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, 1997
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 4, 1997, 121,819,249 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...........................................6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................*
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...................................................*
Item 6. Exhibits and Reports on Form 8-K...................................12
- ---------------
* No reportable information under this item.
When used in this Report, the words "intends," "expects," "plans," "estimates,"
"anticipates," "projects," "believes," 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 that 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;
the 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 scheduled
implementation of digital technology in its markets will be sufficient to meet
or exceed the capabilities and quality of competing networks; 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 as
a result of 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 in the Company's filings with the Securities and
Exchange Commission, including the factors discussed under the heading "Certain
Risk Factors" in the Information Statement set forth as Exhibit 99 to the
Company's Form 10 (File No. 1-14108), 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.
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
ASSETS 1997 1996
------ -------------- ------------
Current Assets (Unaudited)
Cash and cash equivalents $ 5,772 $ 2,554
Accounts receivable, less allowances
of $7,300 and $5,730, respectively 99,002 102,483
Other receivables 36,153 27,090
Unbilled revenue 33,000 35,712
Inventory 32,314 35,908
Prepaid expenses and other 20,986 25,096
-------------- ------------
Total current assets 227,227 228,843
-------------- ------------
Property, plant and equipment 1,627,781 1,499,407
Less: accumulated depreciation 521,466 415,981
-------------- ------------
Property, plant and equipment, net 1,106,315 1,083,426
-------------- ------------
Investments in unconsolidated entities 461,385 349,231
Intangibles, net 1,150,661 1,136,587
Other assets 17,349 13,982
-------------- ------------
Total assets $ 2,962,937 $ 2,812,069
============== ============
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current Liabilities
Trade accounts and other payables $ 172,862 $ 227,654
Short-term borrowings 29,175 43,750
Advance billings 31,045 28,314
Accrued taxes 22,082 17,951
Other 37,608 33,179
-------------- ------------
Total current liabilities 292,772 350,848
-------------- ------------
Long-term debt 1,849,643 1,699,778
-------------- ------------
Deferred Credits and Other Liabilities
Deferred income taxes 144,065 113,005
Postretirement and other benefit obligations 6,133 5,855
-------------- ------------
Total deferred credits and other liabilities 150,198 118,860
-------------- ------------
Minority interests in consolidated entities 170,238 180,083
-------------- ------------
Shareowners' Equity
Common stock ($.01 par value; 1,000,000 shares
authorized; 121,811,980 shares issued 1,233 1,233
and outstanding)
Additional paid-in capital 774,901 773,472
Accumulated deficit (250,801) (310,932)
Treasury stock, at cost (1,552,168 shares in 1997
and 55,227 shares in 1996) (25,247) (1,273)
--------------- ------------
Total shareowners' equity 500,086 462,500
--------------- ------------
Total liabilities and shareowners' equity $ 2,962,937 $ 2,812,069
=============== ============
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
1
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<TABLE>
<CAPTION>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Revenues
Service revenues $ 335,245 $ 271,819 $ 958,049 $ 766,133
Equipment sales 12,264 9,857 36,568 29,411
---------- ---------- ---------- ----------
Total operating revenues 347,509 281,676 994,617 795,544
---------- ---------- ---------- ----------
Operating Expenses
Cost of service 37,127 24,148 118,899 68,492
Cost of equipment sales 28,486 25,046 81,329 71,010
Other operations expense 19,177 15,498 51,182 39,824
Sales, marketing and advertising expenses 54,438 48,527 170,692 143,146
General, administrative and other expenses 77,399 68,030 230,698 190,287
Depreciation and amortization 45,376 36,833 137,738 104,987
---------- ---------- ---------- ----------
Total operating expenses 262,003 218,082 790,538 617,746
---------- ---------- ---------- ----------
Operating Income 85,506 63,594 204,079 177,798
Interest expense (33,570) (24,752) (97,603) (78,854)
Minority interests in net income
of consolidated entities (13,534) (13,843) (39,451) (38,168)
Equity in net income of
unconsolidated entities 16,536 16,339 44,454 40,359
Other income, net (1) 73 101 3,060 423
---------- ---------- ---------- ----------
Income before income taxes 55,011 41,439 114,539 101,558
Income tax expense 26,132 18,552 54,408 47,407
---------- ---------- ---------- ----------
Net income $ 28,879 $ 22,887 $ 60,131 $ 54,151
========== ========== ========== ==========
Earnings per share $ 0.24 $ 0.20 $ 0.49 $ 0.46
========== ========== ========== ==========
Weighted average shares
outstanding 121,875 117,086 122,626 117,060
========== ========== ========== ==========
<FN>
(1) In January 1997, the Company recognized a gain of $3 million ($2 million,
net of tax) in connection with the divestiture of its ownership interests
in two of its unconsolidated entities
</FN>
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
2
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360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Nine Months
Ended September 30,
-------------------------
1997 1996
------------ ------------
Operating Activities
Net income $ 60,131 $ 54,151
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 137,738 104,987
Deferred income taxes 27,822 19,119
Gain on sale of cellular investments (3,029) ----
Equity in net income of unconsolidated
entities, net of distributions (24,639) (25,104)
Minority interests in net income of
consolidated entities 39,451 38,168
Changes in operating assets and liabilities,
excluding acquisitions
Receivables, net 4,115 (16,009)
Other current assets 2,551 (1,410)
Trade accounts and other payables (48,771) 1,825
Accrued expenses and other
current liabilities 9,353 10,267
Noncurrent assets and liabilities, net (3,985) (868)
Other, net 2,453 5,266
------------ ------------
Net Cash Provided by Operating Activities 203,190 190,392
------------ ------------
Investing Activities
Capital expenditures (154,234) (193,543)
Acquisitions and divestitures (57,797) (109,613)
Investments in unconsolidated entities and other (80,735) (14,709)
------------ ------------
Net Cash Used for Investing Activities (292,766) (317,865)
------------ ------------
Financing Activities
Net (payments) borrowings under bank revolving
credit facility (50,000) 465,000
Proceeds from long-term debt 200,000 900,000
Debt issuance costs (1,609) (15,229)
Net short-term (payments) borrowings (14,575) 45,650
Purchases of common stock for treasury (24,152) ----
Increase in advances from affiliates ---- 135,892
Contributions from minority investors 100 4,881
Distributions to minority investors (17,878) (9,275)
Repayment of advances from affiliates ---- (1,400,000)
Other, net 908 (8,600)
------------ ------------
Net Cash Provided by Financing Activities 92,794 118,319
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents 3,218 (9,154)
Cash and Cash Equivalents at Beginning of Period 2,554 19,023
------------ ------------
Cash and Cash Equivalents at End of Period $ 5,772 $ 9,869
============ ============
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
3
<PAGE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Consolidation and Presentation
360 Communications Company and Subsidiaries (the "Company") provide
wireless voice and data telecommunications services. The Company also currently
markets residential long distance service and resells paging service in the
states in which the Company provides wireless service. 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. The Company operates in four regions in the
United States: Mid-Atlantic, Midwest, Southeast and West.
The accompanying 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 financial statements 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,
1996.
Certain 1996 amounts have been reclassified to conform to the presentation
used for the three and nine months ended September 30, 1997.
2. Earnings Per Share
Earnings per share was computed using weighted average shares outstanding,
including common stock equivalents, totaling 121,874,813 and 117,086,280 for the
three months ended September 30, 1997 and 1996, respectively, and 122,626,401
and 117,059,755 for the nine months ended September 30, 1997 and 1996,
respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share,"
effective for both interim and annual periods ending after December 15, 1997.
SFAS No. 128 requires companies to disclose basic and diluted earnings per
share. Basic earnings per share will be calculated based on the weighted average
common shares outstanding and will exclude common stock equivalents from the
calculation. Due to the relative insignificance of the Company's common stock
equivalents and other potentially dilutive instruments, the requirements of SFAS
No. 128, based on current circumstances, will not have a significant effect on
the Company's earnings per share calculations.
4
<PAGE>
3. Acquisitions and Divestitures
During the first and second quarters of 1997, the Company divested
ownership interests in certain unconsolidated entities, as well as in one of its
controlled markets. During the second quarter of 1997, the Company and BellSouth
Corporation ("BellSouth") combined their interests in two partnerships that own
and control cellular licenses and operations in Virginia and Florida. The
resulting partnership is owned approximately 75% by BellSouth and 25% by the
Company, with the Company taking over as manager of the cellular operations in
Virginia. During the nine months ended September 30, 1997, the Company acquired
minority interests in 15 of its controlled markets, which increased its
ownership interest to 100% in 10 of those markets.
4. Income Taxes
The estimated annual effective tax rate was 47.5% for the three and nine
months ended September 30, 1997, differing from the statutory rate due to
nondeductible amortization of goodwill and state income tax expense.
5
<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 360 Communications Company and
Subsidiaries (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, 1996. This discussion contains forward-looking
statements which are qualified by reference to, and should be read in
conjunction with, the Company's discussion regarding forward-looking statements
as set forth herein under "Forward-Looking Statements."
Results of Operations
Customer Growth Rate
The number of cellular customers increased to 2,450,000 at September 30,
1997, from 1,851,000 at September 30, 1996, resulting in a 32.4% increase. The
increase in cellular customers was impacted by 138,000 customers acquired during
the fourth quarter of 1996. For the three months ended September 30, 1997 and
1996, the Company added 87,000 and 100,000 customers, respectively, through
internal growth. For the nine months ended September 30, 1997, the Company added
310,000 customers through internal growth, while in the corresponding 1996
period, customer growth through acquisitions added 46,600 customers and internal
growth added 302,000 new customers. The Company's penetration rate, which is the
number of customers divided by the total population in its licensed service
areas, reached 10.11% at September 30, 1997 compared to 8.84% at September 30,
1996. The average monthly rate of customer disconnects, customer churn, was
1.90% and 1.86%, during the three months ended September 30, 1997 and 1996,
respectively, and l.82% and 1.80% during the nine months ended September 30,
1997 and 1996, respectively.
Service Revenues
Service revenues consist primarily of charges for airtime, access fees,
roaming fees and other services. Service revenues increased 23.3% and 25% in the
three and nine months ended September 30, 1997, respectively, when compared to
the corresponding 1996 periods, principally from growth in the number of
cellular customers. Expanded distribution, increased promotional activity, and
improved consumer awareness of wireless communications are key factors
contributing to the Company's customer growth. In addition, acquisitions
completed in 1996 contributed to an increase of approximately $23.9 million and
$69.3 million in service revenues for the three and nine months ended September
30, 1997, 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, 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. Service revenue per average customer
per month was $46.12 and $50.34 during the three months ended September 30, 1997
and 1996, respectively, and $45.69 and $50.54 during the nine months ended
September 30, 1997 and 1996, respectively. New customers generally use less
airtime than existing customers, causing the average service revenue per
customer per month to decline. As a result, service revenue growth has not kept
pace with the level of growth in the number of customers. Also impacting the
decline in the average service revenue per customer per month was an increase in
promotional activities in 1997. Promotional activities, which includes free
minutes and free access, increased to 4.9% and 4.2% of service revenues for the
three and nine months ended September 30, 1997, respectively from 1.8% and 2% of
service revenues for the three and nine months ended September 30, 1996,
respectively. The Company expects that service revenue per average customer per
month will continue to decline as penetration rates continue to increase.
Roaming airtime minutes increased during the three and nine months ended
September 30, 1997, while roaming revenues as a percentage of service revenues
have declined. The Company expects that roaming rates between carriers will
continue to be reduced which reduces 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.
6
<PAGE>
Future revenue growth will be impacted by the Company's success in
maintaining customer growth in existing markets, generating additional revenue
from the increasing availability of a variety of enhanced services and products,
and acquiring additional cellular communications systems to further strengthen
its existing regional clusters. The growth rate of new customers is expected to
decline as the Company's customer base grows. Revenue growth will also be
impacted by the Company's long distance and paging businesses. The Company
currently markets residential long distance service and resells paging service
in the states in which the Company provides wireless service. An improved
competitive position, reduced cellular churn and increased brand awareness are
expected as the long distance and paging services businesses mature.
Cost of Service
Excluding the impact of roaming activities and expenses associated with the
long distance business, cost of service as a percentage of service revenues was
6.5% and 8.1% for the three months ended September 30, 1997 and 1996,
respectively, and 7.3% and 8.1% for the nine months ended September 30, 1997 and
1996, respectively. The effects of renegotiated long distance contracts
(effective May 1997 and March 1996) and reduced interconnection rates paid to
local telephone companies are key factors favorably impacting the declining
trend in cost of service as a percentage of service revenues.
Roaming margins associated with the Company's customers roaming into other
carriers' markets declined in the three and nine months ended September 30, 1997
when compared to the same periods last year, resulting in an increase in cost of
service as a percentage of service revenues. The decline in margins for the nine
months ended September 30, 1997 is attributable to an increase in unbillable
fraudulent roaming activities. Also contributing to the decline in margins for
the three and nine months ended September 30, 1997 was increased competitive
pressures to reduce rates for such roaming traffic. As part of a pricing
simplification effort, the Company implemented new roaming rate plans in early
1997 that continue to reduce margins in the third quarter of 1997. The Company
expects that the industry-wide trend to reduce rates will continue, thus
stimulating an increase in cellular telephone usage, resulting in an increase in
roaming airtime. To the extent reduced retail rates stimulate increased usage
and the Company is able to negotiate reduced wholesale roaming rates with other
carriers, the effects of discounted rates will be somewhat mitigated.
Unauthorized usage of customers' telephone numbers resulted in unbillable
fraudulent roaming activities that approximated 0.5% and 1.2% of service
revenues for the three months ended September 30, 1997 and 1996, respectively,
and 1.7% and 1.1% of service revenues for the nine months ended September 30,
1997 and 1996, respectively. The increase in unbillable fraudulent roaming
activity for the nine months ended September 30, 1997 was the result of a
significant increase in the level of fraud activity in several markets during
the fourth quarter of 1996 and the first quarter of 1997. The Company believes
it will continue to be impacted by fraudulent roaming activities on a
going-forward basis and continues to proactively invest in new systems and
technologies to reduce the incidence of fraud.
Cost to Acquire New Customers
Cost to acquire a new cellular customer was $301 and $312 for the three
months ended September 30, 1997 and 1996, respectively, and $298 and $317 for
the nine months ended September 30, 1997 and 1996, respectively. The decline in
the cost to acquire a new cellular customer is principally the result of the
higher 1996 amounts due to additional costs associated with the introduction of
the Company's new brand name, as well as, a continued reduction in the wholesale
prices for cellular phones and a transition of new customer sales from national
dealers to Company owned retail outlets.
7
<PAGE>
To improve sales and reduce costs associated with acquiring new customers,
the Company continues to depend more upon its own sales force working out of
Company retail outlets and kiosks located in shopping malls and other
non-company owned retail locations. Incremental sales costs at a Company retail
store or kiosk 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 little change in churn levels, a factor
further contributing to the Company's ability to manage the costs of maintaining
and growing its customer base. The Company is unable to anticipate the impact of
the cost to add new customers as savings associated with the transition to the
use of internal sales distribution channels levels off, the growth rate of new
customers declines and competition for local and national dealers intensifies.
Sales, marketing and advertising expenses associated with the Company's
long distance business accounted for an increase of $1.4 million and $6.8
million during the three and nine months ended September 30, 1997, respectively,
when compared to the corresponding periods in 1996.
Other Operations Expense and General Administrative and Other Expenses
Other operations expense and general, administrative and other expenses
increased due principally to growth in the cellular customer base. During the
three months ended September 30, 1997 and 1996, these expenses as a percentage
of service revenues were 28.8% and 30.7%, respectively, and 29.4% and 30% during
the nine months ended September 30, 1997 and 1996, respectively. The decrease in
the respective periods is attributable to economies of scale realized as a
result of customer growth.
Depreciation and Amortization
Acquisitions of cellular communications systems generate intangible assets
such as Federal Communications Commission license costs and goodwill which are
amortized over 40 years. During the three and nine months ended September 30,
1997, amortization expense increased 48.9% and 53.5% when compared to the
corresponding periods in 1996 due principally to acquisitions completed during
the fourth quarter of 1996. The Company periodically assesses the ongoing value
of these intangible assets and expects the carrying amounts to be fully
recoverable.
During the three and nine months ended September 30, 1997, depreciation
expense increased 18.8% and 27.2% when compared to the corresponding periods in
1996. The increase in depreciation expense is due primarily to the acquisition
of depreciable assets and additional capital investment in the Company's
network.
Interest Expense
Interest expense increased in the three and nine months ended September 30,
1997 when compared to the corresponding prior year periods due to the increase
in borrowing levels. The annualized average interest rate for the three months
ended September 30, 1997 and 1996 was 7.2% and 7.0% respectively, and 7.2% for
the nine months ended September 30, 1997 and 1996. Current borrowings consist of
$450 million of 7 1/8% Senior Notes due 2003, $450 million of 7 1/2% Senior
Notes due 2006, $200 million of 7.6% Senior Notes due 2009, 9% subordinated
promissory notes and borrowings under a revolving credit facility ("Credit
Facility") with interest rates based on the London Interbank Offered Rate plus
50 basis points. The Company also utilizes short-term borrowings based on market
interest rates.
8
<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, 1997, when compared to the prior year periods,
primarily as a result of increased income generated by minority cellular
investments in markets that continue to mature. Income generated by minority
cellular investments may not continue to grow at the pace experienced in prior
years due to increased competition in the higher populated urban markets and the
Company's strategy to exchange its minority cellular investments for increased
ownership interests in its controlled markets or other markets in which it could
obtain control.
Income Taxes
The Company's income tax expense increased 40.9% and 14.8% for the three
and nine months ended September 30, 1997, respectively, when compared to the
corresponding periods in 1996 due primarily to an increase in the levels of
pre-tax income in 1997.
Competition
Cellular carriers compete primarily against the other facilities-based
cellular carrier in each market. However, companies with Personal Communications
Services ("PCS") licenses also offer their products and services in several of
the Company's service areas. The Company has prepared for this new competitive
environment by enhancing its networks, expanding its service territory, offering
new features, products and services to its customers and simplifying its pricing
of services. During the third quarter of 1997, the Company introduced a new
service offering called the Bundled Value Packs, whereby customers may choose
any combination of cellular, long distance and paging and receive the selected
services all on one bill.
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 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
Cash Flows - Operating Activities
The increase in net cash provided by operating activities for the nine
months ended September 30, 1997 was due primarily to improved operating results.
Net cash inflows have been somewhat mitigated by payments made in 1997 for 1996
accruals and a decrease in accrued expenses related to construction activity for
the nine months ended September 30, 1997.
Cash Flows - Investing Activities
Capital expenditures were $154.2 million and $193.5 million for the nine
months ended September 30, 1997 and 1996, respectively. The decrease in capital
expenditures is the result of various timing issues affecting construction
activities. Projected capital expenditures for the calendar year 1997 have been
reduced from $300 million to $280 million due to efficiencies created through
network design and implementation, as well as improved pricing and concessions
from vendors. Also contributing to the reduction in capital spending is the
postponement of the construction of certain cell sites until 1998 because of
zoning issues.
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.
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
$110 million. In the first quarter of 1997, the Company divested its ownership
interests in two of its unconsolidated entities. In connection with this
transaction, the Company recognized a gain of $3 million in other income ($2
million, net of tax).
9
<PAGE>
In the second quarter of 1997, the Company and BellSouth Corporation
("BellSouth") combined their interests in two partnerships that own and control
cellular licenses and operations in Virginia and Florida. The resulting
partnership is owned approximately 75% by BellSouth and 25% by the Company, with
the Company taking over as manager of the cellular operations in Virginia.
The Company divested its ownership interests in one of its unconsolidated
entities, as well as in one of its controlled markets, during the second quarter
of 1997. During the nine months ended September 30, 1997, the Company acquired
minority interests in 15 of its controlled markets, which increased its
ownership interest to 100 percent in 10 of those markets.
Cash Flows - Financing Activities
As part of its cash management program, the Company utilizes 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.
In the first quarter of 1997, the Company issued $200 million in aggregate
principal amount of its 7.6% Senior Notes due 2009. The net proceeds received by
the Company from the sale of these debt securities were used to repay a portion
of the Company's long-term indebtedness outstanding under the Credit Facility.
The Company's Board of Directors authorized the repurchase of up to 3
million shares of the Company's Common Stock through May 1, 1998. The shares may
be purchased from time to time on the open market at prevailing prices, subject
to market conditions. As of September 30, 1997, the Company had purchased
approximately 1.5 million shares of the Company's Common Stock at an average
price of $16 per share.
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 has increased borrowings to the extent its existing cash
needs have not been met through existing cash resources and cash flows from
operations. Existing cash resources, internally generated funds and borrowings
have been used to meet the Company's capital requirements.
The Company expects to make capital expenditures, excluding acquisitions,
of approximately $280 million in 1997. Funding for these expenditures is
expected to be substantially derived from cash flows from operations. In
addition, the Company utilizes existing cash resources, borrowings under the
Credit Facility and the issuance of debt securities to meet these funding
requirements. These expenditures will be made to expand and enhance existing
cellular systems, install digital technology in the Company's greater Raleigh,
North Carolina, service area and replace equipment in recently acquired markets.
In 1998, the Company expects cash flows from operations to substantially
fund its capital expenditure program. The Company expects that it will need to
raise additional funds to finance acquisition activities. Such 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. An agreement, which was designed to
preserve the tax-free status of the Company's spinoff from Sprint Corporation,
imposes certain limitations associated with equity transactions. Accordingly,
the Company is prohibited from issuing preferred stock and is limited as to the
aggregate amount of additional common stock that it can issue, unless an
unqualified opinion of counsel or ruling from the Internal Revenue Service
states that such action would not cause the spinoff to be taxable. At September
30, 1997, the Company was limited to issuing up to an additional 16 million
common shares. This limitation expires on March 7, 1998.
The Company believes that it will have the needed access to the capital
markets on suitable terms and that, together with borrowings under the Credit
Facility, the issuance of unsecured debt securities and/or warrants to purchase
debt securities under a shelf registration statement filed with the Securities
and Exchange Commission and net cash provided by operations, it will have
adequate capital to satisfy its projected funding requirements for operations in
1997 and thereafter. The Company currently does not intend to seek funding from
other sources during 1997. 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.
10
<PAGE>
At September 30, 1997, the Company had $630 million of borrowings
outstanding under the Credit Facility and additional borrowing capacity under
the terms of the Credit Facility of $236 million.
Forward-Looking Statements
When used in this Report, the words "intends," "expects," "plans,"
"estimates," "projects," "believes," "anticipates," 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 that 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; the 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 scheduled implementation of digital technology in its
markets will be sufficient to meet or exceed the capabilities and quality of
competing networks; 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 as a result of 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 in
the Company's filings with the Securities and Exchange Commission, including the
factors discussed under the heading "Certain Risk Factors" in the Information
Statement set forth as Exhibit 99 to the Company's Form 10 (File No. 1-14108),
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.
11
<PAGE>
PART II: OTHER INFORMATION
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 Current Report on Form 8-K, dated July 16, 1997, under "Item 5. Other
Events," the Company filed a press release announcing its consolidated results
for the second quarter of 1997.
12
<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/ Jeffery R. Gardner
Jeffery R. Gardner
Senior Vice President - Finance
(Principal Accounting Officer)
Date: November 10, 1997
13
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 Distribution Agreement dated as of March 7, 1996, by and among
Sprint Corporation, 360 Communications Company (formerly Sprint
Cellular Company) and Centel Corporation. (Filed as Exhibit 2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-14108, and incorporated herein by
reference.)
2.2 Exchange and Merger Agreement, dated as of May 31, 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 2.2 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.)
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. (Filed as
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 1-14108, and
incorporated herein by reference).
3.2 Amended and Restated Bylaws of 360 Communications Company. (Filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 1-14108, and
incorporated herein by reference).
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 on Form S-1 (No.
33-99756), and incorporated herein by reference.)
4.1 360 Communications Company's 7 1/8% Senior Note Due 2003 and 7 1/2%
Senior Note Due 2006. (Filed as Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995,
File No. 1-14108, and incorporated herein by reference).
4.2 Indenture dated as of March 7, 1996 between 360 Communications
Company and Citibank, N.A., as Trustee. (Filed as Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-14108, and incorporated herein by
reference).
4.3 Form of 360 Communications Company Common Stock, $0.01 par value,
certificate. (Filed as Exhibit 4.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, File No.
1-14108, and incorporated herein by reference).
4.4 Rights Agreement dated as of March 5, 1996 between 360
Communications Company and Chemical Bank. (Filed as Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-14108, and incorporated herein by
reference).
14
<PAGE>
4.5 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).
4.6 Indenture dated as of March 1, 1997 from 360 Communications Company
to Citibank, N.A., as Trustee. (Filed as Exhibit 4.6 to the
Company's Current Report on Form 8-K dated March 17, 1997, File No.
1-14108, and incorporated herein by reference.)
4.7 360 Communications Company's 7.60% Senior Note Due 2009. (Filed as
Exhibit 4.7 to the Company's Current Report on Form 8-K dated March
17, 1997, File No. 1-14108, and incorporated herein by reference.)
27 Financial Data Schedule.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,772
<SECURITIES> 0
<RECEIVABLES> 106,302
<ALLOWANCES> 7,300
<INVENTORY> 32,314
<CURRENT-ASSETS> 227,227
<PP&E> 1,627,781
<DEPRECIATION> 521,466
<TOTAL-ASSETS> 2,962,937
<CURRENT-LIABILITIES> 292,772
<BONDS> 1,849,643
0
0
<COMMON> 1,233
<OTHER-SE> 498,853
<TOTAL-LIABILITY-AND-EQUITY> 2,962,937
<SALES> 36,568
<TOTAL-REVENUES> 994,617
<CGS> 81,329
<TOTAL-COSTS> 118,899
<OTHER-EXPENSES> 188,920
<LOSS-PROVISION> 22,797
<INTEREST-EXPENSE> 97,603
<INCOME-PRETAX> 114,539
<INCOME-TAX> 54,408
<INCOME-CONTINUING> 60,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,131
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
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