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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-14108
360 COMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
47-0649117
(I.R.S. Employer Identification No.)
8725 W. Higgins Road
Chicago, Illinois
60631-2702
(773) 399-2500
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
On November 13, 1996, 123,307,468 shares of the registrant's Common Stock were
outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..............................................1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................16
Item 2. Changes in Securities ............................................*
Item 3. Defaults Upon Senior Securities...................................*
Item 4. Submission of Matters to a Vote of Security Holders...............*
Item 5. Other Information.................................................17
Item 6. Exhibits and Reports on Form 8-K..................................18
- ---------------
* No reportable information under this item.
When used in this Report, the words "intends," "expects," "plans,"
"anticipates," "estimates," and similar expressions are intended to identify
forward looking statements. Specifically, statements included in this Report
that are not historical facts, including statements about the Company's beliefs
and expectations about continued market and industry growth, and ability to
maintain existing churn, customer growth and increased penetration rates, are
forward looking statements. Such statements are subject to risks and
uncertainties that could cause actual results or outcomes to differ materially.
Such risks and uncertainties include, but are not limited to, the degree to
which the Company is leveraged and the restrictions imposed on the Company
under its existing debt instruments which may adversely affect the Company's
ability to finance its future operations, to compete effectively against better
capitalized competitors and to withstand downturns in its business or the
economy generally;continued downward pressure on the prices charged for cellular
equipment and services resulting from increased competition in the Company's
markets; the lack of assurance that the Company's ongoing network improvements
and scheduledimplementation of digital technology in its markets will be
sufficient to meetor exceed the capabilities and quality of competing networks;
the impact resulting from the loss of the Sprint name and the uncertainties and
costs associated with the implementation of a new brand name; the effect on the
Company's operations and financial performance of changes in the regulation of
cellular activities; the degree to which the Company incurs significant costs
due to cellular fraud; the impact on the Company's operations that may arise
from concerns suggesting cellular telephones may be linked to cancer; and the
other factors discussed under the heading "Certain Risk Factors" in the
Company's Information Statement set forth as Exhibit 99 to the Company's Form 10
(File No. 1-14108) filed with the Securities and Exchange Commission, which
section is hereby incorporated by reference herein. Forward looking statements
included in this Report speak only as of the date hereof and the Company
undertakes no obligation to revise or update such statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
September 30, December 31,
ASSETS 1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 9,869 $ 19,023
Accounts Receivable, less allowances
of $4,788 and $2,370, respectively 89,257 68,087
Other Receivables 30,977 29,799
Unbilled Revenue 28,389 23,481
Inventory 17,002 19,576
Other 6,267 6,604
--------------- ---------------
Total Current Assets 181,761 166,570
--------------- ---------------
Property, Plant and Equipment 1,364,267 1,151,157
Less: Accumulated Depreciation 395,237 300,703
--------------- ---------------
Property, Plant and Equipment, net 969,030 850,454
--------------- ---------------
Investments in Unconsolidated Entities 344,630 318,287
Intangibles, net 711,093 632,756
Other Assets 18,946 5,179
--------------- ---------------
Total Assets $ 2,225,460 $ 1,973,246
=============== ===============
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Trade Accounts and Other Payables $ 110,162 $ 111,770
Advance Billings 25,178 20,559
Accrued Taxes 33,453 19,690
Short-Term Borrowings 45,650
Accrued Agent Commissions 6,905 15,417
Other 36,731 27,092
--------------- ---------------
Total Current Liabilities 258,079 194,528
--------------- ---------------
Long-Term Debt 1,362,720
Advances From and Notes to Affiliates 1,517,729
--------------- ---------------
Deferred Credits and Other Liabilities
Deferred Income Taxes 111,460 99,168
Postretirement and Other Benefit Obligations 5,931 12,859
--------------- ---------------
Total Deferred Credits and Other Liabilities 117,391 112,027
--------------- ---------------
Minority Interests in Consolidated Entities 179,115 146,894
--------------- ---------------
Shareowners' Equity
Common Stock ($.01 par value; 1,000,000,000 shares
authorized; 116,863,074 shares issued and outstanding) 1,169 11,541
Additional Paid-In Capital 623,287 360,978
Accumulated Deficit (316,301) (370,451)
--------------- ---------------
Total Shareowners' Equity 308,155 2,068
--------------- ---------------
Total Liabilities and Shareowners' Equity $ 2,225,460 $ 1,973,246
=============== ===============
The accompanying Notes are an integral part of the Consolidated Financial Statements.
</TABLE>
1
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<TABLE>
<CAPTION>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------------- --------------------------------
1996 1995 1996 1995
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Cellular Service Revenues $ 271,819 $ 207,472 $ 766,133 $ 572,028
Equipment Sales 9,857 10,311 29,411 34,125
-------------- -------------- ------------- --------------
Total Operating Revenues 281,676 217,783 795,544 606,153
-------------- -------------- ------------- --------------
OPERATING EXPENSES
Cost of Service 24,148 17,488 68,492 50,489
Cost of Equipment Sales 25,046 27,324 71,010 77,933
Other Operations Expense 15,498 10,695 39,824 28,527
Sales, Marketing and Advertising Expenses 48,527 35,697 143,146 97,719
General, Administrative and Other Expenses 68,030 53,773 190,287 153,900
Depreciation and Amortization 36,833 29,380 104,987 83,666
-------------- -------------- ------------- --------------
Total Operating Expenses 218,082 174,357 617,746 492,234
-------------- -------------- ------------- --------------
OPERATING INCOME 63,594 43,426 177,798 113,919
Interest Expense (24,752) (32,376) (78,854) (95,081)
Minority Interests in Net Income
of Consolidated Entities (13,843) (9,303) (38,168) (26,218)
Equity in Net Income of
Unconsolidated Entities 16,339 12,003 40,359 23,566
Other Income (Expense), net 101 (1,236) 423 (1,188)
-------------- -------------- ------------- --------------
Income Before Income Taxes 41,439 12,514 101,558 14,998
Income Tax Expense 18,552 7,967 47,407 17,128
-------------- -------------- ------------- --------------
Net Income (Loss) $ 22,887 $ 4,547 $ 54,151 $ (2,130)
============== ============== ============= ==============
Net Income (Loss) per Share (in Dollars) $ 0.20 $ 0.04 $ 0.46 $ (0.02)
============== ============== ============= ==============
Weighted Average Shares
Outstanding, in thousands 117,086 116,844 117,060 116,600
============== ============== ============= ==============
The accompanying Notes are an integral part of the Consolidated Financial Statements.
</TABLE>
2
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<TABLE>
<CAPTION>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
For the Nine Months
Ended September 30,
-------------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Operating Activities
Net Income (Loss) $ 54,151 $ (2,130)
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 104,987 83,666
Deferred Income Taxes 19,119 11,131
Equity in Net Income of Unconsolidated
Entities, net of distributions (25,104) 2,462
Minority Interests in Net Income of
Consolidated Entities 38,168 26,218
Changes in Operating Assets and Liabilities
Receivables, net (16,009) (22,173)
Other Current Assets (1,410) 8,265
Trade Accounts and Other Payables 1,825 2,512
Accrued Expenses and Other
Current Liabilities 10,267 105
Noncurrent Assets and Liabilities, net (868) 2,484
Other, net 5,266 (1,596)
--------------- ---------------
Net Cash Provided by Operating Activities 190,392 110,944
--------------- ---------------
Investing Activities
Capital Expenditures (193,543) (270,027)
Acquisitions (109,613) ------
Investment in Unconsolidated Entities and Other (14,709) (3,642)
--------------- ---------------
Net Cash Used by Investing Activities (317,865) (273,669)
--------------- ---------------
Financing Activities
Net Borrowings under Bank Revolving Credit Facility 448,543 ------
Proceeds from Long-Term Debt 900,000 ------
Net Short-Term Borrowings 45,650 ------
Increase (Decrease) in Advances from Affiliates (1,400,000) 161,012
Contributions from Minority Investors 4,881 6,093
Distributions to Minority Investors (9,275) (6,341)
Equity Contributions 130,355 ------
Other (1,835) ------
--------------- -------------
Net Cash Provided by Financing Activities 118,319 160,764
--------------- ---------------
Decrease in Cash and Cash Equivalents (9,154) (1,961)
Cash and Cash Equivalents at Beginning of Period 19,023 5,527
--------------- ---------------
Cash and Cash Equivalents at End of Period $ 9,869 $ 3,566
=============== ===============
The accompanying Notes are an integral part of the Consolidated Financial Statements.
</TABLE>
3
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360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Consolidation and Presentation
360 Communications Company and its subsidiaries (the "Company")
provide wireless voice and data telecommunications services. The Company
operates as a general and limited partner and majority owner of cellular systems
in various metropolitan and rural service areas and as a limited minority
partner or manager in other cellular systems. On October 14, 1996, the Company
announced plans to consolidate the North Carolina region with the Southeast
region. The expanded region includes all markets in North Carolina, South
Carolina, Florida and Alabama and is called the Southeast region. The Company
operates in three additional regions in the United States: Mid-Atlantic, Midwest
and West.
The Company was a wholly-owned subsidiary of Centel Corporation, a
wholly-owned subsidiary of Sprint Corporation ("Sprint"). On March 7, 1996,
Sprint completed the spin-off of the Company to Sprint shareholders through a
pro rata distribution of all of the Common Stock of the Company (the
"Spin-off"). For further discussion of the Spin-off, see Note 3.
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned and majority owned subsidiaries.
The assets, liabilities and results of operations of entities (both corporations
and partnerships) in which the Company has a controlling interest have been
consolidated. The ownership interests of noncontrolling owners in such entities
are reflected as minority interests. The Company accounts for all other
investees using the equity method of accounting. All significant intercompany
accounts and transactions have been eliminated.
The unaudited consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and are presented in
accordance with the rules and regulations of the Securities and Exchange
Commission applicable to interim financial information. In the Company's
opinion, the unaudited consolidated financial statements include all adjustments
necessary to present fairly the financial position and results of operations for
each interim period presented. All such adjustments are of a normal recurring
nature. These financials should be read in conjunction with the consolidated
financial statements, including the notes thereto, included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
Certain amounts have been reclassified to conform to the presentation used
for the three months ended September 30, 1996.
2. Earnings Per Share
Earnings per share was computed using weighted average shares outstanding,
including common stock equivalents, totaling 117,086,280 and 116,843,988 for the
three months ended September 30, 1996 and 1995, respectively, and 117,059,755
and 116,600,000 for the nine months ended September 30, 1996 and 1995,
respectively. In 1995, Net Income (Loss) per Share was recalculated based upon
the number of Sprint weighted average shares outstanding for each respective
period, adjusted for a conversion ratio of 1 share of the Company's Common Stock
to 3 shares of Sprint common stock.
3. Spin-off
On July 26, 1995, Sprint announced that its Board of Directors decided to
pursue a tax-free Spin-off of the Company to Sprint shareholders. In the March
1995 Federal Communications Commission ("FCC") auction of wireless Personal
Communications Services ("PCS") licenses, Sprint Spectrum LP won the rights to
several markets which overlap service territories operated by the Company. Under
FCC rules, Sprint was required to divest or reduce its cellular holdings in
certain markets to clear conflicts with the PCS licenses awarded to Sprint
Spectrum LP. For these reasons, Sprint and its Board of Directors decided to
pursue a Spin-off of the cellular operations of Sprint.
4
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3. Spin-off (continued)
On March 7, 1996, the Spin-off was consummated. In conjunction with the
Spin-off, the Company repaid $1.4 billion of intercompany debt to Sprint. The
remaining intercompany debt was contributed to the Company as Additional Paid-In
Capital. Funding for the repayment was derived from the proceeds of $900 million
of the Company's Senior Notes issued under an indenture ("Indenture") and $527
million of initial borrowings under a $800 million five-year revolving credit
facility ("Credit Facility") with a number of banks and institutional lenders.
In addition, a recapitalization of the Company's Common Stock was effected
pursuant to which the Company split the 10 shares of the then issued and
outstanding Common Stock into 116,733,983 new shares of the Common Stock to
allow for the pro rata distribution of such stock to the common shareholders of
Sprint. This distribution was effected as a tax-free stock dividend.
On October 31, 1996, the Credit Facility was amended and restated to
increase the Company's borrowing capacity thereunder from $800 million to $1
billion.
The Indenture and Credit Facility have general and financial covenants
which place certain restrictions on the Company. The Company is limited with
respect to: the making of payments (dividends and distributions); the incurrence
of certain liens; the sale of assets under certain circumstances; entering into
or otherwise permitting any subsidiary distribution restrictions; certain
transactions with affiliates; certain consolidations, mergers and transfers; and
the use of loan proceeds. In addition, the Indenture and Credit Facility limit
the aggregate amount of additional borrowings which can be incurred by the
Company.
4. Significant Equity Investments
The Company's investments in the Kansas City SMSA Limited Partnership,
Orlando SMSA Limited Partnership, New York SMSA Limited Partnership, and GTE
Mobilnet of South Texas Limited Partnership meet the conditions prescribed by
the Securities and Exchange Commission which require interim financial statement
disclosures for significant equity investments. Selected unaudited combined
interim financial information follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- ----------------------------
1996 1995 1996 1995
Results of Operations ------ ------ ------ ------
<S> <C> <C> <C> <C>
Cellular Service Revenues $ 317,190 $ 254,475 $ 912,229 $ 734,444
Equipment Sales 12,733 5,333 35,137 29,687
--------- --------- --------- ---------
Total Operating Revenues 329,923 259,808 947,366 764,131
Cost of Equipment Sales 32,718 18,105 84,406 60,820
Operating, Selling, General,
Administrative and Other Expenses 168,889 122,413 474,003 389,271
Depreciation and Amortization 29,881 24,692 86,024 73,496
--------- --------- --------- ---------
Total Operating Expenses 231,488 165,210 644,433 523,587
--------- --------- --------- ---------
Operating Income 98,435 94,598 302,933 240,544
Other Income (Expense), net (978) (277) (5,101) 2,635
---------- --------- --------- ---------
Net Income $ 97,457 $ 94,321 $ 297,832 $ 243,179
---------- --------- --------- ---------
</TABLE>
5
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5. Income Taxes
During the third quarter of 1996, the Company continued to evaluate and
identify certain tax planning strategies. The annual effect of these tax
planning strategies combined with the effect of increased earnings estimates
resulted in an effective tax rate of 46.7% for the nine months ended September
30, 1996.
6. Contingencies
On or about March 29, 1996, a class action lawsuit was brought in the
Chancery Court of Washington County, Jonesborough, Tennessee (the "Tennessee
Action") on behalf of all customers in the Company's Tennessee markets regarding
customer notification of the Company's practice with respect to billing for
fractional minutes of service. In April 1996, the original complaint was amended
to enlarge the class of plaintiffs to include all customers in all of the
Company's service areas. In late April 1996, the Tennessee Action was removed to
the United States District Court for the Eastern District of Tennessee, Northern
Division. The Company moved to dismiss the action and the plaintiff filed a
motion to remand. On July 16, 1996, the Tennessee District Court granted the
plaintiff's motion to remand and returned the case to the Chancery Court of
Washington County. The Company's Motion to Dismiss is currently pending before
the Chancery Court.
On or about May 28, 1996, a class action lawsuit was brought in the Common
Pleas Court of Erie County, Ohio (the "Ohio Action") on behalf of all customers
in all of the Company's service areas regarding notification of the Company's
practice with respect to billing for fractional minutes of service. On June 25,
1996, the Ohio Action was removed to the United States District Court for the
Northern District of Ohio, Western Division. On July 18, 1996, the Company filed
a Motion to Dismiss Or, In The Alternative, Stay pending resolution of the
Tennessee Action. The basis for the Motion to Stay is the duplicity of the two
actions. On July 24, 1996, the plaintiff filed a Motion to Remand to return the
case to the state court.
Discovery has not commenced in either case. The Company believes that both
lawsuits are without merit, however, the ultimate outcome of these matters and
the potential effect on the financial condition and results of operations of the
Company cannot be determined at this time.
The Company is party to various other legal proceedings in the ordinary
course of business. Although the ultimate resolution of these various
proceedings cannot be ascertained, management of the Company does not believe
that such proceedings, individually or in the aggregate, will have a material
adverse effect on the results of operations or financial position of the
Company.
7. Acquisitions
On January 31, 1996, the Company purchased additional partnership
interests in Centel Cellular Company of Ft. Walton Beach Limited Partnership and
Centel Cellular Company of Tallahassee Limited Partnership. Also on January 31,
1996, the Company purchased an operating license and related cellular assets in
the North Carolina RSA 14 market. On February 23, 1996, the Company acquired an
operating license and related assets in the Ohio RSA 1 market. In addition, on
February 29, 1996, the Company purchased a 50% interest in South Carolina RSA
No. 4 Cellular General Partnership, a 50% interest in South Carolina RSA No. 5
Cellular General Partnership and a 50% interest in South Carolina RSA No. 6
Cellular General Partnership. The aggregate purchase price of these acquisitions
was approximately $109,613,000.
6
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8. Contingencies of Unconsolidated Entities
The GTE Mobilnet of South Texas Limited Partnership, (the "South Texas
partnership"), an equity investee of the Company, filed suit in 1994 against a
former agent and its principals alleging that the former agent continued to hold
itself out as an agent of the South Texas partnership after its contract
expired. The former agent and its principals subsequently filed a counterclaim
against the South Texas partnership, claiming the South Texas partnership
falsely represented to them that all agent agreements were identical and that
all agents were paid the same amount. The complaint against the South Texas
partnership alleges fraud, breach of covenant of good faith and fair dealing,
tortuous interference with plaintiffs' business relations, violation of the
Texas Deceptive Trade Practices Act, and defamation. The plaintiff is seeking
unspecified damages.
On April 12, 1995, a suit which purports to be a class action was filed
alleging that the defendants (including the South Texas partnership) violated
the Telephone Consumer Protection Act ("TCPA") and invaded the plaintiff's
privacy by sending unauthorized facsimiles to the plaintiffs. The complaint
seeks $500 in damages for each alleged violation of the TCPA, plus treble
damages, or in the alternative, punitive damages. In addition, the plaintiffs
seek interest, cost and attorney's fees. The defendants filed a motion to
dismiss for want of subject matter jurisdiction and for failure to state a
proper claim. At a recent hearing, the court ruled that the TCPA applied only to
interstate faxing, and not to intrastate faxing, such as those allegedly
associated with the South Texas partnership. The action is stayed pending the
parties appeal.
On January 25, 1996, a suit was filed against the South Texas partnership
by a former employee of GTE Mobilnet, who alleges among other claims, certain
employment discrimination charges. The plaintiff seeks unspecified damages.
The ultimate outcome of these three matters cannot presently be
determined. Accordingly, no provision for any liability that might result from
these matters has been made in the financial statements of the South Texas
partnership and the Company's financial statements.
On July 26, 1995, Cellco Partnership ("Cellco"), a partnership which is a
general partner in the New York SMSA Limited Partnership (the "New York
partnership"), an equity investee of the Company, was named as a defendant in a
class action lawsuit brought by a subscriber, Mr. Daniel J. Mandell. The
geographic scope of the class is uncertain but may include geographic areas and
customers serviced by the New York partnership. The plaintiff alleges that the
defendant's cellular operations are engaged in fraudulent, misleading, and
deceptive practices by concealing the practice of rounding up airtime usage to
bill in full minute increments. The plaintiff seeks an accounting of monies
received as a result of the above conduct by the defendant, compensatory
damages, punitive damages, treble damages pursuant to the New Jersey Consumer
Fraud Act, and injunctive relief. The defendant's motion to dismiss on forum non
conveniens grounds was refiled. Although the defendant has informed the New York
partnership that it believes that it has meritorious defenses to the claims
asserted against it, and intends to defend itself vigorously, the ultimate
outcome of this matter cannot be determined at the present time. The New York
partnership may be allocated a portion of the damages that may result upon
adjudication of this matter if the plaintiffs prevail in their action. If an
adverse judgment is entered, the potential effect on the financial condition and
the results of operations of Cellco, the New York partnership and the Company
cannot be ascertained at this time but may be material.
The former general partner in the New York partnership was named as a
defendant in a class action lawsuit brought on behalf of New York retail
customers. The plaintiffs have alleged that the general partner has overcharged
customers who experienced an involuntary disconnection ("dropped calls") of
their mobile service calls during the period July 1985 through September 1994.
Further, the plaintiffs allege that the amount of credit given for a dropped
call, the New York partnership general partner's policy of requiring customers
to specifically request such credits, and the absence of sufficient notice
advising customers to actively request such credits were breaches of contract
and deceptive practice. Discovery is ongoing at this time. The New York
partnership is not a defendant
7
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8. Contingencies of Unconsolidated Entities (continued)
in this matter having been dismissed from the case in the early stages of the
litigation. The New York partnership has been informed that the defendant
intends to defend itself vigorously but that the ultimate outcome of the matter
cannot be determined. The New York partnership may be allocated a portion of the
damages that may result upon adjudication of this matter if the plaintiffs
prevail in their action. If an adverse judgment is entered, the potential effect
on the financial condition and the results of operations of the former general
partner of the New York partnership, the New York partnership and the Company
cannot be ascertained at this time but may be material.
On July 2, 1996, a class action lawsuit was filed against Cellco.
Steven Kahn, plaintiff, alleges that the defendant has failed to adequately
disclose its automatic renewal policy, whereby annual agreements are
automatically renewed unless a customer cancels the agreement prior to its
expiration. The plaintiff contends that the renewals are unenforceable under a
New York statute that requires a vendor to give notice to the consumer by
personal service or certified mail of the automatic renewal at least 15 days and
not more than 30 days prior to renewal. As a result, the plaintiff alleges that
the defendant has breached its contracts by failing to provide the required
notice, and seeks a ruling that all contracts are void or voidable. The
plaintiff further contends that the defendant has been unjustly enriched by
charges it has collected from consumers who were automatically renewed without
legally sufficient notification. The complaint seeks compensatory damages in an
amount not less than $10 million. The class action is brought on behalf of all
New York customers who contracted with the defendant and who were automatically
renewed since July 1990. Defendant's motion to dismiss was served on August 28,
1996. It argues that the named plaintiff lacks standing; that the statute does
not apply to the defendant; that actual notice was provided; and that the court
should dismiss the matter based on the primary jurisdiction doctrine. The
ultimate outcome of this matter cannot be determined at the present time. The
New York partnership may be allocated a portion of the damages that may result
upon adjudication of this matter if the plaintiff prevails in this action. If an
adverse judgment is entered, the potential effect on the financial condition and
results of operation of Cellco, the New York partnership and the Company cannot
be ascertained at this time but may be material.
On August 13, 1996, a class action lawsuit was filed against Bell Atlantic
Corporation ("BAC") and NYNEX Corporation ("NYNEX") d/b/a/ Bell Atlantic NYNEX
Mobile (BANM). Christopher G. Kuhn, filing in Pennsylvania state court, alleges
concealed full-minute billing, a concealed practice of charging landline
termination fees, and concealed pricing arrangements with agents. The putative
class is all Cellco subscribers since February 1, 1990. Relief sought includes
statutory, treble and punitive damages, and injunctive relief. Cellco has agreed
to accept service, but has not been served. On August 16, 1996, a second
Pennsylvania state court action was filed against BAC and NYNEX d/b/a/ BANM. The
plaintiff, Larry Carroll, alleges that the defendant acted improperly by failing
to adequately disclose its practice of rounding-up airtime to bill in
full-minute increments, failing to adequately disclose the practice of charging
the customer landline charges, and failing to adequately disclose relationships
with agents. In addition, the complaint alleges failure to disclose service
quality issues resulting in an increased number of redials and reconnects, with
a corresponding increase in cost to customers. The putative class is all Cellco
subscribers since February 1, 1990. Relief sought includes actual and punitive
damages and injunctive relief. Cellco has agreed to accept service, but has not
been served. Although Cellco has not yet been served in the two Pennsylvania
actions, it is likely that the complaints will soon be amended to name it.
Cellco has informed the New York partnership that it believes that it has
meritorious defenses to the claims asserted against it, and intends to defend
itself vigorously. However, the ultimate outcome of the matter cannot be
determined at the present time. The New York partnership may be allocated a
portion of the damages that may result upon adjudication of this matter if the
plaintiffs prevail in their action. If an adverse judgment is entered, the
potential effect on the financial condition and the results of operations of the
former general partner of the New York partnership, the New York partnership and
the Company cannot be ascertained at this time but may be material.
On September 13, 1996, Region 2 of the National Labor Relations Board
filed an amended and consolidated complaint against BAC, NYNEX, Cellco, the New
York partnership and various other affiliated entities. The complaint alleges,
in essence, that the respondents operated as a single integrated enterprise and
as a single employer. As such, Cellco was liable for the collective bargaining
obligations of its NYNEX partner. The substance of the charge is that the
respondents unlawfully refused to recognize the Communications Workers of
America (CWA) as the exclusive representative of the Operating Department
working in the New York Metropolitan Area; that the respondents unlawfully
repudiated the existing bargaining agreements; and unlawfully
8
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8. Contingencies of Unconsolidated Entities (continued)
constructively discharged certain employees. Although the respondents believe
they have meritorious defenses to the claims asserted against them, and intend
to defend themselves vigorously, the ultimate outcome of the matter cannot be
determined at the present time. The New York partnership may be allocated a
portion of the damages that may result if a judgment is entered separately
against Cellco. If an adverse judgment is entered, the potential effect on the
financial condition and results of operations on Cellco, the New York
partnership, and the Company cannot be ascertained at this time but may be
material.
On August 13, 1996, Cellco was named as the defendant in a class action
lawsuit brought by a subscriber, Hector M. Roman, alleging that the defendant
violated the provisions of its form contract by billing subscribers for local
landline charges for calls made in their home calling areas. Relief sought
includes compensatory damages of not less than $5 million, and injunctive
relief. The action is brought on behalf of all of defendant's subscribers billed
for such charges. The defendant has filed a motion to dismiss pursuant to the
doctrine of primary jurisdiction and based on federal preemption. The ultimate
outcome of this matter cannot be determined at the present time. The New York
partnership may be allocated a portion of the damages that may result upon
adjudication of this matter if the plaintiff prevails in the action. If an
adverse judgment is entered, the potential effect on the financial condition and
results of the operations of Cellco, the New York partnership, and the Company
cannot be ascertained at this time but may be material.
On August 16, 1996, a class action was filed against Cellco, by Gary R.
Goldman. The complaint alleges that the defendant's automatic renewal policy is
in violation of the notice provision of a New York statute. The complaint
further alleges that the defendant acted improperly in charging termination fees
for contracts canceled beyond the initial terms of those contracts, and that it
deliberately advertised its services in such a way to defraud consumers by
misleading them into believing that they had no obligation to pay termination
charges after the expiration of the initial term of the contract. The action is
brought on behalf of all New York customers who paid termination charges, and
seeks compensatory damages and injunctive relief. The ultimate outcome of this
matter cannot be determined at the present time. The New York partnership may be
allocated a portion of the damages that may result upon adjudication of this
matter if the plaintiff prevails in this action. If an adverse judgment is
entered, the potential effect on the financial condition and results of
operations of Cellco, the New York partnership, and the Company cannot be
ascertained at this time but may be material.
9. Subsequent Event
On November 1, 1996, the Company completed its previously announced
acquisition (the "ICN Acquisition") of Independent Cellular Network, Inc. and
affiliated companies (collectively, the "Acquired Companies") which own and
operate cellular licenses and related systems and assets in Kentucky, Ohio,
Pennsylvania and West Virginia. The Acquired Companies provide cellular service
to approximately 140,000 customers in 20 markets representing an estimated 3.2
million potential customers. The Company acquired the Acquired Companies from
Independent Cellular Network Partners and certain of its affiliates
(collectively, "ICNP") for approximately $514 million, comprised of 6,500,000
shares of the Company's Common Stock, $122 million in aggregate principal amount
of the Company's subordinated non-negotiable promissory notes and the Company's
assumption of $240 million of Independent Cellular Network Partners' senior
debt. The remaining portion of the purchase price was paid in cash.
The Company's subordinated non-negotiable promissory notes issued in
connection with the ICN Acquisition are due October 31, 2006 and accrue interest
at the rate of 9.5% per annum, which may be reduced to 9.0% upon the occurrence
of certain events, payable semiannually. Fifty percent of the interest due and
owing will be paid on each interest payment date and the remaining fifty percent
of the interest due and owing will be capitalized and become part of the
principal amount owed thereunder. The $240 million of senior debt assumed by the
Company in connection with the ICN Acquisition was refinanced, and the cash
portion of the purchase price was funded, under the Credit Facility. On October
31, 1996, the Credit Facility was amended and restated to permit, among other
things, the ICN Acquisition and to increase the Company's borrowing capacity
thereunder from $800 million to $1 billion.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
General
The following is a discussion and analysis of the historical results of
operations and financial condition of the Company and factors affecting the
Company's financial resources. This discussion should be read in conjunction
with the consolidated financial statements, including the notes thereto, set
forth herein under "Financial Statements" and the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995. This discussion contains
forward looking statements which are qualified by reference to, and should be
read in conjunction with, the Company's statement regarding forward looking
statements set forth on page (i) of this Report.
Results of Operations
Customer Growth Rate
Cellular customers increased to 1,850,500 at September 30, 1996 from
1,348,500 at September 30, 1995, resulting in a 37.2% increase. For the three
months ended September 30, 1996 and 1995, the Company added 100,200 and 107,200
customers, respectively, through internal growth. For the nine months ended
September 30, 1996, customer growth through acquisitions added 46,600 customers
and internal growth added 302,100 new customers, while in the corresponding 1995
period, the Company added 308,500 customers through internal growth. The
Company's penetration rate, which is the number of customers divided by the
total population in its licensed service areas, reached 8.84% at September 30,
1996 compared to 6.86% at September 30, 1995. During the three months ended
September 30, 1996 and 1995, customer churn, the average monthly rate of
customer disconnects, was 1.86% and 1.89%, respectively, and during the nine
months ended September 30, 1996 and 1995 was 1.80% and 1.79%, respectively.
Cellular Service Revenues
Cellular service revenues consist primarily of charges for airtime,
access fees, roaming fees and other services. Cellular service revenues
increased 31.0% and 33.9% in the three and nine months ended September 30, 1996
when compared to the corresponding 1995 periods, principally from growth in the
number of cellular customers. Increased distribution channels, expanded network
capacity, declining cellular telephone equipment prices and pricing plans
targeted at particular market segments are key factors contributing to the
Company's customer growth. In addition, acquisitions completed in the first
quarter of 1996 contributed $11.0 million and $25.5 million of service revenues
in the three and nine months ended September 30, 1996, respectively.
Consistent with the rest of the cellular industry, the Company has
experienced increased penetration in the consumer market, a trend attributable
to declining cellular telephone equipment prices and increased promotional
activities (i.e. packaging, special rate plans), an increased awareness of the
benefits of cellular communications, widespread distribution channels in
consumer-oriented retail locations and expanded network coverage and capacity.
The Company expects this trend to continue. New customers generally use less
airtime than existing customers, causing the average service revenue per
customer per month to decline. As a result, cellular service revenue growth has
not kept pace with the level of growth in the number of customers. Service
revenue per average customer per month was $50.34 and $53.35 during the three
months ended September 30, 1996 and 1995, respectively, and $50.54 and $53.66
during the nine months ended September 30, 1996 and 1995, respectively. The
Company expects that service revenue per average customer per month will
continue to decline as penetration rates continue to increase.
10
<PAGE>
In an effort to increase cellular telephone usage through increased
roaming airtime, the Company expects the continuation of the industry-wide trend
for negotiated reduced roaming rates between carriers, which may reduce revenues
derived from cellular service users who roam into the Company's systems. The
Company expects roaming airtime to increase as reduced roaming rates between
carriers are ultimately passed on to customers, thus stimulating increased
usage. Roaming airtime minutes increased during the three and nine months ended
September 30, 1996, when compared to the same periods in 1995, the major factor
contributing to the $15.5 million and $40.6 million increase in roaming revenue
for the three and nine months ended September 30, 1996.
Future revenue growth will be impacted by the Company's success in
maintaining customer growth in existing markets, additional revenue generated
from the increasing availability of a variety of enhanced services and products
and by the Company's success in acquiring additional cellular communications
systems to further strengthen its existing regional clusters. The percentage
growth rate of new customers is expected to decline as the customer base grows.
Future revenue growth will also be impacted by the Company's entrance into the
long distance and paging businesses. In August, the Company began marketing
residential long distance service in 13 of the 14 states in which the Company
provides wireless service and expects to offer service in New Mexico by the end
of the year. The Company also began reselling paging in two markets and plans to
expand service to its other existing markets by the end of the year. An improved
competitive position, reduced cellular churn and increased brand awareness are
expected as the long distance and paging service businesses mature.
Equipment Sales
Equipment sales consist of revenues from sales of cellular telephone
equipment and accessories. Equipment sales decreased 4.4% and 13.8% in the three
and nine months ended September 30, 1996 when compared to the corresponding 1995
periods, despite an increase in the number of telephone units sold. Competitive
market pressures have resulted in a continued trend of selling equipment at
discounted prices. Although declining cellular telephone prices have generated
increased activations of cellular service, gross margins on equipment sales
declined in the nine months ended September 30, 1996 when compared to the
corresponding 1995 period as the Company continues to sell cellular telephones
at or below cost. The Company experienced a slight improvement in the negative
gross margins in the three months ended September 30, 1996 when compared to the
corresponding 1995 period, however, the Company expects competitive market
pressures and negative gross margins on equipment sales to continue.
Cost of Service, Other Operations Expense, Sales, Marketing and Advertising
Expenses and General, Administrative and Other Expenses
Cost of service, other operations expense, sales, marketing and
advertising expenses and general, administrative and other expenses increased
due principally to growth in the cellular customer base. Expense levels in the
three months ended September 30, 1996 were also impacted by charges associated
with start-up expenses for residential long distance service and two major
hurricanes that affected the Company. During the three months ended September
30, 1996 and 1995, these expenses as a percent of cellular service revenues were
57.5% and 56.7%, respectively, and during the nine months ended September 30,
1996 and 1995 were 57.7% and 57.8%, respectively.
Economies of scale in the three and nine months ended September 30, 1996
were offset by increased expense levels experienced in the three months ended
September 30, 1996. The Company incurred $680,000 of additional maintenance
expenses caused by two major hurricanes and $808,000 of start-up expenses
incurred in connection with the initiation of residential long distance service.
In the three and nine months ended September 30, 1996, bad debt expense
increased $2.9 million and $5.8 million, respectively, due to the overall
increase in the level of consumer debt delinquencies nationwide. The Company
continues to expect a gain in future economies of scale from serving additional
customers, improved operational support systems, strong revenue growth and
improved productivity.
11
<PAGE>
In the three and nine months ended September 30, 1996, expenses were
impacted by $5.3 million and $21.5 million, respectively, of additional
advertising, promotional and other marketing expense associated with the planned
introduction of the Company's new brand name. This increase also resulted in an
increase in sales, marketing and advertising costs to acquire a new customer.
Such costs were $312 and $291 during the three months ended September 30, 1996
and 1995, respectively, and $317 and $286 during the nine months ended September
30, 1996 and 1995, respectively.
In an effort to control costs associated with acquiring new customers, the
Company has begun to utilize more extensively an internal sales force located in
Company retail outlets. Incremental sales costs at a Company retail store are
significantly lower than commissions paid to national dealers. Although the
Company intends to continue to support its large dealer network, continued
increases in its own retail distribution channels are planned. The Company has
experienced lower churn levels in the consumer segment acquired through its
retail distribution channel, thereby helping to control the cost of growing its
customer base. The Company is unable to anticipate whether the cost to add new
customers will increase as savings associated with the transition to the use of
an internal sales force levels off, the growth rate of new customers declines
and competition for local and national dealers intensifies.
Following the Spin-off, the Company began to perform certain functions
previously provided to the Company by Sprint. The undertaking of such functions
is not expected to have a significant impact on the Company's operating
expenses.
Depreciation and Amortization
Acquisitions of cellular communications systems generated intangible
assets, such as FCC license costs and goodwill, which are being amortized over
40 years. During the three and nine months ended September 30, 1996 amortization
expense increased 12.2% and 10.1%, respectively, when compared to the
corresponding periods in 1995. The increase is attributable to acquisitions
completed in the first quarter of 1996.
During the three and nine months ended September 30, 1996 depreciation
expense increased 27.9% and 28.7%, respectively, when compared to the
corresponding period in 1995. During the three months ended September 30, 1996
and 1995, depreciation as a percent of cellular service revenues was 11.6% and
11.9%, respectively, and during the nine months ended September 30, 1996 and
1995 was 11.6% and 12.1%, respectively. The increase in depreciation expense in
1996 when compared to the corresponding 1995 periods is the result of increased
capital investment in the Company's cellular network.
Interest Expense
Interest expense decreased in the three and nine months ended September
30, 1996 when compared to the corresponding prior year periods due to decreases
in interest rates and borrowing levels. Prior to the Spin-off, the Company
borrowed from Sprint, primarily to fund construction costs and start-up losses,
at interest rates based on prime plus 2 percent and a 30 day commercial paper
rate. The annualized average interest rate for the three and nine months ended
September 30, 1995 was 8.7% and 8.3%, respectively. The annualized interest rate
for the three and nine months ended September 30, 1996 was 7.0% and 7.2%,
respectively. Current borrowings consist of $450 million of 7 1/8% Senior Notes
due 2003, $450 million of 7 1/2% Senior Notes due 2006, borrowings under the
Credit Facility with interest rates based on the London Interbank Offered Rate
plus 50 basis points and market based short-term borrowings.
12
<PAGE>
Equity in Net Income of Unconsolidated Entities
"Equity in Net Income of Unconsolidated Entities" represents the Company's
share of operating results of cellular systems in which the Company does not
have a controlling interest. Equity earnings increased for the three and nine
months ended September 30, 1996, when compared to the prior year periods,
primarily as a result of increased income generated by minority cellular
investments which continue to mature and increase penetration.
The South Texas and New York partnerships, two of the Company's equity
investees, are parties to separate legal proceedings. Because the outcome of
such legal proceedings has not been determined by the partnerships, no provision
for any liability that may result upon adjudication of that litigation has been
made in the unaudited interim consolidated financial statements. The Company's
combined investments in these partnerships, including intangible assets recorded
in connection with the acquisitions of these partnerships, was $225.2 million at
September 30, 1996 and its combined equity in the net income of these
partnerships, net of amortization of intangible assets, was $6.6 million and
$18.2 million for the three and nine months ended September 30, 1996,
respectively. In view of the uncertainty regarding such litigation, there can be
no assurance that the outcome of such litigation will not have a material
adverse effect on the Company's investment in these partnerships or in its
equity in the combined income of such partnerships.
Competition
Cellular carriers compete primarily against the other cellular carriers in
each market. However, companies with PCS licenses have begun to offer their
products and services in several of the Company's serving areas. The Company has
prepared for this new competitive environment by enhancing its networks,
expanding its service territory and offering new features, products and services
to its customers. The Company believes it will benefit from its position as an
incumbent in the cellular field with a high quality network, extensive
geographic footprint that is not capacity constrained, strong distribution
channels, superior customer service capabilities and an experienced management
team. However, there can be no assurance that these measures will completely
mitigate the pressures associated with the expected increase in the level of PCS
competition.
Liquidity and Capital Resources
Spin-off
On March 7, 1996, the Spin-off was consummated. In conjunction with the
Spin-off, the Company repaid $1.4 billion of intercompany debt to Sprint. The
remaining intercompany debt was contributed to the Company as Additional Paid-In
Capital. Funding for the repayment was derived from the proceeds of $900 million
of the Company's Senior Notes issued under the Indenture and $527 million of
initial borrowings under the Credit Facility. In addition, a recapitalization of
the Company's Common Stock was effected pursuant to which the Company split the
10 shares of the then issued and outstanding Common Stock into 116,733,983 new
shares of the Common Stock to allow for the pro rata distribution of such stock
to the common shareholders of Sprint. This distribution was effected as a
tax-free stock dividend.
Cash Flows - Operating Activities
Cash flows from operating activities were $190.4 million and $110.9
million for the nine months ended September 30, 1996 and 1995, respectively.
Operating cash flow increases are due to improved operating results. Although
future operating cash flows will continue to be impacted by the advertising,
promotional and other marketing expenses associated with the introduction and
promotion of the Company's new brand name, the Company expects cash flows
generated by operating activities to continue to increase.
13
<PAGE>
Cash Flows - Investing Activities
During the nine months ended September 30, 1996 and 1995 the Company's
investing activities used cash of $317.9 million and $273.7 million,
respectively, of which capital expenditures were $193.5 million and $270.0
million, respectively. The decrease in capital expenditures was the result of
the maturing of the Company's network. In previous years, the Company
concentrated on satisfying FCC cellular systems build-out requirements regarding
the expansion of the geographic footprint or coverage area of Company held
licenses, in addition to capital investment to support customer growth. With the
geographic areas of its licensed areas essentially covered, the Company
currently focuses on capital investment to support customer growth and on
improving customer call quality. In August 1996, the Company began offering Code
Division Multiple Access ("CDMA") digital technology to the Company's new and
existing customers in Las Vegas, Nevada. The introduction of CDMA technology in
Las Vegas followed a six month market trial that began in early 1996. The
Company plans to implement a gradual transition to CDMA technology in its other
markets on a market by market basis as additional network capacity is required
to accommodate growth in call volume. This approach should provide time for
anticipated digital technology improvements to be proven, while also avoiding
premature capital expenditures. The Company expects that its investment in
digital technology will increase over time as network capacity needs warrant.
In the first quarter of 1996, the Company acquired cellular properties in
South Carolina, North Carolina and Ohio and acquired additional partnership
interests in Florida. The aggregate purchase price of these acquisitions totaled
$109.6 million.
On a limited basis, the Company has increased its ownership interests in
certain of its controlled markets. To the extent feasible, the Company intends
to exchange some or all of its minority investments in cellular communications
systems for increased ownership interests in its controlled markets or for
ownership interests in new markets in which it could obtain control.
Cash Flows - Financing Activities
During the nine months ended September 30, 1996 and 1995 net cash received
from financing activities was $118.3 million and $160.8 million, respectively.
In 1995, cash received from financing activities principally reflected
borrowings from Sprint. Following the Spin-off, capital to meet funding
requirements is not available from Sprint and its subsidiaries. In conjunction
with the Spin-off, the Company repaid $1.4 billion of intercompany debt to
Sprint. The remaining intercompany debt was contributed to the Company as
Paid-In Capital. Funding for the repayment was derived from proceeds of the
Company's Senior Notes issued under the Indenture and initial borrowings under
the Credit Facility. As part of its cash management program, the Company also
incurs short-term borrowings based on market interest rates to support its daily
cash requirements. The aggregate amount of these borrowings is limited to $50
million under certain debt covenants.
Liquidity and Capital Requirements
Substantial capital is required to expand and operate the Company's
existing cellular systems and to acquire interests in additional cellular
systems. The Company meets its funding requirements through existing cash
resources, cash flow from operations and borrowings under the Credit Facility.
Prior to the Spin-off, the Company borrowed from Sprint to the extent its
existing cash needs were not met through existing cash resources and cash flows
from operations.
Including capital expenditures to be incurred in the fourth quarter
related to the recently completed ICN Acquisition, the Company expects to make
capital expenditures, of approximately $300 million in 1996. Funding for these
expenditures is expected to be derived from existing cash resources, cash flow
from operations and borrowings under the Credit Facility. These expenditures
expand and enhance existing cellular systems. Enhancements include a minimal
level of digital technology deployment.
14
<PAGE>
Contingencies have been identified regarding class action lawsuits
regarding customer notification as to the practice of billing for fractional
minutes of service. The ultimate outcome of these matters and the potential
effect on the financial condition and results of operations of the Company
cannot be determined at this time. In addition, contingencies have been
identified in the South Texas and New York partnerships, the outcome of which
cannot presently be determined.
For the next several years, the Company does not expect its operations to
generate sufficient cash flows to meet both future capital requirements for
operating activities and cash requirements for acquisitions of ownership
interests in cellular communications systems. Acquisition activities may include
acquisitions of new cellular communications systems or additional investments in
cellular communications systems in which the Company already holds an ownership
interest. The Company expects that it will need to raise additional funds
through borrowings under the Credit Facility, the public or private sale of debt
or the issuance of equity securities to make such acquisitions, subject to the
limitations of an agreement entered into for a period of two years after the
Spin-off by the Company and Sprint designed to preserve the tax-free status of
the Spin-off. The Company believes that it will be able to obtain the needed
access to the capital markets on suitable terms and that, together with
borrowings under the Credit Facility and net cash provided by operations, it
will have adequate capital to satisfy its projected funding requirements for
operations in 1996 and thereafter. However, acquisitions and possibly other
contingencies may require access to the capital markets in addition to funding
under the Credit Facility. There can be no assurance that access to the capital
markets can be obtained in amounts and on terms adequate to meet its objectives
or that the borrowings or net cash from operations will be adequate to meet the
Company's projected funding requirements.
At September 30, 1996, the Company was not restricted or limited in its
borrowing capacity under the Credit Facility. The aggregate amount of additional
borrowings which can be incurred is ultimately limited by certain covenants
included in the Credit Agreement and the Indenture.
On November 1, 1996, the Company completed its previously announced
acquisition (the "ICN Acquisition") of Independent Cellular Network, Inc. and
affiliated companies (collectively, the "Acquired Companies") which own and
operate cellular licenses and related systems and assets in Kentucky, Ohio,
Pennsylvania and West Virginia. The Acquired Companies provide cellular service
to approximately 140,000 customers in 20 markets representing an estimated 3.2
million potential customers. The Company acquired the Acquired Companies from
Independent Cellular Network Partners and certain of its affiliates
(collectively, "ICNP") for approximately $514 million, comprised of 6,500,000
shares of the Company's Common Stock $122 million in aggregate principal amount
of the Company's subordinated non-negotiable promissory notes and the Company's
assumption of $240 million of Independent Cellular Network Partners' senior
debt. The remaining portion of the purchase price was paid in cash.
The Company's subordinated non-negotiable promissory notes issued in
connection with the ICN Acquisition are due October 31, 2006 and accrue interest
at the rate of 9.5% per annum, which may be reduced to 9.0% upon the occurrence
of certain events, payable semiannually. Fifty percent of the interest due and
owing will be paid on each interest payment date and the remaining fifty percent
of the interest due and owing will be capitalized and become part of the
principal amount owed thereunder. The $240 million of senior debt assumed by the
Company in connection with the ICN Acquisition was refinanced, and the cash
portion of the purchase price was funded, under the Credit Facility. On October
31, 1996, the Credit Facility was amended and restated to permit, among other
things, the ICN Acquisition and to increase the Company's borrowing capacity
thereunder from $800 million to $1 billion.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On or about March 29, 1996, a class action lawsuit was brought in the
Chancery Court of Washington County, Jonesborough, Tennessee (the "Tennessee
Action") on behalf of all customers in the Company's Tennessee markets regarding
customer notification of the Company's practice with respect to billing for
fractional minutes of service. In April 1996, the original complaint was amended
to enlarge the class of plaintiffs to include all customers in all of the
Company's service areas. In late April 1996, the Tennessee Action was removed to
the United States District Court for the Eastern District of Tennessee, Northern
Division. The Company moved to dismiss the action and the plaintiff filed a
motion to remand. On July 16, 1996, the Tennessee District Court granted the
plaintiff's motion to remand and returned the case to the Chancery Court of
Washington County. The Company's Motion to Dismiss is currently pending before
the Chancery Court.
On or about May 28, 1996, a class action lawsuit was brought in the Common
Pleas Court of Erie County, Ohio (the "Ohio Action") on behalf of all customers
in all of the Company's service areas regarding notification of the Company's
practice with respect to billing for fractional minutes of service. On June 25,
1996, the Ohio Action was removed to the United States District Court for the
Northern District of Ohio, Western Division. On July 18, 1996, the Company filed
a Motion to Dismiss Or, In The Alternative, Stay pending resolution of the
Tennessee Action. The basis for the Motion to Stay is the duplicity of the two
actions. On July 24, 1996, the plaintiff filed a Motion to Remand to return the
case to the state court.
Discovery has not commenced in either case. The Company believes that both
lawsuits are without merit, however, the ultimate outcome of these matters and
the potential effect on the financial condition and results of operations of the
Company cannot be determined at this time.
The Company is party to various other legal proceedings in the ordinary
course of business. Although the ultimate resolution of these various
proceedings cannot be ascertained, management of the Company does not believe
that such proceedings, individually or in the aggregate, will have a material
adverse effect on the results of operations or financial position of the
Company.
16
<PAGE>
Item 5. Other Information.
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
SELECTED PROPORTIONATE OPERATING RESULTS AND DATA
(Unaudited)
The following table sets forth supplemental financial data reflecting the
proportionate consolidation of entities in which the Company holds interests
significant to its operations. This presentation differs from the consolidation
methodology used to prepare the Company's principal financial statements in
accordance with Generally Accepted Accounting Principles ("GAAP") (see Note 1 of
"360 Communications Company and Subsidiaries Notes to Unaudited Interim
Consolidated Financial Statements" set forth herein under "Financial
Statements") and does not reflect operating results in accordance with GAAP. The
proportionate operating data reflects the Company's ownership percentage of
entities consolidated for financial reporting purposes and the Company's
ownership percentage of certain of its significant unconsolidated entities which
are accounted for under the equity method for financial reporting purposes.
Because significant assets of the Company are not consolidated, the Company
believes the following proportionate operating results facilitate the
understanding and assessment of the overall extent of its investments. However,
the operating data presented below are not indicative of the cash flow available
to the Company with respect to its interests in unconsolidated entities. Such
interests are subject to partnership agreements and other restrictions limiting
the Company's ability to effect distributions of cash and other assets of the
entity in which the Company holds a noncontrolling interest. The following table
is not required by GAAP, and is not intended to replace and should not be viewed
as being of greater significance than, or in isolation from, the consolidated
financial statements prepared in accordance with GAAP.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended and as of Ended and as of
September 30,(1)<F1> September 30,(1)<F1>
--------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Thousands of Dollars)
Operating Results:
<S> <C> <C> <C> <C>
Operating Revenues
Cellular Service Revenues $ 268,403 $ 208,500 $ 757,546 $ 573,772
Equipment Sales 10,374 9,570 30,476 33,118
--------- --------- ---------- ----------
Total Operating Revenues 278,777 218,070 788,022 606,890
--------- --------- ---------- ----------
Operating Expenses
Cost of Equipment Sales 25,272 24,650 70,986 72,584
Operating, Selling, General, Administrative
and Other Expenses 152,646 118,487 431,463 331,809
Depreciation and Amortization 37,675 29,760 107,570 86,045
--------- --------- ---------- ----------
Total Operating Expenses 215,593 172,897 610,019 490,438
--------- --------- ---------- ----------
Operating Income $ 63,184 $ 45,173 $ 178,003 $ 116,452
--------- --------- ---------- ----------
Other Operating Data:
EBITDA (2)<F2> $ 100,859 $ 74,933 $ 285,573 $ 202,497
EBITDA Margin (3)<F3> 37.58% 35.94% 37.70% 35.29%
Capital Expenditures (4)<F4> $ 54,858 $ 83,494 $ 196,141 $ 247,941
Selected Net POPs (5)<F5> 21,214,434 20,007,309 21,214,434 20,007,309
Proportionate Customers (6)<F6> 1,807,069 1,299,593 1,807,069 1,299,593
Average Proportionate Customers (7)<F7> 1,751,722 1,204,843 1,654,986 1,154,169
Churn 1.9% 2.0% 1.9% 1.8%
Penetration 8.5% 6.5% 8.5% 6.5%
Service Revenue per Average Customer per
Month $ 51.07 $ 57.68 $ 50.86 $ 55.24
17
<PAGE>
<FN>
- -------------
Notes to Selected Proportionate Operating Results and Data
<F1>
(1) The proportionate operating results include the Company's ownership
percentage of entities consolidated for financial reporting purposes as
well as the Company's ownership percentage of certain unconsolidated equity
investments which are significant to the Company, consisting of the
Company's investments in cellular partnerships serving markets such as
Chicago, IL; Houston, TX; Kansas City, MO; New York, NY; Omaha, NE;
Orlando, FL; and Richmond, VA.
<F2>
(2) EBITDA is defined as operating income plus depreciation and amortization
and is included herein as supplemental disclosure because it is generally
considered useful information regarding a company's ability to service
debt. EBITDA, however, is not a measure determined in accordance with GAAP
and should not be considered in isolation or as an alternative to net
income (loss), cash flow provided by operating activities or other income
or cash flow data prepared in accordance with GAAP or as a measure of a
company's performance or liquidity. Proportionate EBITDA represents the
Company's ownership interest in the respective entities multiplied by the
entities' EBITDA and, therefore, does not represent cash available to the
Company.
<F3>
(3) EBITDA Margin represents EBITDA divided by Cellular Service Revenues.
<F4>
(4) Capital Expenditures exclude acquisitions.
<F5>
(5) Selected Net POPs are the estimated market population multiplied by the
Company's ownership interest in each presented market and excludes certain
markets as described above.
<F6>
(6) Proportionate customers reflect total customers in each presented market in
which the Company owns an interest multiplied by the Company's ownership interest.
<F7>
(7) Average Proportionate Customers represents a simple average of beginning of
period plus end of period proportionate customers
divided by 2.
</FN>
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibits are listed in the Exhibit Index.
(b) Reports on Form 8-K:
On Form 8-K, dated July 16, 1996 under, "Item 5. Other Events," the Company
filed a press release announcing its consolidated operating results for the
second quarter of 1996 and the Company's plans to begin offering CDMA digital
technology to its Las Vegas customers in early August 1996.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
360 Communications Company
By: /s/ Gary L. Burge
--------------------------
Gary L. Burge
Senior Vice President - Finance
(Principal Accounting Officer)
Date: November 14, 1996
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
2.3 First Amendment to Exchange and Merger Agreement, dated as of
November 1, 1996, by and among Independent Cellular Network
Partners, James A. Dwyer, Jr., David Winstel, CC Industries, Inc.,
Ohio Cellular RSA, L.P., Ohio RSA Corporation, Quality Cellular
Communications of Ohio, Inc., Cellular Plus, L.P., C-Plus, Inc.,
Quality Cellular Plus Communications, Inc., Henry Crown and
Company (Not Incorporated ) and 360 Communications
Company. (Filed as Exhibit 2.3 to the Company's Current Report
on Form 8-K dated November 1, 1996, File No. 1-14108, and
incorporated herein by reference.)
3.1 Amended and Restated Certificate of Incorporation of 360
Communications Company, as amended as of March 4, 1996.*
3.2 Amended and Restated Bylaws of 360 Communications Company.*
3.3 Certificate of Designation of First Series Junior Participating
Preferred Stock of 360 Communications Company. (Filed as Exhibit 3.3
to Amendment No. 4 to Registration Statement No.33-99756 and
incorporated herein by reference.)
4.1 360 Communications Company's 7 1/8% Senior Note Due 2003 and7 1/2%
Senior Note Due 2006.*
4.2 Indenture dated as of March 7, 1996 between 360 Communications
Company and Citibank, N.A., as Trustee.*
4.3 Form of 360 Communications Company Common Stock, $0.01 par value,
certificate.*
4.4 Form of 360 Communications Company's Subordinated Non-Negotiable
Promissory Note (included in Exhibit 2.2 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,1996,
File No. 1-14108, and incorporated herein by reference).
27 Financial Data Schedule.
- ------------
* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 and incorporated herein by reference.
20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINICIAL DATA
FROM THE FINANCIAL STATEMENTS INCLUDED AS PART
OF 360 COMMUNICATIONS' THIRD QUARTER 10Q
</LEGEND>
<CIK> 0001003959
<NAME> 360 COMMUNICATIONS COMPANY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,869
<SECURITIES> 0
<RECEIVABLES> 94,045
<ALLOWANCES> 4,788
<INVENTORY> 17,002
<CURRENT-ASSETS> 181,761
<PP&E> 1,364,267
<DEPRECIATION> 395,237
<TOTAL-ASSETS> 2,225,460
<CURRENT-LIABILITIES> 258,079
<BONDS> 1,362,720
0
0
<COMMON> 1,169
<OTHER-SE> 306,986
<TOTAL-LIABILITY-AND-EQUITY> 2,225,460
<SALES> 29,411
<TOTAL-REVENUES> 795,544
<CGS> 71,010
<TOTAL-COSTS> 68,492
<OTHER-EXPENSES> 144,811
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,854
<INCOME-PRETAX> 101,558
<INCOME-TAX> 47,407
<INCOME-CONTINUING> 54,151
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,151
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0
</TABLE>
