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