SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-14108
360 COMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
47-0649117
(I.R.S. Employer Identification No.)
8725 W. Higgins Road
Chicago, Illinois
60631-2702
(773) 399-2500
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
On August 5, 1997, 121,837,901 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..........................................6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................*
Item 2. Changes in Securities .............................................*
Item 3. Defaults Upon Senior Securities....................................*
Item 4. Submission of Matters to a Vote of Security Holders...............12
Item 5. Other Information..................................................*
Item 6. Exhibits and Reports on Form 8-K..................................12
- ---------------
* No reportable information under this item.
When used in this Report, the words "intends," "expects," "plans," "estimates,"
"anticipates," "projects," "believes," and similar expressions are intended to
identify forward-looking statements. Specifically, statements included in this
Report that are not historical facts, including statements about the Company's
beliefs and expectations about continued market and industry growth, and ability
to maintain existing churn, customer growth and increased penetration rates, are
forward-looking statements. Such statements are subject to risks and
uncertainties that could cause actual results or outcomes to differ materially.
Such risks and uncertainties include, but are not limited to, the degree to
which the Company is leveraged and the restrictions imposed on the Company under
its existing debt instruments that may adversely affect the Company's ability to
finance its future operations, to compete effectively against better capitalized
competitors and to withstand downturns in its business or the economy generally;
the continued downward pressure on the prices charged for cellular equipment and
services resulting from increased competition in the Company's markets; the lack
of assurance that the Company's ongoing network improvements and scheduled
implementation of digital technology in its markets will be sufficient to meet
or exceed the capabilities and quality of competing networks; the effect on the
Company's operations and financial performance of changes in the regulation of
cellular activities; the degree to which the Company incurs significant costs as
a result of cellular fraud; the impact on the Company's operations that may
arise from concerns suggesting cellular telephones may be linked to cancer; and
the other factors discussed in the Company's filings with the Securities and
Exchange Commission, including the factors discussed under the heading "Certain
Risk Factors" in the Information Statement set forth as Exhibit 99 to the
Company's Form 10 (File No. 1-14108), which section is hereby incorporated by
reference herein. Forward-looking statements included in this Report speak only
as of the date hereof and the Company undertakes no obligation to revise or
update such statements to reflect events or circumstances after the date hereof
or to reflect the occurrence of unanticipated events.
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
ASSETS 1997 1996
------ -------------- -------------
Current Assets (Unaudited)
Cash and cash equivalents $ 8,108 $ 2,554
Accounts receivable, less allowances
of $6,243 and $5,730, respectively 101,672 102,483
Other receivables 32,945 27,090
Unbilled revenue 36,091 35,712
Inventory 32,771 35,908
Deferred income taxes 10,894 8,462
Prepaid expenses and other 10,170 16,634
------------- -------------
Total current assets 232,651 228,843
------------- -------------
Property, plant and equipment 1,556,847 1,499,407
Less: accumulated depreciation 466,360 415,981
------------- -------------
Property, plant and equipment, net 1,090,487 1,083,426
------------- -------------
Investments in unconsolidated entities 443,466 349,231
Intangibles, net 1,140,733 1,136,587
Other assets 16,798 13,982
------------- -------------
Total Assets $ 2,924,135 $ 2,812,069
============= =============
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current Liabilities
Trade accounts and other payables $ 191,938 $ 227,654
Short-term borrowings 10,845 43,750
Advance billings 30,656 28,314
Accrued taxes 29,997 17,951
Accrued agent commissions 7,643 12,089
Other 22,385 21,090
------------- -------------
Total current liabilities 293,464 350,848
------------- -------------
Long-term debt 1,844,577 1,699,778
------------- -------------
Deferred Credits and Other Liabilities
Deferred income taxes 118,868 113,005
Postretirement and other benefit obligations 5,980 5,855
------------- -------------
Total deferred credits and other liabilities 124,848 118,860
------------- -------------
Minority interests in consolidated entities 184,945 180,083
------------- -------------
Shareowners' Equity
Common stock 1,233 1,233
Additional paid-in capital 754,748 772,199
Accumulated deficit (279,680) (310,932)
------------- -------------
Total shareowners' equity 476,301 462,500
------------- -------------
Total liabilities and shareowners' equity $ 2,924,135 $ 2,812,069
============= =============
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
1
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Operating Revenues
Service revenues $328,834 $263,560 $622,804 $494,314
Equipment sales 11,428 10,613 24,304 19,554
--------- --------- --------- ---------
Total operating revenues 340,262 274,173 647,108 513,868
--------- --------- --------- ---------
Operating Expenses
Cost of service 40,283 22,205 81,772 44,344
Cost of equipment sales 24,394 25,355 52,843 45,964
Other operations expense 17,012 11,783 32,005 24,326
Sales, marketing and advertising expenses 55,673 47,649 116,254 94,619
General, administrative and other expenses 80,207 64,243 153,299 122,257
Depreciation and amortization 46,833 35,157 92,362 68,154
--------- --------- --------- ---------
Total operating expenses 264,402 206,392 528,535 399,664
--------- --------- --------- ---------
Operating Income 75,860 67,781 118,573 114,204
Interest expense (32,843) (24,274) (64,033) (54,102)
Minority interests in net income
of consolidated entities (16,208) (13,861) (25,917) (24,325)
Equity in net income of
unconsolidated entities 14,755 14,348 27,918 24,020
Other income (expense), net (27) (137) 2,987 322
--------- --------- --------- ---------
Income before income taxes 41,537 43,857 59,528 60,119
Income tax expense 19,730 19,573 28,276 28,855
--------- --------- --------- ---------
Net income $ 21,807 $ 24,284 $ 31,252 $ 31,264
========= ========= ========= =========
Earnings per share $ 0.18 $ 0.21 $ 0.25 $ 0.27
========= ========= ========= =========
Weighted average shares
outstanding 122,580 117,066 122,996 117,048
========= ========= ========= =========
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
2
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months
Ended June 30,
---------------------------
1997 1996
------------ ------------
Operating Activities
Net income $ 31,252 $ 31,264
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 92,362 68,154
Deferred income taxes 3,431 11,919
Gain on sale of cellular investments (3,029)
Equity in net income of unconsolidated
entities, net of distributions (16,472) (14,891)
Minority interests in net income of
consolidated entities 25,917 24,325
Changes in operating assets and liabilities,
excluding acquisitions
Receivables, net (1,814) (12,010)
Other current assets 5,016 (6,529)
Trade accounts and other payables (24,770) 26,573
Accrued expenses and other
current liabilities (1,040) 7,759
Noncurrent assets and liabilities, net (2,944) 255
Other, net 3,084 (2)
------------ ------------
Net Cash Provided by Operating Activities 110,993 136,817
------------ ------------
Investing Activities
Capital expenditures (89,520) (143,942)
Acquisitions and divestitures (19,957) (109,642)
Investments in unconsolidated entities and other (80,156) (2,476)
------------ ------------
Net Cash Used for Investing Activities (189,633) (256,060)
------------ ------------
Financing Activities
Net (payments) borrowings under bank revolving
credit facility (55,000) 490,000
Proceeds from long-term debt 200,000 900,000
Debt issuance costs (1,609) (15,229)
Net short-term (payments) borrowings (32,905) 24,950
Purchases of common stock for treasury (18,878)
Increase in advances from affiliates 135,892
Contributions from minority investors 4,597
Distributions to minority investors (8,322) (7,075)
Repayment of advances from affiliates (1,400,000)
Other, net 908 (4,308)
------------ ------------
Net Cash Provided by Financing Activities 84,194 128,827
------------ ------------
Increase in Cash and Cash Equivalents 5,554 9,584
Cash and Cash Equivalents at Beginning of Period 2,554 19,023
------------ ------------
Cash and Cash Equivalents at End of Period $ 8,108 $ 28,607
============ ============
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
1. Basis of Consolidation and Presentation
360 Communications Company and Subsidiaries (the "Company") provide
wireless voice and data telecommunications services. The Company also currently
markets residential long distance service and resells paging service in the
states in which the Company provides wireless service. The Company operates as a
general and limited partner and majority owner of cellular systems in various
metropolitan and rural service areas and as a limited minority partner or
manager in other cellular systems. The Company operates in four regions in the
United States: Mid-Atlantic, Midwest, Southeast and West.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned and majority-owned subsidiaries. The assets,
liabilities and results of operations of entities (both corporations and
partnerships) in which the Company has a controlling interest have been
consolidated. The ownership interests of noncontrolling owners in such entities
are reflected as minority interests. The Company accounts for all other
investees using the equity method of accounting. All significant intercompany
accounts and transactions have been eliminated.
The unaudited consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and are presented in
accordance with the rules and regulations of the Securities and Exchange
Commission applicable to interim financial information. In the Company's
opinion, the unaudited consolidated financial statements include all adjustments
necessary to present fairly the financial position and results of operations for
each interim period presented. All such adjustments are of a normal recurring
nature. These financials should be read in conjunction with the consolidated
financial statements, including the notes thereto, included in the Company's
1996 Annual Report.
Certain 1996 amounts have been reclassified to conform to the presentation
used for the three and six months ended June 30, 1997.
2. Earnings Per Share
Earnings per share was computed using weighted average shares outstanding,
including common stock equivalents, totaling 122,579,873 and 117,065,513 for the
three months ended June 30, 1997 and 1996, respectively, and 122,995,723 and
117,047,971 for the six months ended June 30, 1997 and 1996, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share,"
effective for both interim and annual periods ending after December 15, 1997.
SFAS No. 128 requires companies to disclose basic and diluted earnings per
share. Basic earnings per share will be calculated based on the weighted average
common shares outstanding and will exclude common stock equivalents from the
calculation. Due to the relative insignificance of the Company's common stock
equivalents and other potentially dilutive instruments, the requirements of SFAS
No. 128, based on current circumstances, will not have a significant effect on
the Company's earnings per share calculations.
4
3. Acquisitions and Divestitures
In January 1997, the Company acquired additional ownership interests in
certain majority-owned partnerships and divested ownership interests in certain
unconsolidated entities. During the second quarter of 1997, the Company and
BellSouth Corporation ("BellSouth") combined their interests in two partnerships
that own and control cellular licenses and operations in Virginia and Florida.
The resulting partnership is owned approximately 75% by BellSouth and 25% by the
Company, with the Company taking over as manager of the cellular operation in
Virginia. The Company divested its ownership interest in one of its
unconsolidated entities, as well as in one of its controlled markets, during the
second quarter of 1997. In addition, the Company acquired the remaining
ownership interest in one of its controlled markets during the second quarter of
1997.
4. Income Taxes
The estimated annual effective tax rate was 47.5% for the three and six
months ended June 30, 1997, differing from the statutory rate due to
nondeductible amortization of goodwill and state income tax expense.
5
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.
General
The following is a discussion and analysis of the historical results of
operations and financial condition of 360 Communications Company and
Subsidiaries (the "Company") and factors affecting the Company's financial
resources. This discussion should be read in conjunction with the consolidated
financial statements, including the notes thereto, set forth herein under
"Financial Statements" and the Company's 1996 Annual Report. This discussion
contains forward-looking statements which are qualified by reference to, and
should be read in conjunction with, the Company's discussion regarding
forward-looking statements as set forth herein under "Forward-Looking
Statements."
Results of Operations
Customer Growth Rate
The number of cellular customers increased to 2,379,000 at June 30, 1997
from 1,750,000 at June 30, 1996, resulting in a 35.9% increase. The increase in
cellular customers was impacted by 138,000 customers acquired during the fourth
quarter of 1996. For the three months ended June 30, 1997 and 1996, the Company
added 98,000 and 107,000 customers, respectively, through internal growth. For
the six months ended June 30, 1997, the Company added 223,000 customers through
internal growth, while in the corresponding 1996 period, customer growth through
acquisitions added 46,600 customers and internal growth added 202,000 new
customers. The Company's penetration rate, which is the number of customers
divided by the total population in its licensed service areas, reached 9.77% at
June 30, 1997 compared to 8.36% at June 30, 1996. The average monthly rate of
customer disconnects, customer churn, was 1.69% and 1.77%, during the three
months ended June 30, 1997 and 1996, respectively, and l.78% during the six
months ended June 30, 1997 and 1996.
Service Revenues
Service revenues consist primarily of charges for airtime, access fees,
roaming fees and other services. Service revenues increased 24.8% and 26% in the
three and six months ended June 30, 1997 when compared to the corresponding 1996
periods, principally from growth in the number of cellular customers. Expanded
distribution, increased promotional activity, and improved consumer awareness of
wireless communications are key factors contributing to the Company's customer
growth. In addition, acquisitions completed in 1996 contributed to an increase
of approximately $22.8 million and $45.4 million in service revenues for the
three and six months ended June 30, 1997, respectively.
Consistent with the rest of the cellular industry, the Company has
experienced increased penetration in the consumer market, a trend attributable
to declining cellular telephone equipment prices 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. Service revenue per average customer
per month was $46.86 and $51.73 during the three months ended June 30, 1997 and
1996, respectively, and $45.47 and $50.61 during the six months ended June 30,
1997 and 1996, respectively. New customers generally use less airtime than
existing customers, causing the average service revenue per customer per month
to decline. As a result, service revenue growth has not kept pace with the level
of growth in the number of customers. Also impacting the decline in the average
service revenue per customer per month was an increase in promotional activities
in 1997. Promotional activities, which includes free minutes and free access,
increased to 3.9% and 3.8% of service revenues for the three and six months
ended June 30, 1997 from 2% of service revenues when compared to the same
periods last year. The Company expects that service revenue per average customer
per month will continue to decline as penetration rates continue to increase.
6
Roaming airtime minutes increased during the three and six months ended
June 30, 1997, while roaming revenues as a percent of service revenues have
declined. The Company expects that roaming rates between carriers will continue
to be reduced which reduces revenues derived from cellular service users who
roam into the Company's systems. The Company expects roaming airtime to increase
as reduced roaming rates between carriers are ultimately passed on to customers.
Future revenue growth will be impacted by the Company's success in
maintaining customer growth in existing markets, generating additional revenue
from the increasing availability of a variety of enhanced services and products,
and acquiring additional cellular communications systems to further strengthen
its existing regional clusters. The growth rate of new customers is expected to
decline as the Company's customer base grows. Revenue growth will also be
impacted by the Company's long distance and paging businesses. The Company
currently markets residential long distance service and resells paging service
in the states in which the Company provides wireless service. An improved
competitive position, reduced cellular churn and increased brand awareness are
expected as the long distance and paging services businesses mature.
Cost of Service
Excluding the impact of roaming activities and long distance expenses,
cost of service as a percentage of service revenues was 7.3% and 7.8% for the
three months ended June 30, 1997 and 1996, respectively, and 7.8% and 8.2% for
the six months ended June 30, 1997 and 1996, respectively. The effects of
renegotiated long distance contracts with Sprint Corporation (effective May 1997
and March 1996) and reduced interconnection rates paid to local telephone
companies are key factors favorably impacting the declining trend in cost of
service as a percentage of service revenues.
Roaming margins associated with the Company's customers roaming into other
carriers' markets declined in the three and six months ended June 30, 1997 when
compared to the same periods last year, resulting in an increase in cost of
service as a percent of service revenues. The decline in margins is attributable
to increased competitive pressures to reduce rates for such roaming traffic and
an increase in unbillable fraudulent roaming activities. As part of a pricing
simplification effort, the Company implemented new roaming rate plans in early
1997 which continue to reduce margins in the second quarter of 1997. The Company
expects that the industry-wide trend to reduce rates will continue, thus
stimulating an increase in cellular telephone usage, resulting in an increase in
roaming airtime. To the extent reduced retail rates stimulate increased usage
and the Company is able to negotiate reduced wholesale roaming rates with other
carriers, the effects of discounted rates will be somewhat mitigated.
Unauthorized usage of customers' telephone numbers resulted in unbillable
fraudulent roaming activities that approximated 1% of service revenues for the
three months ended June 30, 1997 and 1996, and 2% and 1% of service revenues for
the six months ended June 30, 1997 and 1996, respectively. The increase in
unbillable fraudulent roaming activity was the result of a significant increase
in the level of fraud activity in several markets during the fourth quarter of
1996 and the first quarter of 1997. The Company believes it will continue to be
impacted by fraudulent roaming activities on a going-forward basis and continues
to proactively invest in new systems and technologies to reduce the incidence of
fraud.
Cost to Acquire New Customers
Cost to acquire a new cellular customer was $303 and $313 for the three
months ended June 30, 1997 and 1996, respectively, and $297 and $320 for the six
months ended June 30, 1997 and 1996, respectively. The decline in the cost to
acquire a new cellular customer is principally the result of additional costs
associated with the introduction of the Company's new brand name incurred during
the three and six months ended June 30, 1996, as well as, continued decline in
the wholesale prices for cellular phones.
7
To improve sales and reduce costs associated with acquiring new customers,
the Company continues to depend more upon its own sales force working out of
Company retail outlets and kiosks located in shopping malls and other
non-company owned retail locations. Incremental sales costs at a Company retail
store or kiosk are significantly lower than commissions paid to national
dealers. Although the Company intends to continue to support its large dealer
network, continued increases in its own retail distribution channels are
planned. The Company has experienced little change in churn levels, a factor
further contributing to the Company's ability to manage the costs of maintaining
and growing its customer base. The Company is unable to anticipate the impact of
the cost to add new customers as savings associated with the transition to the
use of internal sales distribution channels levels off, the growth rate of new
customers declines and competition for local and national dealers intensifies.
During the three and six months ended June 30, 1997, sales, marketing and
advertising expenses were impacted by $3 million and $5.4 million, respectively,
of costs associated with the Company's long distance business.
Other Operations Expense and General Administrative and Other Expenses
Other operations expense and general, administrative and other expenses
increased due principally to growth in the cellular customer base. During the
three months ended June 30, 1997 and 1996, these expenses as a percent of
service revenues were 29.6% and 28.8%, respectively, and 29.8% and 29.7% during
the six months ended June 30, 1997 and 1996, respectively. The slight increase
for the respective periods is the result of increases in bad debt levels.
Depreciation and Amortization
Acquisitions of cellular communications systems generate intangible assets
such as Federal Communications Commission license costs and goodwill which are
amortized over 40 years. During the three and six months ended June 30, 1997,
amortization expense increased 52.9% and 55.8% when compared to the
corresponding periods in 1996 due principally to acquisitions completed during
the fourth quarter of 1996. The Company periodically assesses the ongoing value
of these intangible assets and expects the carrying amounts to be fully
recoverable.
During the three and six months ended June 30, 1997, depreciation expense
increased 29.7% and 31.8% when compared to the corresponding periods in 1996 due
to the acquisition of depreciable assets and additional capital investment in
the Company's network.
Interest Expense
Interest expense increased in the three and six months ended June 30, 1997
when compared to the corresponding prior year periods due to the increase in
borrowing levels. The annualized average interest rate for the three months
ended June 30, 1997 and 1996 was 7.2% and 6.8%, respectively, and 7.2% and 7.4%
for the six months ended June 30, 1997 and 1996, 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,
$122 million of subordinated promissory notes and borrowings under a revolving
credit facility ("Credit Facility") with interest rates based on the London
Interbank Offered Rate plus 50 basis points. The Company also utilizes
short-term borrowings based on market interest rates.
8
Equity in Net Income of Unconsolidated Entities
Equity in net income of unconsolidated entities represents the Company's
share of operating results of cellular systems in which the Company does not
have a controlling interest. Equity earnings increased for the three and six
months ended June 30, 1997, when compared to the prior year periods, primarily
as a result of increased income generated by minority cellular investments in
markets that continue to mature. Income generated by minority cellular
investments may not continue to grow at the pace experienced in prior years due
to increased competition in the higher populated urban markets and the Company's
strategy to exchange its minority cellular investments for increased ownership
interests in its controlled markets or other markets in which it could obtain
control.
Competition
Cellular carriers compete primarily against the other facilities-based
cellular carrier in each market. However, companies with Personal Communications
Services ("PCS") licenses have begun to offer their products and services in
several of the Company's service areas. The Company has prepared for this new
competitive environment by enhancing its networks, expanding its service
territory, offering new features, products and services to its customers and
simplifying its pricing of services. The Company believes it will benefit from
its position as an incumbent in the cellular field with a high quality network,
extensive geographic footprint that is not capacity constrained, strong
distribution channels, superior customer service and an experienced management
team. However, there can be no assurance that these measures will completely
mitigate the pressures associated with the expected increase in the level of PCS
competition.
Liquidity and Capital Resources
Cash Flows - Operating Activities
The decrease in net cash provided by operating activities for the six
months ended June 30, 1997 was due primarily to the significant construction
activity incurred during the fourth quarter of 1996 which resulted in elevated
accrued expense levels during that period. Current operating activities reflect
payments made in 1997 for 1996 accruals and a decrease in the accrued expenses
related to construction activity for the six months ended June 30, 1997.
Cash Flows - Investing Activities
Capital expenditures were $89.5 million and $143.9 million for the six
months ended June 30, 1997 and 1996, respectively. The decrease in capital
expenditures was the result of various timing issues affecting construction
activities in the first half of 1997. Total capital expenditures for the
calendar year 1997 are projected to be $300 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.
In the first quarter of 1996, the Company acquired cellular properties in
South Carolina, North Carolina and Ohio and acquired additional partnership
interests in Florida. The aggregate purchase price of these acquisitions totaled
$110 million. In the first quarter of 1997, the Company divested its ownership
interests in two of its unconsolidated entities. In connection with this
transaction, the Company recognized a gain of $3 million in other income ($2
million, net of tax). The Company also acquired additional ownership interests
in two of its controlled markets during the first quarter of 1997.
In the second quarter of 1997, the Company and BellSouth Corporation
("BellSouth") combined their interests in two partnerships that own and control
cellular licenses and operations in Virginia and Florida. The resulting
partnership is owned approximately 75% by BellSouth and 25% by the Company, with
the Company taking over as manager of the cellular operation in Virginia.
9
The Company divested its ownership interests in one of its unconsolidated
entities, as well as in one of its controlled markets, during the second quarter
of 1997. In addition, the Company acquired the remaining ownership interest in
one of its controlled markets during the second quarter of 1997.
Cash Flows - Financing Activities
As part of its cash management program, the Company utilizes short-term
borrowings based on market interest rates to support its daily cash
requirements. The aggregate amount of these borrowings is limited to $50 million
under certain debt covenants.
In the first quarter of 1997, the Company issued $200 million in aggregate
principal amount of its 7.6% Senior Notes due 2009. The net proceeds received by
the Company from the sale of these debt securities were used to repay a portion
of the Company's long-term indebtedness outstanding under the Credit Facility.
During the second quarter of 1997, the Company purchased 1.2 million
shares of the Company's Common Stock at an average price of less than $16 per
share. The Company's Board of Directors authorized the repurchase of up to 3
million shares of the Company's Common Stock through May 1, 1998. The shares may
be purchased from time to time on the open market at prevailing prices, subject
to market conditions.
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 $300 million in 1997. Funding for these expenditures is
expected to be derived from existing cash resources, cash flows from operations,
borrowings under the Credit Facility and the issuance of debt securities. These
expenditures will be made to expand and enhance existing cellular systems,
install digital technology in the Company's greater Raleigh, North Carolina,
service area and replace equipment in recently acquired markets.
For the next several years, the Company does not expect its operations to
generate sufficient cash flows to meet both future capital requirements for
operating activities and cash requirements for acquisitions of ownership
interests in cellular communications systems. Acquisition activities may include
acquisitions of new cellular communications systems or additional investments in
cellular communications systems in which the Company already holds an ownership
interest. The Company expects that it will need to raise additional funds to
make such investments. An agreement, which was designed to preserve the tax-free
status of the Company's spinoff from Sprint Corporation, imposes certain
limitations associated with equity transactions. Accordingly, the Company is
prohibited from issuing preferred stock and is limited as to the aggregate
amount of additional common stock that it can issue, unless an unqualified
opinion of counsel or ruling from the Internal Revenue Service states that such
action would not cause the spinoff to be taxable. At June 30, 1997, the Company
was limited to issuing up to an additional 16.5 million common shares. This
limitation expires on March 7, 1998.
The Company believes that it will have the needed access to the capital
markets on suitable terms and that, together with borrowings under the Credit
Facility, the issuance of unsecured debt securities and/or warrants to purchase
debt securities under a shelf registration statement filed with the Securities
and Exchange Commission and net cash provided by operations, it will have
adequate capital to satisfy its projected funding requirements for operations in
1997 and thereafter. The Company currently does not intend to seek funding from
other sources during 1997. There can be no assurance that access to the capital
markets can be obtained in amounts and on terms adequate to meet its objectives
or that the borrowings or net cash from operations will be adequate to meet the
Company's projected funding requirements.
10
At June 30, 1997, the Company had $625 million of borrowings outstanding
under the Credit Facility and additional borrowing capacity under the terms of
the Credit Facility of $160 million.
Forward-Looking Statements
When used in this Report, the words "intends," "expects," "plans,"
"estimates," "projects," "believes," "anticipates," and similar expressions are
intended to identify forward-looking statements. Specifically, statements
included in this Report that are not historical facts, including statements
about the Company's beliefs and expectations about continued market and industry
growth, and ability to maintain existing churn, customer growth and increased
penetration rates, are forward-looking statements. Such statements are subject
to risks and uncertainties that could cause actual results or outcomes to differ
materially. Such risks and uncertainties include, but are not limited to, the
degree to which the Company is leveraged and the restrictions imposed on the
Company under its existing debt instruments that may adversely affect the
Company's ability to finance its future operations, to compete effectively
against better capitalized competitors and to withstand downturns in its
business or the economy generally; the continued downward pressure on the prices
charged for cellular equipment and services resulting from increased competition
in the Company's markets; the lack of assurance that the Company's ongoing
network improvements and scheduled implementation of digital technology in its
markets will be sufficient to meet or exceed the capabilities and quality of
competing networks; the effect on the Company's operations and financial
performance of changes in the regulation of cellular activities; the degree to
which the Company incurs significant costs as a result of cellular fraud; the
impact on the Company's operations that may arise from concerns suggesting
cellular telephones may be linked to cancer; and the other factors discussed in
the Company's filings with the Securities and Exchange Commission, including the
factors discussed under the heading "Certain Risk Factors" in the Information
Statement set forth as Exhibit 99 to the Company's Form 10 (File No. 1-14108),
which section is hereby incorporated by reference herein. Forward-looking
statements included in this Report speak only as of the date hereof and the
Company undertakes no obligation to revise or update such statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
11
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On May 6, 1997, the Company held its Annual Meeting of Shareowners. Four
matters were submitted to a vote of the holders of the Company's Common Stock,
$0.01 par value, entitled to vote at the meeting and the number of votes cast
with respect to each matter are as follows:
Proposal 1 to elect three directors, constituting Class I of the Company's
Board of Directors, to serve a three-year term expiring at the 2000 Annual
Meeting of Shareowners: 104,649,517 shares voted for Frank E. Reed, and 748,681
shares withheld; 104,598,309 shares voted for Robert E. R. Huntley, and 799,889
shares withheld; and 104,622,405 shares voted for Valerie B. Jarrett, and
775,793 shares withheld.
Proposal 2 to approve the Company's Employee Stock Purchase Plan:
102,776,518 shares voted for this proposal, 2,074,328 shares voted against, and
547,352 shares abstained. No broker non-votes were cast with respect to this
proposal.
Proposal 3 to approve the Company's Amended and Restated 1996 Equity
Incentive Plan: 96,621,028 shares voted for this proposal, 8,030,562 shares
voted against, and 746,608 shares abstained. No broker non-votes were cast with
respect to this proposal.
Proposal 4 to ratify the selection of Ernst & Young LLP as the Company's
independent accountants for the fiscal year ending December 31, 1997:
104,808,568 shares voted for this proposal, 245,090 shares voted against, and
344,540 shares abstained. No broker non-votes were cast with respect to this
proposal.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibits are listed in the Exhibit Index.
(b) Reports on Form 8-K:
On Current Report on Form 8-K, dated April 15, 1997, under "Item 5. Other
Events," the Company filed a press release announcing its consolidated results
for the first quarter of 1997.
12
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
360 COMMUNICATIONS COMPANY
By: /s/ Jeffery R. Gardner
Jeffery R. Gardner
Senior Vice President - Finance
(Principal Accounting Officer)
Date: August 11, 1997
13
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 Distribution Agreement dated as of March 7, 1996, by and among
Sprint Corporation, 360 Communications Company (formerly Sprint
Cellular Company) and Centel Corporation. (Filed as Exhibit 2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-14108, and incorporated herein by
reference.)
2.2 Exchange and Merger Agreement, dated as of May 31, 1996, by and
among Independent Cellular Network Partners, James A. Dwyer, Jr.,
David Winstel, CC Industries, Inc., Ohio Cellular RSA, L.P., Ohio
RSA Corporation, Quality Cellular Communications of Ohio, Inc.,
Cellular Plus, L.P., C-Plus, Inc., Quality Cellular Plus
Communications, Inc., Henry Crown and Company (Not Incorporated) and
360 Communications Company. (Filed as Exhibit 2.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1996, File No. 1-14108, and incorporated herein by reference.)
2.3 First Amendment to Exchange and Merger Agreement, dated as of
November 1, 1996, by and among Independent Cellular Network
Partners, James A. Dwyer, Jr., David Winstel, CC Industries, Inc.,
Ohio Cellular RSA, L.P., Ohio RSA Corporation, Quality Cellular
Communications of Ohio, Inc., Cellular Plus, L.P., C-Plus, Inc.,
Quality Cellular Plus Communications, Inc., Henry Crown and Company
(Not Incorporated) and 360 Communications Company. (Filed as Exhibit
2.3 to the Company's Current Report on Form 8-K dated November 1,
1996, File No. 1-14108, and incorporated herein by reference.)
3.1 Amended and Restated Certificate of Incorporation of 360
Communications Company, as amended as of March 4, 1996. (Filed as
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 1-14108, and
incorporated herein by reference).
3.2 Amended and Restated Bylaws of 360 Communications Company. (Filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 1-14108, and
incorporated herein by reference).
3.3 Certificate of Designation of First Series Junior Participating
Preferred Stock of 360 Communications Company. (Filed as Exhibit 3.3
to Amendment No. 4 to Registration Statement on Form S-1 (No.
33-99756), and incorporated herein by reference.)
4.1 360 Communications Company's 7 1/8% Senior Note Due 2003 and 7 1/2%
Senior Note Due 2006. (Filed as Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995,
File No. 1-14108, and incorporated herein by reference).
4.2 Indenture dated as of March 7, 1996 between 360 Communications
Company and Citibank, N.A., as Trustee. (Filed as Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-14108, and incorporated herein by
reference).
4.3 Form of 360 Communications Company Common Stock, $0.01 par value,
certificate. (Filed as Exhibit 4.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, File No.
1-14108, and incorporated herein by reference).
4.4 Rights Agreement dated as of March 5, 1996 between 360
Communications Company and Chemical Bank. (Filed as Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-14108, and incorporated herein by
reference).
14
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.)
10.5 360 Communications Company Amended and Restated 1996 Equity
Incentive Plan. *
27 Financial Data Schedule.
- ----------
* Indicates management contract or compensating plan or arrangement.
15