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, 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 May 5, 1998, 121,416,327 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...................................................11
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....................................11
- ---------------
* 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 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; a significant delay in the expected closing of the
proposed merger between the Company and ALLTEL Corporation; and the other
factors discussed in the Company's filings with the Securities and Exchange
Commission, 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 "Certain Risk Factors" in the
Information Statement set forth as Exhibit 99 to the Company's Form 10 (File No.
1-14108), 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.
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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 1998 1997
------ ------------ ------------
Current Assets (Unaudited)
Cash and cash equivalents $ 7,123 $ 3,471
Accounts receivable, less allowances
of $6,187 and $6,602, respectively 93,036 100,472
Other receivables 27,707 26,981
Unbilled revenue 35,087 35,618
Inventory 26,590 34,354
Deferred income taxes 15,932 15,220
Prepaid expenses and other 8,976 14,051
------------ ------------
Total current assets 214,451 230,167
------------ ------------
Property, plant and equipment 1,782,963 1,750,097
Less: accumulated depreciation 603,721 561,140
------------ ------------
Property, plant and equipment, net 1,179,242 1,188,957
------------ ------------
Investments in unconsolidated entities 484,575 459,669
Intangibles, net 1,036,109 1,045,007
Other assets 21,857 18,124
------------ ------------
Total assets $ 2,936,234 $ 2,941,924
============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current Liabilities
Trade accounts and other payables $ 161,807 $ 241,127
Short-term borrowings 20,400 18,150
Advance billings 32,450 31,779
Accrued taxes 39,823 17,846
Accrued agent commissions 8,960 11,923
Other 30,303 46,386
------------ ------------
Total current liabilities 293,743 367,211
------------ ------------
Long-term debt 1,845,400 1,825,347
------------ ------------
Deferred Credits and Other Liabilities
Deferred income taxes 63,804 60,470
Postretirement and other benefit obligations 6,495 6,347
------------ ------------
Total deferred credits and other liabilities 70,299 66,817
------------ ------------
Minority interests in consolidated entities 171,386 173,248
------------ ------------
Shareowners' Equity
Common stock ($.01 par value: 1,000,000,000 shares
authorized issued and outstanding 121,334,314 shares
in 1998 and 121,267,127 shares in 1997) 1,233 1,233
Additional paid-in capital 774,943 774,938
Accumulated deficit (185,317) (229,437)
Treasury Stock, at cost (2,029,834 shares in 1998 and
2,097,021 shares in 1997) (35,453) (37,433)
------------ ------------
Total shareowners' equity 555,406 509,301
------------ ------------
Total liabilities and shareowners' equity $ 2,936,234 $ 2,941,924
============ ============
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
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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,
--------------------------
1998 1997
----------- ------------
Operating Revenues
Service revenues $ 341,575 $ 293,970
Equipment sales 13,260 12,876
----------- ------------
Total operating revenues 354,835 306,846
----------- ------------
Operating Expenses
Cost of service 40,792 41,489
Cost of equipment sales 28,434 28,449
Other operations expense 17,873 14,993
Sales, marketing and advertising expenses 56,386 60,581
General, administrative and other expenses 81,673 73,092
Depreciation and amortization 49,833 45,529
----------- ------------
Total operating expenses 274,991 264,133
----------- ------------
Operating Income 79,844 42,713
Interest expense (33,259) (31,190)
Minority interests in net income
of consolidated entities (13,647) (9,709)
Equity in net income of
unconsolidated entities 16,174 13,163
Other income, net 30,536 3,014
----------- ------------
Income before income taxes 79,648 17,991
Income tax expense 35,528 8,546
----------- ------------
Net income $ 44,120 $ 9,445
=========== ============
Basic and diluted earnings per share $ 0.36 $ 0.08
=========== ============
Weighted average shares
outstanding 121,287 123,309
=========== ============
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,
--------------------
1998 1997
--------- ----------
Operating Activities
Net income $ 44,120 $ 9,445
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 49,833 45,529
Deferred income taxes 12,249 2,161
Gain on sale of cellular investments (30,506) (3,029)
Equity in net income of unconsolidated
entities, net of distributions (8,846) (7,803)
Minority interests in net income of
consolidated entities 13,647 9,709
Changes in operating assets and liabilities,
excluding acquisitions
Receivables, net 7,967 15,170
Other current assets 12,113 (4,389)
Trade accounts and other payables (63,087) (75,932)
Accrued expenses and other
current liabilities (11,440) (7,763)
Noncurrent assets and liabilities, net (2,907) (1,112)
Other, net 615 1,178
--------- ----------
Net Cash Provided by (Used for) Operating Activities 23,758 (16,836)
--------- ----------
Investing Activities
Capital expenditures (32,544) (23,273)
Acquisitions of additional interests in
consolidated entities (14,284) (24,812)
Divestitures of cellular investments 15,199 3,888
--------- ----------
Net Cash Used for Investing Activities (31,629) (44,197)
--------- ----------
Financing Activities
Net payments under bank revolving credit facility (80,000) (100,000)
Proceeds from long-term debt 100,000 200,000
Debt issuance costs (856) (1,609)
Net short-term borrowings (payments) 2,250 (30,000)
Distributions to minority investors (10,383) (2,040)
Other, net 512 798
--------- ----------
Net Cash Provided by Financing Activities 11,523 67,149
--------- ----------
Increase in Cash and Cash Equivalents 3,652 6,116
Cash and Cash Equivalents at Beginning of Period 3,471 2,554
--------- ----------
Cash and Cash Equivalents at End of Period $ 7,123 $ 8,670
========= ==========
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
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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. Merger Agreement with ALLTEL Corporation
On March 16, 1998, the Company entered into an Agreement and Plan of Merger
with ALLTEL Corporation ("ALLTEL") and Pinnacle Merger Sub, Inc., a wholly owned
subsidiary of ALLTEL, pursuant to which each outstanding share of the Company's
common stock will be converted into the right to receive .74 of a share of
ALLTEL common stock, par value $1.00 per share. The transaction is expected to
be accounted for as a pooling-of-interests. Upon consummation of the merger, the
Company will become a wholly owned subsidiary of ALLTEL. Consummation of the
merger is subject to certain conditions, including the approval by the
respective shareowners of the Company and ALLTEL and the receipt of required
regulatory approvals. Pending the receipt of such approvals, the Company expects
to complete the merger in the third quarter of 1998.
3. Earnings Per Share
Basic earnings per share amounts were computed using the weighted average
number of shares outstanding, excluding common stock equivalents, totaling
121,286,725 and 123,309,453 for the three months ended March 31, 1998 and 1997,
respectively. Diluted earnings per share amounts were computed using the
weighted average number of shares outstanding, including common stock
equivalents, totaling 121,687,065 and 123,422,149 for the three months ended
March 31, 1998 and 1997, respectively. Options to purchase approximately 80,000
and 418,000 shares of common stock at March 31, 1998 and 1997, respectively,
were excluded from the computation of diluted earnings per share because the
effect was antidilutive.
4
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4. 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.
5. Acquisitions and Divestitures
On February 27, 1998, the divestiture of the Company's 27.9% interest in
the Omaha, Nebraska, cellular market was completed 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 on February 27, 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.
6. 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
three months ended March 31, 1998, differing from the statutory rate due to
nondeductible amortization of goodwill and state income tax expense.
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."
Merger Agreement with ALLTEL Corporation
On March 16, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with ALLTEL Corporation, a Delaware corporation
("ALLTEL"), and Pinnacle Merger Sub, Inc., a Delaware corporation and a wholly
owned subsidiary of ALLTEL ("Merger Sub"), pursuant to which Merger Sub will
merge with and into the Company (the "Merger"). As a result of the Merger, (a)
each outstanding share of the Company's common stock (other than shares owned by
ALLTEL or Merger Sub or held by the Company) will be converted into the right to
receive .74 of a share of the common stock, par value $1.00 per share, of ALLTEL
and (b) the Company will become a wholly owned subsidiary of ALLTEL.
Consummation of the merger is subject to certain conditions, including the
approval of the Merger by the respective shareowners of the Company and ALLTEL
and the receipt of required regulatory approvals. Pending the receipt of such
approvals, the Company expects to complete the merger in the third quarter of
1998. The Merger Agreement may be terminated under certain circumstances
relating to a third party offer to acquire the Company, in which event the
Company will be obligated to pay to ALLTEL a termination fee of $100 million
(the "Termination Fee").
Concurrently with the execution of the Merger Agreement, the Company and
ALLTEL entered into a Stock Option Agreement (the "Stock Option Agreement")
whereby the Company granted to ALLTEL an option (the "Option") to purchase up to
19.9% of the number of shares of the Company's common stock issued and
outstanding immediately prior to the grant of the Option (approximately
24,140,553 shares) at an exercise price of $33.90 per share (subject to
adjustment in certain circumstances). The Option is exercisable by ALLTEL only
in the event that ALLTEL becomes entitled to receive the Termination Fee.
Concurrently with any exercise of the Option, the Company has the option to
repurchase from ALLTEL, at a price of $35.90 per share, any shares issued upon
the exercise of the Option.
The Merger is expected to be accounted for as a pooling-of-interests. If
the Merger is consummated, the Company's common stock will be delisted from the
New York Stock Exchange, the Pacific Exchange and the Chicago Stock Exchange and
will be deregistered under the Securities Exchange Act of 1934, as amended.
Results of Operations
Customer Growth Rate
The Company's number of cellular customers increased to 2,644,000 at March
31, 1998, from 2,281,000 at March 31, 1997, resulting in a 15.9% increase. For
the three months ended March 31, 1998 and 1997, the Company added 61,000 and
125,000 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 10.79% at March 31, 1998
compared to 9.36% at March 31, 1997. The average monthly rate of customer
disconnects, customer churn, was 1.97% and 1.87%, during the three months ended
March 31, 1998 and 1997, respectively.
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Service Revenues
Service revenues increased 16.2% in the three months ended March 31,
1998, when compared to the corresponding 1997 period, 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.
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 declined 1% to $43.46 from $43.91 during the three
months ended March 31, 1998 and 1997, respectively. 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
1998. Promotional activities, which includes free minutes and free access,
increased to 4.4% of service revenues from 3.7% of service revenues for the
three months ended March 31, 1998 and 1997, respectively. The Company
implemented marketing and sales strategies to manage the rate of decline of
service revenue per average customer per month. The Company expects that service
revenue per average customer per month will continue to decline, at a slower
rate, as penetration rates continue to increase.
Roaming airtime minutes increased during the three months ended March 31,
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 11.9% and 14.1% for
the three months ended March 31, 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 0.2% and 4.0% of service
revenues for the three months ended March 31, 1998 and 1997, respectively. The
increase in unbillable fraudulent roaming activities for the three months ended
March 31, 1997 was the result of a significant increase in the level of fraud
activity in several markets during the fourth quarter of 1996 and the first
quarter of 1997. The Company believes it will continue to be impacted by
fraudulent roaming activities 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 $324 and $290 for the three
months ended March 31, 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.
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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.
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 March 31, 1998 and 1997, these expenses as a percent of
service revenues were 29.1% and 30.0%, 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 months ended March 31, 1998,
amortization expense decreased 8.2% when compared to the corresponding period 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 months ended March 31, 1998, depreciation expense
increased 13.3% when compared to the corresponding period 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 March 31, 1998 and 1997 was 12.4% and 12.7%, respectively.
Interest Expense
Interest expense increased in the three months ended March 31, 1998 when
compared to the corresponding prior year period due to an increase in borrowing
levels. The annualized average interest rate for the three months ended March
31, 1998 and 1997, was 7.2% and 7.1%, 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, $200 million of 7.6% Senior Notes due 2009, approximately $128
million of 9% subordinated promissory notes and borrowings under a revolving
credit facility ("Credit Facility") with interest rates based on the London
Interbank Offered Rate plus 50 basis points. The Company also utilizes
short-term borrowings based on market interest rates. 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 months ended
March 31, 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 months
ended March 31, 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.
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Income Taxes
The Company's income tax expense increased for the three months ended
March 31, 1998, when compared to the corresponding period in 1997 due to the
increase in pre-tax income in 1998.
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
months ended March 31, 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 $32.5 million and $23.3 million for the three
months ended March 31, 1998 and 1997, respectively. Total capital expenditures
for the calendar year 1998 are projected to be $270 million. In 1997, the
Company initiated installation of CDMA digital technology in the greater
Raleigh, North Carolina, service area. The Company expects to begin commercially
offering digital service to its customers in Raleigh in the second quarter of
1998.
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. See Note 5
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.
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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 $270 million in 1998. Funding for these expenditures is
expected to be substantially derived from cash flows from operations. These
expenditures will be made to expand and enhance existing cellular systems, and
to deploy digital technology.
The Company expects that it will need to raise additional funds to finance
acquisition activities. Such acquisition activities may include acquisitions of
new cellular communications systems or additional investments in cellular
communications systems in which the Company already holds an ownership interest.
The Company may utilize existing cash resources, borrowings under the Credit
Facility and the issuance of debt securities to meet these funding requirements.
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 debt securities and net cash provided by operations,
it will have sufficient capital to meet its projected funding requirements for
operations in 1998 and thereafter. The Company currently does not intend to seek
funding from other sources during 1998. 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, 1998, the Company had $520 million of borrowings outstanding
under the Credit Facility and was not restricted or limited in its borrowing
capacity.
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; a
significant delay in the expected closing of the proposed merger between the
Company and ALLTEL Corporation; and the other factors discussed in the Company's
filings with the Securities and Exchange Commission, 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 "Certain Risk Factors" in the Information Statement set forth as Exhibit 99
to the Company's Form 10 (File No. 1-14108), 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 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 seek 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 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 13, 1998, under "Item 7.
Financial Statements and Exhibits," the Company filed documents relating to the
issuance of its 6.65% Senior Notes Due 2008.
On Current Report on Form 8-K, dated February 18, 1998, under "Item 5. Other
Events," the Company filed a press release announcing its consolidated operating
results for the fourth quarter of 1997 and for the year ended December 31, 1997.
On Current Report on Form 8-K, dated March 16, 1998, under "Item 5. Other
Events," the Company filed a press release announcing the execution of the
Agreement and Plan of Merger with ALLTEL Corporation.
On Current Report on Form 8-K/A, dated March 17, 1998, under "Item 7.
Financial Statements and Exhibits," the Company filed documents relating to the
proposed merger with ALLTEL Corporation.
.
11
<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: May 15, 1998
12
<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.)
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.)
13
<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.
14
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,123
<SECURITIES> 0
<RECEIVABLES> 99,223
<ALLOWANCES> 6,187
<INVENTORY> 26,590
<CURRENT-ASSETS> 214,451
<PP&E> 1,782,963
<DEPRECIATION> 603,721
<TOTAL-ASSETS> 2,936,234
<CURRENT-LIABILITIES> 293,743
<BONDS> 1,845,400
0
0
<COMMON> 1,233
<OTHER-SE> 554,173
<TOTAL-LIABILITY-AND-EQUITY> 2,936,234
<SALES> 13,260
<TOTAL-REVENUES> 354,835
<CGS> 28,434
<TOTAL-COSTS> 40,792
<OTHER-EXPENSES> 67,706
<LOSS-PROVISION> 9,050
<INTEREST-EXPENSE> 33,259
<INCOME-PRETAX> 79,648
<INCOME-TAX> 35,528
<INCOME-CONTINUING> 44,120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,120
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
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