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 March 31, 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 April 23, 1997, 123,310,118 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
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* 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
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
ASSETS 1997 1996
------ -------------- --------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 8,670 $ 2,554
Accounts receivable, less allowances
of $5,319 and $5,730, respectively 90,197 102,483
Other receivables 31,023 27,090
Unbilled revenue 32,828 35,712
Inventory 39,060 35,908
Deferred income taxes 9,772 8,462
Prepaid expenses and other 14,202 16,634
------------- -------------
Total current assets 225,752 228,843
------------- -------------
Property, plant and equipment 1,519,435 1,499,407
Less: accumulated depreciation 452,246 415,981
------------- -------------
Property, plant and equipment, net 1,067,189 1,083,426
------------- -------------
Investments in unconsolidated entities 356,220 349,231
Intangibles, net 1,145,353 1,136,587
Other assets 15,225 13,982
------------- -------------
Total assets $ 2,809,739 $ 2,812,069
============= =============
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current Liabilities
Trade accounts and other payables $ 153,013 $ 227,654
Short-term borrowings 13,750 43,750
Advance billings 29,446 28,314
Accrued taxes 15,608 17,951
Accrued agent commissions 7,060 12,089
Other 19,608 21,090
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Total current liabilities 238,485 350,848
------------- -------------
Long-term debt 1,799,513 1,699,778
------------- -------------
Deferred Credits and Other Liabilities
Deferred income taxes 116,476 113,005
Postretirement and other benefit obligations 5,915 5,855
------------- -------------
Total deferred credits and other liabilities 122,391 118,860
------------- -------------
Minority interests in consolidated entities 176,143 180,083
------------- -------------
Shareowners' Equity
Common stock 1,233 1,233
Additional paid-in capital 773,461 772,199
Accumulated deficit (301,487) (310,932)
------------- -------------
Total shareowners' equity 473,207 462,500
------------- -------------
Total liabilities and shareowners' equity $ 2,809,739 $ 2,812,069
============= =============
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
1
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360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For the Three Months
Ended March 31,
---------------------------------
1997 1996
----------- ------------
Operating Revenues
Service revenues $ 293,970 $ 230,754
Equipment sales 12,876 8,941
----------- ------------
Total operating revenues 306,846 239,695
----------- ------------
Operating Expenses
Cost of service 41,489 22,139
Cost of equipment sales 28,449 20,609
Other operations expense 14,993 12,543
Sales, marketing and advertising expenses 60,581 46,970
General, administrative and other expenses 73,092 58,014
Depreciation and amortization 45,529 32,997
----------- ------------
Total operating expenses 264,133 193,272
----------- ------------
Operating Income 42,713 46,423
Interest expense (31,190) (29,828)
Minority interests in net income
of consolidated entities (9,709) (10,464)
Equity in net income of
unconsolidated entities 13,163 9,672
Other income, net 3,014 459
----------- ------------
Income before income taxes 17,991 16,262
Income tax expense 8,546 9,282
----------- ------------
Net income $ 9,445 $ 6,980
=========== ============
Earnings per share $ 0.08 $ 0.06
=========== ============
Weighted average shares
outstanding 123,422 117,035
=========== ============
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 Three Months
Ended March 31,
---------------------------
1997 1996
----------- -----------
Operating Activities
Net income $ 9,445 $ 6,980
Adjustments to reconcile net income to net
cash (used for) provided by operating activities:
Depreciation and amortization 45,529 32,997
Deferred income taxes 2,161 6,930
Gain on sale of cellular investments (3,029)
Equity in net income of unconsolidated
entities, net of distributions (7,803) (5,876)
Minority interests in net income of
consolidated entities 9,709 10,464
Changes in operating assets and liabilities,
excluding acquisitions
Receivables, net 15,170 4,663
Other current assets (4,389) (363)
Trade accounts and other payables (75,932) 12,965
Accrued expenses and other
current liabilities (7,763) (18,604)
Noncurrent assets and liabilities, net (1,112) (39)
Other, net 1,178 (69)
----------- -----------
Net Cash (Used for) Provided by Operating Activities (16,836) 50,048
----------- -----------
Investing Activities
Capital expenditures (23,273) (56,776)
Acquisitions and divestitures (20,924) (109,613)
Other, net ----- (933)
----------- -----------
Net Cash Used for Investing Activities (44,197) (167,322)
----------- -----------
Financing Activities
Net (payments) borrowings under bank revolving
credit facility (100,000) 527,000
Proceeds from long-term debt 200,000 900,000
Debt issuance costs (1,609) (15,229)
Net short-term (payments) borrowings (30,000) -----
Increase in advances from affiliates ----- 135,892
Contributions from minority investors ----- 3,372
Distributions to minority investors (2,040) (3,673)
Repayment of advances from affiliates ----- (1,400,000)
Other, net 798 (3,937)
----------- -----------
Net Cash Provided by Financing Activities 67,149 143,425
----------- -----------
Increase in Cash and Cash Equivalents 6,116 26,151
Cash and Cash Equivalents at Beginning of Period 2,554 19,023
----------- -----------
Cash and Cash Equivalents at End of Period $ 8,670 $ 45,174
=========== ===========
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
3
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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 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 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, 1996.
Certain 1996 amounts have been reclassified to conform to the presentation
used for the three months ended March 31, 1997.
2. Earnings Per Share
Earnings per share was computed using weighted average shares outstanding,
including common stock equivalents, totaling 123,422,149 and 117,034,568 for the
three months ended March 31, 1997 and 1996, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share," which
will become effective for both interim and annual periods ending after December
15, 1997. SFAS No. 128 will require 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 would 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
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3. Acquisitions and Divestitures
In January 1997, the Company acquired additional ownership interests in
certain majority-owned partnerships and divested ownership interests in certain
unconsolidated entities. In February 1997, the Company signed definitive
agreements with BellSouth Corporation ("BellSouth") to combine ownership
interests in two cellular partnerships in which the Company currently has a
noncontrolling interest and BellSouth has a controlling interest. The resulting
partnership will be owned approximately 75% by BellSouth and 25% by the Company.
In addition, the Company will contribute its ownership interest in another
unconsolidated entity and cash. The Company also agreed to sell to BellSouth its
interest in a 100% owned entity and acquire from BellSouth an additional
interest in a majority-owned partnership. The combined effect of the
aforementioned transactions is expected to result in a net cash payment by the
Company of approximately $100 million of which $20 million was paid in the first
quarter of 1997.
4. Income Taxes
The estimated annual effective tax rate was 47.5% for the three months
ended March 31, 1997, differing from the statutory rate due to deductible
amortization of goodwill and state income tax expense.
5
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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 under "Forward-Looking Statements."
Results of Operations
Customer Growth Rate
The number of cellular customers increased to 2,281,000 at March 31, 1997
from 1,643,000 at March 31, 1996, resulting in a 38.8% increase. The increase in
cellular customers was impacted by 138,000 customers acquired during the fourth
quarter of 1996. For the three months ended March 31, 1997 and 1996, the Company
added 125,000 and 95,000 customers, respectively, through internal growth. For
the three months ended March 31, 1996, customer growth through acquisitions
added 46,600 customers. The Company's penetration rate, which is the number of
customers divided by the total population in its licensed service areas, reached
9.36% at March 31, 1997 compared to 7.85% at March 31, 1996. During the three
months ended March 31, 1997 and 1996, customer churn, the average monthly rate
of customer disconnects, was 1.87% and 1.79%, respectively.
Service Revenues
Service revenues consist primarily of charges for airtime, access fees,
roaming fees and other services. Service revenues increased 27.4% in the three
months ended March 31, 1997 when compared to the corresponding 1996 period,
principally from growth in the number of cellular customers. Increased
distribution channels, expanded network capacity, declining prices for cellular
telephone equipment and service, increased consumer awareness and acceptance of
wireless communications and pricing plans targeted at particular market segments
are key factors contributing to the Company's customer growth. In addition,
acquisitions completed in 1996 contributed to an increase of approximately $24
million in service revenues for the three months ended March 31, 1997.
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. Also impacting the decline in the average service
revenue per customer per month was an increase in promotional activities in the
first quarter of 1997. Promotional activities, which includes free minutes and
free access, increased to 3.7% of service revenues from 2.1% of service revenues
when compared to the same period last year. As a result, 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 $43.91 and $49.28 during the three
months ended March 31, 1997 and 1996, respectively. The Company expects that
service revenue per average customer per month will continue to decline as
penetration rates continue to increase.
6
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Roaming airtime minutes increased during the three months ended March 31,
1997, while roaming revenues as a percent 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.
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 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 entrance into the 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 long distance expenses, cost
of service as a percentage of service revenues was 8.4% and 8.6% for the three
months ended March 31, 1997 and 1996, respectively. The effects of the March
1996 renegotiated long distance contract with Sprint 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 months ended March 31, 1997 when
compared to the same period last year, resulting in an increase in cost of
service as a percent of service revenues. The decline in margins is attributable
to increased competitive pressures to reduce rates for such roaming traffic and
an increase in unbillable fraudulent roaming activities. As part of a pricing
simplification effort, the Company implemented new roaming rate plans in early
1997 which further reduced margins in the first 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 4% and 1% of service revenues
for the three months ended March 31, 1997 and 1996, respectively. The increase
in unbillable fraudulent roaming activity 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 $290 and $328 for the three
months ended March 31, 1997 and 1996, respectively. The decline in the cost to
acquire a new cellular customer is principally the result of additional costs
associated with the introduction of the Company's new brand name incurred during
the three months ended March 31, 1996, as well as, increased sales through the
Company's own distribution channels in 1997.
7
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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 whether the
cost to add new customers will increase 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.
During the three months ended March 31, 1997, sales, marketing and
advertising expenses were impacted by $2.4 million of costs associated with the
Company's introduction of long distance service.
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 March 31, 1997 and 1996, these expenses as a percent of
service revenues were 30.0% and 30.6%, respectively. The Company expects that
these expenses as a percentage of service revenues will decrease as future
economies of scale are realized.
Depreciation and Amortization
Acquisitions of cellular communications systems generated intangible assets
such as Federal Communications Commission license costs and goodwill which are
being amortized over 40 years. During the three months ended March 31, 1997,
amortization expense increased 58.8% when compared to the corresponding period
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 months ended March 31, 1997, depreciation expense
increased 34.2% when compared to the corresponding period in 1996 due to the
acquisition of depreciable assets and additional capital investment in the
Company's network. Depreciation expense as a percent of service revenues for the
three months ended March 31, 1997 and 1996 was 12.7% and 12.1%, respectively.
Interest Expense
Interest expense increased in the three months ended March 31, 1997 when
compared to the corresponding prior year period. The overall impact of the
increase in borrowing levels was mitigated by lower interest rates. The
annualized average interest rate for the three months ended March 31, 1997 and
1996 was 7.1% and 8.1%, 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,
$122 million of 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 incurs short-term
borrowings based on market interest rates. Additionally, on March 17, 1997, the
Company issued $200 million of 7.6% Senior Notes due 2009, the proceeds of which
were used to pay down borrowings under the Credit Facility.
8
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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 months
ended March 31, 1997, when compared to the prior year period, primarily as a
result of increased income generated by minority cellular investments in markets
that continue to mature.
Income Taxes
The Company's income tax expense for the three months ended March 31, 1997
and 1996 was $8.5 million and $9.3 million, respectively. The reduction in the
Company's effective tax rate for the three months ended March 31, 1997, when
compared to the corresponding 1996 period, primarily was attributable to
increased levels of pre-tax income which lessened the impact of items not
deductible for income tax purposes.
Competition
Cellular carriers compete primarily against the other facilities-based
cellular carrier in each market. However, companies with Personal Communications
Services ("PCS") licenses have begun to 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. 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
Cash Flows - Operating Activities
The decrease in operating cash flow for the three months ended March 31,
1997 was due primarily to a decrease in working capital of approximately $73
million. This decrease reflects a reduction in accrued expenses of $50 million
during the first quarter of 1997 for accruals related to significant
construction activity incurred during the fourth quarter of 1996. Also impacting
working capital was a $17 million reduction in accrued interest due
semi-annually on certain long-term debt instruments.
Cash Flows - Investing Activities
Capital expenditures were $23.3 million and $56.8 million for the three
months ended March 31, 1997 and 1996, respectively. The decrease in capital
expenditures was the result of various timing issues affecting construction
activities in the first quarter of 1997. Total capital expenditures for the
calendar year 1997 are projected to be $315 million versus $300 million in 1996.
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). The Company also acquired additional ownership interests
in two of its controlled markets during the first quarter of 1997.
9
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Cash Flows - Financing Activities
As part of its cash management program, the Company 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.
On March 17, 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.
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 $315 million in 1997. Funding for these expenditures is
expected to be derived from existing cash resources, cash flows from operations,
borrowings under the Credit Facility and the issuance of debt securities. 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.
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 to
make such investments. 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 March 31, 1997, the Company
was limited to issuing up to an additional 18.4 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. See Note 3 of Notes to Consolidated Financial
Statements for a discussion of completed and proposed acquisitions and
divestitures. 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 March 31, 1997, the Company had $580 million of borrowings outstanding
under the Credit Facility and was not restricted or limited in its borrowing
capacity under the Credit Facility.
On April 15, 1997, the Company's Board of Directors authorized a program to
repurchase 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.
10
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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 January 24, 1997, under "Item 5. Other
Events," and "Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits," the Company filed historical financial statements and pro forma
financial information with respect to the acquisition of Independent Cellular
Network, Inc. and affiliated companies which supplemented previously filed
financial statements and pro forma information.
On Current Report on Form 8-K, dated February 14, 1997, under "Item 5.
Other Events," the Company filed a press release announcing its consolidated
operating results for the fourth quarter of 1996 and for the year ended December
31, 1996.
On Current Report on Form 8-K, dated March 11, 1997, under "Item 5. Other
Events," the Company filed a press release announcing developments that were
expected to impact operating revenues for the first quarter of 1997.
On Current Report on Form 8-K, dated March 17, 1997, under "Item 7.
Financial Statements and Exhibits," the Company filed documents relating to the
issuance of its 7.60% Senior Notes Due 2009.
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/ Gary L. Burge
Gary L. Burge
Senior Vice President - Finance
(Principal Accounting Officer)
Date: May 5, 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.)
14
<PAGE>
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.)
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' FIRST QUARTER 10Q.
</LEGEND>
<CIK> 0001003959
<NAME> 360 COMMUNICATIONS COMPANY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,670
<SECURITIES> 0
<RECEIVABLES> 95,516
<ALLOWANCES> 5,319
<INVENTORY> 39,060
<CURRENT-ASSETS> 225,752
<PP&E> 1,519,435
<DEPRECIATION> 452,246
<TOTAL-ASSETS> 2,809,739
<CURRENT-LIABILITIES> 238,485
<BONDS> 1,799,513
0
0
<COMMON> 1,233
<OTHER-SE> 471,974
<TOTAL-LIABILITY-AND-EQUITY> 2,809,739
<SALES> 12,876
<TOTAL-REVENUES> 306,846
<CGS> 28,449
<TOTAL-COSTS> 41,489
<OTHER-EXPENSES> 60,522
<LOSS-PROVISION> 6,431
<INTEREST-EXPENSE> 31,190
<INCOME-PRETAX> 17,991
<INCOME-TAX> 8,546
<INCOME-CONTINUING> 9,445
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,445
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
