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 June 30, 1998
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 August 10, 1998, 1,000 shares of the registrant's Common Stock were
outstanding (100% owned by ALLTEL Corporation).
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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..................................................11
Item 2. Changes in Securities ..............................................*
Item 3. Defaults Upon Senior Securities.....................................*
Item 4. Submission of Matters to a Vote of Security Holders................11
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,"
"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 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; and the other factors discussed in the Company's
filings (File No. 1-14108) with the Securities and Exchange Commission (the
"SEC"), including the factors discussed under the headings "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Impact of the Year 2000 Issue" in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and "Risk Factors" in the Company's
definitive proxy statement, filed with the SEC on May 11, 1998, relating to the
special meeting of stockholders held on June 23, 1998, which sections are 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)
June 30, December 31,
ASSETS 1998 1997
------ ------------ ------------
Current Assets (Unaudited)
Cash and cash equivalents $ 13,235 $ 3,471
Accounts receivable, less allowances
of $5,927 and $6,602, respectively 115,082 100,472
Other receivables 29,120 26,981
Unbilled revenue 39,855 35,618
Inventory 25,219 34,354
Deferred income taxes 16,628 15,220
Prepaid expenses and other 8,592 14,051
------------ ------------
Total current assets 247,731 230,167
------------ ------------
Property, plant and equipment 1,832,269 1,750,097
Less: accumulated depreciation 646,911 561,140
------------ ------------
Property, plant and equipment, net 1,185,358 1,188,957
------------ ------------
Investments in unconsolidated entities 477,661 459,669
Intangibles, net 1,032,024 1,045,007
Other assets 30,700 18,124
------------ ------------
Total assets $ 2,973,474 $ 2,941,924
============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current Liabilities
Trade accounts and other payables $ 165,952 $ 241,127
Short-term borrowings 7,200 18,150
Advance billings 33,844 31,779
Accrued taxes 36,213 17,846
Accrued agent commissions 10,380 11,923
Other 36,112 46,386
------------ ------------
Total current liabilities 289,701 367,211
------------ ------------
Long-term debt 1,823,342 1,825,347
------------ ------------
Deferred Credits and Other Liabilities
Deferred income taxes 84,772 60,470
Postretirement and other benefit obligations 6,659 6,347
------------ ------------
Total deferred credits and other liabilities 91,431 66,817
------------ ------------
Minority interests in consolidated entities 171,972 173,248
------------ ------------
Shareowners' Equity
Common stock ($.01 par value: 1,000,000,000 shares
authorized; issued and outstanding 121,443,845 shares
in 1998 and 121,267,127 shares in 1997) 1,233 1,233
Additional paid-in capital 777,533 774,938
Accumulated deficit (148,199) (229,437)
Treasury Stock, at cost (1,920,303 shares in 1998 and
2,097,021 shares in 1997) (33,539) (37,433)
------------ ------------
Total shareowners' equity 597,028 509,301
------------ ------------
Total liabilities and shareowners' equity $ 2,973,474 $ 2,941,924
============ ============
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 Six Months
Ended June 30, Ended June 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating Revenues
Service revenues $385,072 $328,834 $726,647 $622,804
Equipment sales 13,541 11,428 26,801 24,304
--------- --------- --------- ---------
Total operating revenues 398,613 340,262 753,448 647,108
--------- --------- --------- ---------
Operating Expenses
Cost of service 43,757 40,283 84,549 81,772
Cost of equipment sales 25,430 24,394 53,864 52,843
Other operations expense 16,947 17,012 34,820 32,005
Sales, marketing and advertising expenses 66,937 55,673 123,323 116,254
General, administrative and other expenses 90,622 80,207 172,295 153,299
Depreciation and amortization 50,729 46,833 100,562 92,362
--------- --------- --------- ---------
Total operating expenses 294,422 264,402 569,413 528,535
--------- --------- --------- ---------
Operating Income 104,191 75,860 184,035 118,573
Interest expense (33,581) (32,843) (66,840) (64,033)
Minority interests in net income
of consolidated entities (17,911) (16,208) (31,558) (25,917)
Equity in net income of
unconsolidated entities 16,276 14,755 32,450 27,918
Other income (expense), net 1,060 (27) 31,596 2,987
--------- --------- --------- ---------
Income before income taxes 70,035 41,537 149,683 59,528
Income tax expense 32,916 19,730 68,444 28,276
--------- --------- --------- ---------
Net income $ 37,119 $ 21,807 $ 81,239 $ 31,252
========= ========= ========= =========
Basic and diluted earnings per share $ 0.31 $ 0.18 $ 0.67 $ 0.25
========= ========= ========= =========
Weighted average shares
outstanding 121,399 122,580 121,343 122,943
========= ========= ========= =========
</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 Six Months
Ended June 30,
---------------------
1998 1997
---------- ----------
Operating Activities
Net income $ 81,239 $ 31,252
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 100,562 92,362
Deferred income taxes 32,578 3,431
Gain on sale of cellular investments (31,569) (3,029)
Equity in net income of unconsolidated
entities, net of distributions (3,217) (16,472)
Minority interests in net income of
consolidated entities 31,558 25,917
Changes in operating assets and liabilities,
excluding acquisitions
Receivables, net (18,847) (1,814)
Other current assets 12,470 5,016
Trade accounts and other payables (45,670) (24,770)
Accrued expenses and other
current liabilities (14,479) (1,040)
Noncurrent assets and liabilities, net (11,240) (2,944)
Other, net 3,302 3,084
---------- ----------
Net Cash Provided by Operating Activities 136,687 110,993
---------- ----------
Investing Activities
Capital expenditures (81,881) (89,520)
Acquisitions of additional interests in
consolidated entities (20,543) (23,845)
Divestitures of cellular investments 17,574 3,888
Investments in unconsolidated entities and other (154) (80,156)
---------- ----------
Net Cash Used for Investing Activities (85,004) (189,633)
---------- ----------
Financing Activities
Net payments under bank revolving credit facility (105,000) (55,000)
Proceeds from long-term debt 100,000 200,000
Debt issuance costs (856) (1,609)
Net short-term payments (10,950) (32,905)
Purchases of common stock for treasury ---- (18,878)
Distributions to minority investors (26,905) (8,322)
Other, net 1,792 908
---------- ----------
Net Cash (Used for) Provided by Financing Activities (41,919) 84,194
---------- ----------
Increase in Cash and Cash Equivalents 9,764 5,554
Cash and Cash Equivalents at Beginning of Period 3,471 2,554
---------- ----------
Cash and Cash Equivalents at End of Period $ 13,235 $ 8,108
========== ==========
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 also markets
residential long distance and paging services 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, 1997.
2. Earnings Per Share
Basic earnings per share amounts were computed using the weighted average
number of shares outstanding, excluding common stock equivalents, totaling
121,398,933 and 122,579,873 for the three months ended June 30, 1998 and 1997,
respectively, and 121,343,131 and 122,943,476 for the six months ended June 30,
1998 and 1997, respectively. Diluted earnings per share amounts were computed
using the weighted average number of shares outstanding, including common stock
equivalents, totaling 122,299,739 and 122,579,873 for the three months ended
June 30, 1998 and 1997, respectively, and 121,866,090 and 122,995,723 for the
six months ended June 30, 1998 and 1997, respectively. Options to purchase
approximately 1,899,000 and 845,000 shares of common stock for the three and six
months ended June 30, 1997, respectively, were excluded from the computation of
diluted earnings per share because the effect was antidilutive.
3. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement requires that
all items recognized under accounting standards as components of comprehensive
income be reported in a full set of general purpose financial statements. The
Company does not have any components of comprehensive income to report.
4
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4. Acquisitions and Divestitures
During the second quarter of 1998, the Company acquired minority interests
in two of its controlled markets. Also during the quarter, the Company divested
its ownership interest in an unconsolidated entity.
During the first quarter of 1998, the Company divested its 27.9% interest
in the Omaha, Nebraska, cellular market through the sale of its interest in the
Omaha Cellular General Partnership. This divestiture was initiated by the
managing partner's exercise of an option to acquire the Company's interest
pursuant to a preexisting agreement. The Company recognized a gain of $30.5
million in other income ($18.1 million, net of tax) on this transaction. Also
during the first quarter of 1998, the Company acquired a minority interest in
one of its controlled markets.
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 Richmond, Virginia, and Orlando,
Florida. The resulting partnership is owned approximately 75% by BellSouth and
25% by the Company, with the Company assuming management responsibilities of the
cellular operations in Richmond. In connection with this transaction, the
Company contributed $80 million to the resulting partnership. In 1997, the
Company acquired minority interests in 15 of its controlled markets, which
increased its ownership interest to 100% in 10 of those markets.
5. Income Taxes
Excluding the tax effects associated with the gain on the sale of a
cellular investment, the estimated annual effective tax rate was 47.0% for the
six months ended June 30, 1998, differing from the statutory rate due to
nondeductible amortization of goodwill and state income tax expense.
6. Subsequent Event
On July 1, 1998, the Company and ALLTEL Corporation ("ALLTEL")
completed the merger of an ALLTEL subsidiary with and into the Company (the
"Merger"). At the effective time of the Merger, each outstanding share of the
Company's common stock (other than shares owned by ALLTEL, ALLTEL's
subsidiaries, the Company's subsidiaries, or held as treasury stock by the
Company) was converted into the right to receive .74 of a share of ALLTEL common
stock, par value $1.00 per share, and the Company became a wholly owned
subsidiary of ALLTEL. Also, at the effective time of the Merger, each issued and
outstanding share of common stock of the ALLTEL subsidiary involved in the
Merger was converted into one validly issued, fully paid and non-assessable
share of common stock of the surviving corporation representing 1,000 shares of
common stock, $0.01 par value.
5
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Item 2. Management's Discussion and Analysis of Financial Condition 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, 1997. 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."
Completion of Merger
On July 1, 1998, the Company and ALLTEL Corporation ("ALLTEL") completed
the merger of an ALLTEL subsidiary with and into the Company (the "Merger"). At
the effective time of the Merger, each outstanding share of the Company's common
stock (other than shares owned by ALLTEL, ALLTEL's subsidiaries, the Company's
subsidiaries, or held as treasury stock by the Company) was converted into the
right to receive .74 of a share of ALLTEL common stock, par value $1.00 per
share, and the Company became a wholly owned subsidiary of ALLTEL. Also, at the
effective time of the Merger, each issued and outstanding share of common stock
of the ALLTEL subsidiary involved in the Merger was converted into one validly
issued, fully paid and non-assessable share of common stock of the surviving
corporation representing 1,000 shares of common stock, $0.01 par value.
In connection with the completion of the Merger, the Company terminated the
Second Amended and Restated Credit Agreement dated as of December 5, 1997 among
the Company and a number of banks and institutional lenders (the "Credit
Facility"), and ALLTEL refinanced the outstanding borrowings thereunder
(approximately $495 million) through its existing credit facilities.
On July 1, 1998, the Company's common stock was delisted for trading from
the New York Stock Exchange, the Pacific Exchange and the Chicago Stock
Exchange.
Results of Operations
Customer Growth Rate
The Company's number of cellular customers increased to 2,733,000 at June
30, 1998, from 2,379,000 at June 30, 1997, resulting in a 14.9% increase. For
the three months ended June 30, 1998 and 1997, the Company added 89,000 and
98,000 customers, respectively, through internal growth. For the six months
ended June 30, 1998 and 1997, the Company added 150,000 and 223,000 customers,
respectively, 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 11.15% at June 30, 1998 compared to 9.77% at June 30, 1997. The
average monthly rate of customer disconnects, customer churn, was 1.81% and
1.69%, during the three months ended June 30, 1998 and 1997, respectively, and
1.89% and 1.78%, during the six months ended June 30, 1998 and 1997,
respectively.
Service Revenues
Service revenues increased 17.1% and 16.7% in the three and six months
ended June 30, 1998, when compared to the corresponding 1997 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.
6
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Consistent with the rest of the cellular industry, the Company has
experienced increased penetration in the consumer market, fueled by declining
cellular telephone equipment prices and increased promotional activities, an
increased awareness of wireless 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 $47.43 and $46.86 during the three months ended
June 30, 1998 and 1997, respectively, and $45.46 and $45.47 during the six
months ended June 30, 1998 and 1997, respectively. The Company implemented
marketing and sales strategies to manage service revenue per average customer
per month.
Roaming airtime minutes increased during the three months ended June 30,
1998, 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 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 ultimately are passed on to customers.
Future revenue growth will be impacted by the Company's success in
maintaining customer growth in existing markets; increasing usage per customer,
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 and paging services in the states in
which the Company provides wireless service.
Cost of Service
Cost of service as a percent of service revenues was 11.4% and 12.3% for
the three months ended June 30, 1998 and 1997, respectively, and 11.6% and 13.1%
for the six months ended June 30, 1998 and 1997, respectively. A reduction in
unbillable fraudulent roaming activities, renegotiated wholesale roaming rates,
renegotiated long distance contracts in 1997, and reduced interconnection rates
paid to local telephone companies were key factors favorably impacting the
decline in cost of service as a percent of service revenues. Long distance
telecommunications and operator services are provided to the company by Sprint
Corporation based on terms and conditions of contracts governing such charges.
Unauthorized usage of customers' telephone numbers resulted in unbillable
fraudulent roaming activities that approximated 0.1% and 1.0% of service
revenues for the three months ended June 30, 1998 and 1997, respectively, and
0.1% and 2.7% of service revenues for the six months ended June 30, 1998 and
1997, respectively. The Company believes it will continue to be impacted by
fraudulent roaming activities in the future and continues to proactively invest
in new systems and technologies to mitigate the occurrence of cellular fraud.
Cost to Acquire New Customers
Cost to acquire a new cellular customer was $328 and $303 for the three
months ended June 30, 1998 and 1997, respectively, and $326 and $297 for the six
months ended June 30, 1998 and 1997, respectively. The increase in the cost to
acquire a new cellular customer was principally the result of costs being
distributed over a lower number of acquired customers when compared to the
corresponding prior period. Also contributing to the increase in the cost to
acquire was increased sales from external distribution channels which were
somewhat mitigated by a continued reduction in the wholesale prices for cellular
phones.
To improve sales and reduce costs associated with acquiring new customers,
the Company continues to strive for more dependence 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.
7
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Other Operations Expense and General Administrative and Other Expenses
Other operations expense and general, administrative and other expenses
increased principally due to growth in the cellular customer base. During the
three months ended June 30, 1998 and 1997, these expenses as a percent of
service revenues were 27.9% and 29.6%, respectively, and 28.5% and 29.8% during
the six months ended June 30, 1998 and 1997, respectively. This decrease 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 six months ended June 30, 1998,
amortization expense decreased 6.3% and 7.3% when compared to the corresponding
periods in 1997 due to a reduction in the amount of amortizable goodwill related
to cellular properties acquired in 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 six months ended June 30, 1998, depreciation expense
increased 11.4% and 12.3% when compared to the corresponding periods in 1997.
The increase in depreciation expense is primarily due to additional capital
investment in the Company's network. Depreciation expense as a percent of
service revenues for the three months ended June 30, 1998 and 1997 was 11.2% and
11.8%, respectively, and 11.8% and 12.2% for the six months ended June 30, 1998
and 1997, respectively.
Interest Expense
Interest expense increased in the three and six months ended June 30, 1998
when compared to the corresponding prior year periods due to an increase in the
average interest rate. The annualized average interest rate for the three and
six months ended June 30, 1998 and 1997, was 7.3% 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, $200 million of 7.6% Senior Notes due
2009, approximately $128 million of 9% subordinated promissory notes and
borrowings under the 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. Additionally, on January
13, 1998, the Company issued $100 million of 6.65% Senior Notes due 2008, the
proceeds of which were used to pay down borrowings under the Credit Facility.
Minority Interests in Net Income of Consolidated Entities
Minority interests in net income of consolidated entities represents other
investors' interests in the operating results of cellular systems in which the
Company has a controlling interest. The increase for the three and six months
ended June 30, 1998 when compared to the same period last year was due to
improved operating results.
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 six
months ended June 30, 1998, 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 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 for the three and six months
ended June 30, 1998, when compared to the corresponding period in 1997 due to
the increase in pre-tax income in 1998.
8
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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 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 provider in the cellular industry 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
competition.
Liquidity and Capital Resources
Cash Flows - Operating Activities
The increase in net cash provided by operating activities for the three
and six months ended June 30, 1998 was primarily due to improved operating
results, cash flows generated from changes in working capital and an increase in
deferred income taxes which was partially offset by the gain on the sale of
cellular investments.
Cash Flows - Investing Activities
Capital expenditures were $81.8 million and $89.5 million for the six
months ended June 30, 1998 and 1997, respectively. Total capital expenditures
for the calendar year 1998 are projected to be $270 million. During the second
quarter, the Company began commercially offering digital service to its
customers in the Raleigh, North Carolina, service area. The Company is also
accelerating the deployment of CDMA digital technology in five additional
markets this year, including Greensboro, North Carolina; Greenville, South
Carolina; Norfolk and Richmond, Virginia; and Toledo, Ohio.
On a limited basis, the Company has increased its ownership interests in
certain of its controlled markets. See Note 4 of Notes to Consolidated Financial
Statements for a discussion of acquisitions and divestitures.
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 $100
million under certain debt covenants.
In the first quarter of 1998, the Company issued $100 million in aggregate
principal amount of its 6.65% Senior Notes due 2008. 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.
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.
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 of approximately $270
million in 1998. Funding for these expenditures is expected to be derived from
cash flows from operations and from advances received from ALLTEL Corporation in
the form of interim financing. These expenditures will be made to expand and
enhance existing cellular systems and to deploy digital technology.
9
<PAGE>
Other Financial Information
During the first six months of 1998, there were no material changes in the
market risks discussed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities", ("SFAS 133"). This Statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at fair value. SFAS 133 requires that changes in a derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS 133
is effective for fiscal years beginning after June 15, 1999, and cannot be
applied retroactively. The Company has not yet quantified the impacts of
adopting SFAS 133 on its financial statements; however, SFAS 133 could increase
the volatility of reported earnings and other comprehensive income once adopted.
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
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; and the other factors discussed in the Company's
filings (File No. 1-14108) with the Securities and Exchange Commission (the
"SEC"), including the factors discussed under the headings "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Impact of the Year 2000 Issue" in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and "Risk Factors" in the Company's
definitive proxy statement, filed with the SEC on May 11, 1998, relating to the
special meeting of stockholders held on June 23, 1998, which sections are 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.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In March 1998, the Company and all of its then current directors were named
as defendants in two complaints filed in the Court of Chancery in the State of
Delaware. A third complaint was filed in April 1998. The complaints were brought
by purported stockholders of the Company, individually and purportedly as class
actions on behalf of all other stockholders of the Company. The complaints
allege breaches of fiduciary duty by the Company's directors in connection with
the Merger and sought to enjoin the consummation of the Merger and other
unspecified damages. The defendants believe the complaints to be without merit
and the Company does not believe that these proceedings will have a material
adverse effect on the results of operations or financial position of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
During the quarter ended June 30, 1998, the Company held two meetings at
which the matters discussed below were submitted to a vote of the holders of the
Company's Common Stock, $0.01 par value (the "Common Stock").
Annual Meeting
On May 12, 1998, the Company held its Annual Meeting of Shareowners. Two
proposals were submitted to a vote of the holders of the Company's Common Stock
entitled to vote at the meeting and the number of votes cast with respect to
each proposal are as follows:
Proposal 1 to elect two directors, constituting Class II of the Company's
Board of Directors: 106,095,964 shares were voted for Alice M. Peterson, and
1,999,115 shares were withheld; and 106,073,298 shares were voted for Charles H.
Price, II, and 2,021,781 shares were withheld.
Proposal 2 to ratify the selection of Ernst & Young LLP as the Company's
independent accountants for the fiscal year ending December 31, 1998:
107,786,396 shares were voted for this proposal, 138,853 were voted against, and
169,830 shares were abstained. No broker non-votes were cast with respect to
this proposal.
Special Meeting
On June 23, 1998, the Company held a Special Meeting of Stockholders at
which holders of the Company's Common Stock were asked to approve and adopt the
Agreement and Plan of Merger dated as of March 16, 1998 among the Company,
ALLTEL and Pinnacle Merger Sub, Inc., a wholly owned subsidiary of ALLTEL, and
the transactions contemplated thereby (the "Merger Proposal"). Of the
121,342,551 shares of the Company's Common Stock entitled to vote at the
meeting, 93,035,251 shares were voted for the Merger Proposal, 398,509 shares
were voted against, and 305,164 shares were abstained. No broker non-votes were
cast with respect to the Merger Proposal.
11
<PAGE>
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 April 15, 1998, under "Item 5. Other
Events," the Company filed a press release announcing its consolidated operating
results for the first quarter of 1998.
On Current Report on Form 8-K, dated June 23, 1998, under "Item 5. Other
Events," the Company filed a press release announcing the approval by the
shareholders of the Company and ALLTEL of the merger of the two companies at
separate special meetings held on June 23, 1998.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
360 COMMUNICATIONS COMPANY
By: /s/ Jeffery R. Gardner
Jeffery R. Gardner
Senior Vice President - Finance
(Principal Accounting Officer)
Date: August 14, 1998
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.)
2.4 Agreement and Plan of Merger dated as of March 16, 1998 among ALLTEL
Corporation, Pinnacle Merger Sub, Inc. and 360 Communications Company
(Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K/A
dated March 16, 1998, File No. 1-14108, and incorporated herein by
reference.)
2.5 Stock Option Agreement dated as of March 16, 1998 between ALLTEL
Corporation and 360 Communications Company (Filed as Exhibit 2.2 to
the Company's Current Report on Form 8-K/A dated March 16, 1998, 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.)
3.4 Certificate of Merger with respect to the Merger of Pinnacle Merger
Sub, Inc. into 360 Communications Company.
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.)
14
<PAGE>
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.)
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.)
4.8 360 Communications Company's 6.65% Senior Note Due 2008. (Filed as
Exhibit 4.8 to the Company's Current Report on Form 8-K dated January
13, 1998, File No. 1-14108, and incorporated herein by reference.)
4.9 First Amendment to Rights Agreement dated as of March 16, 1998 to
Rights Agreement dated as of March 5, 1996 between 360 Communications
Company and The Chase Manhattan Bank, as successor in interest to
Chemical Bank, as Rights Agent. (Filed as Exhibit 4.9 to the
Company's Current Report on Form 8-K/A dated March 16, 1998, File No.
1-14108, and incorporated herein by reference.)
27 Financial Data Schedule.
15
CERTIFICATE OF MERGER
PINNACLE MERGER SUB, INC.
INTO
360 COMMUNICATIONS COMPANY
------------------------------
Pursuant to Section 251 of the General
Corporation Law of the State of Delaware
------------------------------
360 Communications Company, a Delaware Corporation, hereby certifies as
follows with respect to the merger of Pinnacle Merger Sub, Inc. into 360
Communications Company (the "Merger"):
FIRST: The names of the constituent corporations to the Merger are
Pinnacle Merger Sub, Inc. and 360 Communications Company. Each constituent
corporation is incorporated under the laws of the State of Delaware.
SECOND: An Agreement and Plan of Merger, dated as of March 16, 1998
(the "Merger Agreement"), has been approved, adopted, certified, executed and
acknowledged by each constituent corporation in accordance with Section 251 of
the General Corporation Law of the State of Delaware.
THIRD: The name of the surviving corporation of the Merger is "360
Communications Company" (the "Surviving Corporation").
FOURTH: The Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws of 360 Communications Company in effect on the date
hereof shall be the certificate of incorporation and by-laws of the Surviving
Corporation.
FIFTH: An executed copy of the Merger Agreement is on file at the
principal place of business of the Surviving Corporation, 8725 W. Higgins Road,
Chicago, Illinois 60631.
SIXTH: A copy of the Merger Agreement will be furnished by the
Surviving Corporation on request and without cost to any stockholder of either
constituent corporation.
SEVENTH: That the Merger shall be effective as of 12:01 a.m., eastern
time, on July 1, 1998.
IN WITNESS WHEREOF, 360 Communications Company caused this Certificate
of Merger to be executed in its corporate name by its President as of this 30th
day of June, 1998.
360 COMMUNICATIONS COMPANY
By: /s/ Dennis E. Foster
Dennis E. Foster
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA
FROM THE FINANCIAL STATEMENTS INCLUDED AS PART
OF 360 COMMUNICATIONS' SECOND QUARTER 10Q.
</LEGEND>
<CIK> 0001003959
<NAME> 360 COMMUNICATIONS COMPANY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,235
<SECURITIES> 0
<RECEIVABLES> 121,009
<ALLOWANCES> 5,927
<INVENTORY> 25,219
<CURRENT-ASSETS> 247,731
<PP&E> 1,832,269
<DEPRECIATION> 646,911
<TOTAL-ASSETS> 2,973,474
<CURRENT-LIABILITIES> 289,701
<BONDS> 1,823,342
0
0
<COMMON> 1,233
<OTHER-SE> 595,795
<TOTAL-LIABILITY-AND-EQUITY> 2,973,474
<SALES> 26,801
<TOTAL-REVENUES> 753,448
<CGS> 53,864
<TOTAL-COSTS> 84,549
<OTHER-EXPENSES> 135,382
<LOSS-PROVISION> 15,834
<INTEREST-EXPENSE> 66,840
<INCOME-PRETAX> 149,683
<INCOME-TAX> 68,444
<INCOME-CONTINUING> 81,239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,239
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.67
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