EXTERNAL DEBT. We are required under our limited liability
company agreement to use commercially reasonable best efforts to assist SBC and
a subsidiary of SBC in obtaining release from guaranties of leveraged lease and
related hedging obligations, which aggregated approximately $145 million as of
March 31, 2002. However, SBC has advised us that it has no immediate plans to
require us to unwind these leases because of penalties that would be payable.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We are offering to issue our 5.625% Senior Notes Due 2006, 6.50% Senior
Notes Due 2011 and 7.125% Senior Notes Due 2031, which have been registered
under the Securities Act and which we refer to as the "new notes", in exchange
for our outstanding 5.625% Senior Notes Due 2006, 6.50% Senior Notes Due 2011
and 7.125% Senior Notes Due 2031, which have not been so registered and which we
refer to as the "old notes", as described herein. We are referring to this
exchange offer as the "exchange offer".
The old notes were purchased by Lehman Brothers Inc., Goldman, Sachs & Co.,
J.P. Morgan Securities Inc., Banc of America Securities LLC, Credit Suisse First
Boston Corporation, Salomon Smith Barney Inc., UBS Warburg LLC, ABN AMRO
Incorporated, Banc One Capital Markets, Inc., Barclays Capital Inc., Commerzbank
Capital Markets Corp., Credit Lyonnais Securities (USA) Inc., Deutsche Banc
Alex. Brown Inc., Dresdner Kleinwort Wasserstein Securities LLC, Fleet
Securities, Inc., HSBC Securities (USA) Inc., First Union Securities, Inc., The
Williams Capital Group, L.P., Banca d'Intermediazione Mobiliare IMI S.p.A.,
Blaylock & Partners, L.P., Mellon Financial Markets, LLC, Mizuho International
plc, SunTrust Capital Markets, Inc. and Tokyo-Mitsubishi International plc, whom
we refer to as the initial purchasers, on December 12, 2001 for resale to
qualified institutional buyers in compliance with Rule 144A under the Securities
Act and outside of the United States in compliance with Rule 904 under the
Securities Act. In connection with the sale of the old notes, we and the initial
purchasers entered into a registration rights agreement, dated December 12,
2001, which requires us, among other things,
(a) to file with the SEC an exchange offer registration statement
under the Securities Act with respect to new notes identical in all
material respects to the old notes, to use reasonable best efforts to cause
this registration statement to be declared effective under the Securities
Act and to make an exchange offer for the old notes as discussed below, or
(b) in very limited circumstances to register the old notes on a shelf
registration statement under the Securities Act.
We are obligated, upon the effectiveness of the exchange offer registration
statement referred to in (a) above, to offer the holders of the old notes the
opportunity to exchange their old notes for a like principal amount of new notes
which will be issued without a restrictive legend and may be reoffered and
resold by the holder generally without restrictions or limitations under the
Securities Act. A copy of the registration rights agreement has been filed as an
exhibit to the registration statement of which this prospectus is a part. The
exchange offer is being made pursuant to the registration rights agreement to
satisfy our obligations under that agreement.
The old notes and registration rights agreement provide, among other
things, that if we default in our obligations to take certain steps to make the
exchange offer within the required time period, the interest rate on the old
notes will be increased by up to a maximum additional annual interest rate of
0.25% until the default is remedied.
The term "holder" with respect to the exchange offer means any person in
whose name old notes are registered on our books, or any other person who has
obtained a properly completed assignment from the registered holder. At the date
of this prospectus, the sole holder of old notes is DTC.
In participating in the exchange offer, a holder is deemed to represent to
us, among other things, that
- it is not an "affiliate" of ours, as defined in Rule 405 under the
Securities Act, or a broker-dealer tendering the old notes acquired
directly from us for its own account,
- it has no arrangement or understanding with any person to participate in
the distribution of the old notes or the new notes within the meaning of
the Securities Act,
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- if such holder is not a broker-dealer, or is a broker-dealer but will not
receive new notes for its own account in exchange for the old notes, that
it is not engaged in, and does not intend to participate in, a
distribution of the old notes or the new notes, and
- any new notes to be received by it will be acquired in the ordinary
course of its business.
Based on an interpretation by the staff of the SEC set forth in no-action
letters issued to third parties, we believe that the new notes issued pursuant
to the exchange offer may be offered for resale and resold or otherwise
transferred by any holder of the new notes (other than any holder which is an
"affiliate" of ours within the meaning of Rule 405 under the Securities Act and
except as otherwise discussed below with respect to holders which are
broker-dealers) without compliance with the registration and prospectus delivery
requirements of the Securities Act, so long as these new notes are acquired in
the ordinary course of such holder's business and such holder has no arrangement
or understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of these new notes. Any holder who tenders in the
exchange offer for the purpose of participating in a distribution of the new
notes cannot rely on this interpretation by the staff of the SEC and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction. Under no circumstances may
this prospectus be used for any offer to resell or any resale or other transfer
in connection with a distribution of the new notes. In the event that our belief
is not correct, holders of the new notes who transfer new notes in violation of
the prospectus delivery provisions of the Securities Act and without an
exemption from registration thereunder may incur liability thereunder. We do not
assume or indemnify holders against such liability.
Each broker-dealer that receives new notes for its own account in exchange
for old notes, where the old notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will, and must, deliver a prospectus in connection with any resale of
the new notes. This prospectus may be used for this purpose. It is understood
that, by acknowledging that it will deliver a prospectus meeting the
requirements of the Securities Act, the holder is not admitting to be an
"underwriter" within the meaning of the Securities Act. The foregoing
interpretation of the staff of the SEC does not apply to, and this prospectus
may not be used in connection with, the resale by any broker-dealer of any new
notes received in exchange for an unsold allotment of old notes purchased
directly from us. See "Plan of Distribution".
We have not entered into any arrangement or understanding with any person
to distribute the new notes to be received in the exchange offer.
The exchange offer is not being made to, nor will we knowingly accept
tenders for exchange from, holders of old notes in any jurisdiction in which the
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes properly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date. Holders may tender their old notes in whole or in part in
minimum denominations of $1,000 and integral multiples thereof, although any
holders of old notes in certificated form may tender their old notes only in
minimum denominations of $250,000 and integral multiples of $1,000. For each old
note accepted for exchange, the holder of the old note will receive a new note
having a principal amount equal to that of the surrendered old note.
The form and terms of the new notes will be the same as the form and terms
of the old notes, except that the registration rights and related additional
interest provisions and the transfer restrictions applicable to the old notes
are not applicable to the new notes. The new notes will evidence the same debt
as the old notes. The new notes will be issued under and entitled to the
benefits of the indenture pursuant to which the old notes were issued. The new
notes will be registered under the Securities Act while the old notes were not.
104
No interest will be paid in connection with the exchange. The new notes
will bear interest from and including the last interest payment date on the old
notes, which is the June 15 or December 15 next preceding the date of the
exchange, or if one has not yet occurred, the issuance date of the old notes.
Accordingly, the holders of old notes that are accepted for exchange will not
receive accrued but unpaid interest on old notes at the time of tender. Rather,
that interest will be payable on the new notes delivered in exchange for the old
notes on the first interest payment date after the expiration date.
As of the date of this prospectus, $2,000,000,000 in aggregate principal
amount of the old notes is outstanding. This prospectus, together with the
letter of transmittal, is being sent to all registered holders of the old notes.
We will be deemed to have accepted validly tendered old notes when, as and
if we shall have given oral (promptly confirmed in writing) or written notice
thereof to the exchange agent. The exchange agent will act as agent for the
tendering holders for the purpose of receiving the new notes from us.
Old notes that are not tendered for exchange in the exchange offer will
remain outstanding and will be entitled to the rights and benefits holders of
these old notes have under the indenture. If any tendered old notes are not
accepted for exchange because of an invalid tender, the occurrence of certain
other events set forth herein or otherwise, certificates for any such unaccepted
old notes will be returned, without expense, to the tendering holder thereof as
promptly as practicable after the expiration date.
We reserve the right in our sole discretion:
- to purchase or make offers for any restricted notes that remain
outstanding subsequent to the expiration of the exchange offer;
- to terminate the exchange offer, as set forth in "-- Conditions to the
Exchange Offer" below; and
- to the extent permitted by applicable law, to purchase restricted notes
in the open market while the exchange offer is pending, in privately
negotiated transactions or otherwise.
The terms of any of these purchases or offers may differ from the terms of
the exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS TO THE EXCHANGE OFFER
The term "expiration date" means 5:00 p.m., New York City time, on August
28, 2002, unless we, in our sole discretion, extend the exchange offer for up to
15 days, in which case the term "expiration date" means the latest date and time
to which the exchange offer is extended.
In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral (promptly confirmed in writing) or written notice and will
mail to the registered holders an announcement thereof, prior to 9:00 a.m., New
York City time, on the next business day after the expiration date.
We reserve the right, in our sole discretion,
- to delay accepting any old notes, to extend the exchange offer or to
terminate the exchange offer if any of the conditions set forth below
under "-- Conditions to the Exchange Offer" shall not have been satisfied
by giving oral (promptly confirmed in writing) or written notice of such
delay, extension or termination to the exchange agent, or
- to amend the terms of the exchange offer in any manner.
Any such delay in acceptances, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders. If the exchange offer is amended in a manner that we
determine constitutes a material change, we will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders of the old notes, and we will extend the exchange offer to
the extent required by law.
Without limiting the manner in which we may choose to make a public
announcement of any delay, extension, amendment or termination of the exchange
offer, we will have no obligation to publish, advertise,
105
or otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
Upon satisfaction or waiver of all the conditions to the exchange offer, we
will accept, promptly after the expiration date, all old notes properly tendered
and will issue the new notes promptly after acceptance of the old notes. See
"-- Conditions to the Exchange Offer".
In all cases, issuance of the new notes for old notes that are accepted for
exchange pursuant to the exchange offer will be made only after timely receipt
by the exchange agent of a properly completed and duly executed letter of
transmittal (or an agent's message (as hereinafter defined) in lieu thereof) and
all other required documents; provided, however, that we reserve the absolute
right to waive any defects or irregularities in the tender or conditions of the
exchange offer. If any tendered old notes are not accepted for any reason set
forth in the terms and conditions of the exchange offer or if old notes are
submitted for a greater principal amount than the holder desires to exchange,
then such unaccepted or non-exchanged old notes evidencing the unaccepted or
non-exchanged portion, as appropriate, will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the exchange offer.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other terms of the exchange offer, we will not be
required to exchange any new notes for any old notes and may terminate the
exchange offer before the acceptance of any old notes for exchange, if:
- any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our reasonable judgment, might materially impair our ability to
proceed with the exchange offer; or
- any law, statute, rule or regulation is proposed, adopted or enacted, or
any existing law, statute, rule or regulation is interpreted by the staff
of the SEC, which, in our reasonable judgment, might materially impair
our ability to proceed with the exchange offer.
If we determine in our sole discretion that any of these conditions are not
satisfied, we may
- refuse to accept any old notes and return all tendered old notes to the
tendering holders,
- extend the exchange offer and retain all old notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders who tendered the old notes to withdraw their tendered old notes,
or
- waive such unsatisfied conditions with respect to the exchange offer and
accept all properly tendered old notes which have not been withdrawn. If
such waiver constitutes a material change to the exchange offer, we will
promptly disclose the waiver by means of a prospectus supplement that
will be distributed to the registered holders, and we will extend the
exchange offer to the extent required by law.
PROCEDURES FOR TENDERING -- REGISTERED HOLDERS AND DTC PARTICIPANTS
Registered holders of old notes, as well as beneficial owners who are
direct participants in DTC, who desire to participate in the exchange offer
should follow the directions set forth below and in the letter of transmittal.
All other beneficial owners should follow the instructions received from
their broker or nominee and should contact their broker or nominee directly. The
instructions set forth below and in the letter of transmittal DO NOT APPLY to
these beneficial owners.
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REGISTERED HOLDERS
To tender in the exchange offer, a holder must complete, sign and date the
letter of transmittal, have the signatures thereon guaranteed if required by the
letter of transmittal, and mail or otherwise deliver such letter of transmittal
to the exchange agent prior to the expiration date. In addition, either
- certificates for such old notes must be received by the exchange agent
along with the letter of transmittal, or
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the letter of transmittal and other required
documents must be received by the exchange agent at the address set forth below
under "-- Exchange Agent" prior to the expiration date.
The tender by a holder which is not withdrawn prior to the expiration date
will constitute an agreement between such holder and us in accordance with the
terms and subject to the conditions set forth herein and in the letter of
transmittal.
The method of delivery of old notes, the letter of transmittal and all
other required documents to the exchange agent is at the election and risk of
the holder, but the delivery will be deemed made only when actually received or
confirmed by the exchange agent. Instead of delivery by mail, it is recommended
that holders use an overnight or hand delivery service. In all cases, sufficient
time should be allowed to assure delivery to the exchange agent before the
expiration date. No letter of transmittal or old notes should be sent to us.
Holders may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the above transactions for such holders.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an "eligible institution", which is any of
the following:
- a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.,
- a commercial bank or trust company having an office or correspondent in
the United States, or
- an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act,
unless the old notes tendered pursuant thereto are tendered:
- by a registered holder who has not completed the box entitled "Special
Payment Instructions" or "Special Delivery Instructions" on the letter of
transmittal, or
- for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the
registered holder of any old notes listed therein, these old notes must be
endorsed or accompanied by a properly completed bond power signed by the
registered holder exactly as the registered holder's name appears on these old
notes.
If the letter of transmittal or any old notes or bond or stock powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, these persons should so indicate when signing, and unless waived by
us, evidence satisfactory to us of their authority to so act must be submitted
with the letter of transmittal.
DTC PARTICIPANTS
Any financial institution that is a participant in DTC's system may make
book-entry delivery of old notes by causing DTC to transfer the old notes into
the exchange agent's account at DTC in accordance with DTC's procedures for
transfer. The delivery must be accompanied by either
- the letter of transmittal, with any required signature guarantees, or
- an agent's message (as hereinafter defined),
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and any other required documents, and must, in any case, be transmitted to and
received by the exchange agent at the address set forth below under "-- Exchange
Agent" prior to the expiration date or the guaranteed delivery procedures
described above must be complied with. The exchange agent will make a request to
establish an account with respect to the old notes at DTC for purposes of the
exchange offer within two business days after the date of this prospectus.
The term "agent's message" means a message, electronically transmitted by
DTC to and received by the exchange agent, and forming a part of the book-entry
confirmation, which states that DTC has received an express acknowledgment from
a holder of old notes stating that the holder has received and agrees to be
bound by, and makes each of the representations and warranties contained in, the
letter of transmittal and, further, that the holder agrees that we may enforce
the letter of transmittal against the holder.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their old notes and
- whose old notes are not immediately available,
- who cannot deliver their old notes, the letter of transmittal or any
other required documents to the exchange agent prior to the expiration
date, or
- who cannot complete the procedures for book-entry tender on a timely
basis
may effect a tender if:
(1) the tender is made through an eligible institution;
(2) prior to the expiration date, the exchange agent receives from
that eligible institution a properly completed and duly executed notice of
guaranteed delivery (by mail or hand delivery), setting forth the name and
address of the holder, the certificate number(s) of the old notes (unless
tender is to be made by book-entry transfer) and the principal amount of
old notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after
the date of delivery of the notice of guaranteed delivery, the certificates
for all physically tendered old notes, in proper form for transfer, or
book-entry confirmation (as defined in the letter of transmittal), as the
case may be, together with a properly completed and duly executed letter of
transmittal (or agent's message in lieu thereof), with any required
signature guarantees and all other documents required by the letter of
transmittal, will be deposited by the eligible institution with the
exchange agent; and
(3) the certificates and/or other documents referred to in clause (2)
above must be received by the exchange agent within the time specified
above.
Upon request to the exchange agent a notice of guaranteed delivery will be
sent to holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
MISCELLANEOUS
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered old notes and withdrawal of tendered old notes
will be determined by us in our sole discretion, which determination will be
final and binding. We reserve the absolute right to reject any and all old notes
not properly tendered or any old notes our acceptance of which would, in the
opinion of our counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer (including the
instructions in the letter of transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes must be cured within the time we shall determine. Although we
intend to notify holders of defects or irregularities with respect to tenders of
old notes, none of us, the exchange agent, nor any other person shall incur any
liability for failure to give this notification. Tenders of old notes will not
be deemed to have been made until these defects or irregularities have been
cured or waived. Any old notes received by the exchange agent that are not
properly tendered and as to which the defects or
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irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration date.
We may accept tender of old notes upon expiration of the exchange offer by
delivering written notice of acceptance to the exchange agent, at which time the
holder's right to withdraw such tender will terminate.
In all cases, issuance of new notes pursuant to the exchange offer will be
made only after timely receipt by the exchange agent of certificates for the old
notes tendered for exchange or a timely book-entry confirmation of these old
notes into the exchange agent's account at DTC, a properly completed and duly
executed letter of transmittal (or agent's message in lieu thereof) and all
other required documents. If any tendered old notes are not accepted for any
reason set forth in the terms and conditions of the exchange offer or if old
notes are submitted for a greater principal amount than the holder desires to
exchange, these unaccepted or non-exchanged old notes will be returned via first
class U.S. mail without expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the exchange offer. In the
case of old notes tendered by book-entry transfer into the exchange agent's
account at DTC pursuant to the book-entry transfer procedures described below,
these unaccepted or non-exchanged old notes will be credited to an account
maintained with DTC.
WITHDRAWAL OF TENDERS OF OLD NOTES
Except as otherwise provided herein, tenders of old notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the expiration date.
To withdraw a tender of old notes in the exchange offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
exchange agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the expiration date. Any notice of withdrawal must
- specify the name of the person having deposited the old notes to be
withdrawn, which we refer to as the "depositor",
- identify the old notes to be withdrawn, including the certificate number,
unless tendered by book-entry transfer,
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which these old notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee with respect to the
old notes register the transfer of these old notes in the name of the
person withdrawing the tender, and
- specify the name in which any old notes are to be registered, if
different from that of the depositor. If old notes have been tendered
pursuant to book-entry transfer, any notice of withdrawal must specify
the name and number of the account at DTC to be credited with the
withdrawn old notes, in which case a notice of withdrawal will be
effective if delivered to the exchange agent by any method of delivery
described in this paragraph.
All questions as to the validity, form and eligibility, including time of
receipt of these notices, will be determined by us, and our determination will
be final and binding on all parties. Any old notes so withdrawn will be deemed
not to have been validly tendered for purposes of the exchange offer and will be
returned to the holder thereof via first class U.S. mail without cost to the
holder as soon as practicable after withdrawal, and no new notes will be issued
with respect thereto unless the old notes so withdrawn are validly re-tendered.
Properly withdrawn old notes may be re-tendered by following one of the
procedures described above under "-- Procedures for Tendering -- Registered
Holders and DTC Participants" at any time prior to the expiration date.
EXCHANGE AGENT
We have appointed Bank One Trust Company, N.A., which is also the trustee
under the indenture that governs the notes, as exchange agent for the exchange
offer. Requests for additional copies of this prospectus
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or of the letter of transmittal and requests for notice of guaranteed delivery
with respect to the exchange of the old notes should be directed to the exchange
agent addressed as follows:
Bank One Trust Company, N.A.
1111 Polaris Parkway
Suite 1N, OH1-0184
Columbus, OH 43240
Attention: Exchanges
Telephone: (800) 346-5153
Facsimile: (614) 248-9987
FEES AND EXPENSES
We will pay the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, additional solicitation may be made by
telecopier, telephone or in person by officers and regular employees of Cingular
Wireless and our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We, however, will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith. We will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this prospectus
and related documents to the beneficial owners of the old notes and in handling
or forwarding tenders for exchange for their customers.
We will pay all transfer taxes, if any, applicable to the exchange of the
old notes pursuant to the exchange offer. If, however, certificates representing
new notes for principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of old notes tendered, or if tendered old notes are registered
in the name of any person other than the person signing the letter of
transmittal, or if a transfer tax is imposed for any reason other than the
exchange of the old notes pursuant to the exchange offer, then the amount of any
such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of these taxes or exemption therefrom is not submitted with the letter
of transmittal, the amount of these transfer taxes will be billed directly to
the tendering holder.
ACCOUNTING TREATMENT
We will record the new notes at the same carrying value as the old notes
for which they are exchanged, which is the aggregate principal amount of the old
notes, as reflected in our accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized in
connection with the exchange offer. The cost of the exchange offer will be
amortized over the terms of the new notes.
APPRAISAL OR DISSENTERS' RIGHTS
Holders of the old notes will not have appraisal or dissenters' rights in
connection with the exchange offer.
REGULATORY REQUIREMENTS
Following the effectiveness of the registration statement covering the
exchange offer, no material federal or state regulatory requirement must be
complied with in connection with this exchange offer.
CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
Following consummation of the exchange offer, assuming we have accepted for
exchange all validly tendered old notes, we will have fulfilled our exchange and
registration obligations under the registration rights agreement.
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All untendered old notes outstanding after consummation of the exchange
offer will continue to be valid and enforceable debt obligations of ours, but
will continue to be subject to the restrictions on transfer set forth in the
indenture governing the notes.
Holders of old notes will only be able to offer for sale, sell or otherwise
transfer untendered old notes as follows:
- to us, although we have no obligation to purchase untendered old notes
except if they are called for redemption by us in accordance with the
provisions of the indenture governing the notes;
- pursuant to a shelf registration statement that has been declared
effective under the Securities Act, although we will have no obligation,
and do not intend, to file any such registration statement;
- for so long as the old notes are eligible for resale pursuant to Rule
144A under the Securities Act, to a person reasonably believed to be a
qualified institutional buyer, or "QIB", within the meaning of Rule 144A,
that purchases for its own account or for the account of a QIB to whom
notice is given that the transfer is being made in reliance of the
exemption from the registration requirements of the Securities Act
provided by Rule 144A;
- pursuant to offers and sales that occur outside the United States to
non-U.S. persons in transactions complying with the provisions of
Regulation S under the Securities Act; or
- pursuant to any other available exemption from the registration
requirements of the Securities Act.
To the extent that old notes are tendered and accepted in the exchange
offer, the liquidity of the trading market for untendered old notes could be
adversely affected.
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DESCRIPTION OF THE NEW NOTES
GENERAL
In this description of the new notes, "Cingular Wireless" refers only to
Cingular Wireless LLC and any successor obligor on the new notes, and not to any
of its subsidiaries.
The old notes were and the new notes are governed by a document called the
"indenture". The indenture is a contract between Cingular Wireless and Bank One
Trust Company, N.A., which acts as trustee. The trustee has two main roles.
First, the trustee can enforce your rights against us if we default. There are
some limitations on the extent to which the trustee acts on your behalf in the
case of an event of default, as more fully described under "-- Events of
Default -- Remedies If an Event of Default Occurs". Second, unless other
agencies have been appointed for these duties, the trustee performs
administrative duties for us, such as sending you interest payments,
transferring your new notes to a new buyer if you sell and sending you notices.
The indenture and its associated documents contain the full legal text of the
matters described in this section. New York law governs the indenture and the
new notes. See "Where You Can Find More Information" for information on how to
obtain a copy of the indenture.
The indenture does not limit the aggregate principal amount of debt
securities that we may issue and we may issue as many distinct series of debt
securities under the indenture as we wish.
The following description of the provisions of the indenture is a summary
only. The more specific terms, as well as the definitions of relevant terms, can
be found in the indenture and the Trust Indenture Act of 1939, which is
applicable to the indenture. Parenthetical references to sections are to
sections of the indenture that are summarized below. Because this section is a
summary, it does not describe every aspect of the new notes. The provisions of
the indenture, including definitions of terms used in the indenture, govern your
rights as holders of the new notes, and not this summary. The old notes and new
notes are sometimes collectively called the "notes".
The new notes will be identical in all material respects to the old notes,
except that the registration rights and the related additional interest
provisions and transfer restrictions applicable to the old notes do not apply to
the new notes. The new notes will be of the same series as the old notes, and
both the old notes and the new notes will be considered as a single class for
purposes of any acts of holders, such as voting and consents, under the
indenture. To the extent any old notes are not exchanged for new notes, those
old notes will remain outstanding under the indenture and will rank pari passu
with the new notes.
SPECIFIC TERMS OF THE NEW NOTES
The old notes were and the new notes will be issued in three separate
series. The old notes were and the new notes will be general senior unsecured
obligations that will rank equally with all of our other existing and future
senior unsecured indebtedness. We may call some or all of the new notes of each
series at any time at the prices specified below under "-- Redemption Price".
The specific terms of the new notes are set forth below:
- TITLE:
5.625% Senior Notes Due 2006
6.50% Senior Notes Due 2011
7.125% Senior Notes Due 2031
- TOTAL PRINCIPAL AMOUNT BEING OFFERED FOR EXCHANGE:
$500,000,000 for the 5.625% Notes Due 2006
$750,000,000 for the 6.50% Notes Due 2011
$750,000,000 for the 7.125% Notes Due 2031
- INTEREST RATE:
5.625% per annum for the Notes Due 2006
6.50% per annum for the Notes Due 2011
7.125% per annum for the Notes Due 2031
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- DATE INTEREST STARTS ACCRUING: From the last interest due date of the old
notes on which interest was paid, or if no interest due date has
occurred, December 12, 2001
- INTEREST DUE DATES: Every June 15 and December 15
- FIRST INTEREST DUE DATE OF THE NEW NOTES: December 15, 2002
- REGULAR RECORD DATES FOR INTEREST: June 1 for interest due June 15;
December 1 for interest due December 15.
- FURTHER ISSUE: We may from time to time, without notice to or the consent
of the registered holders of the new notes, create and issue further 2006
notes, 2011 notes and 2031 notes ranking equally and ratably with the
notes of that series in all respects, or in all respects except for the
payment of interest accruing prior to the issue date of such further
notes or except for the first payment of interest following the issue
date of such further notes, so that such further notes shall be
consolidated and form a single series with the notes of that series and
shall have the same terms as to status, redemption or otherwise as the
notes of that series.
- FORM OF NOTES: The new notes will be issued as one or more global notes
that we will deposit with or on behalf of the depositary.
- NAME OF DEPOSITARY: The Depository Trust Company ("DTC").
- TRADING IN DTC: Indirect holders trading their beneficial interests in
the global notes through DTC must trade in DTC's same-day funds
settlement system and pay in immediately available funds.
- OPTIONAL REDEMPTION: We may call some or all of the new notes of each
series for redemption at any time -- that is, we may repay them early at
the prices specified below under "-- Redemption Price".
- REDEMPTION PRICE: The new notes are redeemable at our option at any time
upon the giving of notice as described below. The price at which the new
notes may be redeemed is:
- 100% of the principal amount thereof, plus accrued and unpaid interest
thereon to the redemption date, plus
- the Make-Whole Amount, if any.
The term "Make-Whole Amount" shall mean, in connection with any optional
redemption of any new note, the excess, if any, of:
- the aggregate present value as of the date of such redemption of each
dollar of principal being redeemed and the amount of interest (exclusive
of interest accrued to the redemption date) that would have been payable
in respect of such dollar if such prepayment had not been made,
determined by discounting, on a semiannual basis, such principal and
interest at the Treasury Rate; plus 0.20% for the 5.625% notes due 2006,
plus 0.25% for the 6.50% notes due 2011, or plus 0.30% for the 7.125%
notes due 2031, from the respective dates on which such principal and
interest would have been payable if the new note had not been redeemed,
over
- the principal amount of the new note being redeemed.
In connection with the calculation of any Make-Whole Amount with respect
to any new note, the "Treasury Rate" will be determined as:
- the yield to maturity at the time of computation of U.S. Treasury
securities with a constant maturity, as compiled by and published in the
most recent Statistical Release that has become publicly available at
least two business days prior to the redemption date, equal to the then
remaining maturity of the new note being prepaid; if no maturity exactly
corresponds to such maturity, yields for the two published maturities
most closely corresponding to such maturity shall be calculated pursuant
to the immediately preceding clause and the Treasury Rate shall be
interpolated or extrapolated from such yields on a straight-line basis,
rounding in each of such relevant periods to the nearest month; or
- if the Statistical Release is not published during the week preceding
the calculation date or does not contain such yields, the rate per annum
equal to the semi-annual equivalent yield to maturity of the Comparable
Treasury Issue, calculated using a price for the Comparable Treasury
Issue (expressed
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as a percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date.
The Treasury Rate shall be calculated on the third Business Day
preceding the redemption date.
"Comparable Treasury Issue" means the U.S. Treasury security selected by
an Independent Investment Banker as having a maturity comparable to the
remaining term ("Remaining Life") of the new notes to be redeemed that
would be utilized, at the time of selection and in accordance with
customary financial practice, in pricing new issues of corporate debt
securities of comparable maturity to the remaining term of such new
notes.
"Comparable Treasury Price" means (1) the average of three out of five
Reference Treasury Dealer Quotations for such redemption date, after
excluding the highest and lowest Reference Treasury Dealer Quotations,
or (2) if the Independent Investment Banker obtains fewer than five such
Reference Treasury Dealer Quotations, the average of all such
quotations.
"Independent Investment Banker" means (1) any of Lehman Brothers Inc.,
Goldman, Sachs & Co. or J.P. Morgan Securities Inc. and their respective
successors, as selected by us, or (2) if all those firms are unwilling
or unable to select the Comparable Treasury Issue, an independent
investment banking institution of national standing appointed by us.
"Reference Treasury Dealer" means (1) Lehman Brothers Inc., Goldman,
Sachs & Co. and J.P. Morgan Securities Inc. and their respective
successors, provided, that if any of the foregoing shall cease to be a
primary U.S. Government securities dealer in New York City (a "Primary
Treasury Dealer"), we will substitute another Primary Treasury Dealer
and (2) any other Primary Treasury Dealer selected by any Independent
Investment Banker after consultation with us.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as
determined by the Independent Investment Banker, of the bid and asked
prices for the Comparable Treasury Issue (expressed in each case as a
percentage of its principal amount) quoted in writing to the Independent
Investment Banker at 5:00 p.m., New York City time, on the third
Business Day preceding such redemption date.
"Statistical Release" means the statistical release designated
"H.15(519)" or any successor publication which is published weekly by
the Federal Reserve System and which establishes yields on actively
traded U.S. government securities adjusted to constant maturities.
- REDEMPTION NOTICES: We will give notice to DTC and each other record
holder of new notes of any redemption we propose to make at least 30
days, but not more than 60 days, before the redemption date. If we
redeem only some of the new notes of a series, the trustee shall select
the securities to be redeemed by such method as it shall deem fair and
appropriate and which may provide for redemption of a portion of the
principal amount of any new note so long as the unredeemed portion is an
authorized denomination. If a portion of a global note is selected,
DTC's practice is to determine by lot the amount of new notes to be
redeemed from each of its participating institutions. Notice by DTC to
these participants and by participants to "street name" holders of
indirect interests in the new notes will be made according to
arrangements among them and may be subject to statutory or regulatory
requirements.
- SINKING FUND OR MANDATORY REDEMPTION: There is no sinking fund or
mandatory redemption applicable to the new notes.
- DEFEASANCE: The new notes are subject to our ability to choose "Full
Defeasance" and "Covenant Defeasance".
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BASIC TERMS APPLICABLE TO ALL OF THE NEW NOTES
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
Neither the indenture nor the new notes contain any provisions that would
limit our ability to incur indebtedness or require the maintenance of financial
ratios or specified levels of net worth or liquidity, nor does it contain
covenants or other provisions designed to afford holders of the new notes
protection in the event of a highly leveraged transaction, change in credit
rating or other similar occurrence. However, the provisions of the indenture and
the new notes do
- provide that, subject to significant exceptions, we will not subject our
property or assets to any mortgage or other encumbrance unless the new
notes are secured equally and ratably with the other indebtedness that is
secured by that property or assets; and
- contain limitations on our ability to merge, consolidate or sell all or
substantially all of our assets.
In addition, neither the indenture nor the new notes contain any provisions
that would require us to repurchase or redeem or otherwise modify the terms of
any of the new notes upon a change in control or other events involving us that
may adversely affect the creditworthiness of the new notes. See "-- Restrictive
Covenants" and "-- Special Situations".
RANKING
The old notes were not and the new notes are not secured by any of our
property or assets. Accordingly, your ownership of new notes means you are an
unsecured creditor. The old notes were not and the new notes are not
subordinated to any of our other debt obligations and rank equally with all of
our other existing and future unsecured and unsubordinated indebtedness,
including our commercial paper notes and any outstanding debt under our bank
credit facility. Our commercial paper, any bank debt and the new notes have the
benefit of agreements by our parent companies, SBC and BellSouth, subordinating
the parents' rights to repayment of debt currently owed to them in the event of
our default on senior debt. However, those subordinated parent loans are
scheduled to mature before the new notes. Future debt may have the benefit of
those or similar agreements to the extent we and our parents agree. For more
information on the debt we owe our parent companies, you should read
"Description of Financing Arrangements -- Financing Arrangements with
Members -- Member Loans" above. For more information on our credit facility, you
should read "Description of Financing Arrangements -- Bank Credit Facility"
above. The credit facility prohibits payment on the subordinated notes during a
payment or a non-payment default under the credit facility.
LEGAL OWNERSHIP
"STREET NAME" AND OTHER INDIRECT HOLDERS. We will generally not recognize
beneficial owners who hold new notes in accounts at banks or brokers as legal
holders of new notes. Instead, we will recognize only the bank or broker or the
financial institution that the bank or broker uses to hold its new notes. This
is called holding in "street name". These intermediary banks, brokers and other
financial institutions pass along principal, interest and other payments on the
new notes either because they agree to do so in their customer agreements or
because they are legally required to. If you hold new notes in "street name",
you should check with your own institution to find out:
- how it handles securities payments and notices;
- whether it imposes fees or charges;
- how it would handle voting if ever required;
- whether and how you can instruct it to send you new notes registered in
your own name so you can be a direct holder as described below; and
- how it would pursue rights under the new notes if there were a default or
other event triggering the need for holders to act to protect their
interests.
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DIRECT HOLDERS
Our obligations, as well as the obligations of the trustee and those of any
third parties employed by us or the trustee, run only to persons who are
registered as holders of new notes. As noted above, we do not have obligations
to you if you hold in "street name" or other indirect means, either because you
choose to hold new notes in that manner or because the new notes are issued in
the form of global notes as described below. For example, once we make payment
to the registered holder, we have no further responsibility for the payment even
if that holder is legally required to pass the payment along to you as a "street
name" customer but does not do so.
GLOBAL NOTES
WHAT IS A GLOBAL NOTE? A global note is a special type of indirectly held
security, as described above under "-- Legal Ownership -- 'Street Name' and
Other Indirect Holders". Any new notes exchanged for old notes will exclusively
be issued in the form of global notes, and therefore, the ultimate beneficial
owners of these new notes can only be indirect holders. We require that the
global note be registered in the name of a financial institution we select and
that the new notes represented by the global note not be transferred to the name
of any other direct holder unless the special circumstances described below
occur. The financial institution that acts as the sole direct holder of the
global note is called the "depositary". Any person wishing to own a new note
must do so indirectly by virtue of an account with a broker, bank or other
financial institution that in turn has an account with the depositary.
SPECIAL CONSIDERATIONS FOR GLOBAL NOTES. As an indirect holder, your rights
relating to a global note will be governed by the account rules of the
investor's financial institution and of the depositary, as well as general laws
relating to securities transfers. We do not recognize this type of holder as a
record holder of new notes and instead deal only with the depositary that holds
the global note.
An indirect holder should be aware that:
- the indirect holder generally cannot get new notes registered in his or
her own name;
- the indirect holder generally cannot receive physical certificates for
his or her interest in the new notes;
- the indirect holder will be a "street name" holder and must look to his
or her own bank or broker to forward payments on the new notes and
protection of his or her legal rights relating to the new notes. See
"-- Legal Ownership -- 'Street Name' and Other Indirect Holders" above;
- the indirect holder may not be able to sell interests in the new notes to
some insurance companies and other institutions that are required by law
to own their securities in the form of physical certificates;
- the depositary's policies will govern payments, transfers, exchange and
other matters relating to the indirect holder's interest in the global
note. Neither we nor the trustee has any responsibility for any aspect of
the depositary's actions or for its records of ownership interests in the
global note. Neither we nor the trustee supervises the depositary in any
way; and
- the payment for purchases and sales in the market for corporate bonds and
notes is generally made in next-day funds. In contrast, the depositary
will usually require that interests in a global note be purchased or sold
within its system using same-day funds. This difference could have some
effect on how global note interests trade, but we do not know what that
effect will be.
SPECIAL SITUATIONS WHEN A GLOBAL NOTE WILL BE TERMINATED. In a few special
situations described later, the global note will terminate and interests in it
will be exchanged for physical certificates representing new notes. After that
exchange, the choice of whether to hold new notes directly or in "street name"
will be up to the holder. Indirect holders must consult their own bank or
brokers to find out how to have their interests in new notes transferred to
their own name, so that they will be direct holders. The rights of "street name"
holders and direct holders in the new notes have been previously described in
the sections entitled "-- Legal Ownership -- 'Street Name' and Other Indirect
Holders" and "-- Direct Holders".
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The special situations for termination of a global note are:
- when the depositary notifies us that it is unwilling, unable or no longer
qualified to continue as depositary;
- when we notify the trustee that we wish to terminate the global note; or
- when an event of default on the new notes has occurred and has not been
cured. We discuss events of default below under "-- Events of Default".
When a global note terminates, the depositary, and not us or the trustee,
is responsible for deciding the names of the institutions that will be the
initial direct holders. (Sections 204 and 305)
IN THE REMAINDER OF THIS DESCRIPTION "YOU" MEANS DIRECT HOLDERS AND NOT "STREET
NAME" OR OTHER INDIRECT HOLDERS OF NEW NOTES. INDIRECT HOLDERS SHOULD READ THE
PREVIOUS SECTION ENTITLED "-- LEGAL OWNERSHIP -- 'STREET NAME' AND OTHER
INDIRECT HOLDERS".
OVERVIEW OF REMAINDER OF THIS DESCRIPTION
The remainder of this description summarizes:
- ADDITIONAL MECHANICS relevant to the new notes under normal
circumstances, such as how you transfer ownership and where we make
payments;
- promises OR RESTRICTIVE COVENANTS we make to you about actions we promise
not to take;
- your rights under several SPECIAL SITUATIONS, such as if we redeem the
new notes at our option, if we merge with another company or if we want
to change a term of the new notes; and
- your rights if we DEFAULT or experience other financial difficulties.
ADDITIONAL MECHANICS
BOOK-ENTRY, DELIVERY AND FORM. We will issue the new notes only in the form
of one or more fully registered global notes, which will be deposited with, or
on behalf of, the depositary and registered in the name of the depositary's
nominee. Beneficial interests in the global notes will be represented through
book-entry accounts of financial institutions acting on behalf of beneficial
owners as direct and indirect participants in the depositary. Beneficial owners
may elect to hold interests in the global notes through the depositary,
Clearstream Banking, Societe Anonyme, which we refer to as "Clearstream
Luxembourg", or Euroclear Bank S.A./N.V., as operator of the Euroclear System,
which we refer to as "Euroclear", if they are participants of such systems, or
indirectly through organizations which are participants in such systems.
Clearstream Luxembourg and Euroclear will hold interests on behalf of their
participants through customers' securities accounts in Clearstream Luxembourg's
and Euroclear's names on the books of DTC. Except as set forth below, the global
notes may be transferred, in whole and not in part, only to another nominee of
DTC or to a successor of DTC or its nominee.
DTC has advised us that it is a limited-purpose trust company organized
under the New York banking law, a "banking organization" within the meaning of
the New York banking law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
U.S. Securities Exchange Act of 1934. DTC holds securities deposited with it by
its participants and facilitates the settlement of transactions among its
participants in such securities through electronic computerized book-entry
changes in accounts of the participants, thereby eliminating the need for
physical movement of securities certificates. DTC's participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, some of whom, or their representatives, own
DTC. Access to the book-entry system of DTC is also available to others, such as
banks, brokers, dealers and trust companies, which clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
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Clearstream Luxembourg advises that it is incorporated under the laws of
Luxembourg as a bank. Clearstream Luxembourg holds securities for its customers
that we refer to as "Clearstream Luxembourg Customers", and facilitates the
clearance and settlement of securities transactions between Clearstream
Luxembourg Customers through electronic book-entry transfers between their
accounts. Clearstream Luxembourg provides to Clearstream Luxembourg Customers,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Clearstream Luxembourg interfaces with domestic securities markets in
over 30 countries through established depositary and custodial relationships. As
a bank, Clearstream Luxembourg is subject to regulation by the Luxembourg
Commission for the Supervision of the Financial Sector, also known as the
Commission de Surveillance du Secteur Financier. Clearstream Luxembourg
Customers are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Clearstream Luxembourg's customers
within the United States are limited to securities brokers and dealers and
banks. Indirect access to Clearstream Luxembourg is also available to other
institutions such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Clearstream Luxembourg
Customer.
Distributions with respect to the new notes held through Clearstream
Luxembourg will be credited to cash accounts of Clearstream Luxembourg Customers
in accordance with its rules and procedures, to the extent received by the U.S.
depositary for Clearstream Luxembourg.
Euroclear advises that it was created in 1968 to hold securities for its
participants, that we refer to as "Euroclear Participants", and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Euroclear provides various other services,
including securities lending and borrowing, and interfaces with domestic markets
in several countries. Euroclear is operated by Euroclear Bank S.A./N.V., which
we refer to as the "Euroclear Operator". All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator. Euroclear
Participants include banks, including central banks, securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law,
which we refer to collectively as the "Terms and Conditions". The Terms and
Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants and has no record of or relationship
with persons holding through Euroclear Participants.
Distributions with respect to the new notes held beneficially through
Euroclear will be credited to the cash accounts of Euroclear Participants in
accordance with the Terms and Conditions, to the extent received by the U.S.
depositary for Euroclear.
Euroclear further advises that investors that acquire, hold and transfer
interests in the new notes by book-entry through accounts with the Euroclear
Operator or any other securities intermediary are subject to the laws and
contractual provisions governing their relationship with their intermediary, as
well as the laws and contractual provisions governing the relationship between
such an intermediary and each other intermediary, if any, standing between
themselves and the global notes.
The Euroclear Operator advises that under Belgian law investors that are
credited with securities on the records of the Euroclear Operator have a
co-property right in the fungible pool of interests in securities on deposit
with the Euroclear Operator in an amount equal to the amount of interests in
securities credited to their accounts. In the event of the insolvency of the
Euroclear Operator, Euroclear Participants will have a right under Belgian law
to the return of the amount and type of interests in securities credited to
their
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accounts with the Euroclear Operator. If the Euroclear Operator does not have a
sufficient amount of interests in securities on deposit of a particular type to
cover the claims of all Euroclear Participants credited with such interests in
securities on the Euroclear Operator's records, all Euroclear Participants
having an amount of interests in securities of such type credited to their
accounts with the Euroclear Operator would have the right under Belgian law to
the return of their pro rata share of the amount of interests in securities
actually on deposit.
Under Belgian law, the Euroclear Operator is required to pass on the
benefits of ownership in any interests in securities on deposit with it, such as
dividends, voting rights and other entitlements, to any person credited with
such interests in securities on its records.
DTC has advised that pursuant to procedures established by it (1) upon the
issuance by us of the global notes representing the new notes, DTC or its
nominee will credit the accounts of participants with the aggregate principal
amount of the individual beneficial interest represented by these global notes
and (2) ownership of beneficial interests in the new notes will be shown on, and
the transfer of that ownership will be effected only through, records maintained
by DTC with respect to its participants' interests, the participants and the
indirect participants. The laws of some jurisdictions require that certain
persons take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in the global notes
is limited to such extent.
So long as a nominee of DTC is the registered owner of the global notes,
such nominee will be considered the sole owner or holder of the global notes for
all purposes under the indenture. Except as provided below, owners of beneficial
interests in the global notes will not be entitled to have the new notes
registered in their names, will not receive or be entitled to receive physical
delivery of the new notes in definitive form and will not be considered the
owners or holders thereof under the indenture.
Neither we, the trustee, any paying agent nor the registrar will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global notes,
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Principal and interest payments on the global notes registered in the name
of DTC's nominee will be made by us, through the paying agent, to DTC's nominee
as the registered owner of the global notes. Under the terms of the indenture,
we and the trustee will treat the persons in whose names the global notes are
registered as the owners of such notes for the purpose of receiving payments of
principal and interest on such notes, receiving redemption and other notices
with respect to such notes and for all other purposes whatsoever. Therefore,
neither the trustee nor any paying agent has any direct responsibility or
liability for the payment of principal or interest on the new notes to owners of
beneficial interests in the global notes. DTC has advised the trustee that its
present practice is, upon receipt of any payment of principal or interest, to
credit immediately the accounts of the participants with payment in amounts
proportionate to their respective holdings in principal amount of beneficial
interests in the global notes as shown on the records of DTC. Payments by
participants and indirect participants to owners of beneficial interests in the
global notes will be governed by standing instructions and customary practices,
and will be the responsibility of such participants or indirect participants.
If DTC is at any time unwilling, unable or ineligible to continue as
depositary and a successor depositary is not appointed by us within 90 days, we
will issue the new notes in definitive form in exchange for the global notes. In
addition, we may at any time determine not to have the new notes represented by
global notes and, in such event, will issue the new notes in definitive form in
exchange for the global notes. In either instance, an owner of a beneficial
interest in the global notes will be entitled to have new notes equal in
principal amount to such beneficial interest registered in its name and will be
entitled to physical delivery of such new notes in definitive form. The new
notes so issued in definitive form will be issued in denominations of $1,000 and
integral multiples thereof and will be issued in registered form only, without
coupons.
The trustee may require new notes surrendered for exchange or transfer to
be accompanied by satisfactory instruments of transfer. If at any time the new
notes are issued in definitive form, interest will be
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paid by check mailed on or before the payment date, by first class mail, to the
holders thereof, unless we determine otherwise. We will notify the holders as to
any alternative method of payment we elect. Payments of principal on definitive
new notes will be made against surrender of the new notes at the principal
office in the United States of the trustee, as paying agent. The holder of a
certificated definitive registered new note may transfer the new note by
surrendering it at the office or agency maintained by us for that purpose in New
York, New York, which initially will be the office of the trustee.
Title to book-entry interests in the new notes will pass by book-entry
registration of the transfer within the records of Clearstream Luxembourg,
Euroclear or DTC, as the case may be, in accordance with their respective
procedures. Book-entry interests in the new notes may be transferred within
Clearstream Luxembourg and within Euroclear and between Clearstream Luxembourg
and Euroclear in accordance with procedures established for these purposes by
Clearstream Luxembourg and Euroclear. Book-entry interests in the new notes may
be transferred within DTC in accordance with procedures established for this
purpose by DTC. Transfers of book-entry interests in the new notes among
Clearstream Luxembourg and Euroclear and DTC may be effected in accordance with
procedures established for this purpose by Clearstream Luxembourg, Euroclear and
DTC.
GLOBAL CLEARANCE AND SETTLEMENT PROCEDURES
Secondary market trading between DTC participants will occur in the
ordinary way in accordance with DTC's rules and will be settled in immediately
available funds using its Same-Day Funds Settlement System. Secondary market
trading between Clearstream Luxembourg Customers and Euroclear Participants will
occur in the ordinary way in accordance with the applicable rules and operating
procedures of Clearstream Luxembourg and Euroclear and will be settled using the
procedures applicable to conventional Eurobonds in immediately available funds.
Cross-market transfers between persons holding directly or indirectly
through DTC on the one hand, and directly or indirectly through Clearstream
Luxembourg Customers or Euroclear Participants, on the other hand, will be
effected in DTC in accordance with its rules on behalf of the relevant European
international clearing system. However, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines, in European time. The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its U.S. depositary to take
action to effect final settlement on its behalf by delivering interests in the
new notes to or receiving interests in the new notes from DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Clearstream Luxembourg Customers and Euroclear
Participants may not deliver instructions directly to DTC.
Because of time-zone differences, credits of interests in the new notes
received in Clearstream Luxembourg or Euroclear as a result of a transaction
with a DTC participant will be made during subsequent securities settlement
processing and dated the business day following the DTC settlement date. These
credits or any transactions involving interests in the new notes settled during
this processing will be reported to the relevant Clearstream Luxembourg
Customers or Euroclear Participants on that business day. Cash received in
Clearstream Luxembourg or Euroclear as a result of sales of interests in the new
notes by or through a Clearstream Luxembourg Customer or a Euroclear Participant
to a DTC participant will be received with value on the DTC settlement date but
will be available in the relevant Clearstream Luxembourg Euroclear cash account
only as of the business day following settlement in DTC.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of interests in the new
notes among participants of DTC, Clearstream Luxembourg and Euroclear, they are
under no obligation to perform or continue to perform such procedures and such
procedures may be changed or discontinued at any time.
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EXCHANGE AND TRANSFER OF NEW NOTES
The new notes will be issued:
- only in fully registered form;
- without interest coupons; and
- in denominations that are integral multiples of $1,000. (Section 302)
You may have your new notes broken into more notes of smaller denominations
or combined into fewer notes of larger denominations, as long as the total
principal amount is not changed. (Section 305) This is called an "exchange".
You may exchange or transfer new notes at the office of the trustee. The
trustee acts as our agent for registering notes in the names of holders and
transferring notes. We may change this appointment to another entity or perform
it ourselves. The entity performing the role of maintaining the list of
registered holders is called the "security registrar". It will also perform
transfers. (Section 305)
You will not be required to pay a service charge to transfer or exchange
new notes, but you may be required to pay for any tax or other governmental
charge associated with the exchange or transfer. The transfer or exchange will
only be made if the security registrar is satisfied with your proof of
ownership. (Section 305)
If we redeem less than all of the new notes, we may block the transfer or
exchange of new notes during the period beginning 15 days before the day the
notice of redemption is mailed and ending on the day of that mailing, in order
to freeze the list of holders to prepare the mailing. We may also refuse to
register transfers or exchanges of new notes selected for redemption, except
that we will continue to permit transfers and exchanges of the unredeemed
portion of any new notes being partially redeemed. (Section 305)
We may cancel the designation of any particular transfer agent. We may also
approve a change in the office through which any transfer agent acts. (Section
1002)
PAYMENT AND PAYING AGENTS
We will pay interest, other than defaulted interest, to you if you are a
direct holder listed in the trustee's records at the close of business on a
particular day in advance of each due date for interest, even if you no longer
own the new notes on the interest due date. This date is called the "regular
record date". (Section 307) Holders buying and selling new notes must work out
between them how to compensate for the fact that we will pay all the interest
for an interest period to the one who is the registered holder on the regular
record date. The normal manner would be to adjust the sales price of the new
notes to prorate interest fairly between the buyer and seller. This prorated
interest amount is called "accrued interest".
We will pay interest, principal and any other money due on the new notes at
the corporate trust office of the trustee in New York City. That office is
currently located at 55 Water Street, 1st Floor, New York, NY 10041. You must
make arrangements to have your payments picked up at or wired from that office.
We may also choose to pay interest by mailing checks. Initially, the trustee
will act as our paying agent.
"STREET NAME" AND OTHER INDIRECT HOLDERS SHOULD CONSULT THEIR BANKS OR BROKERS
FOR INFORMATION ON HOW AND WHEN THEY WILL RECEIVE PAYMENTS.
We may also arrange for additional payment offices and may cancel or change
these offices, including our use of the trustee's corporate trust office. These
offices are called "paying agents". We may also choose to act as our own paying
agent. We must notify you of changes in the paying agents for any particular
series of new notes. (Section 1002)
Regardless of who acts as paying agent, all money paid by us to a paying
agent which remains unclaimed at the end of two years after the amount is due to
direct holders will be repaid to us. After that
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two-year period, you may look only to us for payment and not to the trustee, any
other paying agent or anyone else. (Section 1003)
NOTICES
We and the trustee will send notices regarding the new notes only to direct
holders, using their addresses as listed in the trustee's records. (Section 106)
RESTRICTIVE COVENANTS
The indenture contains restrictive covenants including, among others, the
following:
LIMITATION ON SECURED DEBT. Cingular Wireless will not, nor will it permit
any Subsidiary to, incur, issue, assume, guarantee or create any Secured Debt,
without effectively providing concurrently with the incurrence, issuance,
assumption, guaranty or creation of the Secured Debt that the new notes will be
secured equally and ratably with, or prior to, such Secured Debt, unless, after
giving effect thereto, the sum of the aggregate amount of all outstanding
Secured Debt of Cingular Wireless and its Subsidiaries would not exceed 15% of
Consolidated Net Tangible Assets.
This restriction will not apply to, and there will be excluded from Secured
Debt in any computation under this restriction, Debt secured by:
(1) Liens on property, shares of capital stock or Debt of any Person
existing at the time such Person becomes a Subsidiary; provided that the
Liens were not granted in contemplation of that Person becoming a
Subsidiary;
(2) Liens on property, shares of capital stock or Debt existing at the
time of acquisition thereof by Cingular Wireless or any Subsidiary;
provided that the Liens were not granted in contemplation of that
acquisition;
(3) Liens on property, shares of capital stock or Debt created at the
time of, or within twelve months after the acquisition or the completion of
construction or improvement of such property, whichever is later, to secure
or provide for the payment of all or any part of the purchase price or the
cost of construction or improvement thereof; provided that
(a) the amount secured does not exceed the purchase price or cost
of construction or improvement; and
(b) the Lien does not extend to any other property, shares or Debt
other than the property, shares or Debt purchased, constructed or
improved;
(4) Liens in favor of Cingular Wireless or any of its Subsidiaries;
(5) Liens incurred or assumed in connection with the issuance of
revenue bonds the interest on which is exempt from Federal income taxation
pursuant to Section 103(b) of the Internal Revenue Code;
(6) Liens existing on the Issue Date (other than liens of the type
described in clause (4)); or
(7) any extension, renewal, refunding or replacement of the foregoing
(other than liens of the type described in clause (4)); provided that the
amount secured by the Lien is not increased and the Lien does not extend to
any additional property or assets.
CERTAIN DEFINITIONS.
"Capital Lease Obligations" means all obligations required to be classified
and accounted for as a capitalized lease under GAAP, and the amount of Debt
represented by such obligation will be the capitalized amount thereof determined
in accordance with GAAP.
"Consolidated Net Tangible Assets" means, at any date of determination, the
sum of the amounts that would appear on a consolidated balance sheet of Cingular
Wireless and its Subsidiaries as the total assets
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(less accumulated depreciation and amortization, allowances for doubtful
receivables and other applicable reserves) of Cingular Wireless and its
Subsidiaries, after deducting therefrom consolidated current liabilities of
Cingular Wireless and its Subsidiaries and, to the extent otherwise included,
the amounts (without duplication) of:
(a) the excess of cost over fair market value of assets or
businesses acquired;
(b) any revaluation or other write-up in book value of assets
subsequent to the last day of the fiscal quarter of Cingular Wireless
immediately preceding the date of the indenture as a result of a change
in the method of valuation in accordance with GAAP;
(c) unamortized debt discount and expenses and other unamortized
deferred charges, goodwill, patents, trademarks, service marks, trade
names, copyrights, licenses, organization or developmental expenses and
other intangible items;
(d) minority interests in consolidated Subsidiaries held by Persons
other than Cingular Wireless or any Subsidiary;
(e) treasury stock; and
(f) cash or securities set aside and held in a sinking or other
analogous fund established for the purpose of redemption or other
retirement of capital stock to the extent such obligation is not
reflected in consolidated current liabilities of Cingular Wireless and
its Subsidiaries at such time.
"Debt" means, with respect to any Person, without duplication,
(1) all indebtedness of such Person and its Subsidiaries for borrowed
money;
(2) all obligations of such Person and its Subsidiaries evidenced by
bonds, debentures, notes or other similar instruments;
(3) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services to the extent recorded as
liabilities under GAAP, excluding trade payables arising in the ordinary
course of business;
(4) all Capital Lease Obligations of such Person and its Subsidiaries;
and
(5) all Debt of other Persons Guaranteed by such Person (including by
securing such Debt by a Lien on any asset of such Person, whether or not
such Debt is assumed by such Person) to the extent so Guaranteed.
"GAAP" means generally accepted accounting principles as in effect as of
the date of determination.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt or other obligation of any other
Person; provided that the term "Guarantee" does not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Issue Date" of the new notes means the original issue date of the old
notes, which is December 12, 2001.
"Liens" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind, including any conditional sale or other title retention
agreement or lease in the nature thereof and including in connection with any
Capital Lease Obligation.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity, including a
government or political subdivision or an agency or instrumentality thereof.
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"Principal Property" means any real and tangible property that
- is located within the United States of America or its territories or
possessions, and
- constitutes a manufacturing, development, warehouse, service, sales,
office or operating (including, without limitation, any switch, cell site
or network operations center) facility owned and operated now or
hereafter by Cingular Wireless or any Subsidiary, if the gross book value
of such facility, including leaseholds and fixtures constituting a part
thereof, is equal to more than 0.5% of Cingular Wireless' Consolidated
Net Tangible Assets on the date of determination. As of the date of this
prospectus, none of Cingular Wireless' facilities constitute a Principal
Property.
"Secured Debt" means Debt that is secured by a Lien on any (i) Principal
Property, (ii) shares of stock in a Subsidiary owned by Cingular Wireless or a
Subsidiary or (iii) Debt of a Subsidiary held by Cingular Wireless or a
Subsidiary (other than in the case of clauses (ii) or (iii), stock or debt of a
Subsidiary without assets or liabilities except for a de minimis amount of
assets relating to the capitalization of the Subsidiary) (in each case whether
owned on the Issue Date or thereafter acquired or created).
"Subsidiary" means with respect to any Person, any corporation, association
or other business entity of which more than 50% of the outstanding voting stock
is or, in the case of a partnership, the sole general partner or the managing
partner or the only general partners of which are owned, directly or indirectly
by, such Person and one or more Subsidiaries of such Person (or a combination
thereof); provided that, for purposes of the definition of "Secured Debt" only,
"Subsidiary" shall also refer to Salmon PCS LLC, its Subsidiaries and any Mirror
LLC, as defined in and formed pursuant to the Salmon PCS Limited Liability
Company Agreement dated as of November 6, 2000, as amended through December 12,
2001. Unless otherwise specified, "Subsidiary" means a Subsidiary of Cingular
Wireless.
SPECIAL SITUATIONS
MERGERS AND SIMILAR EVENTS. We are generally permitted to consolidate or
merge with another company or firm. We are also permitted to sell substantially
all of our assets to another firm, or to buy substantially all of the assets of
another firm. However, we may not take any of these actions unless all the
following conditions are met:
- where we merge out of existence or sell our assets, the other firm may
not be organized under a foreign country's laws -- that is, it must be a
corporation, limited liability company, partnership or trust organized
under the laws of a State or the District of Columbia or under federal
law -- and it must agree to be legally responsible for the new notes; and
- the merger, sale of assets or other transaction must not cause a default
on the new notes, and we must not already be in default, unless the
merger or other transaction would cure the default. For purposes of this
no-default test, a default would include an event of default that has
occurred and not been cured, as described later under "-- Events of
Default -- What Is an Event of Default?" A default for this purpose would
also include any event that would be an event of default if the
requirements for giving us default notice or our default having to exist
for a specific period of time were disregarded. (Section 801)
Upon the consummation of any transaction effected in accordance with these
provisions, if we are not the continuing Person, the resulting, surviving or
transferee Person will succeed to, and be substituted for, and may exercise
every right and power of, us under the indenture with the same effect as if such
successor Person had been named as us in the indenture. Following the
consummation of a consolidation, merger or sale and upon such substitution, we
will be released from our obligations under the indenture and the new notes.
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The indenture does not restrict, or require us to redeem or permit holders
to cause a redemption of new notes in the event of:
- a consolidation, merger, sale of assets or other similar transaction that
may adversely affect the creditworthiness of Cingular Wireless or our
successor or combined entity;
- a change in control of us; or
- a highly leveraged transaction, whether or not involving a change in
control.
Accordingly, you will not have protection in the event of a highly
leveraged transaction, reorganization, restructuring, merger or similar
transaction that may adversely affect the value of the new notes.
NO PERSONAL LIABILITY OF MANAGERS, DIRECTORS, OFFICERS, EMPLOYEES,
STOCKHOLDERS AND MEMBERS. No manager, director, officer, employee, member or
stockholder of us (including SBC or BellSouth), as such, will have any liability
for any of our obligations under the new notes or the indenture or for any claim
based on, in respect of, or by reason of, such obligations. Each holder of
notes, by accepting a note, waives and releases all such liability. The waiver
and release are part of the consideration for exchange of the notes. This waiver
may not be effective to waive liabilities under the Federal securities laws and
it is the view of the SEC that such a waiver is against public policy.
MODIFICATION AND WAIVER. There are three types of changes we can make to
the indenture and the new notes. As stated above under "-- General", the new
notes will be of the same series as the old notes, and both the old notes and
the new notes will be considered as a single class for purposes of any acts of
holders under the indenture, such as voting and consents.
Changes Requiring Your Approval. First, there are changes that cannot be
made to your new notes without your specific approval. Specifically, without
your individual consent, we may not:
- change the stated maturity of the principal or interest on a new note or
any of the redemption provisions;
- reduce any amounts due on a new note;
- reduce the amount of principal payable upon acceleration of the maturity
of a new note following a default;
- change the place or currency of payment on a new note;
- impair your right to sue for payment;
- reduce the percentage of holders of new notes whose consent is needed to
modify or amend the indenture;
- reduce the percentage of holders of new notes whose consent is needed to
waive compliance with certain provisions of the indenture or to waive
certain defaults; and
- modify any other aspect of the provisions dealing with modification and
waiver of the indenture. (Section 902)
Changes Requiring a Majority Vote. The second type of change to the
indenture and the new notes is the kind that requires a vote in favor by holders
of new notes and old notes owning a majority of the principal amount of the
particular series affected. Most changes fall into this category, except for
those described above and clarifying changes and certain other changes that
would not adversely affect holders of the notes. The same vote would be required
for us to obtain a waiver of all or part of the restrictive covenants described
later or a waiver of a past default. However, we cannot obtain a waiver of a
payment default (Section 513) or any other aspect of the indenture or the new
notes listed in the first category described above under "-- Changes Requiring
Your Approval" unless we obtain your individual consent to the waiver.
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Changes Not Requiring Approval. The third type of change does not require
any vote by holders of notes. This type is limited to clarifications and certain
other changes that would not adversely affect holders of the notes.
The notes will not be considered outstanding, and therefore not eligible to
vote, if we have deposited or set aside in trust for you money for their payment
or redemption. The notes will also not be eligible to vote if they have been
fully defeased as described under "-- Defeasance" below.
We will generally be entitled to set any day as a record date for the
purpose of determining the holders of outstanding notes, which are entitled to
vote or take other action under the indenture. In certain limited circumstances,
the trustee will be entitled to set a record date for action by holders. If we
or the trustee set a record date for a vote or other action to be taken by
holders of a particular series, that vote or action may be taken only by persons
who are holders of outstanding notes of that series on the record date and must
be taken within 180 days following the record date or a shorter period that we
may specify, or as the trustee may specify if it sets the record date. We may
shorten or lengthen, but not beyond 180 days, this period from time to time.
(Section 104)
"STREET NAME" AND OTHER INDIRECT HOLDERS SHOULD CONSULT THEIR BANKS OR BROKERS
FOR INFORMATION ON HOW APPROVAL MAY BE GRANTED OR DENIED IF WE SEEK TO CHANGE
THE INDENTURE OR THE NEW NOTES OR REQUEST A WAIVER.
DEFEASANCE
FULL DEFEASANCE. If there is a change in federal tax law, as described
below, we can legally be released from any payment or other obligations on the
notes, which is called "full defeasance", if we put in place the following other
arrangements for you to be repaid:
- we must deposit in trust for your benefit and the benefit of all other
direct holders of the notes a combination of money and U.S. government or
U.S. government agency notes or bonds that will generate enough cash to
make interest, principal and any other payments on the notes on their
various due dates;
- there must be a change in current federal tax law or an Internal Revenue
Service ruling that lets us make the above deposit without causing you to
be taxed on the notes any differently than if we did not make the deposit
and just repaid the notes. Under current federal tax law, the deposit and
our legal release from the notes would be treated as though we took back
your notes and gave you your share of the cash and notes or bonds
deposited in trust. In that event, you could recognize gain or loss on
the notes you give back to us; and/or
- we must deliver to the trustee a legal opinion of our counsel confirming
the tax law change described above. (Sections 1302 and 1304)
If we ever did accomplish full defeasance, as described above, you must
rely solely on the trust deposit for repayment on the notes. You could not look
to us for repayment in the unlikely event of any shortfall.
COVENANT DEFEASANCE. Under current federal tax law, we can make the same
type of deposit described above and be released from some of the restrictive
covenants in the notes. This is called "covenant defeasance." In that event, you
would lose the protection of those restrictive covenants but would gain the
protection of having money and securities set aside in trust to repay the new
notes. In order to achieve covenant defeasance, we must do the following:
- We must deposit in trust for your benefit and the benefit of all other
direct holders of the notes a combination of money and U.S. government or
U.S. government agency notes or bonds that will generate enough cash to
make interest, principal and any other payments on the notes on their
various due dates.
126
- We must deliver to the trustee a legal opinion of our counsel confirming
that under current federal income tax law we may make the above deposit
without causing you to be taxed on the notes any differently than if we
did not make the deposit and just repaid the notes ourselves in
accordance with their terms.
If we accomplish covenant defeasance, the following provisions of the indenture
and the notes would no longer apply:
- Our promises previously described under "-- Restrictive Covenants" and
any other covenants applicable to the notes as described in this
prospectus.
- The event of default relating to breach of those covenants as described
below under "-- Events of Default -- What Is an Event of Default?".
If we accomplish covenant defeasance, you could still look to us for
repayment of the notes if there were a shortfall in the trust deposit. In fact,
if one of the remaining events of default occurred, such as our bankruptcy, and
the notes become immediately due and payable, there may be such a shortfall.
Depending on the event causing the default, you may not be able to obtain
payment of the shortfall. (Sections 1303 and 1304)
EVENTS OF DEFAULT
You will have special rights if an event of default occurs and is not
cured, as described later in this subsection.
WHAT IS AN EVENT OF DEFAULT? The term "event of default" with respect to
any series of notes means any of the following:
- we do not pay the principal or any premium on a note of such series on
its due date;
- we do not pay interest, including additional interest, on a note of such
series within 90 days of its due date;
- we remain in breach of a restricted covenant described above under the
section entitled "-- Restrictive Covenants" or any other terms of the
indenture for 90 days after we receive written notice of default. The
notice must be sent by either the trustee or holders of 25% of the
principal amount of the notes of such series; or
- Cingular Wireless files for bankruptcy or certain other events in
bankruptcy, insolvency or reorganization occur. (Section 501)
An event of default with respect to any series of notes will not create an
event of default with respect to any other series.
REMEDIES IF AN EVENT OF DEFAULT OCCURS. If an event of default has occurred
with respect to any series of notes and has not been cured, the trustee or the
holders of 25% in principal amount of the notes of such series may declare the
entire principal amount of all the notes of such series to be due and
immediately payable. This is called a declaration of acceleration of maturity.
If an event of default occurs because of certain events in bankruptcy,
insolvency or reorganization, the principal amount of all the notes of such
series will be automatically accelerated, without any action by the trustee or
any holder. A declaration of acceleration of maturity may be canceled by the
holders of at least a majority in principal amount of the notes of such series.
(Section 502)
Except in cases of default, where the trustee has some special duties, the
trustee is not required to take any action under the indenture at the request of
any holders unless the holders offer the trustee reasonable protection from
expenses and liability, which is called an "indemnity". (Section 603) If
reasonable indemnity is provided, the holders of a majority in principal amount
of the outstanding notes of the applicable series may direct the time, method
and place of conducting any lawsuit or other formal legal action seeking any
127
remedy available to the trustee. These majority holders may also direct the
trustee to perform any other action under the indenture. (Section 512)
Before you can bypass the trustee and bring your own lawsuit or other
formal legal action or take other steps to enforce your rights or protect your
interests relating to the notes, the following must occur:
- you must give the trustee written notice that an event of default has
occurred and remains uncured;
- the holders of 25% in principal amount of all outstanding notes of the
applicable series must make a written request that the trustee take
action because of the default and must offer reasonable indemnity to the
trustee against the cost and other liabilities of taking that action; and
- the trustee must have not taken action for 60 days after receipt of the
above notice and offer of indemnity. (Section 507)
However, you are entitled at any time to bring a lawsuit for the payment of
money due on your note on or after its due date. (Section 508)
"STREET NAME" AND OTHER INDIRECT HOLDERS SHOULD CONSULT THEIR BANKS OR BROKERS
FOR INFORMATION ON HOW TO GIVE NOTICE OR DIRECTION TO OR MAKE A REQUEST OF THE
TRUSTEE AND TO MAKE OR CANCEL A DECLARATION OF ACCELERATION.
We will furnish to the trustee every year a written statement of certain of
our officers certifying that to their knowledge we are in compliance with the
indenture and the notes, or else specifying any default. (Section 1004)
REGARDING THE TRUSTEE
The trustee's current address is Global Corporate Trust Services, 100 East
Broad Street, 8th floor, Columbus, Ohio 43215.
The indenture and the provisions of the Trust Indenture Act incorporated by
reference in the indenture provide that, except during the continuance of an
event of default, the trustee will perform only such duties as are specifically
stated in the indenture. During the existence of an event of default, the
trustee must exercise such rights and powers vested in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs. (Section 601)
The indenture and provisions of the Trust Indenture Act incorporated by
reference in the indenture contain limitations on the rights of the trustee,
should it become a creditor of us, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claim as
security or otherwise. The trustee is permitted to engage in other transactions
with us or any affiliate. If the trustee acquires any conflicting interest, as
defined in the indenture or in the Trust Indenture Act, it must eliminate the
conflict or resign. (Sections 608 and 613)
The trustee is also the exchange agent with respect to the exchange offer,
is a member of the syndicate of lenders for our $3 billion 364-day revolving
credit facility and provides other commercial banking services for us.
128
PLAN OF DISTRIBUTION
As discussed under "The Exchange Offer", based on an interpretation of the
staff of the SEC, new notes issued pursuant to the exchange offer may be offered
for resale and resold or otherwise transferred by a holder of these new notes
(other than any holder which is an "affiliate" of us within the meaning of Rule
405 under the Securities Act and except as otherwise discussed below with
respect to holders which are broker-dealers) without compliance with the
registration and prospectus delivery requirements of the Securities Act so long
as these new notes are acquired in the ordinary course of the holder's business
and the holder has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
these new notes.
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
consummation of this exchange offer, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for us in connection with any such
resale. In addition, until October 29, 2002, all dealers effecting transactions
in the new notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any of these new notes. Any broker-dealer
that resells new notes that were received by it for its own account pursuant to
the exchange offer and any broker or dealer that participated in a distribution
of such new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of new notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the consummation of this exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed with the initial purchasers of the
old notes to pay expenses incident to the exchange offer other than commissions
or commissions of any brokers or dealers and will indemnify the holders of the
old notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
By acceptance of this exchange offer, each broker-dealer that receives new
notes for its own account pursuant to the exchange offer agrees that, upon
receipt of notice from us of the happening of any event which makes any
statement in this prospectus untrue in any material respect or requires the
making of any changes in this prospectus in order to make the statements therein
not misleading (which notice we agree to deliver promptly to such
broker-dealer), such broker-dealer will suspend use of this prospectus until we
have amended or supplemented this prospectus to correct such misstatement or
omission and have furnished copies of this amended or supplemental prospectus to
such broker-dealer.
The interpretation of the staff of the SEC referred to in the first
paragraph of this section does not apply to, and this prospectus may not be used
in connection with, the resale by any broker-dealer of any new notes received in
exchange for an unsold allotment of old notes purchased directly from us.
129
VALIDITY OF THE NEW NOTES
The validity of the new notes will be passed upon for us by Sullivan &
Cromwell, New York, New York.
EXPERTS
The consolidated financial statements of Cingular Wireless LLC at December
31, 2000 and December 31, 2001 and for the period from April 24, 2000
(inception) through December 31, 2000 and the year ended December 31, 2001,
appearing in this prospectus and registration statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
The combined financial statements of the SBC Domestic Wireless Group at
December 31, 1999 and October 2, 2000 and for the year ended December 31, 1999
and for the period from January 1, 2000 to October 2, 2000, appearing in this
prospectus and registration statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such reports given on the authority of
such firm as experts in accounting and auditing.
The combined financial statements of the BellSouth Domestic Wireless Group
at October 2, 2000 and for the period from January 1, 2000 to October 2, 2000,
appearing in this prospectus and registration statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
The combined financial statements of the BellSouth Domestic Wireless Group
as of December 31, 1999, and for the year then ended included in this
prospectus, have been so included in reliance on the report (which contains
explanatory paragraphs relating to the derivation of the combined financial
statements from the consolidated financial statements and accounting records of
BellSouth Corporation and the adoption of AICPA Statement of Position 98-1 in
1999, as discussed in Note 1 to the combined financial statements) of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
130
INDEX TO FINANCIAL STATEMENTS
CINGULAR WIRELESS LLC
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 2001 AND FOR
PERIOD FROM APRIL 24, 2000 (INCEPTION)
THROUGH DECEMBER 31, 2000
<Table>
<Caption>
PAGE
----
Report of Independent Auditors.............................. F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Cash Flows....................... F-6
Consolidated Statements of Changes in Members' Capital...... F-7
Notes to Consolidated Financial Statements.................. F-8
</Table>
CINGULAR WIRELESS LLC
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2002
<Table>
<Caption>
PAGE
----
Consolidated Balance Sheets................................. F-27
Consolidated Statement of Operations........................ F-28
Consolidated Statements of Cash Flows....................... F-29
Consolidated Statement of Changes in Members' Capital....... F-30
Notes to Consolidated Financial Statements.................. F-31
</Table>
SBC DOMESTIC WIRELESS GROUP
COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
AND THE PERIOD FROM JANUARY 1, 2000 THROUGH OCTOBER 2, 2000
<Table>
<Caption>
PAGE
----
Report of Independent Auditors.............................. F-37
Combined Balance Sheets..................................... F-38
Combined Statements of Operations........................... F-39
Combined Statements of Cash Flows........................... F-40
Combined Statements of Shareowner's Equity.................. F-41
Notes to Combined Financial Statements...................... F-42
</Table>
F-1
BELLSOUTH DOMESTIC WIRELESS GROUP
COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
AND THE PERIOD FROM JANUARY 1, 2000 THROUGH OCTOBER 2, 2000
<Table>
<Caption>
PAGE
----
Report of Independent Auditors.............................. F-56
Report of Independent Accountants........................... F-57
Combined Statements of Operations........................... F-58
Combined Balance Sheets..................................... F-59
Combined Statements of Cash Flows........................... F-60
Combined Statements of Shareowners' Equity (Deficit)........ F-61
Notes to Combined Financial Statements...................... F-62
</Table>
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareowners
Cingular Wireless LLC
We have audited the accompanying consolidated balance sheets of Cingular
Wireless LLC as of December 31, 2001 and 2000 and the related consolidated
statements of operations, changes in members' capital, and cash flows for the
year ended December 31, 2001 and for the period from April 24, 2000 (inception)
through December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cingular Wireless LLC at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for the year ended December 31,
2001 and for the period from April 24, 2000 (inception) through December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
February 8, 2002
Atlanta, Georgia
F-3
CINGULAR WIRELESS LLC
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<Table>
<Caption>
DECEMBER 31,
-----------------
2000 2001
------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 126 $ 567
Accounts receivable -- net of allowance for doubtful
accounts of $67 and $131............................... 1,332 1,644
Inventories............................................... 240 189
Prepaid expenses and other current assets................. 234 157
------- -------
Total current assets.............................. 1,932 2,557
Property, plant and equipment, net.......................... 7,651 8,864
FCC licenses, net........................................... 6,278 7,403
Goodwill, net............................................... 791 859
Other intangible assets, net................................ 542 493
Investments in and advances to equity affiliates............ 297 2,023
Other assets................................................ 490 331
------- -------
Total assets...................................... $17,981 $22,530
======= =======
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Debt maturing within one year............................. $ 1,119 $ 65
Accounts payable.......................................... 759 1,137
Due to affiliates, net.................................... 308 54
Advanced billing and customer deposits.................... 352 415
Accrued liabilities....................................... 1,280 1,553
------- -------
Total current liabilities......................... 3,818 3,224
Long-term debt:
Debt due to affiliates.................................... 10,673 9,678
Other long-term debt, net of discount..................... 607 2,788
------- -------
Total long-term debt.............................. 11,280 12,466
Other noncurrent liabilities................................ 160 505
------- -------
Total liabilities........................................... 15,258 16,195
------- -------
Minority interests in consolidated partnerships............. 458 485
Members' capital:
Members' capital.......................................... 4,620 6,030
Receivable for properties to be contributed............... (2,355) (178)
Accumulated other comprehensive loss...................... -- (2)
------- -------
Total members' capital............................ 2,265 5,850
------- -------
Total liabilities and members' capital............ $17,981 $22,530
======= =======
</Table>
See accompanying notes.
F-4
CINGULAR WIRELESS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
<Table>
<Caption>
PERIOD FROM
APRIL 24, 2000 YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, 2000 2001
----------------- ------------
Operating revenues:
Service revenues.......................................... $2,814 $13,069
Equipment sales........................................... 241 1,039
------ -------
Total operating revenues.......................... 3,055 14,108
Operating expenses:
Cost of services (excluding depreciation of $293 and
$1,291, which is included below)....................... 581 2,752
Cost of equipment sales................................... 393 1,652
Selling, general and administrative....................... 1,279 5,235
Depreciation and amortization............................. 421 1,921
------ -------
Total operating expenses.......................... 2,674 11,560
------ -------
Operating income............................................ 381 2,548
Other income (expenses):
Interest expense.......................................... (231) (822)
Minority interest in net income of consolidated
partnerships........................................... (32) (122)
Equity in net income (loss) of affiliates, net............ 3 (68)
Other, net................................................ 7 164
------ -------
Total other income (expenses)..................... (253) (848)
------ -------
Income before provision for income taxes.................... 128 1,700
Provision for income taxes.................................. 1 8
------ -------
Net income........................................ $ 127 $ 1,692
====== =======
</Table>
See accompanying notes.
F-5
CINGULAR WIRELESS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<Table>
<Caption>
PERIOD FROM
APRIL 24, 2000
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
2000 2001
-------------- ------------
OPERATING ACTIVITIES:
Net income.................................................. $ 127 $1,692
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 421 1,921
Provision for doubtful accounts........................... 57 333
Gain on disposition of businesses......................... -- (97)
Minority interest in net income of consolidated
partnerships........................................... 32 122
Equity in net (income) loss of affiliates, net............ (3) 68
Changes in operating assets and liabilities:
Receivables............................................ (65) (571)
Other current assets................................... (5) 98
Accounts payable and other current liabilities......... 483 141
Other, net................................................ 15 (42)
------- ------
Net cash provided by operating activities................... 1,062 3,665
INVESTING ACTIVITIES:
Construction and capital expenditures....................... (959) (3,156)
Investments in and advances to equity affiliates............ (239) (592)
Dispositions of businesses.................................. -- 85
Acquisitions, net of cash received.......................... (20) (289)
Other, net.................................................. -- 7
------- ------
Net cash used in investing activities....................... (1,218) (3,945)
FINANCING ACTIVITIES:
Net repayment of amounts due to affiliates.................. (140) (1,148)
Proceeds from issuance of senior notes, net of issuance
costs..................................................... -- 1,973
Net borrowings (repayment) of commercial paper.............. 699 (672)
Net repayment of long-term debt............................. (324) (37)
Distributions to members.................................... -- (639)
Net distributions to minority interests..................... (70) (126)
Contributions by members.................................... 117 1,370
------- ------
Net cash provided by financing activities................... 282 721
------- ------
Net increase in cash and cash equivalents................... 126 441
Cash and cash equivalents at beginning of period............ -- 126
------- ------
Cash and cash equivalents at end of period.................. $ 126 $ 567
======= ======
</Table>
See accompanying notes.
F-6
CINGULAR WIRELESS LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
(DOLLARS IN MILLIONS)
<Table>
Balance at April 24, 2000................................... $ --
Net income................................................ 127
Contributions from members................................ 4,493
Receivable for pending contributions...................... (2,355)
-------
Balance at December 31, 2000................................ 2,265
Net income................................................ 1,692
Contributions from members................................ 2,534
Distributions to members.................................. (639)
Other comprehensive loss.................................. (2)
-------
Balance at December 31, 2001................................ $ 5,850
=======
</Table>
<Table>
<Caption>
PERIOD FROM
APRIL 24, 2000 YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, 2000 2001
----------------- ------------
SUMMARY OF COMPREHENSIVE INCOME (LOSS):
Net income.................................................. $127 $1,692
Net unrealized loss on securities......................... -- (1)
Minimum pension liability adjustment...................... -- (1)
---- ------
Total comprehensive income........................ $127 $1,690
==== ======
</Table>
See accompanying notes.
F-7
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM APRIL 24, 2000 THROUGH DECEMBER 31, 2000
AND YEAR ENDED DECEMBER 31, 2001
(DOLLARS IN MILLIONS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Cingular Wireless LLC (the Company) is a Delaware limited liability
company, formed by SBC Communications Inc. (SBC) and BellSouth Corporation
(BellSouth) as the operating company for their U.S. wireless joint venture. The
parties entered into an agreement to form the Company in April 2000, subject to
regulatory approvals. Cingular Wireless Corporation acts as the Company's
manager and controls the Company's management and operations. The Company
provides advanced domestic wireless communications services, including local,
long distance, and roaming services using both cellular and personal
communications services. Wireless services and products also include certain
voice and data enhanced services, interactive messaging services and wireless
equipment.
On October 2, 2000, SBC and BellSouth (the members) contributed
substantially all of their U.S. wireless assets in exchange for approximately
60% and 40% economic interests, respectively, in the Company, and the Company
began doing business under the "Cingular" brand name. SBC and BellSouth have
joint voting control of the Company's operations by virtue of the stockholder's
agreement pertaining to their ownership of Cingular Wireless Corporation. All
assets and liabilities contributed to the venture have been recorded at their
historical basis of accounting. At the contribution date, assets and liabilities
of $12,381 and $9,958, respectively, were contributed by SBC; assets and
liabilities of $7,099 and $5,029, respectively, were contributed by BellSouth.
Included in these amounts were estimated assets and liabilities of operations to
be contributed to the Company after the original contribution date and are
reflected as "Receivable for pending contributions" on the Consolidated
Statement of Changes in Members' Capital at December 31, 2000.
As provided for in the Contribution and Formation Agreement between the
Company, SBC and BellSouth, additional contributions of wireless operations and
assets in certain markets were made throughout 2001. The contribution by SBC of
wireless operations and assets in the Arkansas markets, or an equivalent amount
in cash if such assets are not contributed, was still pending as of December 31,
2001. Until such time as the contribution is made, the Company continues to
manage the properties for a fee. Fees received for managing the Arkansas markets
for the periods ended December 31, 2000 and 2001 were $9 and $28, respectively.
For the wireless businesses contributed in 2001, the Company received management
fees in 2000 and 2001, respectively, of $5 and $22 for services provided prior
to the actual dates of contribution.
These financial statements include charges from SBC and BellSouth for
certain expenses pursuant to various agreements (see Notes 10 and 12). These
expenses are considered to be a reasonable reflection of the value of services
provided or the benefit received by the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates. Estimates are used when accounting for certain
items such as the allowance for doubtful accounts, depreciation and
amortization, valuation of inventory, investments and asset impairment.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and entities in which the Company exercises control. Other parties' interests in
consolidated entities are reported as minority interests.
F-8
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The equity method is used to account for investments for which the Company
exercises significant influence but does not control. All significant
intercompany transactions are eliminated in the consolidation process.
OPERATING SEGMENTS
The Company manages the business as one reportable business segment,
wireless communications services. The Company operates only domestically.
FCC LICENSES
The Federal Communications Commission (FCC) issues licenses that authorize
wireless carriers to provide service in specific geographic service areas. The
FCC grants licenses for terms of up to ten years. In 1993, the FCC adopted
specific standards to apply to wireless renewals, concluding it will award a
license renewal to a licensee that meets certain standards of past performance.
Historically, the FCC has granted license renewals routinely. The licenses held
by the Company expire at various dates. The Company believes that it will be
able to meet all requirements necessary to secure renewal of its wireless
licenses.
REVENUE RECOGNITION
The Company earns service revenues by providing access to its wireless
network (access revenue) and for usage of its wireless system (airtime revenue).
Access revenue is recognized when earned throughout the normal billing cycle.
Airtime revenue, including roaming revenue and long-distance revenue, is
recognized when the service is rendered. The revenue and related expenses
associated with the sale of wireless handsets and accessories are recognized
when the products are delivered and accepted by the customer, as this is
considered to be a separate earnings process from the sale of wireless services.
The Company defers non-refundable, up-front activation fees and associated costs
to the extent of the related revenues and amortizes these amounts over the
estimated customer relationship period, which is currently estimated to be three
years.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin Number 101 (SAB 101), "Revenue Recognition in Financial
Statements," which the Company adopted in 2000. SAB 101 addresses, among other
items, when revenue relating to non-refundable, up-front fees and associated
costs should be recognized. The Company has recorded deferred revenues and
deferred expenses of equal amount in the balance sheets. As of December 31,
2000, upon adoption of SAB 101 deferred revenue and expenses were $105.
INCOME TAXES
Substantially all of the operating units controlled and consolidated by the
Company are either limited liability companies or partnerships. Accordingly, in
most tax jurisdictions, tax items flow through to the members who are taxed at
their level pursuant to federal and state income tax laws. The members or
partners are responsible for their tax liabilities resulting from income earned
at the member or partner level. The Company is not subject to income taxes at
the limited liability company or partnership level in most tax jurisdictions.
There are a few tax-paying subsidiaries for which the Company has provided an
income tax provision.
REQUIRED DISTRIBUTIONS
The Company is required to make periodic distributions to its members on a
pro rata basis in accordance with each member's ownership interest in amounts
sufficient to permit members to pay the tax liabilities resulting from
allocations of income tax items from the Company. During 2001, the Company made
distributions to members of $47 related to 2000 tax liabilities and $592 related
to 2001 tax liabilities.
F-9
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, the Company is required to distribute to its members 50% of
its "excess cash," as defined, at the end of each fiscal year, as generated from
the Company's operations, less forecasted cash needs for the upcoming fiscal
year and distributions made to the members for their tax payments. In 2000 and
2001, the Company was not required to make any distributions of excess cash to
the members and does not anticipate being required to make any such
distributions over the next several years.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with
original maturities of three months or less. Checks outstanding of $289 and $534
have been included in "Accounts payable" in the balance sheets as of December
31, 2000 and 2001, respectively.
ACCOUNTS RECEIVABLE
Accounts receivable from customers are generally unsecured and are due
within 30 days. Credit losses relating to these receivables consistently have
been within management's expectations. Expected credit losses are recorded as an
allowance for doubtful accounts in the balance sheets.
INVENTORIES
Inventories consist principally of wireless mobile telephone handsets and
accessories and are valued at the lower of weighted-average cost or market
value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation and amortization. The cost of additions and substantial
improvements to property, plant and equipment is capitalized. The cost of
maintenance and repairs of property, plant and equipment is charged to operating
expenses. Property, plant and equipment is depreciated using the straight-line
method over their estimated economic lives. Effective January 1, 2001, the
Company conformed the estimated economic useful lives from those used by its
predecessor entities. These useful lives are applied to all assets purchased
after January 1, 2001. This change did not have a material effect on the
Company's results of operations. Upon sale or retirement of an asset, the
related costs and accumulated depreciation are removed from the accounts and any
gain or loss is recognized and included in operating results.
Interest expense and network engineering costs incurred during the
construction phase of the Company's wireless network are capitalized as part of
property, plant and equipment until the projects are completed and placed into
service.
SOFTWARE CAPITALIZATION
The Company capitalizes certain costs incurred in connection with
developing or obtaining internal use software in accordance with American
Institute of Certified Public Accountants Statement of Position 98-1. These
capitalized software costs are included in "Property, plant and equipment, net"
in the balance sheets and are being amortized ratably over a period not to
exceed five years.
INTANGIBLE ASSETS
Intangible assets consist primarily of FCC licenses, the excess of
consideration paid over the fair value of net assets acquired in purchase
business combinations (goodwill), and customer lists. In 2000 and 2001, goodwill
and licenses were amortized using the straight-line method over 20 to 40 years
and 40 years, respectively. Accumulated amortization for FCC licenses as of
December 31, 2000 and 2001, respectively, was $781 and $1,167; for goodwill,
accumulated amortization at December 31, 2000 and 2001 was $130 and
F-10
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$146, respectively. Customer lists represent values placed on customers of
acquired businesses. The Company's customer lists are amortized over a five-year
period primarily using the straight-line method.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets, including property, plant and equipment, FCC licenses,
goodwill, customer lists and investments, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. It is reasonably possible that these assets could become impaired
as a result of technological or other industry changes. For assets the Company
intends to hold for use, if the total of the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is recognized for
the difference between the fair value and carrying amount of the asset. For
assets the Company intends to dispose of, a loss is recognized if the carrying
amount of the asset is more than fair value, net of the costs of disposal. The
Company principally uses the discounted cash flow method to estimate the fair
value of its long-lived assets. The discount rate applied to the undiscounted
cash flows is consistent with the Company's weighted-average cost of capital.
The Company periodically evaluates the useful lives of its wireless network
equipment and other equipment based on technological and other industry changes
to determine whether events or changes in circumstances warrant revisions to the
useful lives.
DEFERRED FINANCING COSTS
In connection with the issuance of Senior Notes in December 2001 described
in Note 7, the Company recorded $20 of deferred costs for underwriting fees and
other related debt issuance costs. These deferred costs are included in "Other
assets" in the balance sheet, and are amortized over the related terms of the
notes using the effective interest method.
ADVERTISING COSTS
Costs for advertising products and services or corporate image are expensed
as incurred. Total advertising expenses were $152 and $509 for the periods ended
December 31, 2000 and 2001, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company maintains foreign exchange-forward contracts to hedge foreign
currency transactions, specifically Japanese Yen denominated capital lease
obligations. The foreign exchange-forward contracts generally require the
Company to exchange U.S. Dollars for Yen at maturity at rates agreed to at the
inception of the contracts. Changes in the fair value of the foreign exchange
forward contracts are recognized in "Other, net" in the statements of
operations. Gains (losses) on the foreign exchange forward contracts largely
offset foreign currency losses (gains) on Japanese Yen denominated capital lease
obligations. The fair value of foreign exchange forward contracts is included in
"Other noncurrent liabilities" in the balance sheets.
The Company could be at risk if the counterparties do not contractually
comply. Should the counterparties not comply, the ultimate impacts will be a
function of the difference, if any, in the cost of acquiring Yen at the maturity
versus the contractually agreed upon price.
NEW ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The statement supersedes SFAS
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of;" however, it retains the fundamental
provisions of that
F-11
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statement related to the recognition and measurement of the impairment of
long-lived assets to be "held and used." The statement provides more guidance on
estimating cash flows when performing a recoverability test, requires that a
long-lived asset or asset group be disposed of other than by sale (e.g.,
abandoned) be classified as "held and used" until it is disposed of, requires
revision of the depreciable life of a long-lived asset to be abandoned, and
establishes more restrictive criteria to classify an asset or asset group as
"held for sale." The statement is effective for fiscal years beginning after
December 15, 2001. The Company adopted SFAS No. 144 effective January 1, 2002
and this statement is not expected to have an impact on the Company's results of
operations, financial position or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. This statement is effective for fiscal years beginning
after June 15, 2002. The Company will adopt SFAS No. 143 effective January 1,
2003 and is currently evaluating the impact of this statement on results of
operations, financial position and cash flows.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use
of the purchase method of accounting for all business combinations initiated
after June 30, 2001, thereby eliminating the use of the pooling-of-interests
method of accounting for business combinations. In addition, SFAS No. 141
requires intangible assets be recorded apart from goodwill if they meet certain
criteria. SFAS No. 142, which includes the requirement to test goodwill and
indefinite lived intangible assets for impairment rather than amortize them,
will be effective for fiscal years beginning after December 15, 2001. We believe
that FCC licenses qualify as indefinite life intangibles and will accordingly
cease our practice of amortizing them beginning January 1, 2002. Amortization
expense for goodwill and FCC licenses was approximately $7 and $47,
respectively, for the period ended December 31, 2000 and $28 and $202,
respectively, for the year ended December 31, 2001. During the first quarter of
2002, the Company will perform the first of the required impairment tests of
goodwill and FCC licenses. The Company has not yet determined the effect that
these tests will have on its results of operations and financial position. The
results of these tests will not have an impact on the Company's cash flows.
The following table shows net income for the period from April 24, 2000
through December 31, 2000, and for the year ended December 31, 2001, adjusted to
exclude amortization expense related to goodwill and indefinite lived FCC
licenses.
<Table>
<Caption>
PERIOD FROM
APRIL 24, 2000
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
2000 2001
-------------- ------------
Net income -- as reported................................... $127 $1,692
Add back: Goodwill amortization, net of tax................. 7 28
Add back: License amortization, net of tax.................. 47 202
---- ------
Net income -- as adjusted................................... $181 $1,922
==== ======
</Table>
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that entities
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Gains and losses
resulting from changes in the fair values of those derivative instruments will
be recorded to earnings or other comprehensive income depending on the use of
the derivative instrument and whether it qualifies for hedge accounting. SFAS
F-12
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 133, as amended, was adopted by the Company on January 1, 2001 and did not
have a significant impact on the Company's results of operations, financial
position or cash flows.
RECLASSIFICATIONS
Certain amounts have been reclassified in the fiscal year 2000 consolidated
financial statements to conform to the current year presentation.
2. CONTRIBUTIONS, ACQUISITIONS, DISPOSITIONS AND LICENSE EXCHANGE
CONTRIBUTIONS
In September 2001, SBC contributed its controlling 50% equity interest in
Cellular Communications of Puerto Rico. Additional contributions by SBC were
made in May 2001, when a minority interest in the Washington/Baltimore cellular
operation held by an SBC affiliate was contributed to the Company. In March
2001, SBC contributed its interest in the operations and assets of a Michigan
wireless business and certain assets of an SBC affiliate. The aggregate net book
value of these contributions totaled $831.
In December 2000, BellSouth exercised its option to redeem the 55.6%
limited partnership interest of AT&T Wireless Services, Inc. (AT&T Wireless) in
AB Cellular by distributing to AT&T Wireless the Los Angeles area cellular
business. Following this transaction, BellSouth held the remaining assets of the
AB Cellular partnership, which included 100% of the Houston area cellular
market, 87.35% of the Galveston area cellular market and $1,163 in cash. In
January 2001, BellSouth contributed the operations and assets of the AB Cellular
partnership to the Company; the aggregate net book value of the contribution was
$1,727. The majority of the cash contributed was used to pay affiliate debt in
accordance with terms of the Contribution and Formation Agreement.
The results of operations of these contributions are included in the
Company's statements of operations as of their respective contribution dates.
As stipulated by the Contribution and Formation Agreement, amounts may be
due to (from) SBC or BellSouth to the extent that the carrying amounts of net
assets as of the contribution date is more (less) than the agreed upon amount at
formation. In 2001, the Company paid a net amount of $186, plus accrued interest
from the date of contribution to the members under these provisions.
ACQUISITIONS
In May 2001, the Company purchased from SBC for $151 a 10% minority
interest in the Washington/Baltimore wireless business that SBC acquired from
affiliates of Vivendi Universal. Concurrent with this purchase, SBC also
contributed a minority interest in the Washington/Baltimore operations held by
an SBC affiliate. As a result of the purchase and contribution of minority
interests from SBC, the Company holds a 100% interest in the
Washington/Baltimore wireless business.
The minority interest acquisition was accounted for under the purchase
method of accounting. The purchase price in excess of the proportionate interest
in the underlying fair value of identifiable net assets acquired is being
amortized using the straight-line method over a 20-year period. The acquisition
of minority interests did not have a significant impact on the consolidated
results of operations for 2001, nor would it had it occurred on October 2, 2000,
the original contribution date.
In November 2001, the Company acquired two 15-MHz licenses covering two
million people, referred to as "POPs," in the Salt Lake City and Provo Basic
Trading Areas (BTAs) in Utah for $140 in cash.
F-13
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DISPOSITIONS
In March 2001, the Company and ALLTEL Corporation agreed to dissolve a
wireless partnership and distributed the related partnership assets. The Company
recognized the partnership assets received at fair value and a related gain of
$76, which is included in "Other, net" in the statement of operations.
LICENSE EXCHANGE
In May 2001, the Company and VoiceStream Wireless Corporation (VoiceStream)
exchanged licenses covering approximately 36 million POPs each. The Company
received licenses covering 10 MHz of spectrum for the New York major trading
area (MTA) and for each of the St. Louis and Detroit basic trading areas (BTAs).
In exchange, the Company transferred to VoiceStream licenses covering 10 MHz of
spectrum out of the 30 MHz of spectrum that it had in the California and Nevada
markets. This transaction was accounted for as a like-kind exchange at
historical cost.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
<Table>
<Caption>
ESTIMATED DECEMBER 31,
USEFUL LIVES -----------------
(IN YEARS) 2000 2001
------------- ------- -------
Land.................................................. -- $ 49 $ 56
Buildings and building improvements................... 10 - 25 2,463 2,812
Operating and other equipment......................... 3 - 20 8,859 10,322
Furniture and fixtures................................ 3 - 10 1,060 1,486
Construction in progress.............................. -- 558 644
------- -------
12,989 15,320
Less: accumulated depreciation and amortization....... (5,338) (6,456)
------- -------
Property, plant and equipment, net.................... $ 7,651 $ 8,864
======= =======
</Table>
Capitalized interest costs for the periods ended December 31, 2000 and 2001
were $2 and $16, respectively. Network engineering costs capitalized during the
periods ended December 31, 2000 and 2001 were $21 and $116, respectively.
The net book value of assets recorded under capital leases was $347 and
$771 at December 31, 2000 and 2001, respectively. These capital leases
principally relate to towers and other operating equipment. At December 31,
2001, approximately $110 of assets under capital leases are used in the
Company's Factory venture with VoiceStream, pursuant to contractual agreements
(see Note 5, Investments in and Advances to Equity Affiliates, for further
discussion of this arrangement). Amortization of assets recorded under capital
leases is included in depreciation expense. During 2000 and 2001, capital lease
additions totaled $6 and $389, respectively.
Depreciation expense for the periods ended December 31, 2000 and 2001,
respectively, was $324 and $1,514.
F-14
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER INTANGIBLE ASSETS
Other intangible assets are summarized as follows:
<Table>
<Caption>
ESTIMATED DECEMBER 31,
USEFUL LIVES ---------------
(IN YEARS) 2000 2001
------------- ------ ------
Customer lists.......................................... 5 $ 897 $1,070
Other................................................... 3 - 5 160 167
------ ------
1,057 1,237
Less: accumulated amortization.......................... (515) (744)
------ ------
Other intangible assets, net............................ $ 542 $ 493
====== ======
</Table>
5. INVESTMENTS IN AND ADVANCES TO EQUITY AFFILIATES
The Company has investments in affiliates for which it does not have a
controlling interest that are accounted for under the equity method. The more
significant of these investments are GSM Facilities, LLC (Factory), and Salmon
PCS LLC (Salmon).
Investments in and advances to equity affiliates consist of the following:
<Table>
<Caption>
DECEMBER 31,
-------------
2000 2001
---- ------
Investment in Factory....................................... $ -- $1,275
Investment in Salmon........................................ -- 262
Advances to Salmon.......................................... 239 475
Other....................................................... 58 11
---- ------
Investments in and advances to equity affiliates............ $297 $2,023
==== ======
</Table>
FACTORY
On October 12, 2001, the Company and VoiceStream agreed to form a jointly
controlled venture (Factory), and on November 1, 2001 contributed portions of
their existing network infrastructures covering approximately 56 million POPs to
Factory. Factory provides both companies access to network infrastructure in the
California, Nevada and New York City markets. The Company and VoiceStream have
retained ownership and control of licenses in those markets. The Company
contributed to Factory network assets with a carrying value of $1,271. In
addition, Factory will make monthly payments on approximately $166 of the
Company's tower capital lease obligations and assumed other liabilities which
are reflected in the Company's investment in Factory. The Company and
VoiceStream will independently market their services to customers using their
respective brand names and utilizing their own sales, marketing, billing and
customer care operations. In the event the Factory venture is terminated, under
certain circumstances, the parties may have the right to exchange certain
licenses.
The Company and VoiceStream have agreed to jointly fund capital
expenditures of Factory. During the period from November 1, 2001 to December 31,
2001, the Company made additional cash contributions of $208 to Factory,
principally related to capital expenditures in the California and Nevada
markets. Additional contributions to Factory will generally be based on the
Company's proportionate share of the annual capital expenditure requirements and
such contributions will be accounted for as an increase to the Company's
investment in Factory. The Company has also agreed to contribute $450 in fiscal
years 2002 and 2003.
F-15
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The monthly cash operating expenses of Factory are charged to the Company
and VoiceStream based upon their share of the total minutes of use on the
respective networks. Charges for network services provided by Factory are
included in "Cost of services" in the statement of operations ($36 for the
period from November 1, 2001 to December 31, 2001).
The Company performs certain technical and management services for Factory,
for which it billed Factory $39 for the period from November 1, 2001 to December
31, 2001. The associated costs of these services, net of billings, are included
in "Cost of services" in the statement of operations. At December 31, 2001, the
Company had $19 due from Factory, which is included in "Due to affiliates, net"
in the balance sheet.
Factory is expected to incur net losses due to depreciation and interest
expense, which are not reimbursed by the Company and VoiceStream. For the period
November 1, 2001 to December 31, 2001, the Company recorded equity in the net
loss of Factory of $32. At December 31, 2001, the Company had a membership
interest in Factory of approximately 75%.
SALMON
In November 2000, the Company and Crowley Digital Wireless, LLC (Crowley
Digital) entered into an agreement, pursuant to which Salmon was formed to bid
as a favored entity under the FCC rules for certain 1900 MHz band personal
communications services (PCS) licenses auctioned by the FCC in January 2001. As
of December 31, 2001 the Company had an approximate 80% non-controlling equity
interest in Salmon. Salmon is controlled by Crowley Digital, which in turn is
controlled by George D. Crowley, Jr. Mr. Crowley is not an employee or director
of the Company, Cingular Wireless Corporation, SBC or BellSouth, nor has he been
previously. Salmon was the successful bidder for 79 licenses that cost
approximately $2,300, of which $1,700 remains to be paid if the FCC grants all
the remaining licenses to Salmon. As of December 31, 2001, the FCC has granted
to Salmon 45 auctioned licenses, for which Salmon paid $241. The remaining 34
licenses are subject to bankruptcy proceedings of the carriers from whom they
were reclaimed for auction by the FCC. There is substantial uncertainty as to
whether Salmon will be granted the remaining 34 licenses.
Management control of Salmon is vested in Crowley Digital under the terms
of Salmon's limited liability company agreement. Crowley Digital appoints three
of the five members of Salmon's management committee. The Company does not have
the unilateral ability to control any actions by Salmon. As a result, the
Company's non-controlling interest in Salmon is accounted for as an equity
investment.
Salmon has entered into a management agreement for a term of eight years,
under which it has hired the Company to act as the manager of its PCS systems,
subject to its oversight and control. In addition, pursuant to a trademark
license agreement, Salmon has elected to use Company trademarks in its business
to offer Cingular-branded services. The Company will receive a licensing fee of
$10 in the first year, 5% of Salmon's gross revenues thereafter until Salmon's
EBITDA is positive for two consecutive quarters and 7% of Salmon's gross revenue
thereafter. Salmon can terminate the management agreement at any time with one
year's notice. During 2001, the Company earned $3 in management and licensing
fees from Salmon.
Crowley Digital has the right to put its interest in Salmon to the Company
at a cash price equal to Crowley Digital's investment plus a specified rate of
return, which put can be exercised at certain times beginning with the
completion of Salmon's build-out in a manner that satisfies FCC rules and ending
six months before the seventh anniversary of the date on which the last license
is granted to Salmon in the auction. The present value of this put obligation,
estimated at approximately $110, is included in "Other noncurrent liabilities"
in the balance sheet at December 31, 2001. The put obligation results in a basis
difference in the Company's investment in Salmon.
The Company has entered into a credit agreement with Salmon under which the
Company will provide, upon Salmon's request, through secured loans,
substantially all of the capital Salmon will require to pay for
F-16
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the licenses, to build out its system and for working capital, subject to limits
on the amount of these loans. The Company's commitment to make such loans to
Salmon under the credit agreement ends no later than November 6, 2006. Loans are
repayable no later than May 6, 2008, with interest at a rate of 9% per annum or
14% per annum if the management agreement or trademark agreement is terminated.
Interest is not payable in cash until two years after the substantial completion
of the build-out of the Salmon system in a manner that satisfies FCC rules (or
beginning on the date the management or trademark license agreement has been
terminated). For the three years thereafter, only portions of the interest are
payable in cash. There is no scheduled amortization for the loans prior to the
maturity date. As of December 31, 2001, Salmon owed the Company approximately
$475 under the credit agreement.
In October 2001, with the granting of certain licenses to Salmon by the
FCC, the Company contributed approximately $191 in equity to Salmon. The Company
has an additional equity commitment to Salmon of $92. Until Salmon's networks
are built out and it has acquired a significant number of subscribers, it is
expected to generate significant operating losses. Crowley Digital, the other
member of Salmon, is not committed to provide equity funding in excess of its
initial capital contribution of $50. As a result, the Company will recognize
100% of Salmon's losses at such time as Crowley Digital's capital contribution
has been eliminated due to its proportionate share of Salmon's losses. For the
year ended December 31, 2001, the Company recorded equity in the net loss on
Salmon of $43 and capitalized interest of $3 on its investment in and advances
to Salmon.
Summarized unaudited financial information with respect to Salmon and
Factory is as follows:
<Table>
<Caption>
DECEMBER 31,
-------------
2000 2001
---- ------
Balance Sheet Information:
Current assets............................................ $ -- $ 25
Noncurrent assets......................................... 239 2,594
Current liabilities....................................... 1 31
Noncurrent liabilities.................................... 241 643
Net equity/(deficit)...................................... (3) 1,945
</Table>
<Table>
<Caption>
PERIOD FROM
APRIL 24, 2000
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
2000 2001
-------------- ------------
Income Statement Information:
Revenues................................................. $ -- $ 50
Costs and expenses (excluding depreciation).............. 1 57
Depreciation expense..................................... -- 41
Operating loss........................................... (1) (48)
Interest expense......................................... 2 40
Net loss................................................. (3) (88)
</Table>
F-17
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED LIABILITIES
Accrued liabilities are summarized as follows:
<Table>
<Caption>
DECEMBER 31,
---------------
2000 2001
------ ------
Accrued equipment purchases................................. $ 496 $ 705
Taxes other than income..................................... 220 217
Payroll and other related liabilities....................... -- 187
Agent commissions........................................... 139 104
Advertising................................................. 60 25
Other....................................................... 365 315
------ ------
Total accrued liabilities................................... $1,280 $1,553
====== ======
</Table>
7. DEBT
DEBT MATURING WITHIN ONE YEAR
Debt maturing within one year is summarized as follows:
<Table>
<Caption>
DECEMBER 31,
-------------
2000 2001
------ ----
Commercial paper............................................ $ 699 $27
Due to affiliates........................................... 381 --
Current maturities of long-term debt........................ 39 38
------ ---
Debt maturing within one year............................... $1,119 $65
====== ===
</Table>
The Company initiated a $6,000 commercial paper program in November 2000.
The weighted-average interest rate on commercial paper was 6.5% and 2.5% at
December 31, 2000 and 2001, respectively. In November 2000, the Company entered
into a $3,000 unsecured 364-day revolving bank credit facility to support the
commercial paper program. The bank credit facility was renewed in November 2001
and expires on November 18, 2002. JP Morgan Chase Bank serves as administrative
agent for the facility. The bank credit facility includes events of default and
covenants, including a leverage ratio maintenance requirement, and a limitation
on mergers and sale of all or substantially all of the Company's assets. The
credit facility provides that each lender will have the option to terminate its
commitment to make additional loans and declare all outstanding amounts to be
due and payable upon a change in control of the Company. The credit facility
also gives the Company the option to convert revolving loans outstanding on the
maturity date to one-year term loans. As of December 31, 2000 and 2001, the
Company had no outstanding borrowings under the credit facility.
The debt due to affiliates maturing within one year represents the net
amount due to SBC and BellSouth, as provided for in the Contribution and
Formation Agreement. Amounts due under the Contribution and Formation Agreement
have a fixed interest rate of 7.5%.
F-18
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
Long-term debt is summarized as follows:
<Table>
<Caption>
DECEMBER 31,
-----------------
2000 2001
------- -------
Due to affiliates, 7.5%, due March 31, 2004................. $10,673 $ 9,678
Due to external parties:
5.625% Senior Notes, due December 15, 2006................ -- 500
6.5% Senior Notes, due December 15, 2011.................. -- 750
7.125% Senior Notes, due December 15, 2031................ -- 750
Capital leases, 8%........................................ 406 648
Capital leases, Japanese Yen and U.S. Dollar denominated,
4.55% - 7.13%.......................................... 178 110
Other..................................................... 62 80
------- -------
Total long-term debt, including discount and
current maturities............................. 11,319 12,516
Unamortized discount on Senior Notes........................ -- (12)
Current maturities of long-term debt........................ (39) (38)
------- -------
Total long-term debt.............................. $11,280 $12,466
======= =======
</Table>
Interest accrues and is payable on loans from affiliates monthly. Interest
expense on the affiliate loans for the periods ended December 31, 2000 and 2001
was $219 and $735, respectively. Although the loans mature on March 31, 2004,
the Company may prepay them at any time, subject to the provisions described
below.
SBC and BellSouth have agreed, to the extent described below, to
subordinate their repayment rights applicable to the affiliate loans to the
repayment rights of the senior debt. Senior debt includes the Company's Senior
Notes, commercial paper, any debt outstanding under its bank credit facility, as
well as bank notes and other borrowings from third parties designated as such
and to which SBC and BellSouth have specifically agreed to be subordinate. The
payment of principal and interest on the subordinated affiliate loans by the
Company is prohibited during bankruptcy or senior debt payment default, or in
the event of an acceleration of the subordinated debt upon its default, until
the senior debt has been repaid in full. The payment of principal and interest
on the subordinated affiliate loans is also prohibited, with limited exceptions,
during a covenant or other non-payment default under the credit facility (unless
waived by the banks), but may continue during a non-payment default on the
Senior Notes or other senior debt.
In December 2001, the Company completed the sale of $2,000 of Senior Notes
under Rule 144A of the Securities Act of 1933. The Senior Notes are unsecured
obligations and rank equally with all other unsecured and unsubordinated
indebtedness. Interest on the Senior Notes is payable in arrears semi-annually
on June 15 and December 15, beginning June 15, 2002.
The Senior Notes are governed by an indenture with Bank One Trust Company,
N.A., which acts as trustee. The indenture provides that the Company will not
subject its property or assets to any mortgage or other encumbrance unless the
Senior Notes are secured equally and ratably with other indebtedness that is
secured by that property or assets. There is no sinking fund or mandatory
redemption applicable to the Senior Notes. The Senior Notes are redeemable, in
whole or in part, at any time at a price equal to their principal amount plus
any accrued interest and any "make-whole" premium, which is designed to
compensate the investors for early payment of their investment. The premium is
the excess of (i) the present value of all future scheduled principal and
interest payments of the Senior Notes to be redeemed, calculated by discounting
the aggregate amount of such payments by a percentage factor related to the
yield to maturity on U.S. Treasury securities with a constant maturity equal to
the then remaining maturity of the Senior Notes being prepaid, over (ii) the
principal amount of the Senior Notes to be redeemed.
F-19
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 2000, the Company repaid a note payable to Bank of America in
the amount of $310.
Cash paid for interest, inclusive of amounts paid to affiliates, for the
periods ended December 31, 2000 and 2001 was $292 and $883, respectively.
Maturities of long-term debt outstanding at December 31, 2001, are
summarized below:
<Table>
Maturities
2002...................................................... $ 38
2003...................................................... 41
2004...................................................... 9,765
2005...................................................... 6
2006...................................................... 504
Thereafter................................................ 2,162
-------
Total............................................. $12,516
=======
</Table>
8. FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, advanced billing and customer deposits, and other current
liabilities are reasonable estimates of their fair value due to the short-term
nature of these instruments. At December 31, 2001, the carrying value of the
Senior Notes issued in December 2001 approximates fair value. The carrying value
of the long-term debt due to affiliates approximates fair value since the
Company may prepay the debt, at any time without penalty.
The Company maintains foreign exchange-forward contracts to hedge exposures
to foreign exchange risk associated with Japanese Yen denominated capital lease
obligations. The contracts are designated as cash flow hedges. The contracts,
which have an aggregate notional amount of $142 and $138, respectively, at
December 31, 2000 and 2001, expire at various dates from 2002 to 2005. The
notional amount of the foreign exchange-forward contracts equals the future
minimum lease payments required to be paid in Japanese Yen. The fair values of
the foreign exchange-forward contracts were $20 and $42 at December 31, 2000 and
2001, respectively, and are recorded in "Other noncurrent liabilities" in the
balance sheets. Losses on changes in the fair value of the foreign
exchange-forward contracts were $10 and $22, respectively, for the periods ended
December 31, 2000 and 2001, and are recorded in "Other, net" in the statements
of operations.
9. CONCENTRATIONS OF RISK
The Company relies on local and long-distance telephone companies and other
companies to provide certain communication services. Although management
believes alternative telecommunications facilities could be found in a timely
manner, any disruption of these services could potentially have an adverse
impact on operating results.
Although the Company attempts to maintain multiple vendors for each
required product, its inventory and equipment, which are important components of
its operations, are currently acquired from only a few sources. If the suppliers
are unable to meet the Company's needs as it builds out and upgrades its network
infrastructure and sells service and equipment, delays and increased costs in
the expansion of the Company's network infrastructure or losses of potential
customers could result, which would adversely affect operating results.
Financial instruments that potentially subject the Company to credit risks
consist principally of trade accounts receivable. Concentrations of credit risk
with respect to these receivables are limited due to the
F-20
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
composition of the customer base, which includes a large number of individuals
and businesses. No customer accounted for more than 10% of combined revenues in
the periods ended December 31, 2000 and 2001.
Approximately 12,000, or 33%, of the Company's employees are represented by
the Communications Workers of America, with contracts expiring on various dates
between September 2002 and February 2005. Approximately 2% of these bargained
employees are covered by agreements that expire within one year. Most of the
contracts contain no-strike clauses. The Company is contractually required to
maintain a position of neutrality and to allow card-check balloting with respect
to unionization and will support the determination of employees.
10. RELATED PARTY TRANSACTIONS
In addition to the affiliate transactions described elsewhere in these
financial statements, other significant transactions with related parties are
summarized in the succeeding paragraphs.
On October 2, 2000, the Company entered into a transition services
agreement with BellSouth and SBC, pursuant to which BellSouth and SBC each
provided transition services and products for a limited period of time. The
services provided by both BellSouth and SBC included government and regulatory
affairs, finance, compensation and benefit accounting, human resources, internal
audit, risk management, legal, security, and tax. The fees were determined based
upon the costs of providing the expected level of services. The Company has
terminated most of these services and assumed them internally.
The Company also entered into wireless agency agreements with subsidiaries
of SBC and BellSouth. Such subsidiaries and any of their affiliates that make an
election to do so will act as authorized agents exclusively on the Company's
behalf for the sale of its wireless services to subscribers in SBC's and
BellSouth's respective incumbent service territories. The Company is free to
contract with other agents, including retailers and other distributors, for the
sale of its wireless services in both of the members' incumbent service
territories and elsewhere throughout the United States. In addition to
unilateral rights of the SBC and BellSouth and their affiliates to terminate
after October 2, 2003 and to our right to terminate in certain events, each
wireless agency agreement terminates upon breach, mutual agreement of the
parties or on December 31, 2050.
The Company also agreed under certain circumstances to sell to SBC and
BellSouth and their affiliates, as resellers, both existing and future wireless
services and features offered by the Company's wireless systems and under
roaming agreements. The Company is not required to provide any customer service
or billing services to the resellers' customers. Each reseller agreement
terminates on October 2, 2050 or upon mutual agreement of both parties.
The Company incurred local interconnect and long distance charges from SBC
and BellSouth and their affiliates for the periods ended December 31, 2000 and
2001, of $103 and $385, respectively, which were included in "Cost of services"
in the statements of operations. For the year ended December 31, 2001, the
Company incurred charges of $33 from SBC and BellSouth and their affiliates for
agent commissions and compensation paid to affiliates and agents, which was
included in "Selling, general and administrative" in the statement of
operations.
The Company incurred expenses of $153 for charges from SBC and BellSouth
affiliates for services under the transition services agreement, during the
period ended December 31, 2000. For the year ended December 31, 2001, the
Company incurred charges for similar services of $267.
Included in affiliate charges are services under contract with Amdocs
Limited (Amdocs), a software company affiliated with SBC, to provide ongoing
information systems development and support services. Charges for Amdocs
development and support services for the periods ended December 31, 2000 and
2001 were $16 and $63, of which $11 and $32 was capitalized, respectively.
F-21
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had receivables from affiliates of $42 and $85 and payables to
affiliates of $350 and $139 at December 31, 2000 and 2001, respectively.
11. INCOME TAXES
Substantially all of the operating units controlled and consolidated by the
Company are either partnerships or limited liability entities that are taxed as
partnerships under federal and state income tax laws. Therefore, income tax
items flow through to the members.
The Company is required to make periodic distributions to its members on a
pro rata basis in accordance with each member's ownership interests in amounts
sufficient to permit members to pay the tax liabilities resulting from
allocations of income tax items from the Company.
At December 31, 2000 and 2001, the reported amounts of the Company's net
assets exceeded their tax bases by approximately $6,900 and $7,900,
respectively. This basis differential is principally attributable to accelerated
tax depreciation of the assets.
In connection with the contribution of the Puerto Rico wireless operations
in September 2001 as discussed in Note 2, the Company assumed $183 of deferred
tax liabilities. These deferred tax liabilities, which are included in "Other
noncurrent liabilities" in the balance sheet, principally relate to book and tax
basis differences on intangible assets.
12. EMPLOYEE BENEFITS
In conjunction with the contribution of their U.S. wireless assets and
operations to the Company, SBC and BellSouth transferred their respective
wireless employees and related obligations and liabilities to one or more of
their wholly-owned subsidiaries which are leasing companies. Under employee
leasing agreements, the leasing companies agreed to lease all of their employees
and any employees hired after October 2, 2000 to the Company until the leasing
companies were contributed to the Company. During this period, the employees
were solely employed by the leasing companies and participated in their member
company's employee benefit plans. The leasing companies assumed from each of
BellSouth and SBC and their respective affiliates certain employment-related
obligations and liabilities relating to the member companies' compensation and
benefit plans prior to their contribution. For the periods ended December 31,
2000 and 2001, prior to their contribution to the Company, the leasing companies
billed the Company $366 and $1,452, respectively, for payroll costs including
payroll taxes, benefits and relocation costs. In October and December 2001, the
leasing companies were contributed to the Company along with the related
obligations for active employees. These costs in 2001, after the transfer of
employees to the Company, are comparable to those prior to the transfer.
PENSIONS
Substantially all of the Company's employees are covered by one of two
noncontributory qualified pension plans. Participation in the Company's plans
commenced November 1, 2001, following the initial contribution of leasing
companies to the Company. Management employees participate in a cash balance
plan, under which they can elect to receive their pensions in a lump sum. The
pension benefit formula for most non-management employees is based on a flat
dollar amount per year of service according to job classification. These
benefits are typically paid as an annuity, although some non-management
employees can elect a lump sum payment.
F-22
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pension plan funded status and amounts recognized in the balance sheet
at December 31, 2001 are as follows:
<Table>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $ --
Obligations transferred by members.......................... 330
Service cost................................................ 3
Interest cost............................................... 2
Actuarial loss.............................................. 10
Benefits paid............................................... --
----
Benefit obligation at end of year........................... $345
====
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $ --
Plan assets due from members................................ 508
Actual return on plan assets................................ --
Benefits paid............................................... --
----
Fair value of plan assets at end of year.................... $508
====
Funded status............................................... $163
Unrecognized prior service cost............................. 22
Unrecognized net actuarial gain............................. (15)
----
Prepaid pension cost........................................ $170
====
</Table>
In connection with the contribution of various leasing companies to the
Company, SBC and BellSouth have agreed to transfer pension assets from the
qualified trusts to the trusts established for the Company's pension plans. The
Company did not make any contributions to the plans during 2001.
Net pension expense recognized subsequent to the contribution of the
leasing companies is composed of the following:
<Table>
<Caption>
2001
----
Service cost................................................ $ 3
Interest cost............................................... 2
Expected return on plan assets.............................. --
Amortization of prior service cost.......................... --
Recognized actuarial gain................................... --
---
Net pension expense......................................... $ 5
===
</Table>
Significant weighted-average assumptions used in developing pension
information include:
<Table>
<Caption>
2001
----
Discount rate............................................... 7.25%
Long-term rate of return on plan assets..................... 8.50%
Composite rate of compensation increase..................... 5.00%
</Table>
The projected benefit obligation is the actuarial present value of all
benefits attributed by the pension benefit formula to previously rendered
employee service. It is measured based on assumptions concerning future interest
rates, employee compensation levels, retirement date and mortality. Actual
experience will differ from the actuarial assumptions, and the benefit
obligation will be affected.
F-23
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFINED CONTRIBUTION PLANS
The Company maintains several contributory savings plans which cover
substantially all employees. Participation in the plans commenced November 1,
2001, following the contribution of leasing companies to the Company.
Contributions made by the Company and the related cost are determined as a
percentage of each covered employee's eligible contributions to the plans and
totaled $3 in 2001.
SUPPLEMENTAL RETIREMENT PLANS
The Company has also assumed the liabilities related to nonqualified,
unfunded supplemental retirement plans for senior executives previously employed
by SBC Wireless or its affiliates. Expenses related to these plans were less
than $1 in 2001. Liabilities of $5 related to these plans, which include an
additional minimum pension liability of $1, have been included in "Other
noncurrent liabilities" and "Accumulated other comprehensive loss,"
respectively, in the balance sheet at December 31, 2001.
DEFERRED COMPENSATION PLANS
The Company also provides senior and middle management employees with a
nonqualified, unfunded deferred compensation plan. The plan allows eligible
participants to defer some of their compensation on a pre-tax basis into a
market-based interest bearing account. In addition, the plan provides for a
stated match by the Company based on a percentage of the compensation deferred.
Expenses related to the plan were not material in 2001. Liabilities of $2
related to the plan have been included in "Other noncurrent liabilities" in the
balance sheet at December 31, 2001.
POST-RETIREMENT BENEFITS
Nonbargained employees and their covered dependents who meet certain
eligibility requirements will be provided access to certain medical and dental
benefits at no cost to the Company. For bargained employees and a closed group
of nonbargained transitional employees, the Company provides certain retiree
medical, dental and life insurance benefits under various plans and accrues
actuarially determined post-retirement benefit costs as active employees earn
these benefits.
The post-retirement benefit plan funded status and amounts recognized in
the balance sheet at December 31, 2001 are as follows:
<Table>
<Caption>
2001
----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ --
Obligations transferred by members.......................... 46
Service cost................................................ 1
Interest cost............................................... --
Amendments.................................................. 8
Actuarial loss.............................................. 10
Benefits paid............................................... --
----
Benefit obligation at end of year........................... $ 65
====
Funded status............................................... $(65)
Unrecognized transition asset............................... 1
Unrecognized prior service cost............................. 11
Unrecognized net loss....................................... 4
----
Accrued post-retirement benefit obligation.................. $ 49
====
</Table>
F-24
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Post-retirement benefit cost incurred subsequent to the contribution of the
leasing companies was $1 for the year ended December 31, 2001.
The assumed medical cost trend rate in 2002 is 8.0% for retirees 64 and
under and 9.0% for retirees 65 and over, decreasing to 5.0% in 2006, prior to
adjustment for cost-sharing provisions of the medical and dental plans for
active and certain recently retired employees. The assumed dental cost trend
rate is 5.0% in 2002. A one percentage-point change in the assumed health care
cost trend rate would have the following effects:
<Table>
<Caption>
ONE PERCENTAGE- ONE PERCENTAGE-
POINT INCREASE POINT DECREASE
--------------- ---------------
Effect on total of service and interest cost
components............................................ $-- $--
Effect on post-retirement benefit obligation............ $10 $(8)
</Table>
Significant assumptions for the discount rate and the composite rate of
compensation increase used in developing the accumulated post-retirement benefit
obligation and related post-retirement benefit costs were the same as those used
in developing the pension information.
13. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has entered into operating leases for facilities and equipment
used in operations. These leases typically include renewal options and
escalation clauses. Rental expense under operating leases for the periods ended
December 31, 2000 and 2001 was $87 and $399, respectively. Capital leases are
included in Note 7, Debt.
The following table summarizes the approximate future minimum rentals under
noncancelable operating leases in effect at December 31, 2001:
<Table>
2002........................................................ $ 344
2003........................................................ 294
2004........................................................ 248
2005........................................................ 209
2006........................................................ 151
Thereafter.................................................. 928
------
Total............................................. $2,174
======
</Table>
CLAIMS
The Company is subject to claims arising in the ordinary course of business
involving allegations of personal injury, breach of contract, anti-competitive
conduct, employment law issues, regulatory matters and other actions. While
complete assurance cannot be given as to the outcome of any legal claims, the
Company believes that any financial impact would not be material to its results
of operations, financial position or cash flows.
F-25
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMUNICATIONS TOWERS
In June 1999, BellSouth leased to Crown Castle International (Crown) all
unused space on 2,623 of BellSouth's communications towers in exchange for $927
to be paid in a combination of cash and Crown common stock. All cash proceeds
and the majority of stock proceeds resulting from this agreement were retained
by BellSouth.
Under these transactions, Crown manages and maintains the towers. The
Company (as lessor) has the right to withdraw from a particular lease on the
10th anniversary of the lease date and on each five-year anniversary thereafter.
The Company has retained, outside of the leases, a portion of the towers for use
in operating its wireless network and continues to own the tower and related
communications components including switching equipment, shelters and
communications facilities. During 2000 and 2001, the Company paid $9 and $37,
respectively, to Crown for its monitoring and maintenance services.
In August 2000, Southwestern Bell Mobile Systems, Inc. (SBMS), which was
transferred to the Company on October 2, 2000, agreed to transfer approximately
3,900 of its communications towers (later reduced to 3,600), including those
owned by consolidated partnerships, to another SBC affiliate, in connection with
an agreement whereby the SBC affiliate would lease its rights pertaining to
those towers to SpectraSite Holdings, Inc. (SpectraSite) to operate and lease
space on the towers. Under the arrangement, SpectraSite then subleases back to
the SBC affiliate the space on the towers the Company uses and the SBC affiliate
further subleases that space to the Company. The term of the sublease is unique
to each tower and ranges from 13 to 32 years. The Company (as lessee) has the
right to withdraw from a particular lease on the 10th anniversary of the lease
date and on each five-year anniversary thereafter. The Company accounts for its
subleases of the tower space from the SBC affiliate as capital leases.
In 2000 and 2001, SBMS transferred to the SBC affiliate 1,491 and 1,461
towers, respectively. As of December 31, 2001, 648 towers remain to be
transferred to the SBC affiliate, principally in 2003, upon the completion of
legal requirements, including receiving consents from certain limited partners.
For towers not yet transferred by SBMS to the SBC affiliate, the Company pays
monthly monitoring and maintenance fees to the SBC affiliate. During 2001, the
Company paid $9 related to these fees.
As part of the Crown and SpectraSite agreements, the Company has entered
into Build to Suit (BTS) Agreements. The agreements provide for the development
and construction of towers on BTS sites and the performance of other services.
Services include location and acquisition of BTS sites or identification of
co-location sites. Upon completion of a tower on a BTS site, the tower becomes
subject to a lease agreement which is accounted for as a capital lease.
15. SUBSEQUENT EVENTS
In January 2002, the Company filed with the Securities and Exchange
Commission a registration statement on Form S-4 pertaining to the exchange of
privately placed Senior Notes for senior notes that are registered under the
Securities Act of 1933 in identical principal amount and with substantially
identical terms.
In January 2002, the Company and AT&T Wireless announced the formation of a
joint venture to build a GSM/GPRS/EDGE network along 3,000 miles of interstate
highways in predominantly midwestern and western states. The venture will be
managed jointly by both companies. In addition to cash capital contributions,
each company will also contribute spectrum.
F-26
CINGULAR WIRELESS LLC
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<Table>
<Caption>
DECEMBER 31, MARCH 31,
2001 2002
------------ -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 567 $ 285
Accounts receivable -- net of allowance for doubtful
accounts of $131 and $127.............................. 1,644 1,654
Inventories............................................... 189 167
Prepaid expenses and other current assets................. 157 187
------- -------
Total current assets.............................. 2,557 2,293
Property, plant and equipment, net.......................... 8,864 8,769
FCC licenses, net........................................... 7,403 7,391
Goodwill, net............................................... 859 859
Other intangible assets, net................................ 493 444
Investments in and advances to equity affiliates............ 2,023 2,148
Other assets................................................ 331 406
------- -------
Total assets...................................... $22,530 $22,310
======= =======
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Debt maturing within one year............................. $ 65 $ 36
Accounts payable.......................................... 1,137 671
Due to affiliates, net.................................... 54 20
Advanced billing and customer deposits.................... 415 431
Accrued liabilities....................................... 1,553 1,346
------- -------
Total current liabilities......................... 3,224 2,504
Long-term debt:
Due to affiliates......................................... 9,678 9,678
Other long-term debt, net of discount..................... 2,788 2,779
------- -------
Total long-term debt.............................. 12,466 12,457
Other noncurrent liabilities................................ 505 631
------- -------
Total liabilities........................................... 16,195 15,592
Minority interests in consolidated partnerships............. 485 489
Members' capital:
Members' capital.......................................... 6,030 6,404
Receivable for properties to be contributed............... (178) (178)
Accumulated other comprehensive loss...................... (2) 3
------- -------
Total members' capital............................ 5,850 6,229
------- -------
Total liabilities and members' capital............ $22,530 $22,310
======= =======
</Table>
See accompanying notes.
F-27
CINGULAR WIRELESS LLC
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(DOLLARS IN MILLIONS)
<Table>
<Caption>
THREE MONTHS
ENDED MARCH 31,
---------------
2001 2002
------ ------
Operating revenues
Service revenues.......................................... $3,012 $3,316
Equipment sales........................................... 262 227
------ ------
Total operating revenues.......................... 3,274 3,543
Operating expenses
Cost of services (excluding depreciation of $309 and $331,
included below)........................................ 604 723
Cost of equipment sales................................... 437 404
Selling, general and administrative....................... 1,271 1,299
Depreciation and amortization............................. 451 450
------ ------
Total operating expenses.......................... 2,763 2,876
------ ------
Operating income............................................ 511 667
Other income (expenses)
Interest expense.......................................... (198) (225)
Minority interest in net income of consolidated
partnerships........................................... (35) (31)
Equity in net income (loss) of affiliates, net............ (6) (58)
Other, net................................................ 89 19
------ ------
Total other income (expenses)..................... (150) (295)
------ ------
Income before provision for income taxes.................... 361 372
Provision for income taxes.................................. 2 2
------ ------
Net income............................................. $ 359 $ 370
====== ======
</Table>
See accompanying notes.
F-28
CINGULAR WIRELESS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2002
(DOLLARS IN MILLIONS)
<Table>
<Caption>
THREE MONTHS
ENDED MARCH 31,
----------------
2001 2002
------- ------
OPERATING ACTIVITIES
Net income.................................................. $ 359 $ 370
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization.......................... 451 450
Provision for doubtful accounts........................ 66 67
Gain on disposition of businesses...................... (78) (7)
Minority interest in net income of consolidated
partnerships.......................................... 35 31
Equity in net (income) loss of affiliates, net......... 6 58
Changes in operating assets and liabilities
Trade accounts receivables........................ (6) (76)
Other current assets.............................. 32 (17)
Accounts payable and other current liabilities.... (295) (667)
Other, net............................................. (41) 44
------ -----
Net cash provided by operating activities................... 529 253
INVESTING ACTIVITIES
Construction and capital expenditures....................... (387) (346)
Investments in and advances to equity affiliates............ (232) (111)
Dispositions of businesses.................................. 24 6
------ -----
Net cash used in investing activities....................... (595) (451)
FINANCING ACTIVITIES
Net repayment of amounts due to affiliates.................. (966) 0
Net repayment of commercial paper........................... (146) (27)
Net repayment of long-term debt............................. (12) (31)
Distributions to members.................................... (69) 0
Net distributions to minority interests..................... (31) (26)
Contributions by members.................................... 1,278 0
------ -----
Net cash provided by (used in) financing activities......... 54 (84)
------ -----
Net decrease in cash and cash equivalents................... (12) (282)
Cash and cash equivalents at beginning of period............ 126 567
------ -----
Cash and cash equivalents at end of period.................. $ 114 $ 285
====== =====
Cash paid during the three months ended March 31 for:
Interest.................................................... $ 18 $ 190
Income taxes, net of any refunds............................ 1 1
</Table>
See accompanying notes.
F-29
CINGULAR WIRELESS LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' CAPITAL (UNAUDITED)
(DOLLARS IN MILLIONS)
<Table>
Balance at December 31, 2001................................ $5,850
Net income................................................ 370
Contributions from members................................ 4
Distributions to members.................................. --
Other comprehensive income................................ 5
------
Balance at March 31, 2002................................... $6,229
======
</Table>
See accompanying notes.
F-30
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2002
(DOLLARS IN MILLIONS)
1. BACKGROUND
Cingular Wireless LLC (the Company) is a Delaware limited liability company
formed in April 2000 whose members are certain SBC Communications Inc. (SBC) and
BellSouth Corporation (BellSouth) subsidiaries, and Cingular Wireless
Corporation, or "CWC". All of the Company's operations, which consist of
wireless voice and data communications businesses in 37 states, the District of
Columbia, Puerto Rico and the U.S. Virgin Islands, are conducted through
subsidiaries or ventures, and nearly all of the Company's assets are held by
them. In October 2000, SBC and BellSouth contributed to the Company
substantially all of their U.S. wireless voice and data businesses. SBC received
an approximate 60% and BellSouth received an approximate 40% economic interest
in the Company for their contributions. SBC and BellSouth have equal
representation on the board of directors of CWC. Substantially all important
decisions are required to be approved by a strategic review committee of its
board of directors. CWC is a Delaware corporation formed in April 2000 that acts
as the Company's manager and controls its management and operations. CWC has no
material assets of its own other than a nominal limited liability company
membership interest in the Company. SBC and BellSouth each own one share of
super-voting Class B common stock of CWC through which they jointly have the
right to control its board of directors.
2. BASIS OF PRESENTATION
Certain wireless businesses consolidated in the Company's financial
statements for the three months ended March 31, 2002 were not yet contributed to
the Company during the comparable period in 2001 and thus were not consolidated
in the Company's financial statements for the three months ended March 31, 2001.
The Company did receive a management fee for managing the operations of these
businesses prior to the date of contribution.
The consolidated financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC) that
permit reduced disclosure for interim periods. We believe that these financial
statements include all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the results for the interim periods shown.
The results for the interim periods are not necessarily indicative of results
for the full year. These unaudited consolidated financial statements should be
read in conjunction with the December 31, 2001 consolidated financial statements
and accompanying notes.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. Estimates are used when accounting for certain items such as
the allowance for doubtful accounts, depreciation and amortization, valuation of
inventory, investments and asset impairment.
3. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and entities in which the Company exercises control. Other parties' interests in
consolidated entities are reported as minority interests. The equity method is
used to account for investments for which the Company exercises significant
influence but does not control. All significant intercompany transactions are
eliminated in the consolidation process.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). SFAS No. 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives. SFAS No. 142 requires that these
F-31
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
assets be reviewed for impairment at least annually. Intangible assets with
finite lives will continue to be amortized over their estimated useful lives.
Additionally, SFAS No. 142 requires that goodwill included in the carrying value
of equity method investments no longer be amortized. As a result of adopting
SFAS No. 142, amortization expense for the three months ended March 31, 2002 was
reduced by $64.
In conjunction with the adoption of SFAS No. 142, the Company reassessed
the useful lives of previously recognized intangible assets. A significant
portion of its intangible assets are FCC licenses that provide its wireless
operations with the exclusive right to utilize certain radio frequency spectrum
to provide cellular communication services. While FCC licenses are issued for
only a fixed time, generally ten years, such licenses are subject to renewal by
the FCC. Renewals of FCC licenses have occurred routinely and at nominal cost.
Moreover, the Company has determined that there are currently no legal,
regulatory, contractual, competitive, economic or other factors that limit the
useful life of its FCC licenses. As a result, the FCC licenses will be treated
as an indefinite-lived intangible asset under the provisions of SFAS No. 142 and
will not be amortized but rather will be tested for impairment. The Company will
reevaluate the useful life determination for wireless licenses each reporting
period to determine whether events and circumstances continue to support an
indefinite useful life.
The Company has begun to apply the provisions of SFAS No. 142 in the first
quarter of 2002, which includes testing goodwill for impairment using a two-step
process. The first step is a screen for potential impairment, while the second
step measures the amount of the impairment, if any. The Company completed in the
first quarter of 2002 the first of the required impairment tests of goodwill as
of January 1, 2002. Based on the results of the first step, it is likely that
all or a portion of the goodwill related to its Mobitex data network, with a
carrying value of $32, will be impaired; however, the Company has not yet
determined the amount of any potential impairment loss. For goodwill related to
its cellular/PCS business, the results of the first step of the impairment test
indicated no impairment in value. Any impairment that is required to be
recognized when adopting SFAS No. 142 will be reflected as the cumulative effect
of a change in accounting principle in the first quarter of 2002. The Company
plans to complete the measurement of the impairment loss in the second quarter
of 2002.
The Company has completed the impairment test of its indefinite lived
intangible assets as of March 31, 2002, and no impairment exists. This
impairment test was performed on an aggregate basis, consistent with its
management of the business on a national scope, and utilized a fair value
approach, using primarily discounted cash flows, to complete the test. This
approach determines the fair value of the FCC licenses and accordingly
incorporates cash flow assumptions regarding the investment in a network, the
development of distribution channels, and other inputs for making the business
operational. As these inputs are included in determining free cash flows of the
business, the present value of the free cash flows is attributable to the
licenses.
F-32
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Summarized below are the major classes of intangible assets that will
continue to be amortized under SFAS No. 142, as well as the carrying values of
those intangible assets which will no longer be amortized:
<Table>
<Caption>
DECEMBER 31, 2001 MARCH 31, 2002
----------------------- -----------------------
USEFUL CARRYING ACCUMULATED CARRYING ACCUMULATED
LIVES AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- -------- ------------ -------- ------------
Amortized intangible assets:
FCC license used in Mobitex
network.................. 5 years $ 89 $ (13) $ 89 $ (16)
Customer lists.............. 5 years 1,070 (621) 1,070 (660)
Other....................... 3 - 5 years 167 (123) 167 (133)
----------- ------ ----- ------ -----
Total............... $1,326 $(757) $1,326 $(809)
====== ===== ====== =====
Unamortized intangible assets:
FCC licenses................ $7,327 $7,318
</Table>
The following table presents current and expected amortization expense for
each of the following periods:
<Table>
Aggregate amortization expense:
For the three months ended March 31, 2002................. $ 52
Expected amortization expense:
For the remainder of 2002................................. 136
For the years ending:
2003...................................................... 170
2004...................................................... 126
2005...................................................... 60
2006...................................................... 23
2007...................................................... 2
</Table>
As required by SFAS 142, the following table shows net income for the
quarter ended March 31, 2001, presented on a basis comparable to the 2002
results, but adjusted to exclude amortization expense related to goodwill and
indefinite lived FCC licenses.
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------
2001 2002
----- -----
Net income -- as reported................................... $359 $370
Add back: Goodwill amortization, net of tax................. 8 --
Add back: License amortization, net of tax.................. 50 --
---- ----
Net income -- as adjusted................................... $417 $370
==== ====
</Table>
5. FORMATION OF JOINT VENTURE
In January 2002, the Company and AT&T Wireless agreed to form a joint
venture to build a GSM/ GPRS/EDGE network along 3,000 miles of interstate
highways in predominantly midwestern and western states. The venture will be
managed jointly by both companies and is expected to be formed before December
31, 2002. Upon formation, the Company is obligated to contribute cash or assets
in the amount equal to the cash and assets contributed by AT&T Wireless, up to a
maximum of $85. The new network is expected to begin operations in the first
quarter of 2003. The Company and AT&T Wireless will buy network services from
the venture and provide services under their respective brand names.
F-33
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
6. INVESTMENTS IN AND ADVANCES TO EQUITY AFFILIATES
The Company has investments in affiliates for which it does not have a
controlling interest that are accounted for under the equity method. The more
significant of these investments are a jointly controlled infrastructure venture
with VoiceStream Wireless (Factory), and Salmon PCS LLC, which was formed to bid
as a "very small business" on FCC licenses in an auction that concluded in
January 2001.
Investments in and advances to equity affiliates consist of the following:
<Table>
<Caption>
DECEMBER 31, MARCH 31,
2001 2002
------------ ---------
Investment in VoiceStream Venture........................... $1,275 $1,398
Investment in Salmon........................................ 262 251
Advances to Salmon.......................................... 475 487
Other....................................................... 11 12
------ ------
Investments in and advances to equity affiliates............ $2,023 $2,148
====== ======
</Table>
VOICESTREAM VENTURE
The monthly cash operating expenses of this venture are charged to the
Company and VoiceStream based upon their share of the total minutes of use on
the respective networks. This venture is expected to incur net losses due to
depreciation and interest expense, which are not reimbursed by the Company and
VoiceStream. For the three months ended March 31, 2002, the Company recorded
equity in the net loss of this venture of $47.
The Company and VoiceStream have agreed to jointly fund capital
expenditures of the venture. For the three months ended March 31, 2002, the
Company made contributions of $183 to the venture, principally related to
capital expenditures in the California and Nevada markets. Additional
contributions to Factory will generally be based upon the Company's
proportionate share of the annual capital expenditure requirements and such
contributions will be accounted for as an increase in the Company's investment.
The Company has also agreed to contribute $450 throughout fiscal years 2002 and
2003, of which no amounts have been contributed as of March 31, 2002.
SALMON
Subsequent to March 31, 2002, Salmon prepaid $358 in principal of its loan
balance to the Company from auction deposit proceeds refunded by the FCC.
7. COMPREHENSIVE INCOME
The components of comprehensive income for the three months ended March 31,
2002 and 2001 include net income and adjustments to members' capital for the
foreign currency translation adjustment and net unrealized gain (loss) on
securities. The foreign currency translation adjustment is due to exchange rate
fluctuations in our Japanese leveraged lease portfolio, and the Company's net
unrealized gain on securities relates to the Company's investment in Crown
Castle International common stock.
F-34
CINGULAR WIRELESS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The following table presents the Company's comprehensive income:
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------
2001 2002
----- -----
Net income.................................................. $359 $370
Other comprehensive income, net of tax:
Foreign currency translation adjustment................... -- 4
Net unrealized gain on securities:
Unrealized gain on available for sale
securities...................................... -- 1
---- ----
Net unrealized gain (loss) on securities.................. -- 1
---- ----
Other comprehensive income.................................. -- 5
---- ----
TOTAL COMPREHENSIVE INCOME.................................. $359 $375
==== ====
</Table>
8. SUBSEQUENT EVENTS
LONG-TERM INCENTIVE PLAN
In April 2002, the Company's Board of Directors approved the Cingular
Wireless Long-Term Incentive Plan (the Plan). Pursuant to the Plan, the Company
granted performance units, valued at $50 (whole dollars) each, to eligible
participants as of January 1, 2002. The value of the performance units will be
determined based upon the achievement of certain Company objectives regarding
revenue growth and return on capital during the three-year performance period
2002 -- 2004 and will be payable during the first quarter of 2005. The value of
the award payable at the end of the performance period will range from 0 to 200%
of the performance target. The Company has determined that the Plan is
compensatory and will accrue compensation expense over the term of the Plan.
During the first quarter of 2002, the Company accrued compensation expense of $5
associated with the Plan.
TRANSACTION WITH VOICESTREAM
In April 2002, the Company and an affiliate of SBC completed a transaction
with VoiceStream in which VoiceStream contributed assets for a 6% equity
interest in our Puerto Rico wireless operations. No gain or loss was recognized
on this transaction. Following this transaction, the Company's ownership
interest in the Puerto Rico business is 47%. Due to the fact that all existing
control provisions have been retained by the Company, consolidation of the
financial statements of the Puerto Rico operating unit will continue.
TRANSACTION WITH SPECTRASITE
In May 2002, the Company entered into agreements with SpectraSite, subject
to certain conditions, to acquire for $108 in cash SpectraSite's leasehold
interests in 545 SBC communications towers located in California and Nevada,
which it uses in its business. The Company also entered into an agreement with
SBC, subject to certain conditions, to acquire for $32 in cash 187 leased towers
in California and Nevada, which it also uses in its business; as a result, the
total number of sites subject to the original transaction with SpectraSite is
further reduced. The primary condition to the Company's obligations under the
agreements has not been met and the status of these agreements is uncertain.
Additionally, the Company terminated its build-to-suit agreement with
SpectraSite and, accordingly, all of the completed towers, towers under
construction and other work-in-progress will be transferred to the Company
during the transition period, and the Company has agreed to reimburse
SpectraSite for the costs incurred thereunder. The Company expects these
reimbursement payments to be approximately $10.
F-35
COMBINED FINANCIAL STATEMENTS
SBC DOMESTIC WIRELESS GROUP
YEAR ENDED DECEMBER 31, 1999
AND THE PERIOD FROM JANUARY 1, 2000 THROUGH OCTOBER 2, 2000
WITH REPORT OF INDEPENDENT AUDITORS
F-36
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareowner
SBC Domestic Wireless Group
We have audited the accompanying combined balance sheets of the SBC
Domestic Wireless Group (a business of SBC Communications Inc., see Note 1) as
of December 31, 1999 and October 2, 2000, and the related combined statements of
operations, shareowner's equity, and cash flows for the year ended December 31,
1999 and the period from January 1, 2000 to October 2, 2000. These financial
statements are the responsibility of the Group's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
combined financial statements referred to above present fairly, in all material
respects, the combined financial position of the SBC Domestic Wireless Group at
December 31, 1999 and October 2, 2000, and the combined results of its
operations and its cash flows for the year ended December 31, 1999 and the
period from January 1, 2000 to October 2, 2000, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 1 to the combined financial statements, in 1999 the
Group changed its method of accounting for internal-use software development
costs.
/s/ Ernst & Young LLP
December 15, 2000
Atlanta, Georgia
F-37
SBC DOMESTIC WIRELESS GROUP
COMBINED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 59 $ 116
Accounts receivable, net of allowances for doubtful
accounts of $81 and $48................................ 897 990
Inventory................................................. 111 205
Deferred income taxes..................................... 42 43
Prepaid expenses and other current assets................. 39 52
------- -------
Total current assets.............................. 1,148 1,406
Property, plant and equipment, net.......................... 4,231 4,598
Intangible assets, net...................................... 5,701 7,495
Investments in equity affiliates............................ 216 193
Other assets................................................ 286 170
------- -------
Total assets...................................... $11,582 $13,862
======= =======
LIABILITIES AND SHAREOWNER'S EQUITY
Current liabilities:
Due to affiliates......................................... $ 1,079 $ 115
Current portion of long-term debt......................... 37 38
Accounts payable and accrued liabilities.................. 1,034 1,037
Advanced billings and customer deposits................... 190 243
Accrued taxes............................................. 1,505 539
------- -------
Total current liabilities......................... 3,845 1,972
Long-term debt:
Long-term debt due after one year......................... 262 230
Due to affiliates......................................... -- 7,389
------- -------
Total long-term debt.............................. 262 7,619
Other noncurrent liabilities:
Deferred income taxes..................................... 1,492 1,965
Minority interests........................................ 683 773
Other noncurrent liabilities.............................. 266 257
------- -------
2,441 2,995
Shareowner's equity:
Common stock.............................................. -- --
Additional paid-in capital................................ 3,898 1,488
Accumulated earnings (deficit)............................ 1,136 (212)
------- -------
Total shareowner's equity......................... 5,034 1,276
------- -------
Total liabilities and shareowner's equity......... $11,582 $13,862
======= =======
</Table>
See accompanying notes.
F-38
SBC DOMESTIC WIRELESS GROUP
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
<Table>
<Caption>
YEAR ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ------------
Operating revenues:
Service revenues.......................................... $6,787 $5,582
Equipment sales........................................... 589 518
------ ------
Total operating revenues.......................... 7,376 6,100
Operating expenses:
Cost of service........................................... 1,385 1,037
Cost of equipment sales................................... 829 702
Selling, general and administrative....................... 2,870 2,238
Depreciation and amortization............................. 990 835
------ ------
Total operating expenses.......................... 6,074 4,812
------ ------
Operating income............................................ 1,302 1,288
Other income (expenses):
Interest expense.......................................... (218) (267)
Minority interest......................................... (207) (133)
Equity in net income of affiliates, net................... 42 7
Other, net................................................ 10 22
------ ------
Total other income (expenses)..................... (373) (371)
------ ------
Income before provision for income taxes, extraordinary gain
and cumulative effect of accounting changes............... 929 917
Provision for income taxes.................................. 373 367
------ ------
Income before extraordinary gain and cumulative effect of
accounting changes........................................ 556 550
Extraordinary gain on disposal, net of tax.................. 1,379 36
Cumulative effect of accounting change, net of tax.......... (14) -
------ ------
Net income........................................ $1,921 $ 586
====== ======
</Table>
See accompanying notes.
F-39
SBC DOMESTIC WIRELESS GROUP
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<Table>
<Caption>
YEAR ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ------------
OPERATING ACTIVITIES
Net income.................................................. $ 1,921 $ 586
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 772 571
Amortization.............................................. 218 264
Minority interest in net income........................... 207 133
Provision for doubtful accounts........................... 150 57
Deferred income taxes..................................... 35 119
Gains on disposition of businesses........................ -- (21)
Extraordinary gain, net of tax............................ (1,379) (36)
Cumulative effect of accounting changes, net of tax....... 14 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (376) (89)
Inventory, prepaid expenses, and other current
assets................................................ (5) (98)
Accounts payable and other current liabilities......... 646 (836)
Other, net.................................................. (342) (30)
------- -------
Net cash provided by operating activities.............. 1,861 620
INVESTING ACTIVITIES
Construction and capital expenditures....................... (988) (704)
Acquisitions of businesses.................................. (887) (1,824)
Dispositions of businesses.................................. 3,143 --
------- -------
Net cash provided by (used in) investing activities.... 1,268 (2,528)
FINANCING ACTIVITIES
Net increase (decrease) in amounts due to affiliates........ (1,866) 6,375
Repayment of long-term debt................................. (1,471) (31)
Funds received from shareowner.............................. 1,023 --
Return of capital to shareowner............................. -- (2,321)
Dividends paid to shareowner................................ (521) (1,934)
Net distributions to minority interests..................... (248) (124)
------- -------
Net cash provided by (used in) financing activities.... (3,083) 1,965
------- -------
Net increase in cash and cash equivalents................... 46 57
Cash and cash equivalents beginning of period............... 13 59
------- -------
Cash and cash equivalents end of period................ $ 59 $ 116
======= =======
</Table>
See accompanying notes.
F-40
SBC DOMESTIC WIRELESS GROUP
COMBINED STATEMENTS OF SHAREOWNER'S EQUITY
(DOLLARS IN MILLIONS)
<Table>
<Caption>
ADDITIONAL ACCUMULATED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------ ---------- ----------- -------
Balance at December 31, 1998........................... $ -- $ 2,875 $ (264) $ 2,611
Net income........................................... -- -- 1,921 1,921
Dividends to shareowner.............................. -- -- (521) (521)
Funds received from shareowner....................... -- 1,023 -- 1,023
---- ------- ------- -------
Balance at December 31, 1999........................... -- 3,898 1,136 5,034
Net income........................................... -- -- 586 586
Dividends to shareowner.............................. -- -- (1,934) (1,934)
Return of capital to shareowner...................... -- (2,410) -- (2,410)
---- ------- ------- -------
Balance at October 2, 2000............................. $ -- $ 1,488 $ (212) $ 1,276
==== ======= ======= =======
</Table>
See accompanying notes.
F-41
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
AND THE PERIOD FROM JANUARY 1, 2000 TO OCTOBER 2, 2000
(DOLLARS IN MILLIONS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The SBC Domestic Wireless Group (the Group) consists of substantially all
of the domestic wireless businesses of SBC Communications Inc. (SBC). In April
2000, SBC and BellSouth Corporation (BellSouth) formed a joint venture to
combine their respective domestic wireless properties. In October 2000, SBC and
BellSouth began contributions of their wireless properties and formally began
the operations of Cingular Wireless LLC (Cingular). Economic ownership in
Cingular is held 60% by SBC and 40% by BellSouth, with control shared equally.
These combined financial statements have been prepared using SBC's historical
basis in the assets and liabilities and the historical results of the operations
of the Group, which was substantially contributed to Cingular.
Subsidiaries of SBC merged with Ameritech Corporation (Ameritech) in 1999
under the pooling of interests method of accounting. The wireless operations of
this pooled entity are included in all periods presented in these financial
statements as if the company had always been a subsidiary of SBC. As a condition
of the Ameritech merger, Ameritech sold 20 Midwestern cellular properties
including the competing cellular licenses in Chicago, Illinois and St. Louis,
Missouri. The operating results of these 20 Midwestern cellular properties are
included through October 8, 1999, the date of disposition.
These combined financial statements include allocations of certain SBC
corporate expenses, including legal, accounting, employee benefits, real estate,
insurance services, information technology services and other SBC corporate
infrastructure costs. The expense allocations have been determined on bases that
SBC and the Group considered to be a reasonable reflection of the utilization of
services provided or the benefit received by the Group. However, the financial
information included herein may not reflect the combined financial position,
operating results, changes in shareowner equity and cash flows of the Group in
the future or what they would have been had the Group been a separate,
stand-alone entity.
The Group provides domestic wireless telecommunications services, including
local, long distance and roaming services using both cellular and personal
communication services (PCS) networks. Wireless services and products offered
also include certain enhanced services, paging services and wireless equipment.
The services and products of the Group are marketed under several established
brands including Ameritech, Cellular One, Pacific Bell, SNET and Southwestern
Bell.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Comprehensive income for the Group is the same as net income for all
periods presented.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of the Group and
partnerships in which the Group exercises control. Other parties' interests in
controlled partnerships are reported as minority interests. The equity method is
used to account for investments in partnerships for which it has significant
influence. All significant intragroup transactions are eliminated in the
combination process.
OPERATING SEGMENTS
The Group operates in only one segment, wireless telecommunications
services; therefore, separate segment reporting is not applicable.
F-42
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FCC LICENSES
The Federal Communications Commission (FCC) issues licenses that authorize
wireless carriers to provide service in specific geographic areas. The FCC
grants licenses for terms of up to ten years. In 1993, the FCC adopted specific
standards to apply to wireless renewals, concluding it will award a license
renewal to a licensee that meets certain standards of past performance.
Historically, the FCC has granted license renewals routinely. The licenses held
by the Group expire at various dates. The Group believes that it will be able to
meet all requirements necessary to secure renewal of its wireless licenses.
REVENUE RECOGNITION
The Company earns service revenues by providing access to its wireless
network (access revenue) and for usage of its wireless system (airtime revenue).
Access revenue is recognized when earned throughout the normal billing cycle.
Airtime revenue, including roaming revenue and long-distance revenue, is
recognized when the service is rendered. The revenue and related expenses
associated with the sale of wireless handsets and accessories are recognized
when the products are delivered and accepted by the customer, as this is
considered to be a separate earnings process from the sale of wireless services.
INCOME TAXES
The entities that are included in the Group are included in SBC's
consolidated federal income tax return. Federal income taxes are provided for in
accordance with the provisions of the Tax Allocation Agreement (Agreement)
between the Group and SBC. In general, the Group's income tax provision under
the Agreement reflects the financial consequences of income, deductions and
credits which can be utilized on a separate return basis or in consolidation
with SBC and which are assured of realization.
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
for tax purposes.
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with original
maturities of three months or less.
ACCOUNTS RECEIVABLE
Accounts receivable from customers are generally unsecured and are due
within 30 days. Expected credit losses are recorded as an allowance for doubtful
accounts in the Combined Balance Sheets.
INVENTORY
Inventory consists primarily of wireless telephone handsets and is valued
at the lower of weighted average cost or market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. The cost of additions and
substantial improvements to property, plant and equipment is capitalized. The
cost of maintenance and repairs of property, plant and equipment is charged to
operating expenses. Property, plant and equipment is depreciated using
straight-line methods over its estimated economic life, generally ranging from 3
to 40 years. Leasehold improvements are depreciated over the shorter of the
remaining term of the lease or the estimated useful life of the improvement.
F-43
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense and network engineering costs incurred during the
construction phase of the Group's wireless network and real estate properties
under development are capitalized as part of property, plant and equipment and
recorded as plant under construction until the projects are completed and placed
into service.
INTANGIBLE ASSETS
Intangible assets consist primarily of FCC licenses, the excess of
consideration paid over the fair value of net assets acquired in purchase
business combinations (goodwill) and customer lists. These assets are being
amortized using the straight-line method over their estimated economic lives of
up to 40 years. The carrying value of these assets is periodically reviewed to
determine whether such intangibles are fully recoverable from projected net cash
flows of the related business.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets, including intangibles, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. It is reasonably possible that these assets could become
impaired as a result of technological or other industry changes. For assets the
Group intends to hold for use, if the total of the expected future undiscounted
cash flows is less than the carrying amount of the asset, a loss is recognized
for the difference between the fair value and carrying value of the asset. For
assets the Group intends to dispose of, depreciation is adjusted over the
remaining service period to arrive at fair value at the estimated date of
disposal.
ADVERTISING COSTS
Costs for advertising products and services or corporate image are expensed
as incurred. Total advertising expense for the year ended December 31, 1999 was
$244, and $223 for the period ended October 2, 2000.
DERIVATIVE FINANCIAL INSTRUMENTS
The Group does not hold derivatives for trading purposes. From time to
time, as part of its risk management strategy, the Group uses derivative
financial instruments, including foreign currency forward exchange contracts to
hedge exposures to changes in foreign currency rates related to foreign
denominated obligations. Gains and losses on such foreign exchange contracts are
recognized currently and serve to offset foreign exchange transaction losses and
gains recognized on the foreign denominated liability. The Group is subject to
credit risk in the event of nonperformance by the counterparty to the contracts.
However, the Group does not anticipate nonperformance by any counterparty.
SOFTWARE COSTS
The American Institute of Certified Public Accountants issued a Statement
of Position (SOP) that requires capitalization of certain computer software
expenditures beginning in 1999. The SOP, which prescribed prospective
application, requires the capitalization of certain costs incurred in connection
with developing or obtaining internal use software. When placed in service,
capitalized software costs are being amortized over three years. Prior to the
adoption of the SOP, the costs of computer software purchased or developed for
internal use were generally expensed as incurred. However, initial operating
system software costs were, and continue to be, capitalized. The effect of
adopting the SOP was to increase net income by approximately $41 for the year
ended December 31, 1999.
Capitalized software, net of related amortization, of $166 and $186 as of
December 31, 1999 and October 2, 2000, respectively, have been included in
property, plant and equipment.
F-44
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATION
Certain amounts have been reclassified in the prior period financial
statements to conform with the current period presentation.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Among other provisions, it
requires that entities recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. Gains and losses resulting from changes in the fair values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The effective date of this standard
was delayed with the issuance of SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133 -- an amendment of FASB Statement 133." The effective date for
SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. This
means that the standard, as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133," must be adopted by the Group no later than January 1, 2001.
The Group does not expect the adoption of this standard to have a material
impact on net income.
In December 1999, the SEC issued Staff Accounting Bulletin Number 101,
"Revenue Recognition in Financial Statements" (SAB 101) which must be adopted by
the fourth quarter of 2000. SAB 101 addresses, among other items, when revenue
relating to non-refundable, up-front fees, and associated costs should be
recognized. The Group does not expect that the adoption of SAB 101 would have an
effect on net income.
2. MERGERS, ACQUISITIONS, AND DISPOSITIONS
MERGERS
In October 1998, SBC and SNET completed the merger of an SBC subsidiary
with SNET. SNET became a wholly owned subsidiary of SBC effective with the
merger. In October 1999, SBC and Ameritech completed the merger of an SBC
subsidiary with Ameritech. Ameritech became a wholly owned subsidiary of SBC
effective with the merger. Both transactions have been accounted for as a
pooling of interests and tax-free reorganizations.
Combined wireless operating revenues, income before extraordinary items and
cumulative effect of accounting changes and net income of the Group and
Ameritech on a pre-merger basis for the year ended December 31, 1999 is
presented below:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
1999
------------
Operating revenues:
SBC and SNET.............................................. $5,485
Ameritech................................................. 1,891
------
Combined.................................................. $7,376
======
Income before extraordinary items and cumulative effect of
accounting change:
SBC and SNET.............................................. $ 436
Ameritech................................................. 120
------
Combined.................................................. $ 556
======
</Table>
F-45
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
1999
------------
Net income:
SBC and SNET.............................................. $ 431
Ameritech................................................. 1,490
------
Combined.................................................. $1,921
======
</Table>
Combined results include the effect of retroactively conforming accounting
methodologies between SBC and Ameritech. Among other items, non-cash adjustments
were made to conform accounting for pension and postretirement benefits between
the companies and to immediately expense certain items routinely deferred and
amortized by Ameritech, including certain sales commissions and paging
equipment.
The pension and postretirement adjustments include the effects of
conforming the adoption date for postretirement accounting and methods of
recognizing actuarial gains and conforming the estimate methods used related to
the current year's benefit plans.
Conforming Accounting Changes. The Group's results in 1999 include the
effect of conforming the adoption date for postretirement accounting between SBC
and Ameritech. This change was recorded by the Group in the third quarter of
1999, retroactive to January 1, 1999, as a cumulative effect of accounting
change of $14, net of deferred taxes of $9.
Post-Merger Initiatives. Upon completion of each merger, the Group
performed an evaluation and review of operations throughout the merged company.
Based on these merger integration reviews, certain strategic decisions were made
and significant integration of operations and consolidation of some
administrative and support functions occurred resulting in one-time charges for
the Group, as discussed below. In addition, in the fourth quarter of 1999,
pre-merger restructuring accruals of Ameritech were reversed to the extent those
plans were superseded by the current reorganization plans.
Wireless Conversion. In December 1999, the Group notified its Ameritech
wireless customers that the current wireless network platform (Code Division
Multiple Access or CDMA) would be converted to the network platform utilized by
the Group (Time Division Multiple Access or TDMA). As part of the conversion,
the Group sold the CDMA network assets in December 1999 and leased them back
over the conversion period. A charge of $220 ($143, net of tax) was recognized
in the fourth quarter of 1999 on the sale-leaseback and related actions. This
charge is included in the Cost of service and equipment line item of the
Combined Statements of Operations.
Reorganization. With the Ameritech and SNET mergers, the Group centralized
and consolidated several key functions and a number of companywide support
activities, including information technology and financial transaction
processing. These initiatives resulted in the creation of some jobs and the
elimination and realignment of others, with many of the affected employees
changing job responsibilities and in some cases assuming positions in other
locations. The Group recognized charges of $19 ($12, net of tax) during the
fourth quarter of 1999 in connection with these initiatives.
The combined financial statements also include charges related to the
closure and consolidation of Ameritech company-owned wireless retail stores.
These charges were comprised mainly of postemployment benefits, primarily
related to severance, and costs associated with closing down duplicate
operations, including contract cancellations. The fourth quarter 1999 charges
were reduced by the reversal of $38 ($23, net of tax) of prior Ameritech
accruals that were superseded by the current reorganization plans. The
reorganization charges in 1999 are included in the selling, general and
administrative expense line item of the Combined Statements of Operations.
F-46
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Other charges arising out of the merger related to relocation, retraining
and other effects of consolidating certain operations are being recognized in
the periods those charges are incurred.
Impairments/Asset Valuation. As a result of SBC's merger integration
plans, strategic review of domestic operations and organizational alignments,
the Group reviewed the carrying values of the long-lived assets in the fourth
quarter of 1999. The review was conducted company-wide.
The review focused primarily on Ameritech. These reviews included the
estimated remaining useful lives of assets and their estimated future cash
flows, and identified certain assets to be abandoned. Where the review indicated
impairment, fair market values, including, in some cases, discounted cash flows
as an estimate of fair value, of those assets were analyzed to determine the
amount of the impairment.
As a result of the review, no impairment charges were considered necessary.
ACQUISITIONS
In July 1999, the Group completed the acquisition of the wireless
subsidiary of Comcast Corporation, in a transaction valued at approximately
$1,800 including approximately $400 in cash and assumption of $1,400 in debt.
The purchase price allocation was finalized in 2000.
During 1999, SBC and Telefonos de Mexico, S.A. de C.V. (Telmex) completed
the joint acquisition of Cellular Communications of Puerto Rico, Inc. (Cellular
Communications), SBC acquired a controlling 50% equity interest in Cellular
Communications. The transaction was valued at approximately $827, including
assumption of approximately $370 in debt. Cellular Communications offers
wireless services under the Cellular One brand name and also offers paging and
long distance services in Puerto Rico.
The excess purchase price over the fair value of net assets acquired for
1999 acquisitions was approximately $515 and was allocated to goodwill.
In March 2000, SBC completed the acquisition of Radiofone, Inc. (Radiofone)
for $400 in SBC common stock.
In August 2000, SBC purchased wireless properties in Austin, Texas, Seattle
and Spokane, Washington, and other properties in Texas and Washington from GTE
Corporation for approximately $1,348.
The 1999 and 2000 acquisitions were accounted for under the purchase method
of accounting. The purchase prices in excess of the underlying fair value of
identifiable net assets acquired are being amortized over periods not exceeding
40 years. Results of operations of the acquisitions have been included in the
combined financial statements from their respective dates of acquisition.
The above acquisitions did not have a significant impact on combined
results of operations for 1999 nor 2000, nor would they, had they occurred on
January 1 of the year preceding the year of acquisition.
DISPOSITIONS
In October 1999, the Group completed the required disposition, as a
condition of the Ameritech merger, of 20 Midwestern cellular properties
including the competing cellular licenses in several markets including, but not
limited to, Chicago, Illinois and St. Louis, Missouri. The Group recorded an
extraordinary gain of $1,379 on this sale, net of taxes of $960. During the
period ended October 2, 2000, working capital adjustments and settlement of
purchase contingencies resulted in the recording of an additional extraordinary
gain of $36, net of taxes of $24.
In July 2000, SBC entered into agreements to sell overlapping properties in
Indianapolis, Indiana and selected Radiofone properties in New Orleans and Baton
Rouge, Louisiana as a regulatory condition of the formation of Cingular. These
properties were not contributed to Cingular.
F-47
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In August 2000, Southwestern Bell Mobile Systems, Inc. (SBMS) agreed to
transfer approximately 3,900 of its existing network of towers, including those
owned by partnerships, to SBC Communications Inc. (SBC), former owner of SBMS,
in connection with an agreement between SBC and SpectraSite Holdings, Inc.
(SpectraSite) to operate and lease space on the towers. The Group will sublease
space on the existing towers from SpectraSite for $1,400 (actual dollars, not in
millions) a month per tower, inclusive of executory costs, and will account for
the transactions as capital leases. Each tower lease has an initial term of 10
years followed by 5-year renewal periods at the option of the Group. As of
October 2, 2000, the net book value of towers to be transferred to SBC was $117.
On December 14, 2000, SBC closed on 739 towers, with future closings expected to
occur monthly until mid-2002. The Group will transfer its remaining towers to
SBC upon the completion of legal requirements, including receiving consents from
its partners.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
<Table>
<Caption>
ESTIMATED
USEFUL DECEMBER 31, OCTOBER 2,
LIVES 1999 2000
---------- ------------ ----------
(IN
YEARS)
Land.................................................. -- $ 23 $ 22
Buildings and building improvements................... 5-40 964 1,058
Operating and other equipment......................... 3-10 5,028 5,882
Furniture and fixtures................................ 3-10 782 493
Plant under construction.............................. -- 174 324
------- -------
6,971 7,779
Less: accumulated depreciation and amortization....... (2,740) (3,181)
------- -------
Property, plant and equipment, net.................... $ 4,231 $ 4,598
======= =======
</Table>
Interest costs capitalized for the year ended December 31, 1999 were $9,
respectively, and $2 for the period ended October 2, 2000.
Amortization of assets recorded under capital leases is included in
depreciation expense.
4. INTANGIBLE ASSETS
Intangible assets are summarized as follows:
<Table>
<Caption>
ESTIMATED
USEFUL DECEMBER 31, OCTOBER 2,
LIVES 1999 2000
---------- ------------ ----------
(IN
YEARS)
FCC Licenses.......................................... 40 $4,554 $ 5,789
Goodwill.............................................. 20-40 1,112 1,774
Customer lists........................................ 4-7 740 919
Other................................................. 3-40 240 237
------ -------
6,646 8,719
Less: accumulated amortization........................ (945) (1,224)
------ -------
Intangible assets, net................................ $5,701 $ 7,495
====== =======
</Table>
F-48
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are summarized as follows:
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Accounts payable............................................ $ 400 $ 332
Accrued liabilities......................................... 557 654
Accrued wages............................................... 77 51
------ ------
Total accounts payable and accrued liabilities.... $1,034 $1,037
====== ======
</Table>
6. DEBT
Long-term debt is summarized as follows:
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Due to affiliates........................................... $ 1,014 $7,389
Capital leases, Japanese yen-denominated, 5.71%-7.13%....... 237 213
Notes 9.5%-10% 2007......................................... 62 55
------- ------
Total long-term debt, including current maturities.......... 1,313 7,657
Current maturities.......................................... (1,051) (38)
------- ------
Total long-term debt........................................ $ 262 $7,619
======= ======
</Table>
Maturities of long-term debt outstanding at October 2, 2000 are summarized
as follows:
<Table>
Maturities:
2001...................................................... $ 38
2002...................................................... 42
2003...................................................... 7,445
2004...................................................... 48
2005...................................................... 15
Thereafter................................................ 69
------
Total............................................. $7,657
======
</Table>
As of October 2, 2000, the Group was in compliance with all covenants and
conditions of instruments governing its debt. Substantially all of the Group's
outstanding long-term debt is unsecured.
Amounts due to affiliates of the Group are financed through a revolving
credit facility with SBC for credit lines up to $8,900 and are payable on March
31, 2003. The interest rate on amounts due to affiliates at December 31, 1999
and October 2, 2000, was 6.65% and 9.50%, respectively. (See Note 14 for a
discussion of subsequent events related to amounts due to affiliates). Accrued
interest is payable monthly. Interest expense on amounts due to affiliates for
the year ended December 31, 1999 was $221 and for the period ended October 2,
2000 was $254.
During 1999, subsequent to the completion of the acquisitions of Comcast
Cellular Corporation (Comcast) and Cellular Communications (see Note 2), SBC
retired $1,415 of Comcast's and Cellular Communication's long-term debt.
Cash paid for interest was $227 for the year ended December 31, 1999, $269
for the period ended October 2, 2000.
F-49
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, customer deposits and
long-term debt approximate fair values.
FOREIGN EXCHANGE CONTRACTS
The Group does not hold or issue any financial instruments for trading
purposes. The Group entered into a foreign currency contract to hedge exposure
to adverse foreign exchange risk. The notional amount of the foreign currency
exchange contracts, $142 at December 31, 1999 and October 2, 2000 equals the
future minimum lease payments required to be paid in Japanese yen. Valuations of
derivative transactions are provided from proprietary models based upon well
recognized financial principles and reasonable estimates about relevant future
market conditions. The fair value of these foreign currency contracts was $2 at
December 31, 1999 and $10 at October 2, 2000, respectively, and are recorded in
Other Assets.
8. RELATED-PARTY TRANSACTIONS
SBC and its subsidiaries provide the Group with financial, marketing,
network, and administrative services, for which the Group is charged. In
addition, indirect SBC costs are allocated to SBC's subsidiaries based on
several factors, including relative equity, number of employees, marketing
costs, and a composite based on the Group's proportionate share of certain
direct and allocated charges. Total direct and indirect costs charged to the
Group for the year ended December 31, 1999 were $419, and $550 for the period
ended October 2, 2000.
The Group has contracted with AMDOCS, a software company affiliated with
SBC, to provide ongoing information systems development and support services.
Charges for AMDOCS' development and support services for the year ended December
31, 1999 were $39, and for the period ended October 2, 2000 was $36. Beginning
in 1999, the development portion of these services was capitalized in accordance
with SOP 98-1. Capitalized development services included in the above totals
were $18 for the year ended December 31, 1999 and $19 for the period ended
October 2, 2000.
Also included in accounts payable at December 31, 1999 and October 2, 2000
were $65 and $115, respectively, payable to SBC and its various subsidiaries for
general and administrative services provided to the Group.
9. INCOME TAXES
The provision for income taxes is summarized as follows:
<Table>
<Caption>
PERIOD
YEAR ENDED ENDED
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ------------
Current
Federal.................................................. $297 $241
State.................................................... 41 7
---- ----
338 248
---- ----
Deferred
Federal.................................................. 26 91
State.................................................... 9 28
---- ----
35 119
---- ----
Total............................................ $373 $367
==== ====
</Table>
F-50
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Group's deferred tax assets and (liabilities)
are as follows:
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Allowance for uncollectibles............................... $ 24 $ 7
State income taxes......................................... 79 144
Employee benefits.......................................... 57 35
Other...................................................... 120 59
------- -------
Total deferred tax assets........................ 280 245
Valuation allowance........................................ (72) (122)
------- -------
Net deferred tax assets.................................... 208 123
Depreciation and amortization.............................. (1,654) (1,907)
Other...................................................... (4) (138)
------- -------
Deferred tax liabilities................................... (1,658) (2,045)
------- -------
Net deferred tax liabilities............................... $(1,450) $(1,922)
======= =======
</Table>
The valuation allowance relates primarily to unused state loss
carryforwards. The $50 increase in the valuation allowance for the period ended
October 2, 2000 arose from the associated increase in state loss carryforwards
during that period.
A reconciliation of income tax expense and the amount computed by applying
the statutory federal income tax rate to income before provision for income
taxes, extraordinary gain and cumulative effect of accounting changes is as
follows:
<Table>
<Caption>
YEAR ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ------------
Taxes computed at federal statutory rate.................... $325 $321
State and local income taxes -- net of federal benefit...... 33 22
Amortization of intangibles................................. 7 11
Other, net.................................................. 8 13
---- ----
Provision for income taxes.................................. $373 $367
==== ====
</Table>
Cash paid for income taxes was $322 for the year ended December 31, 1999
and $1,214 for the period ended October 2, 2000.
10. EMPLOYEE BENEFITS
PENSIONS
Substantially all employees of the Group are covered by one of the various
noncontributory pension and death benefit plans sponsored by SBC. Management
employees participate in either cash balance or defined lump-sum pension plans.
The pension benefit formula for most nonmanagement employees is based on a flat
dollar amount per year according to job classification. Most employees can elect
to receive their pension benefits in either lump-sum or annuity.
SBC's objective in funding the plans, in combination with the standards of
the Employee Retirement Income Security Act of 1974 (as amended), is to
accumulate funds sufficient to meet its benefit obligations to employees upon
their retirement. Contributions to the plans are made to a trust for the benefit
of plan participants. Plan assets consist primarily of stocks, U.S. government
and domestic corporate bonds, index funds, and real estate.
F-51
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Significant weighted-average assumptions used by SBC in developing pension
information include:
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Discount rate for determining projected benefit
obligation............................................... 7.75% 7.75%
Long-term rate of return on plan assets.................... 8.50% 8.50%
Composite rate of compensation increase.................... 4.25% 4.25%
</Table>
GAAP requires certain disclosures to be made of components of net periodic
pension cost for the period and a reconciliation of the funded status of the
plans with amounts reported in the balance sheets. Since the funded status of
plan assets and obligations relates to the plans as a whole, which are sponsored
by SBC, this information is not presented for the Group. For the period ended
October 2, 2000, pension activity did not have a material effect on the Group's
results of operations. For the year ended December 31, 1999, the Group
recognized pension benefits of $39. In addition, the Group recognized settlement
gains for the year ended December 31, 1999 and the period ended October 2, 2000
of $24 and $10, respectively. These gains resulted from a significant amount of
lump-sum pension payments that caused a partial settlement of Ameritech's
pension plans.
POSTRETIREMENT BENEFITS
Under SBC's benefit plans in which the Group participates, SBC provides
certain medical, dental, and life insurance benefits to substantially all
retired employees and their dependents under various plans and accrues
actuarially determined postretirement benefit costs as active employees earn
these benefits.
GAAP requires certain disclosures to be made of components of net periodic
postretirement benefit cost and a reconciliation of the funded status of the
plans to amounts reported in the balance sheets. Since the funded status of
assets and obligations relates to the plans as a whole, this information is not
presented for the Group. The Group recognized postretirement benefit costs for
the year ended December 31, 1999 of $23, and $15 for the period ended October 2,
2000. At December 31, 1999 and October 2, 2000, the amount included in the
combined balance sheets for accrued postretirement benefit obligations was $91
and $106, respectively. Significant assumptions for the discount rate, long-term
rate of return on plan assets, and composite rate of compensation increase used
by SBC in developing the accumulated postretirement benefit were the same as
those used in developing the pension information.
SAVINGS PLANS
Substantially all employees are eligible to participate in contributory
savings plans sponsored by SBC. Under the savings plans, the Group matches a
stated percentage of eligible employee contributions, subject to a specified
ceiling.
The Group's match of employee contributions to the savings plans is
fulfilled with SBC shares of stocks allocated from the Employee Stock Ownership
Plans and with purchases of SBC's shares of stock in the open market. The
Group's costs related to these savings plans were $6 for the year ended December
31, 1999 and $5 for the period ended October 2, 2000.
11. STOCK OPTION PLANS
Management employees of the Group participate in various stock option plans
sponsored by SBC. Options issued through October 2, 2000, carry exercise prices
equal to the market price of the stock at the date of grant and have maximum
terms of ten years. Depending upon the plan, vesting of options occurs up to
four years from the date of grant.
F-52
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Group measures compensation cost for these plans using the intrinsic
value-based method of accounting as allowed in Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (FAS 123).
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for stock option plans been recognized using the
fair value-based method of accounting at the date of grant for awards as defined
by FAS 123, the Group's net income would have been $1,907 for the year ended
December 31, 1999, and $577 for the period ended October 2, 2000.
For purposes of these pro forma disclosures, the estimated fair value of
the options granted is amortized to expense over the options' vesting period.
The fair value for these stock options was estimated at the date of grant, using
a Black-Scholes option pricing model with the following weighted-average
assumptions for grants in the year ended December 31, 1999 and the period ended
October 2, 2000: risk-free interest rate of 5.31% and 6.69%, respectively;
dividend yield of 1.65% and 2.21%, respectively; expected volatility factor of
15% and 16%, respectively; and expected option life of 4.5 and 4.6,
respectively.
FAS 123 requires certain disclosures to be made about the outstanding and
exercisable options, option activity, weighted-average exercise price per
option, and option exercise price range for each income statement period. Since
the stock option activity relates only to SBC's shareowners' equity, this
information is not presented for the Group.
12. COMMITMENTS AND CONTINGENCIES
LEASE
The Group has entered into operating leases for facilities and equipment
used in operations. Rental expense under operating leases for the year ended
December 31, 1999 was $182 and $142 for the period ended October 2, 2000.
The following table summarizes the approximate future minimum rentals under
noncancelable operating leases in effect at October 2, 2000:
<Table>
2001........................................................ $118
2002........................................................ 107
2003........................................................ 91
2004........................................................ 76
2005........................................................ 90
Thereafter.................................................. 399
----
Total............................................. $881
====
</Table>
CLAIMS
The Group is subject to claims arising in the ordinary course of business
involving allegations of personal injury, breach of contract, anti-competitive
conduct, employment law issues, regulatory matters, and other actions. While
complete assurance cannot be given as to the outcome of any legal claims, the
Group believes that any financial impact would not be material to its financial
statements.
13. CONCENTRATIONS OF RISK
The Group relies on local and long distance telephone companies and other
companies to provide certain telecommunications services. Although management
believes alternative telecommunications facilities could be found in a timely
manner, any disruption of these services could potentially have an adverse
impact on operating results.
F-53
SBC DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Although the Group attempts to maintain multiple vendors for each required
product, its inventory and equipment, which are important components of its
operations, are currently acquired from only a few sources. If the suppliers are
unable to meet the Group's needs as it builds its network infrastructure and
sells services and equipment, delays and increased costs in the expansion of the
Group's network infrastructure or losses of potential customers could result,
which would adversely affect operating results.
Financial instruments that potentially subject the Group to credit risks
consist principally of trade accounts receivable. Concentrations of credit risk
with respect to these receivables are limited due to the composition of the
customer base, which includes a large number of individuals and businesses. No
customer accounted for more than 10% of combined revenues in 1998, 1999, or
2000.
Approximately 30% of the Group's employees are represented by collective
bargaining agreements with varying dates expiring beginning in 2001 through
2004. Of those employees covered by bargaining agreements, 6% are covered by
agreements that expire within one year.
14. SUBSEQUENT EVENTS
TRANSITION SERVICES AGREEMENT
In October 2000, SBC and BellSouth began contributing their wireless
properties to Cingular. Cingular entered into transition services agreements
with SBC and BellSouth under which SBC and BellSouth will provide certain
services and products to Cingular until 90 days' notice is given or until the
agreements expire on December 31, 2002. Services to be provided by SBC and
BellSouth include but are not limited to legal, human resources, internal audit,
risk management, and treasury. Fees for such services are fixed and paid on a
monthly basis.
EMPLOYEE LEASING AGREEMENT
In October 2000, the Group transferred its approximately 14,000 employees
and related liabilities to leasing companies which are wholly owned by SBC. The
leasing companies incur costs for the employees' salaries and related benefits.
Cingular has entered into a services contract with SBC under which these
employees provide services to Cingular and SBC bills Cingular for the costs,
including payroll, payroll taxes, benefit costs and relocation costs.
DUE TO AFFILIATES REVOLVING CREDIT FACILITY
In October 2000, Cingular and SBC amended the revolving credit facility to
increase its borrowing capacity to $10,000 and to set the annual interest rate
at 7.5%. In November 2000, Cingular and SBC amended the revolving credit
facility to extend the maturity to March 31, 2003.
F-54
COMBINED FINANCIAL STATEMENTS
BELLSOUTH DOMESTIC WIRELESS GROUP
YEAR ENDED DECEMBER 31, 1999
AND THE PERIOD FROM JANUARY 1, 2000 THROUGH OCTOBER 2, 2000
WITH REPORTS OF INDEPENDENT AUDITORS AND INDEPENDENT ACCOUNTANTS
F-55
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareowner
BellSouth Domestic Wireless Group
We have audited the accompanying combined balance sheet of the BellSouth
Domestic Wireless Group (a business of BellSouth Corporation, see Note 1) as of
October 2, 2000 and the related combined statements of operations, shareowner's
equity (deficit), and cash flows for the period from January 1, 2000 to October
2, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
BellSouth Domestic Wireless Group at October 2, 2000, and the combined results
of its operations and its cash flows for the period from January 1, 2000 to
October 2, 2000, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
March 9, 2001
Atlanta, Georgia
F-56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management of the BellSouth Domestic Wireless group
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, cash flows and shareowners' equity (deficit)
present fairly, in all material respects, the financial position of the
BellSouth Domestic Wireless Group at December 31, 1999 and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in United States of America. These
financial statements are the responsibility of the management of the BellSouth
Domestic Wireless Group; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 1, these combined financial statements have been
derived from the consolidated financial statements and accounting records of
BellSouth Corporation and its subsidiaries and reflect certain assumptions and
allocations. The results of operations and cash flows of the BellSouth Domestic
Wireless Group could differ from those that would have resulted had the
BellSouth Domestic Wireless Group operated autonomously or as an entity
independent of BellSouth Corporation.
As discussed in Note 1 to the combined financial statements, in 1999 the
BellSouth Domestic Wireless Group adopted AICPA Statement of Position 98-1 and
changed its accounting for internal-use software development costs.
/s/ PricewaterhouseCoopers LLP
March 9, 2001
Atlanta, Georgia
F-57
BELLSOUTH DOMESTIC WIRELESS GROUP
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
<Table>
<Caption>
YEAR ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ------------
Operating revenues:
Service revenues.......................................... $3,284 $2,873
Equipment sales........................................... 289 229
------ ------
Total operating revenues.......................... 3,573 3,102
Operating expenses:
Cost of service........................................... 758 656
Cost of equipment sales................................... 479 438
Selling, general and administrative....................... 1,446 1,138
Depreciation and amortization............................. 677 491
Provision for asset impairment............................ 320 --
------ ------
Total operating expenses.......................... 3,680 2,723
------ ------
Operating income (loss)..................................... (107) 379
Other income (expenses):
Interest expense.......................................... (345) (291)
Minority interest......................................... 41 (8)
Equity in net income of affiliates, net................... 145 123
Other, net................................................ 134 (9)
------ ------
Total other income (expenses)..................... (25) (185)
------ ------
Income (loss) before provision (benefit) for income taxes... (132) 194
Provision (benefit) for income taxes........................ (45) 80
------ ------
Net income (loss)................................. $ (87) $ 114
====== ======
</Table>
See accompanying notes.
F-58
BELLSOUTH DOMESTIC WIRELESS GROUP
COMBINED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11 $ 43
Accounts receivable, net of allowance for doubtful
accounts of $17 and $19................................ 412 458
Inventory................................................. 111 104
Deferred income taxes..................................... 86 74
Prepaid expenses and other current assets................. 37 81
------- -------
Total current assets.............................. 657 760
Property, plant and equipment, net.......................... 2,536 2,509
Intangible assets, net...................................... 1,400 2,280
Investments in equity affiliates............................ 1,501 1,554
Other assets................................................ 19 12
------- -------
Total assets...................................... $ 6,113 $ 7,115
======= =======
LIABILITIES AND SHAREOWNER'S EQUITY (DEFICIT)
Current liabilities:
Due to affiliates......................................... $ 572 $ 210
Current portion of long-term debt......................... 4 3
Accounts payable and accrued liabilities.................. 503 529
Advanced billings and customer deposits................... 117 125
Accrued taxes............................................. 115 142
------- -------
Total current liabilities......................... 1,311 1,009
Long-term debt:
Long-term debt due after one-year......................... 401 391
Due to affiliates......................................... 3,395 4,840
------- -------
Total long-term debt.............................. 3,796 5,231
Other noncurrent liabilities:
Deferred income taxes..................................... 825 801
Minority interests........................................ 70 85
Other noncurrent liabilities.............................. 85 104
------- -------
980 990
Shareowner's equity (deficit):
Common stock.............................................. -- --
Additional paid-in capital................................ 1,187 1,203
Accumulated deficit....................................... (1,167) (1,323)
Accumulated other comprehensive income.................... 6 5
------- -------
Total shareowner's equity (deficit)............... 26 (115)
------- -------
Total liabilities and shareowner's equity
(deficit)....................................... $ 6,113 $ 7,115
======= =======
</Table>
See accompanying notes.
F-59
BELLSOUTH DOMESTIC WIRELESS GROUP
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<Table>
<Caption>
YEAR ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ------------
OPERATING ACTIVITIES
Net income (loss)........................................... $ (87) $ 114
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.............................................. 603 426
Amortization.............................................. 74 65
Minority interest in net income (losses).................. (41) 8
Provision for doubtful accounts........................... 68 45
Deferred income taxes..................................... (110) (19)
Provision for asset impairment............................ 320 --
Gains on dispositions..................................... (161) (2)
Equity in net income of affiliates........................ (145) (123)
Dividends received from equity affiliates................. 79 85
Changes in operating assets and liabilities:
Accounts receivable and other current assets........... (202) (93)
Accounts payable and other current liabilities......... 149 266
Other assets........................................... (3) 7
Other noncurrent liabilities........................... 3 34
Other, net.................................................. (2) 13
----- -------
Net cash provided by operating activities................... 545 826
INVESTING ACTIVITIES
Construction and capital expenditures....................... (590) (461)
Acquisition of minority interests........................... -- (892)
Acquisition of business..................................... (39) --
Dispositions of businesses.................................. 290 --
Other, net.................................................. 17 6
----- -------
Net cash used in investing activities....................... (322) (1,347)
FINANCING ACTIVITIES
Net increase in amounts due to affiliates................... 47 887
Proceeds from long-term debt................................ 82 14
Repayment of long-term debt................................. (218) (24)
Funds received from shareowner.............................. 118 115
Dividends paid to shareowner................................ (324) (397)
Net distributions to minority interests..................... -- (40)
Other, net.................................................. -- (2)
----- -------
Net cash provided by (used in) financing activities......... (295) 553
----- -------
Net increase (decrease) in cash and cash equivalents........ (72) 32
Cash and cash equivalents at beginning of period............ 83 11
----- -------
Cash and cash equivalents at end of period.................. $ 11 $ 43
===== =======
</Table>
See accompanying notes.
F-60
BELLSOUTH DOMESTIC WIRELESS GROUP
COMBINED STATEMENTS OF SHAREOWNERS' EQUITY (DEFICIT)
(DOLLARS IN MILLIONS)
<Table>
<Caption>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT INCOME TOTAL
------ ---------- ----------- ------------- -------
Balance at December 31, 1998.............. $ -- $ 1,102 $ (754) $ -- $ 348
Net loss................................ -- -- (87) -- (87)
Other comprehensive income, net of tax:
Net unrealized gains on securities... -- -- -- 6 6
Dividends to shareowner................. -- -- (326) -- (326)
Funds received from shareowner.......... -- 85 -- -- 85
---- ------- ------- ---- -------
Balance at December 31, 1999.............. $ -- $ 1,187 $(1,167) $ 6 $ 26
Net income.............................. -- -- 114 -- 114
Other comprehensive income, net of tax:
Supplemental executive retirement
plan............................... -- -- -- (1) (1)
Dividends to shareowner................. -- (127) (270) -- (397)
Funds received from shareowner.......... -- 143 -- -- 143
---- ------- ------- ---- -------
Balance at October 2, 2000................ $ -- $ 1,203 $(1,323) $ 5 $ (115)
==== ======= ======= ==== =======
</Table>
See accompanying notes.
F-61
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
AND THE PERIOD FROM JANUARY 1, 2000 TO OCTOBER 2, 2000
(DOLLARS IN MILLIONS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The BellSouth Domestic Wireless Group (the Group) consists of substantially
all of the domestic wireless businesses of BellSouth Corporation (BellSouth). In
April 2000, BellSouth and SBC Communications Inc. (SBC) formed a joint venture
to combine their respective domestic wireless properties. In October 2000, SBC
and BellSouth began contributions of their wireless properties and formally
began operations of Cingular Wireless LLC (Cingular). Economic ownership in
Cingular is held 60% by SBC and 40% by BellSouth, with control shared equally.
These combined financial statements have been prepared using BellSouth's
historical basis in the assets and liabilities and the historical results of the
operations of the Group, which will be substantially contributed to Cingular.
These combined financial statements include allocations of certain
BellSouth corporate expenses, including legal, accounting, employee benefits,
real estate, insurance services, information technology services and other
BellSouth corporate infrastructure costs. BellSouth directly charges
specifically identified costs for shared corporate services to the Group based
upon use of those services and, where not practically determinable, by other
allocation methods. While we believe these allocations are reasonable, they are
not necessarily indicative of, and it is not practical for us to estimate, the
levels of expenses that would have resulted had the Group been operating as an
independent company. However, we believe that the level of expenses would not
have been materially different if these services had been provided by third
parties.
The Group provides domestic wireless telecommunications services, including
local, long distance and roaming services using both cellular and personal
communications services (PCS) networks. Wireless services and products offered
also include certain enhanced services, paging services and wireless equipment.
The Group's customer market principally covers the southeastern region of the
United States.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of the Group and
partnerships in which the Group exercises control. Other parties' interests in
controlled partnerships are reported as minority interests. The equity method is
used to account for its investments in partnerships for which it has significant
influence. All significant intragroup transactions are eliminated in the
combination process.
OPERATING SEGMENTS
The Group operates in only one segment, wireless telecommunications
services; therefore, separate segment reporting is not applicable.
FCC LICENSES
The Federal Communications Commission (FCC) issues licenses that authorize
wireless carriers to provide service in specific geographic areas. The FCC
grants licenses for terms of up to ten years. In 1993, the FCC adopted specific
standards to apply to wireless renewals, concluding it will award a license
renewal to a licensee that meets certain standards of past performance.
Historically, the FCC has granted license
F-62
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
renewals routinely. The licenses held by the Group expire at various dates. The
Group believes that it will be able to meet all requirements necessary to secure
renewal of its wireless licenses.
REVENUE RECOGNITION
The Company earns service revenues by providing access to its wireless
network (access revenue) and for usage of its wireless system (airtime revenue).
Access revenue is recognized when earned throughout the normal billing cycle.
Airtime revenue, including roaming revenue and long distance revenue, is
recognized when the service is rendered. The revenue and related expenses
associated with the sale of wireless handsets and accessories are recognized
when the products are delivered and accepted by the customer, as this is
considered to be a separate earnings process from the sale of wireless services.
INCOME TAXES
The entities that are included in the Group are included in BellSouth's
consolidated federal income tax return. Federal income taxes are provided for in
accordance with the provisions of the Tax Allocation Agreement (Agreement)
between the Group and BellSouth. In general, the Group's income tax provision
reflects the financial consequences of income, deductions and credits which can
be utilized on a separate return basis or in consolidation with BellSouth and
which are assured of realization.
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
for tax purposes.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with
original maturities of three months or less.
ACCOUNTS RECEIVABLE
Accounts receivable from customers are generally unsecured and are due
within 30 days. Expected credit losses are recorded as an allowance for doubtful
accounts in the Combined Balance Sheets.
INVENTORY
Inventory consists primarily of wireless telephone handsets and is valued
at the lower of weighted average cost or market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. The cost of additions and
substantial improvements to property, plant and equipment is capitalized. The
cost of maintenance and repairs of property, plant and equipment is charged to
operating expenses. Property, plant and equipment is depreciated using
straight-line methods over its estimated economic lives, generally ranging from
5 to 40 years. Leasehold improvements are depreciated over the shorter of the
remaining term of the lease or the estimated useful life of the improvement.
Interest expense and network engineering costs incurred during the
construction phase of the Group's wireless network and real estate properties
under development are capitalized as part of property, plant and equipment and
recorded as plant under construction until the projects are completed and placed
into service.
F-63
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist primarily of FCC licenses, the excess of
consideration paid over the fair value of net assets acquired in purchase
business combinations (goodwill), and customer lists. Goodwill and licenses are
being amortized using the straight-line method over their estimated economic
lives up to 40 years. Customer lists represent values placed on acquired
customer bases. These lists are being amortized over a 4 to 6 year period using
the sum of the years digits method. The carrying value of these assets is
periodically reviewed to determine whether such intangibles are fully
recoverable from projected net cash flows of the related business.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. It is
reasonably possible that these assets could become impaired as a result of
technological or other industry changes. For assets the Group intends to hold
for use, if the total of the expected future undiscounted cash flows is less
than the carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset. For assets the Group
intends to dispose of, depreciation is adjusted over the remaining service
period to arrive at fair value less cost to sell at the estimated date of
disposal.
ADVERTISING COSTS
Costs for advertising products and services or corporate image are expensed
as incurred. Total advertising expense for the year ended December 31, 1999 was
$151 and $121 for the period ended October 2, 2000.
DERIVATIVE FINANCIAL INSTRUMENTS
The Group does not hold derivatives for trading purposes. From time to
time, as part of its risk management strategy, the Group uses derivative
financial instruments, including interest rate swap contracts to hedge exposures
to changes in interest rates on its variable rate debt obligations. The interest
rate swap settlement and differential is reflected as an adjustment to interest
expense.
SOFTWARE COSTS
The American Institute of Certified Public Accountants issued a Statement
of Position (SOP) that requires capitalization of certain computer software
expenditures beginning in 1999. The SOP, which prescribed prospective
application, requires the capitalization of certain costs incurred in connection
with developing or obtaining internal use software. When placed in service,
capitalized software costs are being amortized over three years. Prior to the
adoption of the SOP, the costs of computer software purchased or developed for
internal use were generally expensed as incurred. However, initial operating
system software costs were, and continue to be, capitalized. The effect of
adopting the SOP was to increase net income by approximately $10 for the year
ended December 31, 1999.
Capitalized software, net of related amortization of $153 and $157 as of
December 31, 1999 and October 2, 2000, respectively, have been included in
property, plant and equipment.
RECLASSIFICATION
Certain amounts have been reclassified in the prior period financial
statements to conform with the current period presentation.
F-64
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Among other provisions, it
requires that entities recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. Gains and losses resulting from changes in the fair values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The effective date of this standard
was delayed with the issuance of SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133 -- an amendment of FASB Statement 133." The effective date for
SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. This
means that the standard, as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133," must be adopted by the Group no later than January 1, 2001.
The Group does not expect the adoption of this standard to have a material
impact on net income.
In December 1999, the SEC issued Staff Accounting Bulletin Number 101,
"Revenue Recognition in Financial Statements" (SAB 101) which must be adopted by
the fourth quarter of 2000. SAB 101 addresses, among other items, when revenue
relating to non-refundable, up-front fees and associated costs should be
recognized. The Group does not expect that the adoption of SAB 101 would have an
effect on net income.
2. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
On April 7, 1999, the Group acquired a 100% interest in a wireless property
located in Indiana for $39 in cash. Results of operations have been included in
the combined financial statements from its date of acquisition.
On September 27, 2000, the Group acquired the 44.2% outstanding minority
interest of its partners in the BellSouth Carolinas PCS Limited Partnership (the
Partnership). The total purchase consideration was $916 and consisted of $887 in
cash paid to minority members, $24 for liabilities assumed, and $5 for
acquisition costs. The Group borrowed $887 from BellSouth to pay for the
acquisition. This amount is recorded as a long-term obligation under Due to
Affiliates. As the Partnership was previously consolidated by the Group, its
results of operations have been included in the combined financial statements
for all periods presented.
The 1999 and 2000 acquisitions were accounted for under the purchase method
of accounting. No goodwill was recorded in 1999. The excess purchase price over
the fair value of net assets acquired for 2000 acquisitions was approximately
$127 and was allocated to goodwill which is being amortized over 20 years.
The above acquisitions did not have a significant impact on the combined
results of operations for the period ended October 2, 2000, nor would they, had
they occurred on January 1 of the year preceding the year of acquisition.
DISPOSITIONS
During 1999, the Group reorganized its ownership interest in a partnership
that operated cellular properties in Orlando, Florida and Richmond, Virginia.
Through a series of transactions which occurred in January 1999 and August 1999,
the Group exchanged its 75.46% interest in the partnership for a 100% ownership
interest in the Orlando, Florida cellular property. As a result of this
exchange, the Group recognized a pre-tax gain of $46, or $23 after tax.
F-65
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1999, the Group exchanged its 100% ownership interest in
Bakersfield Cellular Telephone Company for $75 in cash and a 100% ownership
interest in Texas Cellular Telephone Company. This exchange resulted in a
pre-tax gain of $60, or $35 after tax.
Also in April 1999, the Group sold its 100% interest in a wireless property
located in Dothan, Alabama for total proceeds of $21. The pre-tax gain on the
sale was $16, or $10 after tax.
In August 1999 the Group sold its 100% interest in Honolulu Cellular for
total proceeds of $194. The pre-tax gain on the sale was $39, or $23 after tax.
The above dispositions did not have a significant impact on combined
results of operations for 1999, nor would they had they occurred on January 1,
1999.
3. INVESTMENTS AND ADVANCES
The Group holds investments in various domestic partnerships and ventures,
which are accounted for under the equity method and investments in equity
securities accounted for under the cost method. Investments and advances consist
of the following:
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Investments in AB Cellular.................................. $1,421 $1,461
Other investments accounted for under the equity method..... 48 60
Investments accounted for under the cost method............. 32 33
------ ------
Investments and advances.................................... $1,501 $1,554
====== ======
</Table>
The Group's investment in AB Cellular is a 44.4% interest in a joint
venture which serves the Los Angeles, Houston and Galveston metropolitan areas.
The joint venture was formed by a 1998 reorganization in which BellSouth and
AT&T contributed to the joint venture their ownership interests in separate
partnerships serving the three areas. In addition, AT&T also contributed
approximately $1,000 of cash to the joint venture. As a result of the
reorganization, the Group's proportionate share of the net assets of the joint
venture exceeded the Group's book investment balance. The related excess totaled
$667 at December 31, 1999 and $650 at October 2, 2000, and is being amortized
into income using the straight-line method over a period of 30 years. See Note
15 for discussion of subsequent event related to the AB Cellular joint venture.
SUMMARY FINANCIAL INFORMATION OF EQUITY INVESTEES
A summary of combined financial information as reported by our equity
investees is set forth below:
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Balance sheet information:
Current assets............................................ $1,427 $1,689
Noncurrent assets......................................... 3,539 3,329
Current liabilities....................................... 256 186
Noncurrent liabilities.................................... 5 8
Net equity................................................ 4,705 4,824
</Table>
F-66
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Income statement information:
Net Revenues.............................................. $1,599 $1,048
Operating income.......................................... 306 404
Net income................................................ 285 226
</Table>
COST METHOD INVESTMENTS
The Group has an investment in a marketable security, which is accounted
for under the cost method. This investment is comprised of Crown Castle
International (Crown) common stock and is classified as available-for-sale
securities under SFAS 115. Under SFAS 115, available-for-sale securities are
required to be carried at their fair value, with unrealized gains and losses
(net of income taxes) recorded in accumulated other comprehensive income (loss).
The fair value of the Group's investment in Crown is determined based on market
quotations. The original cost of this investment was $21. The gross unrealized
gains were $11 and $12 at December 31, 1999 and October 2, 2000, respectively.
The after-tax unrealized gains were $5 at December 31, 1999 and October 2, 2000,
with a fair value of $32 and $33 at December 31, 1999 and October 2, 2000,
respectively. (See Note 14 for more information on the agreement with Crown.)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
<Table>
<Caption>
ESTIMATED
USEFUL DECEMBER 31, OCTOBER 2,
LIVES 1999 2000
---------- ------------ ----------
(IN YEARS)
Land.................................................. -- $ 22 $ 22
Buildings and building improvements................... 25-40 1,022 1,076
Operating and other equipment......................... 5-15 3,151 3,237
Furniture and fixtures................................ 10-15 443 479
Plant under construction.............................. -- 104 127
------- -------
4,742 4,941
Less: accumulated depreciation........................ (2,206) (2,432)
------- -------
Property, plant and equipment, net.................... $ 2,536 $ 2,509
======= =======
</Table>
Interest costs capitalized for the year ended December 31, 1999 was $4 and
$2 for the period ended October 2, 2000.
In June 1999, the Group executed a contract to replace infrastructure
equipment in the southeastern United States. The planned disposals of the
existing infrastructure equipment required an evaluation of asset impairment in
accordance with SFAS 121. As a result, a non-cash charge of $320, or $187 after
tax, was recorded in the second quarter of 1999 to write these assets down to
their fair market value, which was estimated by discounting the expected future
cash flows of these assets through the date of disposal. Management will
continue to use the assets until the conversion process has been completed,
which is estimated to be December 31, 2000, and depreciate the remaining new
carrying value over this period.
F-67
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS
Intangible assets are summarized as follows:
<Table>
<Caption>
ESTIMATED
USEFUL DECEMBER 31, OCTOBER 2,
LIVES 1999 2000
---------- ------------ ----------
(IN YEARS)
FCC Licenses.......................................... 10-40 $1,093 $1,827
Goodwill.............................................. 20-40 373 481
Customer lists........................................ 4-6 42 117
Other................................................. 3-5 161 159
------ ------
1,669 2,584
Less: accumulated amortization........................ (269) (304)
------ ------
Intangible assets, net................................ $1,400 $2,280
====== ======
</Table>
6. DEBT
Long-term debt is summarized as follows:
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Due to affiliates........................................... $3,951 $4,840
Notes payable to external parties:
Bank of America........................................... 324 310
Bank notes................................................ 64 62
Capital leases............................................ 18 22
------ ------
4,357 5,234
Current maturities.......................................... (561) (3)
------ ------
Total long-term debt.............................. $3,796 $5,231
====== ======
</Table>
Amounts due to affiliates of the Group are comprised of various notes with
interest rates of 4.9% to 7.75% in 1999, rates of 5.8% to 8.5% in 2000, and
which have maturities from 2002 through 2006. Accrued interest is payable
monthly. Interest expense on amounts due to affiliates for the year ended
December 31, 1999 was $265 and for the period ended October 2, 2000 was $244.
See Note 15 for discussion of subsequent events related to amount due to
affiliates.
The note payable to Bank of America represents a $550 revolving credit
agreement with a syndicated group of lenders entered into in April 1998.
Borrowings under the credit agreement bear interest at LIBOR plus 1%, or the
base rate as defined. The weighted average interest rate on the balance
outstanding was 6.24% at December 31, 1999 and 7.04% at October 2, 2000. In
December 2000, the balance of this note was paid in full.
F-68
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt outstanding at October 2, 2000 are summarized
as follows:
<Table>
Maturities:
2001...................................................... $ 3
2002...................................................... 1,693
2003...................................................... 2,993
2004...................................................... 215
2005...................................................... 1
Thereafter................................................ 329
------
Total............................................. $5,234
======
</Table>
Cash paid for interest was $90 for the year ended December 31, 1999 and
$199 for the period ended October 2, 2000.
7. FINANCIAL INSTRUMENTS
The recorded amounts of cash and cash equivalents and long-term debt
approximate fair values.
INTEREST RATE SWAPS
The Group enters into interest rate swap agreements to exchange fixed and
variable rate interest payment obligations without the exchange of the
underlying principal amounts. At December 31, 1999 and October 2, 2000, the
Group was party to various interest rate swaps with an aggregate notional amount
of $300 related to the Bank of America note payable. Under these swap
agreements, the Group paid fixed rates of 6.70% at December 31, 1999 and October
2, 2000 and received variable rates of 5.46% at December 31, 1999 and 6.66% at
October 2, 2000. The fair market value of these swaps was $5 at December 31,
1999 and $3 at October 2, 2000. In December 2000, the Group settled the swap
agreements due to the retirement of the Bank of America note payable. As a
result of settling the swap agreements, the Group recorded a gain of $2 in
December 2000.
8. RELATED PARTY TRANSACTIONS
The Group recorded revenues for interconnect services provided to
subsidiaries of BellSouth of $15 for the year ended December 31, 1999 and $11
for the period ended October 2, 2000. The Group also recorded revenues for pager
services to subsidiaries of BellSouth of $11 for the year ended December 31,
1999 and $13 for the period ended October 2, 2000.
The Group incurred local interconnect and long distance charges of $46 for
the year ended December 31, 1999 and $78 for the period ended October 2, 2000,
for services provided by subsidiaries of BellSouth. In addition, BellSouth
subsidiaries charged the Group for joint marketing efforts of $16 for the year
ended December 31, 1999 and $17 for the period ended October 2, 2000.
Included in selling, general and administrative expenses are allocations to
the Group for its share of BellSouth's shared corporate services. These amounts
were $106 for the year ended December 31, 1999 and $61 for the period ended
October 2, 2000. See Note 1 for details describing the nature of corporate
services and allocations.
Also included in accounts payable at December 31, 1999 and October 2, 2000
was $15 and $210, respectively, payable to BellSouth and its various
subsidiaries for general and administrative services provided to the Group.
F-69
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The provision for income taxes is summarized as follows:
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Current:
Federal................................................... $ 18 $ 67
State..................................................... 47 32
----- ----
65 99
Deferred:
Federal................................................... (80) (7)
State..................................................... (30) (12)
----- ----
(110) (19)
----- ----
Total............................................. $ (45) $ 80
===== ====
</Table>
Significant components of the Group's deferred tax assets and (liabilities)
are as follows:
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Compensation related........................................ $ 33 $ 34
Pension..................................................... 8 9
State net operating losses.................................. 78 86
Other....................................................... 35 16
------- -------
154 145
Valuation allowance......................................... (68) (71)
------- -------
Net deferred tax assets..................................... 86 74
Fixed assets................................................ (245) (243)
Licenses.................................................... (165) (152)
Equity investments.......................................... (313) (311)
Bad debts................................................... (7) (7)
Other....................................................... (95) (88)
------- -------
Deferred tax liabilities.................................... (825) (801)
------- -------
Net deferred tax liabilities................................ $ (739) $ (727)
======= =======
</Table>
The valuation allowance, which increased by $3 in the period ended October
2, 2000, primarily relates to state net operating losses which may not be
utilized during the carryforward period. All significant deferred tax
liabilities at December 31, 1999 and October 2, 2000 were noncurrent.
A reconciliation of income tax expense and the amount computed by applying
the statutory federal income tax rate to income before income taxes is as
follows:
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Taxes computed at federal statutory rate.................... $(46) $68
State and local income taxes, net of federal benefit........ 9 12
Valuation allowances established............................ 4 --
Other, net.................................................. (12) --
---- ---
Provision (benefit) for income taxes........................ $(45) $80
==== ===
</Table>
F-70
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The amount of state income tax net operating losses available for
carryforward to future periods totaled $1,236 at October 2, 2000, with
expiration dates ranging between one to twenty years.
Cash paid for income taxes to BellSouth was $75 for the year ended December
31, 1999 and $66 for the period ended October 2, 2000.
10. EMPLOYEE BENEFITS
PENSIONS
Substantially all employees of the Group are covered by a noncontributory
pension plan sponsored by BellSouth. Employees participate in a cash balance
pension plan and can elect to receive their pension benefits in either lump sum
or annuity. Plan assets consist primarily of stocks, U.S. government and
domestic corporate bonds, index funds and real estate. The BellSouth pension
plan is fully funded, so contributions to the plan are not currently required.
Significant weighted-average assumptions used by BellSouth in developing
pension information are set forth below.
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Discount rate for determining projected benefit
obligation................................................ 7.75% 7.75%
Expected rate of return on plan assets...................... 9.00 9.00
Composite rate of compensation increase..................... 5.10 5.10
</Table>
SFAS 87, as amended by SFAS 132, requires certain disclosures to be made of
components of net periodic pension cost for the period and a reconciliation of
the funded status of the plans with amounts reported in the balance sheets.
Since the funded status of plan assets and obligations relates to the plans as a
whole, which are sponsored by BellSouth, this information is not presented for
the Group. The Group recognized pension expense for the year ended December 31,
1999 of $17 and $1 for the period ended October 2, 2000. The accrued liability
included in the Group's combined balance sheet was $58 at both December 31, 1999
and October 2, 2000.
POSTRETIREMENT BENEFITS
The Group also participates in the BellSouth-sponsored postretirement
health and life insurance welfare plans covering certain employees.
SFAS 132 requires certain disclosures to be made of components of net
periodic postretirement benefit cost and a reconciliation of the funded status
of the plans to amounts reported in the balance sheets. Since the funded status
of assets and obligations relates to the plans as a whole, this information is
not presented for the Group. The Group recognized postretirement benefit cost of
$2 for the year ended December 31, 1999 and for the period ended October 2,
2000. The amount included in the combined balance sheets for prepaid
postretirement benefit asset was $8 at December 31, 1999 and $9 at October 2,
2000.
Significant assumptions for the discount rate, long-term rate of return on
plan assets and composite rate of compensation increase used by BellSouth in
developing the accumulated postretirement benefit were the same as those used in
developing the pension information, with the exception of return on plan assets
which was 7.00% for 1999. Since the actuarial review takes place as of December
31 of every year, the assumption as of October 2, 2000 for return on plan assets
was the same as the rate used at December 31, 1999. In addition, the health care
cost trend rate for the year ended December 31, 1999 was 8.00% and 9.00% for the
period ended October 2, 2000.
F-71
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DEFINED CONTRIBUTION PLANS
Substantially all employees are eligible to participate in contributory
savings plans sponsored by BellSouth. Under the savings plans, the Group matches
a stated percentage of eligible employee contributions, subject to a specified
ceiling.
The Group's match of employee contributions to the savings plans is
fulfilled with BellSouth's shares of stock allocated from the Employee Stock
Ownership Plans and with purchases of BellSouth's stock in the open market. The
Group's costs related to these savings plans were $8 for the year ended December
31, 1999 and $7 for the period ended October 2, 2000.
11. STOCK OPTION PLANS
Certain employees of the Group participate in stock option plans sponsored
by BellSouth. The BellSouth Corporation Stock Plan (the Stock Plan) provides for
grants to key employees of stock options and various other stock-based awards.
One share of BellSouth common stock is the underlying security for any award.
The aggregate number of shares of BellSouth common stock that may be granted in
any calendar year cannot exceed one percent of the shares outstanding at the
time of grant. Prior to the adoption of the Stock Plan, stock options were
granted under the BellSouth Corporation Stock Option Plan. Stock options under
both plans entitle an optionee to purchase shares of BellSouth common stock
within prescribed periods at a price either equal to, or in excess of, the fair
market value on the date of grant. Options granted under these plans generally
become exercisable at the end of three to five years and have a term of 10
years.
The Group applies APB Opinion 25 and related Interpretations in accounting
for stock-based compensation plans. Accordingly, no compensation cost has been
recognized by the Group for stock options granted to its employees. Had
compensation cost for BellSouth's stock-based compensation plans been determined
in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Group's net income would have been reduced by $3 for the year ended December 31,
1999, and $6 for the period ended October 2, 2000. For purposes of these pro
forma disclosures, the estimated fair value of the options granted is amortized
to expense over the options' vesting period.
The fair value for these stock options was estimated at the date of grant,
using a Black-Scholes option pricing model with the following weighted-average
assumptions:
<Table>
<Caption>
DECEMBER 31, OCTOBER 2,
1999 2000
------------ ----------
Expected life (years)....................................... 5 5
Dividend yield.............................................. 1.67% 1.66%
Expected volatility......................................... 23.0% 27.0%
Risk-free interest rate..................................... 4.82% 6.65%
</Table>
As options are exercisable in BellSouth common stock, separate assumptions
are not developed for subsidiaries of BellSouth.
SFAS 123 requires certain disclosures to be made about the outstanding and
exercisable options, option activity, weighted average exercise price per option
and option exercise price range for each income statement period. Since the
stock option activity relates only to BellSouth's shareholders' equity, this
information is not presented for the Group.
F-72
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Group has entered into operating leases for facilities and equipment
used in operations. Rental expense under operating leases for the year ended
December 31, 1999 was $128 and $82 for the period ended October 2, 2000. Capital
leases currently in effect are not significant.
The following table summarizes the approximate future minimum rentals under
noncancelable operating leases in effect at October 2, 2000:
<Table>
2001........................................................ $109
2002........................................................ 101
2003........................................................ 92
2004........................................................ 81
2005........................................................ 71
Thereafter.................................................. 536
----
Total............................................. $990
====
</Table>
CLAIMS
The Group is subject to claims arising in the ordinary course of business
involving allegations of personal injury, breach of contract, anti-competitive
conduct, employment law issues, regulatory matters and other actions. While
complete assurance cannot be given as to the outcome of any legal claims, the
Group believes that any financial impact would not be material to its financial
statements.
PURCHASE COMMITMENTS
As of October 2, 2000, the Group had outstanding purchase commitments of
$192 million through 2004 to various vendors for the purchase of network
equipment, services and software.
13. CONCENTRATIONS OF RISK
The Group relies on local and long-distance telephone companies and other
companies to provide certain telecommunication services. Although management
believes alternative telecommunications facilities could be found in a timely
manner, any disruption of these services could potentially have an adverse
impact on operating results.
Although the Group attempts to maintain multiple vendors for each required
product, its inventory and equipment, which are important components of its
operations, are currently acquired from only a few sources. If the suppliers are
unable to meet the Group's needs as it builds out its network infrastructure and
sells service and equipment, delays and increased costs in the expansion of the
Group's network infrastructure or losses of potential customers could result,
which would adversely affect operating results.
Financial instruments that potentially subject us to credit risks consist
principally of trade accounts receivable. Concentrations of credit risk with
respect to these receivables are limited due to the composition of the customer
base, which includes a large number of individuals and businesses.
No customer accounted for more than 10% of combined revenues in the year
ended December 31, 1999 or the period ended October 2, 2000.
F-73
BELLSOUTH DOMESTIC WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBLEASE OF COMMUNICATIONS TOWERS
In June 1999, BellSouth signed a definitive agreement with Crown for the
sublease of all unused space on 2,623 of the Company's communications towers in
exchange for $927 to be paid in a combination of cash and Crown common stock.
The term of the agreement is 20 years for each tower leased to Crown. All cash
proceeds and the majority of stock proceeds resulting from this agreement were
paid directly to BellSouth; however, the Group holds Crown stock resulting from
this agreement. The stock held by the Group represents stock held by
partnerships and corporations with minority partners. The fair value of this
stock was $33 as of October 2, 2000.
With these transactions, Crown will manage, maintain and remarket the
remaining space on the towers. The Group has retained a portion of the space on
each for use in operating its wireless network and will continue to fully own
the towers and communications components including switching equipment, shelters
and cell site facilities. The Group will pay $1,200 (actual dollars, not in
millions) a month per tower to Crown for its monitoring and maintenance
services.
15. SUBSEQUENT EVENTS
TRANSITION SERVICES AGREEMENT
In October 2000, SBC and BellSouth began contributing their wireless
properties to Cingular. Cingular entered into transition services agreements
with BellSouth and SBC under which BellSouth and SBC will provide certain
services and products to Cingular until 90 days notice is given or until the
agreements expire on December 31, 2002. Services to be provided by BellSouth and
SBC include but are not limited to legal, human resources, internal audit, risk
management, and treasury. Fees for such services are fixed and paid on a monthly
basis.
EMPLOYEE LEASING AGREEMENT
In October 2000, the Group transferred approximately 12,000 employees and
related employee liabilities to leasing companies which are wholly owned by
BellSouth. The leasing companies incur costs for the employees' salaries and
related benefits. Cingular has entered into a services contract with BellSouth
under which these employees provide services to Cingular and BellSouth bills
Cingular for the costs, including payroll, payroll taxes, benefit costs and
relocation costs.
DUE TO AFFILIATES REVOLVING CREDIT FACILITY
In October 2000, Cingular, BellSouth and SBC signed an agreement to
establish an interest rate of 7.5% on affiliate debt. In November 2000,
Cingular, BellSouth, and SBC amended existing credit agreements to extend the
repayment of the principal of the amounts due to affiliates to March 31, 2003.
REDEMPTION OF PARTNERSHIP INTEREST IN AB CELLULAR
In December 2000, BellSouth exercised its option to redeem the 55.6%
minority partnership interest in AB Cellular by distributing to the minority
partner the Los Angeles area cellular business. The transaction closed on
December 29, 2000. As a result, BellSouth received the remaining assets of the
AB Cellular partnership, which included 100% of the Houston area cellular
market, 87.35% of the Galveston, Texas area market and approximately $1,000 in
cash already held by the partnership. BellSouth contributed the Houston and
Galveston cellular markets and cash to Cingular on January 4, 2001.
F-74
(CINGULAR WIRELESS LOGO)
CINGULAR WIRELESS LLC
OFFER TO EXCHANGE
$500,000,000 5.625% SENIOR NOTES DUE 2006;
$750,000,000 6.50% SENIOR NOTES DUE 2011; AND
$750,000,000 7.125% SENIOR NOTES DUE 2031
FOR ANY AND ALL OUTSTANDING
5.625% SENIOR NOTES DUE 2006;
6.50% SENIOR NOTES DUE 2011; AND
7.125% SENIOR NOTES DUE 2031
------------------------
Until October 29, 2002, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.